<PAGE>
<PAGE> 1
UNITED STATES
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 [FEE REQUIRED]
For fiscal year ended DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-13340
Mid Atlantic Medical Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1481661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 Taft Court, Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
(301) 294-5140
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock, $0.01 par value The New York Stock
per share. Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
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 (Sec. 229.405 of this chapter) 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 Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 28, 1996: Approximately $974 million.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.<PAGE>
46,595,187 shares of common stock as of February 28, 1996
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders
to be held on April 15, 1996 is incorporated by reference into Part III
of this Form 10-K.<PAGE>
<PAGE> 2
FORM 10-K
INDEX
ITEM NO. DISCLOSURE REQUIRED PAGE
PART I
Item 1 Business .............................................. 3
Item 2 Properties ............................................ 14
Item 3 Legal Proceedings ..................................... 15
Item 4 Submission of Matters to a Vote of Security Holders ... 15
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 16
Item 6 Selected Financial Data .............................. 17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation ................. 18
Item 8 Financial Statements and Supplementary Data .......... 24
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 45
PART III
Item 10 Directors and Executive Officers of the Registrant ... 46
Item 11 Executive Compensation ............................... 46
Item 12 Security Ownership of Certain Beneficial Owners
and Management ..................................... 46
Item 13 Certain Relationships and Related Transactions ....... 46
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 47<PAGE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company for
subsidiaries active in managed health care and other life and health
insurance related activities. MAMSI and its subsidiaries (the
"Company") have developed a broad range of managed health care and
related ancillary products and deliver these services through health
maintenance organizations ("HMOs"), preferred provider organizations
("PPOs"), a life and health insurance company and home health care and
home infusion services companies. The Company also has a partnership
interest in an outpatient surgery center.
GENERAL DEVELOPMENT OF BUSINESS
MAMSI was incorporated in Delaware in 1986 to serve as a holding company
for MD - Individual Practice Association, Inc. ("M.D. IPA") and
Physicians Health Plan of Maryland, Inc. ("PHP-MD"). MAMSI made an
exchange offer for all of the issued and outstanding shares of common
stock of M.D. IPA and PHP-MD in 1987.
M.D. IPA, a Federally qualified HMO, was organized as a nonstock
corporation in 1979. M.D. IPA operated as a non-profit organization
until 1985 when it amended its articles of incorporation and was
reorganized into a stock corporation.
PHP-MD, an individual practice association ("IPA"), was organized as a
nonstock corporation in 1979 to provide physician and other medical
services to M.D. IPA enrollees. PHP-MD operated as a non-profit
organization until it amended its articles of incorporation and was
reorganized into a stock corporation in 1984.
HEALTH MAINTENANCE ORGANIZATIONS
MAMSI's primary business is the delivery of managed health care through
its HMOs. MAMSI currently offers HMO coverage through three licensed
HMO subsidiaries - M.D. IPA, Optimum Choice, Inc. ("OCI"), and Optimum
Choice of the Carolinas, Inc. ("OCCI").
M.D. IPA became a licensed HMO in Maryland in 1981 and in Virginia in
1985. M.D. IPA's present service area (which includes all geographic
areas where the HMO has received regulatory approval to provide health
care services) includes the entire state of Maryland, the District of
Columbia and most counties and cities in Virginia including the Northern
Virginia, Richmond/Tidewater and Roanoke areas ("HMO Service Area"). In
addition to serving governmental entities, M.D. IPA generally provides
coverage to the larger commercial group market.
OCI, a non-Federally qualified HMO, became a licensed HMO in Maryland in
1988, in Virginia in 1990, in Delaware in 1993 and in West Virginia in
1994. OCI generally operates within the small business market segment,
which is comprised of employers with 50 or fewer employees and also
covers Medicaid and Medicare recipients. OCI's present service area
includes the entire states of Maryland and Delaware, the District of
Columbia, most counties and cities in Virginia, and certain areas of
West Virginia.
OCCI, a non-Federally qualified HMO, became a licensed HMO in North
Carolina in 1995. OCCI operates in both the small and large group<PAGE>
commercial market. OCCI's present service area includes certain areas
of North Carolina.
The Company is currently seeking an HMO license in South Carolina and
Pennsylvania.
GENERAL
HMOs provide or arrange for the provision of comprehensive medical care
(including physician and hospital care) to enrollees for a fixed,
prepaid premium regardless of the amount of care provided. Enrollees
generally receive care from participating primary care physicians
("PCPs") who, as required, refer enrollees to participating specialists
and hospitals. HMOs require patients to utilize participating
physicians and other participating health care providers. This allows
HMOs to negotiate favorable rates and control utilization to a greater
extent than traditional health insurers, while monitoring and enhancing
the quality of care provided to enrollees.<PAGE>
<PAGE> 4
The goal of an HMO is to combine quality health care with management
controls designed to encourage efficient and economical use of health
care services. Such controls include monitoring physician services,
hospital admissions and lengths of stay and maximizing the use of non-
hospital based medical services. Because an HMO generally receives
fixed monthly premiums from its enrollees regardless of the health care
services provided, an HMO has an incentive to maintain the health of its
enrollees, while carefully monitoring expenses through the
implementation of various cost control strategies and effective
management.
MAMSI's HMO provider network is organized as an IPA. Under the IPA
model, the HMO contracts with a broadly dispersed group of physicians to
provide medical services to enrollees in the physicians' own offices and
in hospitals; the physicians are generally paid on a capitated or a
negotiated fee-for-service basis. Physicians may contract directly with
the HMO or through a designated organization that, in turn, contracts
with the HMO.
HMOs have been operating in the United States for more than 50 years.
Their popularity has markedly increased since the early 1970s in
response to rapidly escalating health care costs and the enactment of
the Federal Health Maintenance Organization Act of 1973 ("HMO Act").
The HMO Act and its regulations grant "qualified" status to HMOs meeting
comprehensive standards. Although qualification status is not required,
its "mandate" provisions originally provided a marketing advantage
because employers with more than 25 employees that offered health
benefits to employees were generally required to offer employees a
Federally qualified HMO if mandated by a Federally qualified HMO
operating within the relevant service area. Moreover, if a number of
such HMOs mandated such an employer, the employer was required to offer
its employees at least one Federally qualified HMO organized as a staff
or group model and at least one Federally qualified HMO organized as an
IPA, network or hybrid model. The advantages of mandating as described
above ceased on October 24, 1995 because the mandate provisions were
repealed effective on that date. This repeal is not expected to have
any significant effect on MAMSI's operations due to the increased
knowledge about and acceptance of HMOs in the marketplace.
The HMO movement began to experience a "shake-out" in the latter part of
the 1980s. After reaching an industry high of 707 HMOs in 1987,
mergers, acquisitions and closures resulted in a decrease to
approximately 541 operating HMOs in 1993. In 1994, the number of HMOs
increased by 23 to 564. As the concept of managed care continues to
gain acceptance, the number of managed care type organizations being
formed should increase in response to the marketplace, in both the
commercial and government (Medicare and Medicaid) segments. However,
the consolidation trend should also continue as HMOs, traditional
indemnity insurers and others seek to gain market share and size.
National enrollment in HMOs increased to an estimated 55 million
enrollees in 1994, up from a total of 31 million in 1987. Year-end 1994
enrollment of 55 million people represents approximately 21% of the
total U.S. population. Industry experts expect this enrollment trend to
continue. (Source of industry data - Hoechst Marion Roussel, Inc.
Managed Care Digest Series; HMO-PPO Digest, 1995; and, SMG Marketing
Group, Inc.)
MAMSI'S HMO PRODUCTS<PAGE>
MAMSI's HMOs offer a range of benefit plans for providing health care to
enrollees. Generally, enrollees arrange for coverage through their
employer. However, group enrollees can convert their coverage to an
individual contract upon separation from their employer. There is no
assurance that HMO agreements with employers will be renewed annually or
that, within each employer group, the HMO will not experience
disenrollment by individual enrollees. MAMSI's HMOs also offer
individual coverage to the commercial, Medicaid and Medicare markets.
Under traditional HMO coverage, the enrollee selects a PCP from the
HMO's provider network. All medical care provided to the enrollee must
be authorized and coordinated by the PCP. Generally, the enrollee pays
a copayment for all PCP and specialist office visits and may also be
required to pay a copayment for hospital admissions and emergency room
services. Except in emergencies, enrollees are generally required to
utilize only those participating professional and institutional health
care providers that have contracted with the IPA (see further discussion
under "HMO Arrangements with Physician and Institutional Providers").<PAGE>
<PAGE> 5
MAMSI's HMOs, in cooperation with MAMSI Life and Health Insurance
Company ("MAMSI Life"), a wholly owned subsidiary of MAMSI, also offer
point-of-service coverage (the "preferred plan"), which is marketed to
appeal to the following customers:
1. Individuals who will not consider a closed delivery system. These
individuals prefer the flexibility of the traditional indemnity plan but
are also seeking a lower-cost alternative such as an HMO.
2. Small to mid-sized employers who are looking to limit the number of
health care plan options. In this case, the HMO would seek to be
offered as an exclusive health care provider.
In the preferred plan, enrollees have the choice of seeking care from
the PCP or from any physician of their choice. Whenever care is
provided under the point-of-service option and the enrollee visits a
provider outside of the HMO network, MAMSI Life, which underwrites this
indemnity benefit, generally covers the lesser of 80% of the bill or
100% of the established fee maximum for the service provided. The
enrollee is responsible for the remainder of the charge.
MAMSI's hybrid products provide large employer groups the ability to
tailor their employee health care offerings by varying benefit designs,
funding methods and insurance risk. Hybrid products generally compete
in the so-called self-funded employer plan marketplace. A typical MAMSI
hybrid product combines the use of capitated PCPs to serve as
gatekeepers, employer funding of specialist and institutional claims on
an "as paid" basis and MAMSI's underwriting of risk of loss on a
specific and/or aggregate stop loss basis.
OCI offers HMO coverage to recipients of Title XIX Medical Assistance
("Medicaid"). The Medicaid plan operates in a manner similar to the
traditional HMO plan. The participating states pay a monthly premium
based upon the age and sex of the recipients for which OCI provides
comprehensive medical coverage. MAMSI's Medicaid service area includes
Maryland and certain areas of Virginia.
Under all coverage options, enrollees receive the following basic
benefits: primary and specialist physician services; hospital services
such as diagnostic tests, x-rays, drugs, medication, nursing and
maternity services; discounts on dental care and prescription drugs
purchased at a participating pharmacy; outpatient diagnostic tests such
as laboratory tests, x-rays, and allergy testing and injections; and
mental health, drug abuse and other medical services.
OCI also offers health coverage to Title XVIII Medicare recipients.
Under a contractual arrangement with the United States Health Care
Financing Administration ("HCFA"), OCI receives a monthly premium based
upon age, sex, county of residence and enrollment status for which OCI
provides comprehensive medical coverage to those individuals plus
certain additional benefits. Currently, approximately only 3% of the
one million Medicare recipients in MAMSI's Medicare service area (which
includes Maryland, the District of Columbia, and certain areas of
Virginia, West Virginia and Delaware) are covered through MAMSI or other
HMOs.
The Company's total health plan (managed care, ASO and indemnity health
insurance) membership in the HMOs and MAMSI Life grew to approximately<PAGE>
658,000 at December 31, 1995 from 508,000 at December 31, 1994, an
increase of 30%. The Company believes that enrollment will continue to
grow as the Company expands into new service areas, continues to
increase the size of its sales force and maintains its focus on the
Medicaid and Medicare markets.<PAGE>
<PAGE> 6
The following table sets forth information relevant to MAMSI's HMO and
indemnity health plans as of December 31, 1995:
Employer Groups Served 16,845
Population of Aggregate HMO
Service Area 17,000,000
Service Area Penetration 3.9%
Primary Care Physicians 3,650
Specialist Physicians 11,987
Other Affiliated Health
Care Providers 5,440
Hospitals and Outpatient
Facilities 1,198
Pharmacies 3,500
A significant portion of the Company's premium revenue is derived from
Federal, state and local government agencies including governmental
employees and Medicaid and Medicare recipients. For the years ended
December 31, 1995, 1994 and 1993, approximately 7%, 9% and 11%,
respectively, of premium revenue was derived from Federal government
agencies, and approximately 21%, 18% and 11%, respectively, was derived
from state and local government agencies located in the Company's
service area.
HMO ARRANGEMENTS WITH PHYSICIAN AND INSTITUTIONAL PROVIDERS
MAMSI's HMOs contract with PHP-MD to provide physician services to their
enrollees except within North Carolina where OCCI contracts directly
with providers. The HMOs are ultimately responsible for ensuring that
an adequate number of physicians and other health care providers are
maintained in order to service enrollees.
The Company contracts with many different kinds of health care
providers, including primary care and specialist physicians, dentists,
social workers, psychologists, physical therapists and podiatrists.
PCPs are paid a monthly capitation payment for each enrollee who has
chosen that PCP. This capitation payment varies according to the age
and sex of the enrollee and according to the primary care designation of
the provider chosen by the enrollee. The primary care designations on
which premiums are based fall into one of two types: (1) family and
general practice, pediatrics and internal medicine, and (2) obstetrics
and gynecology.
PCPs may receive, in addition to capitation payments, an annual payment
that is based on a Quality Review Reconciliation. This payment
generally does not exceed 3% of their annual capitation payments. The
reconciliation evaluates the physician's practice performance as well as
quality issues such as grievance rates from members, sanctions by a
MAMSI HMO, and member transfer rate. As part of the Quality Review
Reconciliation, the Company provides a quarterly report to each PCP that
compares the physician's practice performance based on outpatient and
inpatient expenses to those of his/her peers and allows the PCP not only
to monitor the number of referrals consistent with quality medical
standards, but also to evaluate the most cost-effective consultants and
facilities within each specialty area.
Prior to July, 1, 1995, specialist providers and participating non-
physician providers were compensated on a fee-for-service basis. This<PAGE>
compensation was limited to an established maximum rate that reflected
the amount that similar providers of a similar service would typically
charge. Effective July 1, 1995, the Company implemented the Medicare
Resource Based Relative Value Scale methodology of provider
reimbursement. This methodology, which applies generally to specialist
health claims, has resulted in the lowering of some reimbursement
levels, mainly those having to do with office and hospital-based
procedures, while increasing payments for many evaluation and management
tasks. Management believes that this change will allow the Company to
continue to be competitive within its marketplace.
The HMOs have contractual arrangements with a combined total of 1,198
facilities, consisting of 188 hospitals and 1,010 non-hospital
facilities, as of December 31, 1995. These facilities are located in
the Company's HMO Service Area. Contracts with facilities are renewable
annually. These hospitals have provided assurance that, if discharged
enrollees require transfer to another facility, they will transfer such
enrollees to participating providers.<PAGE>
<PAGE> 7
HMO ARRANGEMENTS FOR OTHER SERVICES
The HMOs have contracted with a number of entities to arrange for the
provision of other services:
EMERGENCY CARE - Enrollees may receive urgent care services as an
alternative to hospital emergency room treatment. Enrollees can use
local urgent care centers and any hospital emergency room in emergency
situations.
HOME HEALTH CARE - A number of medical care providers are engaged to
provide health care services (such as nursing, pediatric, neonatal,
orthopedic, psychiatric, geriatric, dialysis treatments, physical
therapy, speech therapy and respiratory therapy) at the home of the
enrollee. MAMSI's home health care subsidiary, HomeCall, Inc.
("HomeCall"), provides these services throughout much of the Company's
service area.
PHARMACEUTICAL ASSISTANCE - The Company has arrangements with
participating pharmacies so that an enrollee is only responsible for the
deductibles and/or copayments that are indicated on his or her
enrollment card.
LABORATORY TESTING - The Company has an arrangement with a laboratory
that conducts much of the laboratory work required by HMO providers.
Enrollees in MAMSI's PPO are similarly referred to this laboratory for
testing.
DENTAL - In addition to a dental indemnity product available from MAMSI
Life, the Company has an arrangement with an association of dentists to
provide discounted dental services through a dental PPO. The Company is
also working toward offering a capitated dental HMO plan in 1996.
QUALITY ASSESSMENT/IMPROVEMENT AND COST CONTAINMENT
MAMSI conducts a multidisciplinary approach to its Quality
Assessment/Quality Improvement ("QA/QI") Program, utilizing the
resources of all of its subsidiaries to ensure the provision of quality
health care and services to its HMO enrollees in an appropriate and
cost-efficient manner.
MAMSI recognizes the importance of a Continuous Quality Improvement
Program to determine and allocate appropriate resources that will have
the greatest impact for the members. The QA/QI Program is designed to
meet and serve the needs of employers, members and providers as well as
to monitor the timeliness, appropriateness and effectiveness of services
via ongoing and systematic reviews of key indicators and aspects of
care. The QA/QI Program conducts member satisfaction surveys,
identifies opportunities for improvements in providing care, adopts
strategies to improve outcomes and monitors the improvement to report
progress.
MAMSI's QA/QI Committee, which operates under the auspices of MAMSI's
Board of Directors, includes administrative, clinical, provider and
community representation. The Committee evaluates numerous quality
related issues and outcomes measuring overall services provided to
enrollees.<PAGE>
In addition, MAMSI utilizes several cost control and quality review
mechanisms. Provider applications are reviewed by a Credentials
Committee in order to determine whether the applicant meets MAMSI's
application criteria, including Board Certification or eligibility.
MAMSI maintains a physician review process to determine whether the
needed levels of medical service are being provided in a timely and
efficient manner. The Company conducts medical audits to monitor and
review the quality of care provided. The Company's Medical Director
also monitors the hospital and out-of-plan referrals issued by primary
care providers.<PAGE>
<PAGE> 8
All physicians must obtain prior authorization for non-emergency
hospital admissions. The Medical Director may sanction physicians who
fail to secure prior authorization for non-emergency hospital admissions
of enrollees. Prior to admission for non-emergency hospital services,
MAMSI applies certain medical criteria to authorize the admission and
the anticipated length of stay for the diagnosis under treatment.
After admission of an HMO enrollee, MAMSI's Utilization Management
Department, in cooperation with the Medical Director, monitors the
course of hospital treatment for compliance with the previously
authorized length of stay. Although the Utilization Management staff is
not permitted to interfere with a physician's medical judgment regarding
the course of treatment, if the physician decides to extend an
enrollee's stay beyond that authorized, the physician must provide
medical justification for the necessity of such proposed action and
obtain specific approval from the Medical Director or his designee.
As required by Federal and state law, the HMOs have established a
grievance procedure to respond to enrollee complaints. Enrollees are
encouraged to use this procedure before proceeding further with a
complaint. Once this procedure is exhausted, any unresolved complaint
or grievance may be settled by binding arbitration rather than through
the courts. There is a similar grievance procedure for physician
complaints.
In 1993, MAMSI invited the National Committee for Quality Assurance
("NCQA"), a private, non-profit organization, to evaluate the Company's
methodologies in an effort to receive NCQA accreditation. NCQA
accreditation is a voluntary process. The Company did not meet certain
of NCQA's criteria and, therefore, did not receive NCQA accreditation.
MAMSI believes that it has adopted methodologies and programs designed
to respond to the concerns and questions raised in NCQA's assessment.
The Company believes that, based on its success with large group sales
since the denial of accreditation, the failure to receive NCQA
accreditation has not had a significant adverse effect on its business
or financial condition. It is MAMSI's intention to request the NCQA to
review its current methodologies sometime in 1996. Although the Company
believes that the likelihood of NCQA accreditation is high, there can be
no assurance that accreditation will be received or that MAMSI will not
experience disenrollment if accreditation is not ultimately received.
MAMSI has implemented the Health Plan and Employer Data and Information
Set ("HEDIS") 2.5, which represents a core set of performance measures
developed by NCQA to serve the employer as a purchaser.
The Company's home health care and home infusion subsidiaries underwent
voluntary accreditation review by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO") during 1995. Full accreditation
status was awarded as a result of this process.
COMPETITION AND MARKETING STRATEGY
The HMO industry is characterized by intense competition. MAMSI
recognizes the possibility that other firms with greater resources may
enter into competition with MAMSI in the future by either entering its
HMO Service Area or by designing alternative health care delivery
systems. HMOs compete not only with other HMOs, but also with insurance
companies that offer indemnity insurance products.<PAGE>
<PAGE> 9
MAMSI's HMOs compete with approximately 25 HMOs or other prepaid
alternative health care delivery systems that have a presence in at
least one of the cities or counties in MAMSI's service area. The
following table sets forth MAMSI's best estimate of the HMO enrollment
in 1995 of HMOs operating in its HMO Service Area. Certain of the HMOs
are part of a larger entity and the enrollees estimated herein include
only those in MAMSI's HMO Service Area.
<TABLE>
<CAPTION>
Approximate
Number
HMO Plan Type of Enrollees
------------- --------- ------------
<S> <C> <C>
Mid Atlantic Medical Services, Inc.* .......... IPA 622,000
Kaiser Permanente Health Care Program ......... Group 359,000
Health Plus (Sanus Healthcare)................. IPA 255,000
FreeState Health Plan** ....................... IPA 201,000
Humana Group Health ........................... Staff 117,000
Healthkeepers of Virginia*** .................. IPA 112,000
Capital Care**** .............................. IPA 97,000
George Washington University Health Plan ...... Group 82,000
Optima Health Plan ............................ IPA 76,000
Chesapeake Health Plan (Healthwise of
America, Inc.) .............................. IPA 66,000
Aetna Choice Healthcare Plan .................. IPA 62,000
CIGNA Health Plan of Virginia ................. IPA 56,000
Southern Health Services (Coventry Corp.) ..... IPA 51,000
U.S. Healthcare ............................... IPA 46,000
Sentara Health Plan ........................... Staff 45,000
Other HMOs (11) ............................... Various 257,000
</TABLE>
* - Includes individuals covered by the Company's HMOs only.
** - This company is owned by Blue Cross/Blue Shield of Maryland.
*** - This company is owned by Blue Cross/Blue Shield of Virginia.
**** - This company is owned by Blue Cross/Blue Shield of the National
Capital Area.
MAMSI's HMOs compete with other HMOs and insurance companies on the
basis of price and range of services offered to enrollees. PHP-MD
competes with the same entities and with other IPAs for physician
services. PHP-MD believes that the capitation payments it makes to PCPs
are competitive. MAMSI believes that the freedom IPA-model HMOs offer
their enrollees in choosing their own physicians constitutes a
competitive advantage over group or staff model HMOs. The ability to
retain and attract enrollees will depend, in part, on how present
enrollees assess their benefit packages, quality of service, rates and
the HMOs' responsiveness to enrollee needs. Nevertheless, physicians
increasingly provide health care services to health care organizations
that compete with MAMSI, and this trend may, over time, diminish any
competitive advantage presently enjoyed by MAMSI.
MAMSI subsidiaries employed approximately 613 full-time individuals who<PAGE>
provided marketing services for its HMOs as of December 31, 1995.
MAMSI's marketing strategy includes identifying and contacting employers
with more than 50 employees in its HMO Service Area in addition to
prospecting and telemarketing, employer group consultation, referrals by
consultants, and the use of selected brokers. The Company's strategy in
1995 included reducing the use of brokers for new business while
increasing its internal sales force. New members acquired by the
Company's dedicated sales force accounted for approximately 88% of total
new members in 1995.
RISK MANAGEMENT
With the exceptions of the large group market and the certain small
group markets, OCI uses underwriting criteria as a part of its risk
management efforts. Underwriting is the process of analyzing the risk
of enrolling employer groups in order to establish an appropriate
premium rate. Utilizing underwriting criteria, OCI seeks to avoid
contracting with employers that are likely to experience an actuarially
higher than expected need for medical care. OCI's use of underwriting
techniques is restricted in certain situations by state small group
reform legislation (see further discussion under "Government
Regulation").<PAGE>
<PAGE> 10
The Company maintains professional, directors and officers, errors and
omissions, general liability and property insurance coverage in amounts
believed to be adequate. The Company requires participating hospitals
to maintain professional liability coverage and physicians to have
malpractice insurance. A professional liability insurance policy
provides coverage in the event that legal action is taken against any
entity as a result of medical malpractice committed by a physician.
In addition, MAMSI's HMOs shift part of the risk of catastrophic losses
by maintaining reinsurance coverage for hospital costs. The reinsurer
indemnifies 80% of the eligible in and out of service area medical
expenses in excess of $200,000 per enrollee per year up to a lifetime
maximum of $2,000,000 in eligible medical costs.
During 1995, PHP-MD generally placed 5% to 15% of the payments due to
participating physicians in a Claims Reserve Risk Pool. The Claims
Reserve Risk Pool constitutes a financial risk-sharing arrangement among
the participating physicians and PHP-MD. Amounts held in the Claims
Reserve Risk Pool may be distributed from time to time by PHP-MD to
participating physicians if, in the judgment of PHP-MD's Board of
Directors, PHP-MD's financial condition permits such distribution. The
following table sets forth information regarding the portion of the
amount in the Claims Reserve Risk Pool that was distributed to
participating physicians in each calendar year.
Percentage
Distributed
Year to Providers
---- ------------
1990 16
1991 5
1992 4
1993 59
1994 58
1995 4
GOVERNMENT REGULATION
MAMSI's HMOs are subject to state and, in some instances, Federal
regulation. Among the areas regulated are: (i) premium rate setting;
(ii) benefits provided; (iii) marketing; (iv) provider contracts; (v)
quality assurance and utilization review programs; (vi) adherence to
confidentiality and medical records requirements; (vii) enrollment
requirements; and (viii) financial reserves and other fiscal solvency
requirements.
Under applicable law, HMOs must generally provide services to enrollees
substantially on a fixed, prepaid basis without regard to the actual
degree of utilization of services. The Company generally fixes the
premiums charged to employers for a 12 month period and revises the
premium with each renewal. In setting premiums, the Company forecasts
health care utilization rates based on the relevant demographics and
also considers competitive conditions and the average number of
enrollees in the employer group. In addition to these premiums,
enrollees also make copayments to providers as required.
Although premiums established may vary from account to account through
composite rate factors and special treatment of certain broad classes of<PAGE>
enrollees, Federal regulations generally prohibit traditional experience
rating of accounts on a retrospective basis. Consistent with the
practices of other Federally qualified HMOs, M.D. IPA, in some
situations, bases the premiums it charges employers in part on the age
and sex of the enrolled employees. M.D. IPA believes that its premiums
are competitive with other HMOs and health insurers and its health
coverage is a better value for members because of the range of physician
and hospital selection and other benefits provided.
M.D. IPA contracts with the Office of Personnel Management ("OPM") to
provide or arrange health services under the Federal Employees Health
Benefit Program ("FEHBP"). The contract with OPM and applicable
government regulations establish premium rating requirements for the
FEHBP. The premiums established under the OPM contract are subject to
periodic review and audit to determine if they were established in
compliance with the community rating and other requirements under the
program.<PAGE>
<PAGE> 11
MAMSI's HMOs must file periodic reports with, and are subject to
periodic review by, state regulatory authorities. Although MAMSI's HMOs
are not regulated specifically as insurance companies, they must comply
with certain provisions of state insurance laws as well as other laws
specifically enacted to regulate HMOs.
MAMSI Life, the Company's insurance subsidiary, is domiciled in Maryland
and is licensed in over 30 states. MAMSI Life is subject to regulation
by the department of insurance in each state in which it is licensed.
These regulations subject MAMSI Life to extensive review of the terms,
administration and marketing of insurance products offered and minimum
net worth and deposit requirements. In addition, MAMSI Life is required
to file periodic reports and is subject to periodic audits and
continuing oversight. The offering of certain new insurance products
may require the approval of regulatory agencies.
The Company's home health care operations are regulated principally in
four areas: home health care licensing; certification for participation
in private insurance and government reimbursement programs; employee
licensure and training requirements; and Federal occupational safety
guidelines. The Company believes that it is in compliance with all
applicable regulations, which include possessing the required
Certificates of Need in all locations in which such certificates are
required. Additionally, the Company's infusion business has obtained
the necessary licenses and permits to operate as a full service
pharmacy.
MAMSI's customers include employee health benefit plans subject to the
Employee Retirement Income Security Act of 1974 ("ERISA"). To the
extent that the Company has discretionary authority in the operation of
these plans, the Company could be considered a plan fiduciary under
ERISA. Plan fiduciaries are barred from engaging in various prohibited
transactions, including self-dealing. They are also required to conduct
the operations of employee benefit plans in accordance with each plan's
terms.
Due to the continued escalation of health care costs and the inability
of many individuals to obtain health care insurance, numerous proposals
relating to health care reform have been made, and additional proposals
may be introduced, in the United States Congress and the legislatures of
the states in which the Company operates or may seek to operate.
The United States Congress recently passed a budget reconciliation
package ("Budget Package") that included provisions reforming the
Medicare program. Under the Budget Package, Medicare beneficiaries
would be offered a variety of new health care options, including the
ability to enroll in private plans, such as HMOs, PPOs, point-of-service
plans, medical savings accounts and provider-sponsored organizations. A
traditional fee-for-service Medicare program would, however, continue to
be offered through HCFA. The Budget Package also amended current laws
that prohibit physician self-referral, guard against fraud and abuse and
eliminate the requirement that HMOs participating in the Medicare
program have membership that is composed of at least 50 percent non-
government program beneficiaries. In addition, HMOs would be paid a
monthly capitation rate that blends local and national costs with
greater weight given to the local component. A floor would be
established for payment to rural areas.<PAGE>
The Budget Package was submitted to President Clinton and was vetoed.
Accordingly, the ultimate form in which this legislation will take
effect and the impact of this legislation on the Company's business
cannot be predicted. Management believes that a portion of the managed
care provisions will be included in the final legislation and that
programs similar to the Company's Medicare program would be favorably
impacted by Medicare reform. It may, however, result in an increase in
the number of competitors.
The Budget Package also aimed to modify the Medicaid program by
converting the existing Medicaid program from a federal entitlement into
a block grant payment to the states. In addition, federal standards for
nursing homes would be revoked and states would have to establish and
maintain their own standards. As stated above, ultimate passage of this
legislation and the impact that this legislation would have on the
Company's business cannot be predicted.<PAGE>
<PAGE> 12
In recent years, state legislatures in the Company's service area have
been active in health care reform legislation targeted at the small
group market, i.e., usually for groups of 2 to 50 employees. This small
group reform is now in place in Maryland, Virginia, Delaware and North
Carolina, but not in Washington, D.C. or West Virginia. Although
different in many of the details, this type of legislation generally
requires all HMOs and insurers that offer small group coverage to accept
all small employers who apply for coverage and to guarantee coverage to
their employees seeking coverage regardless of their health status. The
legislation also requires renewal of these small group employer plans,
limits rate renewal increases, mandates adjusted community rating and
eliminates pre-existing condition limitations either entirely or within
a short period of time, usually six months.
The Company believes that the current political environment in which it
operates will result in continued legislative scrutiny of health care
reform and may lead to additional legislative initiatives. The Company
is unable to predict the ultimate impact upon the Company of any federal
or state restructuring of the health care delivery or health care
financing systems, but such changes could have a material adverse impact
on the operations and financial condition of the Company.
The District of Columbia, which has not previously regulated HMOs, has
proposed and may enact legislation providing for regulatory oversight
similar to that currently provided by other states. The Company does
not anticipate any significant negative impact on its operations because
of possible new regulatory oversight in the District of Columbia.
PREFERRED PROVIDER ORGANIZATIONS
MAMSI offers PPO coverage through two subsidiaries: Alliance PPO, Inc.
("Alliance") and Mid Atlantic Psychiatric Services, Inc. ("MAPSI").
PPOs allow enrollees to receive care from participating physicians at
contractually negotiated rates. A PPO is different from an HMO in that
a PPO does not assume any financial risk from medical utilization nor
does it process claims payments to providers. All medical charges are
passed directly to the payor, which can be either a self-funded
employer, a health benefits trust fund or another health insurance
company. In return for access to the PPO's network, the PPO charges the
employer either a per employee rate or a percentage of the savings of
actual claims processed for the services accessed. MAMSI's PPOs provide
access to substantially the same provider network as MAMSI's HMOs.
A PPO operates by being incorporated into an employer's current benefit
program, and offers some or all of the following: access to physician,
hospital and facility services; utilization management and quality
assurance; and claims screening and repricing. The employer determines
the level of the benefits and any applicable copayments.
Alliance is marketed primarily through insurance companies, insurance
brokers, consultants, third party administrators ("TPAs"), self-insured
employers and union trusts. The advantages of a TPA marketing approach
are minimized marketing costs and maximized market coverage through
established TPA-employer relationships. Alliance also works directly
with employers and unions that are self-insured and uses direct
marketing efforts. The major competition comes from other PPOs and
individual insurance carriers. At December 31, 1995, Alliance had<PAGE>
contracts with approximately 19,000 employer groups that had access to
the entire IPA provider network.
The MAPSI PPO is comprised of providers specializing in mental health
and substance abuse care. MAPSI's products are marketed directly to
TPAs, self-insured groups, brokers, indemnity plans, union funds and
consultants. In addition, MAPSI contracts with indemnity insurers that
want to offer groups a managed care mental health product. MAPSI
believes it has a competitive advantage with its unique mental health
screening process that offers the employer the benefit of enhanced
coordinated treatment for employees as well as increased cost savings.
MAPSI's major competitors include CMG Health, Inc., Green Spring Mental
Health and MCC Inc. At December 31, 1995, MAPSI had a provider network
of approximately 2,600 psychiatrists, psychologists, social workers, and
other affiliated licensed mental health providers.<PAGE>
<PAGE> 13
Alliance and MAPSI are most often marketed jointly and the prospective
purchaser usually also purchases the MAPSI PPO if the Alliance PPO is
purchased. The total number of lives covered under one or both of these
PPO products as of December 31, 1995 was approximately 825,000.
PPOs are not subject to HMO regulations by virtue of their business.
However, PPOs are subject to certain state regulations governing the
provision of PPO services such as mandatory state registration. It is
possible that PPOs may be subject to increased regulatory oversight in
the future.
OTHER PRODUCTS
MAMSI Life currently underwrites the indemnity coverage of the HMO's
preferred plans in addition to offering stand-alone indemnity health and
dental insurance, aggregate and specific stop loss insurance for self-
insured groups, and group life, accidental death and short-term
disability policies. In addition, in 1995 MAMSI Life began providing an
administrative services only ("ASO") product to the State of Maryland.
ASO business consists of allowing access to MAMSI's provider network,
without gatekeeper PCPs, and the payment of claims. MAMSI has no
insurance risk on this product. MAMSI Life holds insurance licenses in
over 30 jurisdictions including Maryland, Virginia, the District of
Columbia, West Virginia, Delaware and North Carolina. MAMSI Life also
became licensed in Pennsylvania in 1995.
On October 7, 1994, MAMSI acquired all of the outstanding stock of
HomeCall and its wholly owned subsidiary, FirstCall, Inc. ("FirstCall"),
for approximately $10 million, including direct expenses. HomeCall is a
state licensed, Medicare certified home health agency. The combined
operations of HomeCall and FirstCall include 16 branch locations that
serve virtually all of Maryland, the District of Columbia, Northern
Virginia and the Panhandle area of West Virginia.
Also during the fourth quarter of 1994, the Company formed a home
infusion services company, HomeCall Infusion Services, Inc. ("HIS"),
which received its pharmacy license in 1994 and its Federal license from
the Drug Enforcement Agency in 1995.
Homecall, FirstCall and HIS provide services that are generally lower
cost alternatives to institutional treatment and care. The Company
believes that it will provide better care to its members and reduce its
medical costs by substituting, where medically appropriate, in-home
medical treatment for treatment in an institutional setting.
Medical services provided by HomeCall, FirstCall and HIS include skilled
nursing, high tech nursing in support of infusion therapy,
maternal/infant nursing, physical, speech and occupational therapy,
medical social work, nutrition consultation and home health care aides.
Medical services provided by HIS include a comprehensive range of in
home drug infusion therapies as well as the delivery of infusion ready
drugs for physician office based infusion therapy.
In addition to providing in-home medical care to the Company's members,
HomeCall, FirstCall and HIS will continue to provide services to other
payors, including insurance companies, other HMOs and individuals.
The Company also has an equity interest in an ambulatory surgery center<PAGE>
located in Rockville, Maryland. The surgery center conducts outpatient
surgery and services to HMO enrollees and other patients.<PAGE>
<PAGE> 14
A summary of MAMSI's membership enrollment in all product lines is as
follows:
<TABLE>
<CAPTION>
MEMBERSHIP DATA AT DECEMBER 31
---------------------------------
PRODUCT LINE 1993 1994 1995
------------ ---------------------------------
(in thousands)
<S> <C> <C> <C>
Commercial HMO (1) 382.6 393.2 430.1
Hybrid HMO (2) 48.7 82.5 94.5
Medicaid 8.7 28.0 91.0
Medicare -- .3 6.0
Indemnity -- 4.0 23.6
ASO (3) -- -- 13.2
------- ------- -------
440.0 508.0 658.4
PPO (4) 510.0 698.0 825.0
------- ------- -------
Total Membership 950.0 1,206.0 1,483.4
======= ======= =======
</TABLE>
(1) Commercial HMO includes traditional HMO and point-of-service
members.
(2) Hybrid HMO includes any business that uses MAMSI's network and
gatekeeper PCPs, utilization management services, claims adjudication
and payment services and that has a self-funded component. Generally,
these products include specific and/or aggregate stop loss provisions.
(3) ASO includes administrative services only business without
gatekeeper PCPs and no assumption of insurance risk by any MAMSI
affiliate.
(4) PPO includes all business whereby access is granted to MAMSI's
provider network. MAMSI assumes no risk and does not provide claims
payment services on this business.
INVESTMENTS
The majority of the Company's investments are held by its state
regulated entities to provide capital for those entities' operations and
to satisfy capital, surplus and deposit requirements of the HMO and
insurance laws of the various states in which the Company is licensed.
HMO and insurance laws generally protect consumers of insurance products
with one of the principal focuses being on financial solvency of the
company's underwriting insurance risk. These laws and regulations limit
the types of investments that can be made by the regulated entities with
appropriate investments being deemed "admitted assets." Admitted assets
are those assets that can be used to fulfill capital and surplus
requirements. The Company's current investment policy generally
prohibits investments that would be "non-admitted" for statutory
reporting purposes. The Company has no investments in derivative
financial instruments and has no current intention of owning such
investments.<PAGE>
EMPLOYEES
As of December 31, 1995, the Company had a total of 2,374 employees,
including 1,839 full-time and 535 part-time employees. MAMSI's home
health care subsidiaries employed 799 of these employees (394 on a full-
time basis and 405 on a part-time basis). None of the Company's
employees are covered by a collective bargaining agreement and the
Company has not experienced any work stoppage since its inception. The
Company believes that it has a good relationship with its employees.
ITEM 2. PROPERTIES
To accommodate the Company's rapid growth, the Company has purchased six
office buildings since 1988. These buildings are all located in
Rockville, Maryland and total approximately 244,000 square feet of
office and warehouse space. The Company's headquarters is located at 4
Taft Court, Rockville, Maryland 20850.<PAGE>
<PAGE> 15
In addition, the Company leases approximately 176,000 square feet of
office space and approximately 5,200 square feet of warehouse space in
various locations within its service areas to support sales and
administrative operations.
ITEM 3. LEGAL PROCEEDINGS
During the third quarter of 1995, certain shareholders of MAMSI filed
lawsuits in the United States District Court for the District of
Maryland against MAMSI and certain current and former directors and
officers. (Ivan D. Wesley, et al. v. Mid Atlantic Medical Services,
Inc., et al., No. PJM-95-2098; Charles Rittenberg v. Mid Atlantic
Medical Services, Inc., et al., No. PJM-95-2319; Joseph J. Szlavik v.
Mid Atlantic Medical Services, Inc., et al., No. PJM-95-2346; and Robert
V. Bruchs Trust v. Mid Atlantic Medical Services, Inc., et al., No. JFM
95-2763.) These actions have been consolidated and, on November 1,
1995, a consolidated Amended Class Action Complaint was filed on behalf
of all plaintiffs under the caption In Re Mid Atlantic Medical Services,
Inc. Securities Litigation, No. PJM 95-2098. The amended complaint
alleges that MAMSI is liable under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder for its failure to
disclose in a timely fashion that it had been denied accreditation by
the NCQA and that the officers and directors named as defendants are
liable under Section 10(b) and Rule 10b-5, directly and as controlling
persons of MAMSI, for the failure to disclose. Plaintiffs seek to
represent a class of all persons who purchased the common stock of MAMSI
from March 1, 1995 through June 15, 1995. The Court has set a discovery
schedule, and has set a trial date of December 2, 1996. Currently, the
parties have undertaken limited discovery. The Company is not able to
predict the probability of a favorable or unfavorable outcome or the
amount of potential loss, in the event of an unfavorable outcome. MAMSI
believes it has meritorious defenses to the claims raised in the Amended
Complaint and intends to defend the action vigorously.
The staff of the Securities and Exchange Commission has asked MAMSI to
provide certain information relating to the denial of accreditation by
the NCQA and to sales of stock by certain officers and directors prior
to the announcement of the NCQA's action. MAMSI has voluntarily
complied with the Commission's requests.
The Company is involved in various other legal actions arising in the
normal course of business, some of which seek substantial monetary
damages. After review, including consultation with legal counsel,
management believes that any ultimate liability in excess of amounts
accrued for these other actions will not materially affect the Company's
consolidated financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for shareholder vote in the fourth
quarter of 1995.<PAGE>
<PAGE> 16
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is currently listed on the New York Stock
Exchange ("NYSE") under the trading symbol MME. Prior to September 29,
1994, the common stock of the Company was listed on the Nasdaq National
Market System under the trading symbol MAMS. The following table sets
forth for the indicated periods the high and low reported sale prices
(adjusted for stock dividends; see Note 12 to the consolidated financial
statements) of the common stock as furnished by the NYSE and Nasdaq.
1995 1994
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $26.13 $19.75 $22.50 $12.06
Second Quarter 25.00 16.63 28.31 18.13
Third Quarter 21.00 17.13 30.13 18.44
Fourth Quarter 25.13 17.50 30.25 18.75
The Company has never paid any cash dividends on its common stock and
presently anticipates that no cash dividends will be declared in the
foreseeable future. Any dividends will depend on future earnings, the
financial condition of the Company and regulatory requirements.
As of February 28, 1996, there were approximately 747 stockholders of
record of the Company's common stock.<PAGE>
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands except share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA
Revenue $ 955,395 $ 749,898 $ 648,225 $ 582,489 $ 400,370
Expense 859,055 663,343 605,779 561,176 385,813
Income before income tax and cumulative
effect of accounting change 96,340 86,555 42,446 21,313 14,557
Income before cumulative effect
of accounting change 61,124 54,530 25,496 13,460 9,687
Net income 61,124 54,530 24,833 13,460 9,687
Earnings per common and common
equivalent share (1):
Income before cumulative effect of
accounting change 1.28 1.15 0.57 0.31 0.23
Net income (2) 1.28 1.15 0.55 0.31 0.23
Weighted average common and
common equivalent shares
outstanding (1) 47,908,379 47,370,211 45,109,230 43,067,144 42,852,570
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital 153,668 91,983 39,758 9,722 8,335
Total assets 354,182 268,522 189,561 130,356 100,779
Long-term debt 194 5,331 5,763 6,416 7,064
Stockholders' equity 217,216 141,326 71,963 40,389 24,859
Cash dividends per common share (3) --- --- --- --- ---
KEY RATIOS
Medical loss ratio 81.9% 80.8% 86.3% 89.9% 90.1%
Administrative expense ratio 10.6% 9.4% 8.3% 7.4% 7.3%
Net income margin 6.4% 7.3% 3.9% 2.3% 2.4%
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services 313 312 321 326 336
HMO only (4) 222 238 251 281 281
Medicare 2,531 --- --- --- ---
Medicaid 405 466 --- --- ---
Annualized hospital admissions per
1,000 enrollees 80 76 69 71 69
HMO, hybrid, ASO and indemnity
health enrollees at year end 658,000 508,000 440,000 448,000 386,000<PAGE>
PPO enrollees at year end 825,000 698,000 510,000 327,000 205,000
Participating providers at year end 21,077 16,950 15,500 11,900 10,000
</TABLE>
Notes
1. Earnings per common share are computed after giving effect to
dilutive stock options. All per share amounts and weighted average
common and common equivalent shares have been adjusted to reflect all
stock dividends on a retroactive basis. See Note 12 to the consolidated
financial statements.
2. See Note 8 to the consolidated financial statements.
3. MAMSI has not declared or paid cash dividends on its common stock.
4. Days are presented exclusive of skilled nursing, neonatal intensive
care and psychiatric inpatient care.<PAGE>
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING INFORMATION
All forward-looking information contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations
is based on management's current knowledge of factors affecting MAMSI's
business. MAMSI's actual results may differ materially if these
assumptions prove invalid. Significant risk factors, while not all
inclusive, are:
1. The possibility of increasing price competition in the Company's
market place.
2. The possibility of state or Federal budget related mandates that
reduce premiums for Medicaid or Medicare recipients.
3. The potential for increased medical expenses due to:
- Increased utilization by the Company's membership.
- Inflation of costs in the provider community.
- Federal or state mandates that increase benefits.
4. The possibility that the Company is not able to expand its service
territory as planned due to regulatory delays and/or inability to
contract with appropriate providers.
GENERAL
During the three year period ended December 31, 1995, MAMSI and its
subsidiaries (the "Company") have experienced substantial revenue growth
due to increased HMO and PPO membership. The Company has achieved its
membership growth by expanding its product line, which includes point-
of-service, small group, indemnity health, hybrid products, Medicaid and
Medicare products and through expansion into new geographic markets.
Premium rates during this time have remained at or near competitive
levels for the Company's marketplace. Operating margins have remained
positive due to the control of medical expenses and, accordingly,
profits and earnings per share have increased. The Company currently
anticipates that there may be slight increases in premium rates during
1996 and that the Company's operating margins will remain stable. This
is a forward-looking statement, and the Company's actual operating
margins may differ from management's current expectation due to risk
factors which may affect either the Company's revenues or expenses. See
"Forward-Looking Information" above for a description of these risk
factors.
The Company generally receives a fixed premium amount per member per
month while the majority of medical expenses are variable and
significantly affected by spontaneous member utilization. Even with
managed care controls, unusual medical conditions can occur, such as an
outbreak of influenza or a higher than normal incidence of high cost
cases (such as premature births, complex surgeries, or rare diseases).
As a result, the Company's quarterly results can be materially affected
and irregular. However, over the longer business cycle, the Company
believes that its managed care control systems, underwriting procedures
(when allowed) and network of providers will result in continued strong
profitability.<PAGE>
The United States Congress recently passed a budget reconciliation
package ("Budget Package") that included provisions reforming the
Medicare program. Under the Budget Package, Medicare beneficiaries
would be offered a variety of new health care options, including the
ability to enroll in private plans, such as HMOs, PPOs, point-of-service
plans, medical savings accounts and provider-sponsored organizations. A
traditional fee-for-service Medicare program would, however, continue to
be offered through the Health Care Financing Administration. The Budget
Package also amended current laws that prohibit physician self-referral,
guard against fraud and abuse and eliminate the requirement that HMOs
participating in the Medicare program have membership that is composed
of at least 50 percent non-government program beneficiaries. In
addition, HMOs would be paid a monthly capitation rate that blends local
and national costs with greater weight given to the local component. A
floor would be established for payment to rural areas.<PAGE>
<PAGE> 19
The Budget Package was submitted to President Clinton and was vetoed.
Accordingly, the ultimate form in which this legislation will take
effect and the impact of this legislation on the Company's business
cannot be predicted. Management believes that a portion of the managed
care provisions will be included in the final legislation and that
programs similar to the Company's Medicare program would be favorably
impacted by Medicare reform. It may, however, result in an increase in
the number of competitors.
The Budget Package also aimed to modify the Medicaid program by
converting the existing Medicaid program from a federal entitlement into
a block grant payment to the states. In addition, federal standards for
nursing homes would be revoked and states would have to establish and
maintain their own standards. As stated above, ultimate passage of this
legislation and the impact that this legislation would have on the
Company's business cannot be predicted.
In recent years, state legislatures in the Company's service area have
been active in health care reform legislation targeted at the small
group market, i.e., usually for groups of 2 to 50 employees. This small
group reform is now in place in Maryland, Virginia, Delaware and North
Carolina, but not in Washington, D.C. or West Virginia. Although
different in many of the details, this type of legislation generally
requires all HMOs and insurers that offer small group coverage to accept
all small employers who apply for coverage and to guarantee coverage to
their employees seeking coverage regardless of their health status. The
legislation also requires renewal of these small group employer plans,
limits rate renewal increases, mandates adjusted community rating and
eliminates pre-existing condition limitations either entirely or within
a short period of time, usually six months.
The Company believes that the current political environment in which it
operates will result in continued legislative scrutiny of health care
reform and may lead to additional legislative initiatives. The Company
is unable to predict the ultimate impact upon the Company of any federal
or state restructuring of the health care delivery or health care
financing systems, but such changes could have a material adverse impact
on the operations and financial condition of the Company.
The District of Columbia, which has not previously regulated HMOs, has
proposed and may enact legislation providing for regulatory oversight
similar to that currently provided by other states. The Company does
not anticipate any significant negative impact on its operations because
of possible new regulatory oversight in the District of Columbia.
-----------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31,
1994
-----------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated net income for the Company was $61,124,000 and $54,530,000
in 1995 and 1994, respectively, an increase of 12 percent. Earnings per
share on net income increased 11 percent from $1.15 in 1994 to $1.28 in
1995. All earnings per share amounts reflect the 100% stock dividend
paid to stockholders on August 5, 1994 (see Note 12 to the consolidated
financial statements). The increase in earnings is primarily<PAGE>
attributable to an increase in membership, increased investment income
from higher invested balances and realized gains, and a reduction in per
member per month medical expenses (principally due to a reduction in the
return of physician withhold), partially offset by a reduction in
premiums per enrollee and an increase in administrative expenses
principally due to additions to the Company's internal sales force,
expansion into new geographic territories and the operations of the home
health care subsidiaries that were purchased in late 1994.<PAGE>
<PAGE> 20
Revenue in 1995 increased 27 percent to $955.4 million from $749.9
million in 1994. A 27 percent increase in net average HMO and indemnity
enrollment resulted in an increase of approximately $197.2 million in
health premium revenue and a 2 percent decrease in average premiums per
HMO and indemnity enrollee reduced health premium revenue by
approximately $18.2 million. Health premiums per enrollee have declined
due to the combined effects of an increasing relative percentage of
Virginia Medicaid HMO members with lower per enrollee revenues and the
volatility of revenues from groups with alternative funding arrangements
(i.e., revenues vary in a more direct way with medical expense) coupled
with management's plan to price its commercial products competitively
(see Note 1 to the consolidated financial statements). Although health
premiums per member declined in the current period as compared to the
prior year period, management does not believe that future periods will
necessarily follow this pattern. This is a forward-looking statement.
See "Forward-Looking Information" above for a description of the risk
factors that may affect health premiums per member.
Fee and other revenue increased $5.6 million or 57 percent primarily due
to membership increases in PPO and administrative services only ("ASO")
products. Total PPO and ASO membership grew from 698,000 at December
31, 1994 to 838,200 at December 31, 1995, an increase of 20 percent.
Service revenue from the Company's home health care subsidiaries
contributed $18.9 million in revenue in 1995, and the introduction of
indemnity life, accidental death and disability products in 1995
contributed $1.4 million in revenue.
The Company currently has one of the largest HMO and managed care
enrollments in its service area (which includes the entire states of
Maryland and Delaware, the District of Columbia, most counties and
cities in Virginia, and certain parts of West Virginia and North
Carolina), and also the largest network of contract providers of medical
care. Because of the full range of managed care products, service
reputation, strong provider delivery system, trained sales force, and
competitive premiums, management believes that the Company will continue
to increase its membership in 1996. Management's goal is to increase
membership in all products by 25 percent to 35 percent in 1996. This is
a forward-looking statement, and the actual membership may differ from
management's current expectation due to risk factors such as increased
competition in the Company's service area. See "Forward-Looking
Information" above for a description of these risk factors.
In 1993, MAMSI invited the National Committee for Quality Assurance
("NCQA"), a private, non-profit organization, to evaluate the Company's
methodologies in an effort to receive NCQA accreditation. NCQA
accreditation is a voluntary process. The Company did not meet certain
of NCQA's criteria and, therefore, did not receive NCQA accreditation.
MAMSI believes that it has adopted methodologies and programs designed
to respond to the concerns and questions raised in NCQA's assessment.
The Company currently believes that, based on its success with large
group sales since the denial of accreditation, the failure to receive
NCQA accreditation has not had a significant adverse effect on its
business or financial condition. It is MAMSI's intention to request the
NCQA to review its current methodologies sometime in 1996. Although the
Company believes that the likelihood of NCQA accreditation is high,
there can be no assurance that accreditation will be received or that
MAMSI will not experience disenrollment if accreditation is not
ultimately received.<PAGE>
The Company's home health care and home infusion subsidiaries underwent
voluntary accreditation review by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO") during 1995. Full accreditation
status was awarded as a result of this process.
Medical expenses as a percentage of premium revenue ("medical loss
ratio") increased to 81.9 percent in 1995 as compared to 80.8 percent in
1994, principally due to a decrease in average premiums per enrollee and
also higher than anticipated medical expenses in the Company's Medicare
risk product. On a per member per month basis, medical expenses
declined approximately .6 percent over the same period due to a
reduction in the return of physician withhold and offset by higher
member utilization, particularly in the Medicare product. Management
does not believe that this necessarily represents a sustainable trend.
Total medical costs may increase in future periods due to inflationary
pressures, governmentally mandated benefit increases and/or the Company
may experience increased utilization by its membership.<PAGE>
<PAGE> 21
Over the past two years, the Company has achieved year-over-year
reductions in per member per month medical expenses. In order to
continue to reimburse providers at a fair level in a manner consistent
with the current medical environment, the Company implemented the
Medicare Resource Based Relative Value Scale methodology of provider
reimbursement effective July 1, 1995. This methodology, which applies
generally to specialist health claims, has resulted in the lowering of
some reimbursement levels, mainly those having to do with office and
hospital-based procedures, while increasing payments for many evaluation
and management tasks. Management believes that this change will allow
the Company to continue to be competitive within its marketplace.
Administrative expenses as a percentage of revenue ("administrative
expense ratio") increased to 10.6 percent in 1995 as compared to 9.4
percent in 1994. Administrative expenses increased 43 percent, from
$70.5 million in 1994 to $100.8 million in 1995. The increase in the
administrative expense ratio is primarily attributable to expenses of
the Company's home health care subsidiaries, which were purchased in
late 1994, the Company's territorial expansion into additional service
areas within currently served states as well as into the new states of
North Carolina (approved), South Carolina (pending), and Pennsylvania
(pending), the continued implementation of its plan to significantly
increase its employee sales force and the higher costs of administering
the Medicaid product, which became a more significant line of business
for the Company in 1995.
Investment income increased $5.4 million or 81 percent primarily due to
significantly greater invested balances and an increase in realized
gains on sales of marketable equity securities.
Deferred tax assets are recognized for deductible temporary differences
that, in management's opinion, are more likely than not to be realized
in the current or future periods. The Company's history of operating
revenue and income growth, and expectation of future operating income,
provides strong positive evidence that these deferred tax assets will be
realized. A valuation allowance has been recorded for net operating
loss carryforwards generated by certain subsidiaries that are not
deductible on a consolidated tax return. Management intends to continue
to monitor the realizability of deferred tax assets in light of future
circumstances and assess the reasonableness of the valuation allowance
on a quarterly basis.
The net margin rate decreased from 7.3 percent in 1994 to 6.4 percent in
1995. This decrease is primarily due to lower premium rates on certain
products and increased administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive and the majority of the
Company's expenses are payments to health care providers, which
generally vary in direct proportion to the premium revenues received by
the Company. Although medical utilization rates vary by season, the
payments for such expenses lag behind cash inflow from premiums because
of the lag in provider billing procedures. In the past, the Company's
cash requirements have been met principally from operating cash flow and
it is anticipated that this source will continue to be sufficient in the
future.<PAGE>
Cash and short-term investments increased from $154.0 million at
December 31, 1994 to $215.6 million at December 31, 1995, primarily due
to operating profits and proceeds from the exercise of employee stock
options. Accounts receivable increased from $37.0 million at December
31, 1994 to $61.3 million at December 31, 1995, primarily due to the
significant increase in membership during 1995 and also an increase in
medical recoverable receivables related to new products.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement No. 115"). Statement No. 115
requires that investments in all debt securities plus equity securities
with readily determinable fair values be classified into categories,
which then establish the appropriate accounting treatment. At January
1, 1994, the Company's entire short-term investment portfolio was
classified as available-for-sale and, as a result, the net unrealized
gain associated with these securities of $1.1 million, net of tax, was
recorded as a separate component of stockholders' equity. Also on the
same date, the Company's statutory deposits, which consist of
investments held in custodial accounts by state regulatory agencies,
were classified as held-to-maturity and will continue to be carried at
amortized cost.<PAGE>
<PAGE> 22
Short-term investments are marked to market at the end of every quarter
and the resulting unrealized gain or loss is reflected in the ending
stockholders' equity balance. Accordingly, stockholders' equity at
December 31, 1995 reflects an unrealized gain of $1.5 million, net of
tax, on the Company's short-term investments primarily due to
significant gains during the year in national equity markets plus the
impact of falling interest rates on the market value of the Company's
debt securities.
Net deferred income taxes decreased from $14.0 million at December 31,
1994 to $6.5 million at December 31, 1995, principally due to a change
in the tax filing status of certain subsidiary corporations, which
impacted the calculation of certain deductible temporary differences,
and also the effect of the tax recognized for unrealized gains and
losses on the Company's short-term investments.
Medical claims payable increased from $85.0 million at December 31, 1994
to $108.5 million at December 31, 1995, primarily due to the significant
increase in membership and related claim volume during 1995.
Long-term debt decreased from $5.3 million at December 31, 1994 to $.2
million at December 31, 1995, primarily due to the payoff of the
Company's mortgage note payable without prepayment penalty. The Company
has access to total revolving credit facilities of $10.0 million, which
is used to provide short-term capital resources for routine cash flow
fluctuations. At December 31, 1995, approximately $1.65 million was
drawn against the lines-of-credit and approximately $469,000 was
outstanding in letters-of-credit.
Additional paid-in capital increased from $29.4 million at December 31,
1994 to $40.4 million at December 31, 1995, due to proceeds from the
exercise and related tax benefits of stock options.
Following is a schedule of the short-term capital resources available to
the Company:
December 31
(in thousands) 1995 1994
------------------------
Cash and cash equivalents $ 10,874 $
17,054
Short-term investments 204,734 136,901
Working capital advances to Maryland
hospitals 4,053 3,982
-------- --------
Total available liquid assets 219,661 157,937
Credit line availability 7,880 8,452
-------- --------
Total short-term capital resources $ 227,541 $ 166,389
======== ========
Certain MAMSI subsidiaries that are subject to regulation by state
insurance departments must notify state regulators before the payment of
any dividends to MAMSI and, in certain circumstances, must receive
positive affirmation prior to such payment. Due to the substantial
statutory net worth of these subsidiaries, the Company does not perceive
these requirements to be a significant restriction on its ability to pay
future dividends.<PAGE>
The Company does not anticipate any adverse impact on future liquidity
due to medical malpractice issues because the Company carries
substantial professional liability insurance.
The Company believes that the cash flow generated from operations along
with its current liquidity and borrowing capabilities are adequate for
both current and planned expanded operations. In October 1995, MAMSI
announced the approval of a stock repurchase program. Under this
program, MAMSI may currently expend up to $60 million (including
brokerage commissions) to repurchase shares of its common stock over a
twelve month period at prices not to exceed $24.00 per share. At
December 31, 1995, no shares of common stock had been repurchased under
this program. This program will be financed through cash flow from the
Company's operations. Other capital expenditures will be made over the
next year to enhance the Company's computer systems, to establish
additional sales offices and to make necessary improvements to existing
administrative offices.<PAGE>
<PAGE> 23
-----------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31,
1993
-----------------------------------------------------------------------
RESULTS OF OPERATIONS
For the year ended December 31, 1994, the Company had $54,530,000 in
consolidated net income compared to $24,833,000 for the year ended
December 31, 1993, an increase of 120 percent. The increase in earnings
is attributable to an increase in membership and per member per month
premiums and a significant reduction in the medical loss ratio over the
prior year, partially offset by an increase in the administrative
expense ratio.
Revenues for 1994 increased 16 percent to $749.9 million from $648.2
million in 1993. An 8 percent increase in average HMO enrollment
resulted in approximately a $48.1 million increase in premium revenue
and a 6 percent increase in average premiums per enrollee contributed
$40.8 million in premium revenue. Premiums per enrollee were higher in
1994 due to a combination of premium price increases and membership
gains in certain higher-priced benefit packages. Fee revenues from PPO
products and other service fees, including revenue from MAMSI's home
health care subsidiary that was acquired in October 1994, increased
approximately $8.7 million or 148 percent.
The medical loss ratio for 1994 decreased to 80.8 percent from 86.3
percent in 1993 and, on a per member per month basis, medical expenses
decreased .5 percent. This decrease in the medical loss ratio reflects
higher premiums, a reduction in membership utilization levels in 1994
and the efficacy of managed care controls developed and expanded by the
Company over the preceding three years.
The administrative expense ratio increased from 8.3 percent in 1993 to
9.4 percent in 1994. The increase in the administrative expense ratio
is primarily attributable to increased sales, marketing and advertising
expenses and the development of new products and territories.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under the
new rules, deferred taxes are recognized using the liability method,
whereby tax rates are applied to cumulative temporary differences based
on when and how they are expected to affect the tax return. The
cumulative effect of the change for the year ended December 31, 1993
reduced net income by approximately $663,000 or $.02 per share.
The net margin rate increased from 3.9 percent in 1993 to 7.3 percent in
1994. This increase is primarily due to medical expenses rising at a
lesser rate than premium revenues, partially offset by an increase in
administrative expenses.<PAGE>
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 1995 and 1994 ... 25
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993 ............................. 26
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 ......... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 ............................. 28
Notes to Consolidated Financial Statements ..................... 29
Report of Ernst & Young LLP Independent Auditors ............... 43
Selected Quarterly Financial Data for Fiscal Years 1995
and 1994 (Unaudited) ......................................... 44<PAGE>
<PAGE> 25
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands except share amounts) 1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 10,874 $ 17,054
Short-term investments (Note 2) 204,734 136,901
Accounts receivable, net (Note 3) 61,263 37,031
Prepaid expenses, advances and other 8,974 5,743
Deferred income taxes (Note 8) 4,379 15,540
-------- --------
Total current assets 290,224 212,269
Property and equipment, net (Note 4) 38,704 33,668
Statutory deposits (Note 2) 10,543 9,877
Other assets 11,373 12,708
Deferred income taxes (Note 8) 3,338
-------- --------
Total assets $ 354,182 $ 268,522
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable (Note 5) $ 210 $ 726
Short-term borrowings (Note 5) 1,651 1,048
Accounts payable 15,075 17,565
Income taxes payable (Note 8) 2,589
Medical claims payable, net (Note 6) 108,490 85,014
Deferred premium revenue 10,125 13,344
Deferred income taxes (Note 8) 1,005
-------- --------
Total current liabilities 136,556 120,286
Notes payable (Note 5) 194 5,331
Deferred income taxes (Note 8) 216 1,579
-------- --------
Total liabilities 136,966 127,196
Stockholders' equity (Notes 11, 12 and 14)
Common stock, $0.01 par, 100,000,000 shares authorized,
46,631,327 issued and 46,585,387 outstanding at
December 31, 1995; 45,663,527 issued and 45,617,587
outstanding at December 31, 1994 466 456
Additional paid-in capital 40,374 29,431
Treasury stock (33) (33)
Unrealized gains and (losses) on investments, net of tax
of $1,004 and $(1,490) (Note 2) 1,535 (2,278)
Retained earnings 174,874 113,750
-------- --------
Total stockholders' equity 217,216 141,326
-------- --------
Total liabilities and stockholders' equity $ 354,182 $ 268,522
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
<PAGE>
<PAGE> 26
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands except share amounts) 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenue
Health premium $ 907,694 $ 728,743 $ 639,875
Fee and other 15,334 9,760 5,845
Life, accidental death and disability premium 1,449
Home health services 18,910 4,745
Investment 12,008 6,650 2,505
--------- --------- ---------
Total revenue 955,395 749,898 648,225
--------- --------- ---------
Expense
Medical expense
Referral and ancillary care (Notes 9 and 10) 320,412 271,042 249,750
Hospitalization, net of coordination of benefits 247,870 191,902 185,422
Primary care (Notes 9 and 10) 93,320 70,960 64,546
Prescription drugs 80,438 56,246 51,903
Reinsurance premiums, net (Note 7) 1,587 (1,160) 584
--------- --------- ---------
743,627 588,990 552,205
--------- --------- ---------
Life, accidental death and disability settlements 934
--------- --------- ---------
Home health patient services 13,684 3,817
--------- --------- ---------
Administrative expense
Salaries and benefits 63,194 42,740 34,188
Promotion and advertising 3,246 4,504 1,670
Facilities, maintenance and supplies 19,134 11,990 10,081
Professional services 3,717 2,701 2,092
Other (including interest expense of $1,010, $1,208 and $781) 11,519 8,601 5,543
--------- --------- ---------
100,810 70,536 53,574
--------- --------- ---------
Total expense 859,055 663,343 605,779
--------- --------- ---------
Income before income taxes and cumulative effect of accounting change 96,340 86,555 42,446
Provision for income taxes (Note 8) (35,216) (32,025) (16,950)
--------- --------- ---------
Income before cumulative effect of accounting change 61,124 54,530 25,496
Cumulative effect as of December 31, 1992 of change
in method of accounting for income taxes (Note 8) (663)
--------- --------- ---------
Net Income $ 61,124 $ 54,530 $ 24,833
========= ========= =========
Earnings per common and common equivalent share (Notes 11 and 12):
Income before cumulative effect of accounting change $ 1.28 $ 1.15 $ .57
Cumulative effect of accounting change (.02)
--------- --------- ---------
Net Income $ 1.28 $ 1.15 $ .55
========= ========= =========
Weighted average common and common equivalent shares outstanding (Note 12) 47,908,379 47,370,211 45,109,230
========== ========== ==========<PAGE>
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
<PAGE>
<PAGE> 27
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Additional Unrealized
Stock Paid-In Treasury Gains and Retained
(in thousands except share amounts) $0.01 Par Capital Stock (Losses) Earnings Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 143 $ 5,889 $ (30) $ 34,387 $ 40,389
Exercise of stock options for
1,212,050 shares of MAMSI
common stock 4 3,198 3,202
Recognition of the granting of
non-qualified stock options 1,957 1,957
Stock option tax benefit 1,584 1,584
50% stock dividend ($2 paid in
lieu of fractional shares) 73 (75) (2)
Net income 24,833 24,833
-------- -------- -------- -------- -------- --------
Balance, December 31, 1993 220 12,553 (30) 59,220 71,963
Adjustment to beginning balance
for change in accounting
method, net of tax of $718
(Note 2) $ 1,099 1,099
Exercise of stock options for
1,520,975 shares of MAMSI
common stock 10 6,127 6,137
Stock option tax benefit 10,973 10,973
100% stock dividend 226 (226)
Change in unrealized gains
and (losses), net of tax
benefit of $2,208 (3,377) (3,377)
Other 4 (3) 1
Net income 54,530 54,530
-------- -------- -------- -------- -------- --------
Balance, December 31, 1994 456 29,431 (33) (2,278) 113,750 141,326
Exercise of stock options for
967,800 shares of MAMSI
common stock 10 4,533 4,543
Stock option tax benefit 6,410 6,410
Change in unrealized gains
and (losses), net of tax
of $2,494 3,813 3,813
Net income 61,124 61,124
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 $ 466 $ 40,374 $ (33) $ 1,535 $ 174,874 $ 217,216
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
<PAGE>
<PAGE> 28
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 61,124 $ 54,530 $ 24,833
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,026 4,225 3,702
Provision for bad debts 47 370 1,018
Provision for deferred income taxes 4,971 (2,435) (1,868)
Loss on sale and disposal of assets 78 1,126 993
Cumulative effect of change in accounting principle 663
Recognition of the granting of non-qualified stock options 1,957
Other operating activities (15)
Changes in operating assets and liabilities, net of effects
of acquisition of subsidiary:
Increase in accounts receivable (24,279) (6,575) (532)
Decrease (increase) in prepaid expenses, advances and other (3,231) 726 (1,601)
Increase (decrease) in accounts payable (1,887) 5,016 (899)
Increase (decrease) in income taxes payable (2,589) (465) 1,654
Increase (decrease) in medical claims payable, net 23,476 (2,346) 25,763
Increase (decrease) in deferred premium revenue (3,219) 4,936 1,374
-------- -------- --------
Total adjustments (607) 4,578 32,209
-------- -------- --------
Net cash provided by operating activities 60,517 59,108 57,042
-------- -------- --------
Cash flows used in investing activities:
Purchases of short-term investments (426,601) (220,410) (228,414)
Sales of short-term investments 365,076 184,826 166,119
Purchases of property and equipment (10,027) (8,317) (7,162)
Acquisition of subsidiary (9,958)
Purchases of statutory deposits (1,405) (5,219) (1,381)
Maturities of statutory deposits 739 23 2,814
Purchases of other assets (725) (1,997) (553)
Proceeds from sale of assets 946 1,392 534
-------- -------- --------
Net cash used in investing activities (71,997) (59,660) (68,043)
-------- -------- --------
Cash flows provided by financing activities:
Proceeds from notes payable 300 200
Principal payments on notes payable (5,953) (678) (648)
Exercise of stock options 4,543 6,137 3,202
Stock option tax benefit 6,410 10,973 1,584
Other financing activities 1 (2)
-------- -------- --------
Net cash provided by financing activities 5,300 16,633 4,136
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (6,180) 16,081 (6,865)
Cash and cash equivalents at beginning of year 17,054 973 7,838
-------- -------- --------
Cash and cash equivalents at end of year $ 10,874 $ 17,054 $ 973
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.<PAGE>
/TABLE
<PAGE>
<PAGE> 29
Mid Atlantic Medical Services, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose
subsidiaries are active in managed health care and other life and health
insurance related activities. MAMSI's principle markets currently
include Maryland, Virginia, the District of Columbia, Delaware, West
Virginia and North Carolina. MAMSI and its subsidiaries (collectively
referred to as the "Company") have developed a broad range of managed
health care and related ancillary products and deliver these services
through health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs"), a life and health insurance company, home health
care and home infusion services companies and an outpatient surgery
center.
MAMSI delivers managed health care services principally through HMOs.
The HMOs, MD-Individual Practice Association, Inc. ("M.D. IPA"), Optimum
Choice, Inc. ("OCI") and Optimum Choice of the Carolinas, Inc. ("OCCI"),
arrange for health care services to be provided to a voluntarily
enrolled population for a predetermined, prepaid fee, regardless of the
extent or nature of services provided to the enrollees. The HMOs offer
a full complement of health benefits, including physician, hospital and
prescription drug services.
The following are other significant wholly owned subsidiaries of MAMSI:
Physicians Health Plan of Maryland, Inc. ("PHP-MD") is an individual
practice association ("IPA") that provides physician services to certain
of the Company's HMOs.
Alliance PPO, Inc. ("Alliance") provides a delivery network of
physicians (called a preferred provider organization) to employers and
insurance companies in association with various health plans.
Mid Atlantic Psychiatric Services, Inc. ("MAPSI") provides psychiatric
services to third party payors or self-insured employer groups.
MAMSI Life and Health Insurance Company ("MAMSI Life") develops and
markets indemnity health products in addition to life, accidental death
and disability insurance.
HomeCall, Inc. and its wholly owned subsidiary, FirstCall, Inc.
(collectively referred to as "HomeCall"), were acquired by MAMSI in 1994
for approximately $10 million, including direct expenses. MAMSI
accounted for the acquisition using the purchase method of accounting.
HomeCall and HomeCall Infusion Services, Inc. ("HIS") provide in-home
medical care including skilled nursing, infusion and therapy to both
MAMSI's HMO members and other payors.
The significant accounting policies followed by MAMSI and its
subsidiaries are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MAMSI and<PAGE>
its subsidiaries. All significant intercompany balances have been
eliminated in consolidation.
MAJOR CUSTOMERS
The Company's operations are conducted within one business segment. A
significant portion of the Company's premium revenue is derived from
federal, state and local government agencies including governmental
employees and Medicaid and Medicare recipients. For the years ended
December 31, 1995, 1994, and 1993, approximately 7%, 9% and 11%,
respectively, of premium revenue was derived from federal government
agencies, and approximately 21%, 18%, and 11%, respectively, was derived
from state and local government agencies.
CASH EQUIVALENTS
Floating rate municipal putable bonds, which possess an insignificant
risk of loss from changes in interest rates, that have been held less
than three months are classified as cash equivalents.<PAGE>
<PAGE> 30
SHORT-TERM INVESTMENTS
Short-term investments, consisting principally of marketable equity
securities, municipal bonds and tax-free bond funds, are classified as
available-for-sale. These securities are carried at fair market value
plus accrued interest and any unrealized gains and losses are reported
as a separate component of stockholders' equity, net of the related tax
effect. Gains and losses are reported in earnings when realized. Gains
and losses on sales of securities are computed using the specific
identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the property and equipment. Leasehold improvements are
amortized on a straight-line basis over the lesser of the life of the
improvement or the term of the related lease.
STATUTORY DEPOSITS
Statutory deposits, consisting principally of municipal bonds and
treasury notes held in custodial accounts by state regulatory agencies,
are classified as held-to-maturity. These securities are stated at
amortized cost.
GOODWILL
The excess of cost over the fair value of net assets of the acquired
company in the 1994 purchase transaction is recorded as goodwill and is
classified in the consolidated balance sheets as an other asset.
Goodwill is amortized on a straight-line basis over 15 years.
HEALTH PREMIUM
Amounts charged for health care services are recognized as premium
revenue in the month for which enrollees are entitled to receive care.
Included in premium revenue are amounts due from entities that utilize
the Company's capitated primary care physician network, its medical
utilization management services and other services related to health
management and who self-fund, generally up to specified limits, certain
elements of medical costs, such as hospitalization and specialist
physicians. Premium revenue received in advance is recorded as deferred
premium revenue.
FEE AND OTHER
Amounts charged to third party payors solely for use of the Company's
provider network and its discounted fee for service rate structure are
recognized as fee revenue. Amounts charged for administrative services
only arrangements entailing only claims payment services and utilization
of the provider network without utilization of the Company's primary
care physician network and utilization management services and under
which the Company bears no risk are recognized as fee revenue.
HOME HEALTH SERVICES
Amounts charged to patients, third party payors and others for home<PAGE>
health services are recorded at net realizable amounts, including
retroactive adjustments under cost reimbursement agreements with third
party payors.
MEDICAL EXPENSE
Medical expense consists principally of medical claims and capitation
costs. Medical claims include payments to be made on claims reported as
of the balance sheet date and estimates of health care services incurred
but not reported ("IBNR") to the Company as of the balance sheet date.
The IBNR is estimated using an expense forecasting model that is based
on historical claims incurrence patterns modified to consider current
trends in enrollment, member utilization patterns, timeliness of claims
submissions and other factors. This estimate includes medical costs to
be incurred beyond the premium paying date that are contractually
required.
Capitation costs represent monthly fixed fees to participating
physicians and other medical providers as retainers for providing
continuing medical care.<PAGE>
<PAGE> 31
The Company believes that its IBNR claims estimates are adequate to
satisfy its ultimate claims liabilities; however, the IBNR liability as
established may vary significantly from actual claims amounts, both
negatively or positively, and as such adjustments are deemed necessary
they are included in current operations.
COORDINATION OF BENEFITS
Coordination of benefits ("COB") results from the determination that the
Company has paid for medical claims expenses for which an enrollee has
duplicate coverage and for which another insurer is primarily liable.
In the consolidated statements of income, such identified amounts are
classified as a reduction of hospitalization expense and, in the
consolidated balance sheets, such amounts are classified as a reduction
of medical claims payable.
INCOME TAXES
The income tax provision includes Federal and state income taxes both
currently payable and deferred because of differences between financial
reporting and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
EARNINGS PER COMMON SHARE
Earnings per common and common equivalent share is based upon the
weighted average number of common and common equivalent shares
outstanding. Common equivalent shares result from the assumed exercise
of outstanding stock options that have a dilutive effect when applying
the treasury stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments" ("Statement No. 107"), requires
disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents - The carrying amount reported in the
consolidated balance sheets approximates fair value.
Short-term investments - Fair values are based on quoted market prices.
Statutory deposits - Fair values are based on quoted market prices.
Short-term borrowings - The carrying amount reported in the consolidated
balance sheets approximates fair value.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and<PAGE>
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates and assumptions could
change in the future as more information becomes known, which could
impact the amounts reported and disclosed herein.
RECLASSIFICATIONS
Certain balances in the 1994 and 1993 financial statements have been
reclassified to conform to the 1995 presentation.<PAGE>
<PAGE> 32
NOTE 2 - INVESTMENTS
Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement No. 115"). Under this
statement, securities are classified into categories and are valued
based upon this designation. Securities classified as available-for-
sale, which include debt and equity securities that the Company does not
have the positive intent to hold to maturity, are marked to market with
the resulting unrealized gain or loss reflected in stockholders' equity.
Securities classified as held-to-maturity, which includes debt
securities that the Company has both the positive intent and ability to
hold to maturity, are carried at amortized cost.
On January 1, 1994, the Company classified its short-term investments as
available-for-sale. As a result, the Company recorded net unrealized
gains of $1.1 million, net of tax, as a separate component of
stockholders equity. In addition, the Company classified its statutory
deposits as held to maturity with no effect on the recorded value.
Management re-evaluated these designations at December 31, 1995 and
determined that they continue to be appropriate.
The following is a summary of available-for-sale and held-to-maturity
securities at December 31, 1995:
<TABLE>
<CAPTION>
-------------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
<C> <S> <S> <S> <S>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 20 $ 20
Obligations of states and political subdivisions 98,681 $ 1,306 $ 30 99,957
Municipal bond funds 68,204 68,204
Other debt securities 2,587 94 2,681
Accrued interest 1,163 1,163
--------- --------- --------- ---------
Debt securities 170,655 1,400 30 172,025
Equity securities 27,343 2,270 1,112 28,501
Mutual funds 4,197 11 4,208
--------- --------- --------- ---------
Short-term investments $ 202,195 $ 3,681 $ 1,142 $ 204,734
========= ========= ========= =========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 5,542 $ 167 $ 1 $ 5,708
Obligations of states and political subdivisions 4,103 181 4,284
Other investments 898 898
--------- --------- --------- ---------
Statutory deposits $ 10,543 $ 348 $ 1 $ 10,890
========= ========= ========= =========
/TABLE
<PAGE>
<PAGE> 33
The following is a summary of available-for-sale and held-to-maturity
securities at December 31, 1994:
<TABLE>
<CAPTION>
-------------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
<C> <S> <S> <S> <S>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 610 $ 28 $ 582
Obligations of states and political subdivisions 75,229 $ 100 2,523 72,806
Municipal bond funds 38,089 38,089
Other debt securities 1,509 9 38 1,480
Accrued interest 868 868
--------- --------- --------- ---------
Debt securities 116,305 109 2,589 113,825
Equity securities 24,365 338 1,627 23,076
--------- --------- --------- ---------
Short-term investments $ 140,670 $ 447 $ 4,216 $ 136,901
========= ========= ========= =========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 6,000 $ 236 $ 5,764
Obligations of states and political subdivisions 3,611 $ 76 49 3,638
Other investments 266 266
--------- --------- --------- ---------
Statutory deposits $ 9,877 $ 76 $ 285 $ 9,668
========= ========= ========= =========
</TABLE>
For the years ended December 31, 1995 and 1994, marketable equity
available-for-sale securities with a fair value at the date of sale of
$30,676,000 and $19,830,000, respectively, were sold. The gross
realized gains on such sales totaled $5,943,000 and $3,303,000, and the
gross realized losses totaled $1,149,000 and $794,000 for each of the
respective periods. Realized gains and losses are included in
investment income. Other sales of short-term investments consisted
principally of redemptions from municipal bond funds.
During 1994, statutory deposit investments with an amortized cost of
$2,384,000 were released by state regulatory agencies and transferred to
the Company's short-term investment portfolio. The unrealized gain at
the date of transfer for these investments was $46,000.
The amortized cost and estimated fair value of debt and marketable
equity securities at December 31, 1995, by contractual maturity, are
shown below. Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to
prepay obligations without prepayment penalties.<PAGE>
<PAGE> 34
<TABLE>
<CAPTION>
-------------------------
Estimated
Fair
(in thousands) Cost Value
-------------------------
<C> <S> <S>
AVAILABLE-FOR-SALE
Due in one year or less $ 78,158 $ 78,201
Due after one year through five years 33,502 33,841
Due after five years through ten years 40,312 41,220
Due after ten years 18,683 18,763
--------- ---------
Debt securities 170,655 172,025
Equity securities 27,343 28,501
Mutual funds 4,197 4,208
--------- ---------
$ 202,195 $ 204,734
========= =========
HELD-TO-MATURITY
Due in one year or less $ 3,707 $ 3,717
Due after one year through five years 4,324 4,476
Due after five years through ten years 1,181 1,213
Due after ten years 1,331 1,484
--------- ---------
$ 10,543 $ 10,890
========= =========
</TABLE>
Net realized gains on sales of marketable equity securities was
approximately $307,000 in 1993.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1995 1994
-------------------------
<C> <S> <S>
Premium and fee accounts $ 43,737 $ 29,844
Home service accounts 2,869 3,230
Medical recoverables 10,419 3,257
Other 7,876 4,291
Less: allowance for doubtful accounts (3,638) (3,591)
--------- ---------
$ 61,263 $ 37,031
========= =========
</TABLE>
Medical recoverables consist of refunds identified on paid claims that
will be collected in the following year. This amount has been recorded
as a reduction of medical expense in the consolidated statements of
income. Other receivables consist primarily of amounts due for<PAGE>
reinsurance recoveries and pharmacy rebates.<PAGE>
<PAGE> 35
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1995 1994
-------------------------
<C> <S> <S>
Land, buildings and improvements $ 20,004 $ 18,061
Computer equipment and software 21,823 18,231
Office furniture and equipment 11,673 7,815
Leasehold improvements 295 183
--------- ---------
53,795 44,290
Less: accumulated depreciation and
amortization (15,091) (10,622)
--------- ---------
$ 38,704 $ 33,668
========= =========
</TABLE>
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1995 1994
-------------------------
<C> <S> <S>
Mortgage note payable secured by first deed
of trust on land and buildings with interest
due at 10.10 percent. Principal and interest
payments are due monthly based on a 27-year
amortization $ 5,013
Equipment term loan secured by certain
computer equipment with interest due at
9.8%. Principal is paid in equal monthly
installments with interest until maturity
in March 1996 $ 150 750
Other notes payable 254 294
Current portion (210) (726)
--------- ---------
Noncurrent portion $ 194 $ 5,331
========= =========
</TABLE>
On September 1, 1995, the Company paid off in full, from available cash,
its mortgage note payable amounting to approximately $5.0 million.
The noncurrent portion of notes payable at December 31, 1995 mature in
future years as follows (in thousands):
1997 $ 60<PAGE>
1998 60
1999 60
2000 14
The Company has access to total line-of-credit and letter-of-credit
facilities of $10 million, which are subject to annual renewal.
Borrowings under facilities totalling $8.0 million bear interest at a
rate based on either the bank's prime rate or the Federal Funds rate
plus .75% and are secured by certain cash balances and short-term non-
equity securities. The remaining facility bears interest at either the
bank's prime rate or the Federal Funds rate plus 1.65% and is secured by
certain receivables. At December 31, 1995, approximately $1.65 million
was outstanding on one of the lines-of-credit at an interest rate of
6.38% and approximately $469,000 was outstanding in letters-of-credit.
Interest expense paid in cash during 1995, 1994 and 1993 was
approximately $1,541,000, $708,000 and $781,000, respectively.<PAGE>
<PAGE> 36
NOTE 6 - MEDICAL CLAIMS PAYABLE
Medical claims payable consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1995 1994
-------------------------
<C> <S> <S>
Medical claims payable $ 112,362 $ 90,326
Coordination of benefits recoverable (3,872) (5,312)
--------- ---------
$ 108,490 $ 85,014
========= =========
</TABLE>
NOTE 7 - REINSURANCE
M.D. IPA, OCI and MAMSI Life maintain reinsurance coverage to provide
for reimbursement of claims in excess of certain limits. Reinsurance
for health claims generally covers 80% of all hospital costs in excess
of a deductible amount per enrollee per year (subject to a $2,000,000
maximum lifetime reinsurance limit per person) but excludes coverage of
costs in excess of certain per diem rates. The deductible per enrollee
was raised from $100,000 to $200,000 effective October 1, 1994.
Reinsurance for life and accidental death claims generally covers all
settlements in excess of $50,000 per person subject to a $1,000,000
maximum recovery per person. Reinsurance recoveries for the years ended
December 31, 1995, 1994 and 1993 were approximately $128,000,
$3,029,000 and $1,268,000, respectively. In the consolidated statements
of income, reinsurance premiums are shown net of the related recoveries.
NOTE 8 - INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method
required by Statement No. 109, "Accounting for Income Taxes" ("Statement
No. 109"). The cumulative effect of adopting Statement No. 109 as of
January 1, 1993 was to reduce net income by approximately $663,000.
At December 31, 1995, the Company has net operating loss carryforwards
of approximately $1.7 million for income tax purposes that expire in
various years beginning in the year 2002. Approximately $1.6 million of
these carryforwards relate to HomeCall operations prior to MAMSI's
acquisition. The Company's ability to utilize these net operating loss
carryforwards is limited.<PAGE>
<PAGE> 37
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows as of December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1995 1994
-------------------------
<C> <S> <S>
Deferred tax liabilities:
Accelerated depreciation $ 2,597 $ 2,147
Unrealized investment gains 1,004
--------- ---------
Total deferred tax liabilities 3,601 2,147
--------- ---------
Deferred tax assets:
Accrued medical expenses 6,040 10,333
Premium revenue adjustments 710 1,555
Unrealized investment losses 1,490
Allowance recapture 1,229 1,322
Accrued pension expenses 1,199 661
Other 1,047 886
--------- ---------
Total deferred tax assets 10,225 16,247
Valuation allowance for deferred tax assets (128) (139)
--------- ---------
Net deferred tax assets 10,097 16,108
--------- ---------
$ 6,496 $ 13,961
========= =========
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 4,379 $ 15,540
Non-current assets - deferred income taxes 3,338
Current liabilities - deferred income taxes (1,005)
Non-current liabilities - deferred
income taxes (216) (1,579)
--------- ---------
Net deferred tax assets $ 6,496 $ 13,961
========= =========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
----------------------------------------
<C> <S> <S> <S>
Current:
Federal $ 32,217 $ 22,924 $ 15,828
State 5,844 3,861 2,990
--------- --------- ---------
Total current 38,061 26,785 18,818<PAGE>
--------- --------- ---------
Deferred:
Federal (2,207) 4,286 (1,755)
State (638) 954 (113)
--------- --------- ---------
Total deferred (2,845) 5,240 (1,868)
--------- --------- ---------
$ 35,216 $ 32,025 $ 16,950
========= ========= =========
/TABLE
<PAGE>
<PAGE> 38
The Company's tax provision differs from the statutory rate for Federal
income taxes for the years ended December 31 as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
----------------------------------------
<C> <S> <S> <S>
Statutory rate (35%) $ 33,719 $ 30,294 $ 14,856
Tax-exempt interest (1,872) (1,171) (676)
State income taxes, net of Federal benefit 3,399 3,062 1,825
Increase (decrease) in valuation allowance for
deferred tax assets (11) (244) 149
Other, net (19) 84 796
--------- --------- ---------
$ 35,216 $ 32,025 $ 16,950
========= ========= =========
</TABLE>
The income tax rate for 1993 was increased to 35% to reflect changes
adopted by the Revenue Reconciliation Act of 1993. This adjustment
resulted in an increase in the Company's net deferred tax assets of
$202,000 in 1993.
Total tax deposits made by the Company in 1995, 1994 and 1993 were
approximately $27,266,000, $25,191,000 and $15,656,000, respectively.
NOTE 9 - RISK POOL WITHHOLDINGS
Contracts with participating physicians allow for withholdings generally
ranging from 5% to 15% from primary care physicians and participating
specialists on capitation and fee for service payments. The withheld
amounts ultimately paid back to providers may be less than the total
amount withheld. Withheld liabilities and related medical expenses were
reduced by $22,802,000, $8,719,000 and $7,111,000 in 1995, 1994 and
1993, respectively.
NOTE 10 - RELATED PARTIES
For the years ended December 31, 1995, 1994 and 1993, certain members of
the Boards of Directors of MAMSI and subsidiary corporations who are
also participating physicians provided medical services to enrollees
totaling $9,699,000, $6,450,000 and $6,048,000, respectively, which
represents approximately 2% in all years of payments to all physicians.
Board members are remunerated at the same contractual level as all other
participating physicians and are selected by enrollees to render medical
services under the same guidelines as all other participating
physicians.
NOTE 11 - EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a defined contribution 401(k) savings plan covering all
full-time employees. Employees are allowed to contribute up to 10% of<PAGE>
their pre-tax earnings annually and the Company makes a matching
contribution of 50% on the first 4% of contributions made by employees.
Employees vest immediately in the employee contributions and ratably
over six years in the Company contributions. During 1995, 1994 and
1993, the Company's contribution to the 401(k) plan aggregated $433,000,
$231,000 and $247,000, respectively.
Effective December 31, 1994, the Company discontinued its non-
contributory defined benefit pension plan (the "Plan"). Benefits earned
to date under the Plan, which covered substantially all employees, were
fully vested at that date. The obligation to provide these benefits was
satisfied as of December 31, 1995 through a combination of annuity
contracts, transfers of vested funds into the 401(k) plan and cash
withdrawals. The Company recognized a gain on the curtailment of the
defined benefit pension plan of approximately $345,000.<PAGE>
<PAGE> 39
The net pension cost for the Plan was approximately $1,095,000 and
$832,000 in 1994 and 1993, respectively.
In accordance with a personal service contract negotiated by the
Company, its Chief Executive Officer is entitled to supplemental pension
benefits based upon years of service and attained salary levels.
Supplemental pension benefits of $1,682,000, $844,000 and $187,000 were
accrued for the years ended December 31, 1995, 1994 and 1993,
respectively.
INCENTIVE AND STOCK OPTION PLANS
In 1989, MAMSI implemented a non-qualified stock option plan whereby
options for the purchase of up to 750,000 shares may be granted to
officers and employees of the Company. Options issued under this plan
may be exercised at 25% of the market value at the time the options are
fully vested. The plan provides for reimbursement by the Company to the
recipients of the stock options for personal income taxes that result
upon the exercise of the options. In 1993, options under this plan for
439,800 shares of MAMSI stock were granted and vested immediately.
These options were exercised in 1993 and the Company recorded
compensation expense approximating $3,664,000 to account for the
granting and exercise of the options. At December 31, 1995, all options
that were granted to date under this plan have been exercised and no
further options will be granted under this plan.
In each year 1990 through 1995, MAMSI implemented a non-qualified stock
option plan whereby options for the purchase of shares of common stock
may be granted to officers and employees of the Company. Options under
the plans generally vest over a three-year period and are exercisable at
100 percent of the fair market value per share on the date the options
are granted. The Company accounts for these stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for
these stock option grants.
Transactions involving the 1990 plan, which authorized options for the
purchase of up to 1,800,000 shares of common stock, are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------
<C> <S> <S> <S>
Outstanding, January 1 326,300 714,750 1,074,000
Granted --- 5,700 30,000
Exercised (1995 - $1.46 to $4.75 per share) (97,400) (394,150) (372,750)
Forfeited --- --- (16,500)
Outstanding, December 31 228,900 326,300 714,750
Exercisable, December 31 (1995 - $5.24
weighted average exercise price per share) 226,900 289,400 563,550
Available for grant, December 31 --- --- 5,700
</TABLE>
Transactions involving the 1991 plan, which authorized options for the
purchase of up to 1,800,000 shares of common stock, are summarized as
follows:<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------
<C> <S> <S> <S>
Outstanding, January 1 1,134,800 1,531,100 1,681,500
Granted 1,800 24,900 98,100
Exercised (1995 - $2.58 to $14.38 per share) (300,250) (418,200) (196,900)
Forfeited (2,400) (3,000) (51,600)
Outstanding, December 31 833,950 1,134,800 1,531,100
Exercisable, December 31 (1995 - $5.68
weighted average exercise price per share) 816,850 995,000 860,420
Available for grant, December 31 600 --- 21,900
/TABLE
<PAGE>
<PAGE> 40
Transactions involving the 1992 plan, which authorized options for the
purchase of up to 1,950,000 shares of common stock, are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------
<C> <S> <S> <S>
Outstanding, January 1 1,253,050 1,655,400 1,784,100
Granted 19,950 151,800 209,100
Exercised (1995 - $3.13 to $18.75 per share) (327,100) (496,850) (200,100)
Forfeited (21,100) (57,300) (137,700)
Outstanding, December 31 924,800 1,253,050 1,655,400
Exercisable, December 31 (1995 - $5.21
weighted average exercise price per share) 752,150 500,050 412,200
Available for grant, December 31 1,150 --- 94,500
</TABLE>
Transactions involving the 1993 plan, which authorized options for the
purchase of up to 1,950,000 shares of common stock, are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------
<C> <S> <S> <S>
Outstanding, January 1 1,727,175 1,933,400 ---
Granted 69,150 104,550 2,038,500
Exercised (1995 - $5.63 to $15.31 per share) (243,050) (211,775) (2,500)
Forfeited (93,960) (99,000) (102,600)
Outstanding, December 31 1,459,315 1,727,175 1,933,400
Exercisable, December 31 (1995 - $6.55
weighted average exercise price per share) 860,175 508,925 33,500
Available for grant, December 31 33,360 8,550 14,100
</TABLE>
Transactions involving the 1994 plan, which authorized options for the
purchase of up to 2,000,000 shares of common stock, are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------
<C> <S> <S>
Outstanding, January 1 1,984,140 ---
Granted 100,350 2,014,320
Exercised --- ---
Forfeited (145,400) (30,180)
Outstanding, December 31 1,939,090 1,984,140
Exercisable, December 31 (1995 - $26.87
weighted average exercise price per share) 625,330 ---
Available for grant, December 31 60,910 15,860
</TABLE>
Transactions involving the 1995 plan, which authorized options for the<PAGE>
purchase of up to 3,000,000 shares of common stock, are summarized as
follows:
<TABLE>
<CAPTION>
1995
----------
<C> <S>
Outstanding, January 1 ---
Granted 2,078,850
Exercised ---
Forfeited (64,500)
Outstanding, December 31 2,014,350
Exercisable, December 31 ---
Available for grant, December 31 985,650
/TABLE
<PAGE>
<PAGE> 41
The Company has an incentive compensation plan whereby officers and key
employees receive bonuses based upon the annual operating results of the
Company. Incentive compensation expense was approximately $3,162,000
and $1,902,000 in 1994 and 1993, respectively. No management bonus was
earned in 1995. In addition, certain individuals will receive a cash
bonus based upon the achievement of certain measurable criteria other
than the annual operating results of the Company. These bonus amounts
are not significant.
NOTE 12 - COMMON STOCK
On April 17, 1995, the stockholders of MAMSI approved an increase in the
number of authorized shares of common stock from 60,000,000 to
100,000,000.
On June 15, 1994, the Board of Directors declared a 100% stock dividend.
The stock dividend was paid on August 5, 1994 to shareholders of record
on July 5, 1994.
On October 21, 1993, the Board of Directors declared a 50% stock
dividend. The stock dividend was paid on November 19, 1993 to
shareholders of record on November 1, 1993.
All references in the consolidated financial statements to per share
amounts, number of shares, and weighted average common and common
equivalent shares have been adjusted to reflect the stock dividends on a
retroactive basis.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office space under the terms of
noncancellable operating leases that expire at various dates through
2000. Rent expense relating to these operating leases approximated
$2,593,000, $984,000 and $720,000 in 1995, 1994 and 1993, respectively.
Future minimum lease commitments under non-cancelable operating leases
are as follows for the years ended December 31 (in thousands):
1996 $ 2,998
1997 2,467
1998 1,444
1999 833
2000 307
---------
$ 8,049
=========
During the third quarter of 1995, certain shareholders of MAMSI filed
four lawsuits in the United States District Court for the District of
Maryland against MAMSI and certain current and former directors and
officers. These actions have been consolidated and, on November 1,
1995, a consolidated Amended Class Action Complaint was filed on behalf
of all plaintiffs. The amended complaint alleges that MAMSI is liable
under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-
5 thereunder for its failure to disclose in a timely fashion that it had
been denied accreditation by the National Committee for Quality<PAGE>
Assurance ("NCQA") and that the officers and directors named as
defendants are liable under Section 10(b) and Rule 10b-5, directly and
as controlling persons of MAMSI, for the failure to disclose.
Plaintiffs seek to represent a class of all persons who purchased the
common stock of MAMSI from March 1, 1995 through June 15, 1995. The
Court has set a discovery schedule, and has set a trial date of December
2, 1996. Currently, the parties have undertaken limited discovery. The
Company is not able to predict the probability of a favorable or
unfavorable outcome or the amount of potential loss, in the event of an
unfavorable outcome. MAMSI believes it has meritorious defenses to the
claims raised in the amended complaint and intends to defend the action
vigorously.
The staff of the Securities and Exchange Commission has asked MAMSI to
provide certain information relating to the denial of accreditation by
the NCQA and to sales of stock by certain officers and directors prior
to the announcement of NCQA's action. MAMSI has complied voluntarily
with the Commission's requests.<PAGE>
<PAGE> 42
The Company is involved in other various legal actions arising in the
normal course of business, some of which seek substantial monetary
damages. After review, including consultation with legal counsel,
management believes any ultimate liability that could arise from these
other actions would not materially affect the Company's consolidated
financial position or results of operations.
NOTE 14 - STATUTORY REQUIREMENTS
M.D. IPA, OCI and OCCI are subject to insurance department regulations
in the states in which they are licensed. The state with the highest
requirement obligated M.D. IPA and OCI to each maintain a statutory net
worth of $3.0 million at December 31, 1995 and 1994; at December 31,
1995, OCCI was required to maintain a statutory net worth of $1.0
million. The statutory net worth of M.D. IPA was approximately $57.8
million and $48.0 million for the respective periods. The statutory net
worth of OCI was approximately $19.8 million and $11.6 million for the
respective periods. The statutory net worth of OCCI was approximately
$2.5 million at December 31, 1995.
MAMSI Life is subject to insurance department regulations in Maryland,
its state of domicile. At December 31, 1995 and 1994, MAMSI Life was
obligated to maintain statutory capital and surplus funds of $3.8
million. The statutory capital and surplus funds of MAMSI Life totalled
approximately $20.9 million and $12.1 million for the respective
periods.
M.D. IPA, OCI, OCCI and MAMSI Life were in compliance with state
depository rules at December 31, 1995 and 1994. In addition, MAMSI Life
was in compliance with the applicable risk-based capital requirements
for life and health insurance companies at December 31, 1995 and 1994.
These MAMSI subsidiaries must notify state regulators before the payment
of any dividends to MAMSI and, in certain circumstances, must receive
positive affirmation prior to such payment.
NOTE 15 - RISK CONCENTRATIONS
Financial instruments that potentially subject the Company to credit
risk consist primarily of investments in marketable securities
(including money market funds, floating rate municipal putable bonds,
intermediate term municipal bonds, and common stocks) and premiums
receivable. The Company receives advice through or assigns direct
management of short-term investments in marketable securities to
professional investment managers selected for their expertise in various
markets, within guidelines established by the Board of Directors. These
guidelines include broad diversification of investments. Concentrations
of credit risk and business volume with respect to commercial premiums
receivable are generally limited due to the large number of employer
groups comprising the Company's customer base. As of December 31, 1995,
approximately 18% of premium and home service receivables were due from
federal government agencies. The Company performs ongoing credit
evaluations of customers and generally does not require collateral.<PAGE>
<PAGE> 43
Report of Ernst & Young LLP Independent Auditors
Board of Directors and Stockholders
Mid Atlantic Medical Services, Inc.
We have audited the accompanying consolidated balance sheets of Mid
Atlantic Medical Services, Inc. and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. Our audits also included the financial
statement schedule listed in the Index to Financial Statement Schedule
at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Mid Atlantic Medical Services, Inc. and subsidiaries at December 31,
1995 and 1994, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Notes 2 and 8 to the consolidated financial statements,
the Company changed its method of accounting for certain investments in
debt and equity securities in 1994 and for income taxes in 1993.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Washington, D.C.
February 23, 1996<PAGE>
<PAGE> 44
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1995 AND 1994 (1)
<TABLE>
<CAPTION>
1995 1995 1995 1995 1994 1994 1994 1994
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(in thousands except share amounts)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $220,988 $235,516 $243,280 $255,611 $179,770 $181,803 $188,934 $199,391
Expense 193,724 213,476 220,088 231,767 158,065 162,636 168,066 174,576
Income before income tax 27,264 22,040 23,192 23,844 21,705 19,167 20,868 24,815
Net income 16,918 13,825 14,399 15,982 13,457 11,884 13,555 15,634
Earnings per common and common
equivalent share (2):
Net income 0.36 0.29 0.30 0.33 0.29 0.25 0.28 0.33
</TABLE>
Notes
1. Certain 1994 quarterly revenue and expense amounts are different from
the amounts originally reported due to reclassifications necessary to
conform to the current presentation.
2. Earnings per common share are computed after giving effect to
dilutive stock options. All per share amounts and weighted average
common and common equivalent shares have been adjusted to reflect all
stock dividends on a retroactive basis. See Note 12 to the consolidated
financial statements.<PAGE>
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.<PAGE>
<PAGE> 46
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
"Directors and Executive Officers" in the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 15, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
"Directors and Executive Officers -- Directors' Compensation" and
"Executive Management Compensation" in the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 15, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
"Stock Owned by Management" and "Principal Stockholders" in the Proxy
Statement for MAMSI's annual meeting of shareholders to be held on April
15, 1996.
ITEM 13. CERTAIN RELATIONS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
"Executive Management Compensation" in the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 15, 1996.<PAGE>
<PAGE> 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of December 31, 1995 and 1994 ... 25
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993 ............................. 26
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 ......... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 ............................. 28
Notes to Consolidated Financial Statements ..................... 29
Report of Ernst & Young LLP Independent Auditors ............... 43
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
1995, 1994 and 1993 ..................................... 48
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
omitted because they are not required under the related instructions or
are inapplicable.<PAGE>
<PAGE> 48
Mid Atlantic Medical Services, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at ------------------------------
Beginning Charged to Charged to Balance
of Costs Other Deductions- at End
Description Period and Expenses Accounts Write-Offs of Period
----------- ---------- ------------- ---------- ----------- ---------
<C> <S> <S> <S> <S> <S>
DEDUCTED FROM ASSET ACCOUNTS:
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts - accounts receivable
$ 2,048 $ 1,018(1) $ 3,066
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 234(2) $ 149(3) $ 383
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts - accounts receivable
$ 3,066 $ 39 $ 486(4) $ 3,591
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 383 $ 244 $ 139
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts - accounts receivable
$ 3,591 $ 25 $ 22(1) $ 3,638
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 139 $ 11 $ 128
======== ======== ======== ======== ========
</TABLE>
(1) The additions to the allowance were charged to premium revenue.
(2) The valuation allowance was created with the implementation of FASB
Statement No. 109, "Accounting for Income Taxes" on January 1, 1993.
(3) The additions to the allowance were charged to the tax provision.
(4) Total additions includes $155,000, which represents the allowance
established by an acquired company immediately prior to the acquisition.
The remaining additions were charged to premium revenue.<PAGE>
<PAGE> 49
(a)(3)
EXHIBITS
See the Exhibit Index on pages 52-53 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.<PAGE>
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has caused this report to be signed on its behalf by
undersigned thereunto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI")
(Registrant)
By: /s/ George T. Jochum 3/28/96
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President, and Director
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: /s/ John L. Child 3/28/96
--------------------------------------------------
John L. Child Date
Director
By: /s/ John H. Cook, III, M.D. 3/28/96
--------------------------------------------------
John H. Cook, III, M.D. Date
Director
By: /s/ Peter L. Flaherty, Jr., M.D. 3/28/96
--------------------------------------------------
Peter L. Flaherty, Jr., M.D. Date
Vice Chairman and Director
By: /s/ Robert E. Foss 3/28/96
--------------------------------------------------
Robert E. Foss Date
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Walter Girardin 3/28/96
--------------------------------------------------
Walter Girardin Date
Director
By: /s/ Mark D. Groban, M.D. 3/28/96
--------------------------------------------------
Mark D. Groban, M.D. Date
Assistant Medical Director for Mental Health Services
and Director<PAGE>
By: /s/ Donald R. Hammett 3/28/96
--------------------------------------------------
Donald R. Hammett Date
Director
By: /s/ George T. Jochum 3/28/96
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President and Director
(Principal Executive Officer)
By: /s/ William M. Mayer, M.D. 3/28/96
--------------------------------------------------
William M. Mayer, M.D. Date
Director<PAGE>
<PAGE> 51
By: /s/ Creighton R. Schneck 3/28/96
--------------------------------------------------
Creighton R. Schneck Date
Director
By: /s/ Mary E. Shocklee 3/28/96
--------------------------------------------------
Mary E. Shocklee Date
Controller and Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ Stanley F. Smith, R.Ph. 3/28/96
--------------------------------------------------
Stanley F. Smith, R.Ph. Date
Director
By: /s/ Alfred Talamantes 3/28/96
--------------------------------------------------
Alfred Talamantes Date
Chief Operating Officer and Director
By: /s/ James A. Wild 3/28/96
--------------------------------------------------
James A. Wild Date
Director<PAGE>
<PAGE> 52
(a)(3), (b) and (c) List of Exhibits.
<TABLE>
<CAPTION>
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
------- ----------------------- -------------------
<C> <S>
3.1 Copy of Certificate of Incorporation of MAMSI dated
October 7, 1986..........................................................(1)
3.2 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated April 23, 1990.......................................(5)
3.3 Amended and Restated By-laws of MAMSI as of February 28, 1996............
3.4 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated June 2, 1994.........................................(5)
10.5 Copy of Agreement between M.D. IPA and the United States
Secretary of Health and Human Services dated December 20, 1985...........(1)
10.6 M.D. IPA's 1985 Stock Option Plan........................................(1)
10.7 Promissory Note signed by Thomas P. Barbera dated November 9, 1993.......(5)
10.16 1989 Non-Qualified Stock Option Plan.....................................(4)
10.17 Copy of 1989 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.20 Copy of Amendments to Agreement between M.D. IPA and the United
States Secretary of Health and Human Services dated December 24, 1987....(4)
10.26 1990 Non-Qualified Stock Option Plan.....................................(5)
10.27 Copy of 1990 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.32 Copy of Contract between George T. Jochum and M.D. IPA for the period
January 1, 1991 through January 1, 1994..................................(5)
10.35 1991 Non-Qualified Stock Option Plan.....................................(5)
10.36 Copy of 1991 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.41 Copy of Agreement between M.D. IPA and Surgical Care Affiliates, Inc.,
dated April 22, 1985.....................................................(5)
10.44 1992 Non-Qualified Stock Option Plan.....................................(5)
10.45 Copy of 1992 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.46 Agreement to Purchase 10 Taft Court dated February 10, 1992..............(5)
10.47 Agreement to Purchase 11 Taft Court dated February 14, 1992..............(5)
10.48 Equipment Term Loan Agreement with Signet Bank dated March 25, 1991......(5)
10.50 Amendment to Revolving Loan Agreement with Signet Bank dated
June 19, 1991............................................................(5)
10.53 Amendments to the Stock Option Plans effective May 15, 1991..............(5)
10.54 Summary Plan Description of the Employees Cash or Deferred Profit
Sharing (401k) Plan dated October, 1991..................................(5)
10.55 Defined Benefit Plan Agreement with the Principal Financial Group which
was approved September 12, 1991..........................................(5)
10.57 Mortgage and Loan Agreement with Aid Association for Lutherans dated
October 4, 1990..........................................................(5)
10.58 1993 Management Bonus Program............................................(2)
10.59 1993 CEO Bonus Program...................................................(2)
10.60 1993 Non-Qualified Stock Option Plan.....................................(2)
10.61 1993 Non-Qualified Stock Option Letter Sent to Key Employees.............(2)
10.62 1992 Amendment to Employment Agreement Between George T. Jochum and
the Company..............................................................(2)
10.63 Agreement to Purchase MAMSI Life and Health Insurance Company, as
amended..................................................................(2)
10.65 Agreement to Purchase 2301 Research Boulevard dated September 30, 1993...(3)
10.66 1994 Management Bonus Program............................................(4)
10.67 1994 Non-Qualified Stock Option Plan.....................................(4)<PAGE>
10.68 1994 Non-Qualified Stock Option Letter sent to Key Employees.............(4)
10.69 Revolving Loan Agreement with Signet Bank dated September 30, 1993.......(4)
10.70 Articles of Merger between M.D. IPA and MAMSOVA as of December 2, 1993...(4)
10.71 Agreement between OCI and the State of Maryland governing the Medical
Assistance Program ("Medicaid") dated August 5, 1993.....................(4)
10.72 List of States in which MAMSI Life is Licensed to Operate................(4)
10.73 1995 Management Bonus Program............................................(5)
10.74 1995 Non-Qualified Stock Option Plan.....................................(5)
10.75 1995 Non-Qualified Stock Option Plan letter sent to Key Employees........(5)
10.76 Agreement between OCI and the Commonwealth of Virginia governing the
Medical Assistance Program ("Medicaid") dated May 27, 1994...............(5)
10.77 1995 Amendment to Employment Agreement Between George T. Jochum and
the Company..............................................................
10.78 1996 Management Bonus Program............................................
10.79 1996 Non-Qualified Stock Option Plan.....................................
10.80 Form of Agreement between MAMSI and Employees Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................<PAGE>
<PAGE> 53
10.81 Form of Agreement between MAMSI and George T. Jochum Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................
10.82 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1996 Non-Qualified Stock Option Plan...................
21 Subsidiaries of the Company..............................................
23 Consent of Independent Auditors..........................................
27 Financial Data Schedule..................................................
</TABLE>
(1) Incorporated by reference to exhibits filed with the Company's
Registration Statement filed under the Securities Act of 1933 on Form S-
4 (Registration No. 33-9803).
(2) Incorporated by reference to exhibits filed with the Company's
Annual Report filed under the Securities Exchange Act of 1934 on Form
10-K for the fiscal year ended December 31, 1992.
(3) Incorporated by reference to exhibits filed with the Company's
Quarterly Report filed under the Securities Exchange Act of 1934 on Form
10-Q for the Quarterly Period Ended September 30, 1993.
(4) Incorporated by reference to exhibits filed with the Company's
Annual Report filed under the Securities Exchange Act of 1934 on Form
10-K for the fiscal year ended December 31, 1993.
(5) Incorporated by reference to exhibits filed with the Company's
Annual Report filed under the Securities Exchange Act of 1934 on Form
10-K for the fiscal year ended December 31, 1994.<PAGE>
<PAGE>
<PAGE> 1
AMENDED AND RESTATED BY-LAWS
OF
MID ATLANTIC MEDICAL SERVICES, INC.
AS OF FEBRUARY 28, 1996
OFFICES
SECTION 1.1 PRINCIPAL OFFICE. - The principal office of the
corporation shall be at 4 Taft Court, Rockville, Maryland 20850. The
principal address of the corporation in Delaware is 229 South State
Street, Dover, Delaware 19901.
SECTION 1.2 OTHER OFFICES. - The corporation may have such other
offices and places of business within or without the State of Delaware
as the Board of Directors shall determine.
STOCKHOLDERS
SECTION 2.1 PLACE OF MEETINGS. - Meetings of the stockholders may
be held at such place or places within or without the State of Delaware
as shall be fixed by the Board of Directors and stated in the notice of
the meeting.
SECTION 2.2 ANNUAL MEETING. - An annual meeting of stockholders
for the election of directors and the transaction of such other business
as may properly come before the meeting shall be held within five months
after the close of the fiscal year of the corporation.
SECTION 2.3 SPECIAL MEETINGS. - Special meetings of the
stockholders for any purpose(s) may be called by the Board of Directors
or by the President stating the purpose(s) of the meeting. No matters,
except those set forth in the notice of special meeting, may be
considered at the special meeting.
SECTION 2.4 NOTICE OF MEETINGS. - Notice stating the time and
place, and in the case of a special meeting the purpose(s) thereof and
by whom called, shall be delivered to each stockholder entitled to vote,
not less than twenty-five (25) nor more than sixty (60) days prior to
the meeting. If mailed, notice shall be directed to each such
stockholder at his address as it appears on the records of the
stockholders of the corporation, unless he shall have previously filed
with the Secretary of the corporation a written request that notices
intended for him be mailed to some other address, in which case it shall
be mailed to the address designated in the request. Notice of any
meeting need not be given to any person who may become a stockholder of
record after the mailing of such notice and prior to the meeting, or to
any stockholder who attends such meeting, in person or by proxy, for
purposes other than solely to object to the lack of proper notice, or to
any stockholder who, in person or by proxy, submits a signed waiver of
notice either before or after such meeting. Notice of any adjourned
meeting of stockholders need not be given, unless otherwise required by
statute.
SECTION 2.5 QUORUM AND ACTION. - (a) At any duly held meeting of
stockholders, the presence in person or by proxy of stockholders
entitled to cast a majority of the votes thereat shall constitute a
quorum, except as otherwise provided by law or the Certificate of
Incorporation.<PAGE>
(b) A majority of the votes cast at a duly held meeting of
stockholders at which a quorum is present (stockholders represented by
proxy shall be deemed present), shall be sufficient to take or authorize
action upon any matter which may properly come before the meeting,
unless a greater vote, or voting by classes, is required by law or by
the Certificate of Incorporation or by these By-Laws on any question,
and except that in elections of directors, those receiving the greatest
number of votes shall be deemed elected even though not receiving a
majority.
Notwithstanding the above, at all meetings of the stockholders, any
vacancy in the Board of Directors by reason of an increase in the number
of directors, the resignation of a director, or for any other cause
other than the removal of a director by the stockholders, may be filled
only the affirmative vote of three-quarters (3/4) of the votes cast at
the meeting.<PAGE>
<PAGE> 2
SECTION 2.6 VOTING. - At each meeting of the stockholders, every
holder of stock then entitled to vote may vote in person or by proxy
and, except as may be otherwise provided by the Certificate of
Incorporation, shall have one vote for each share of stock registered in
his name. No proxy shall be valid after eleven (11) months from the
date of its execution, unless a longer period is provided for in the
proxy. Proxies shall be exhibited to the Secretary at the meeting and
filed with the records of the corporation.
SECTION 2.7 ADJOURNED MEETINGS. - Any duly called meeting of
stockholders may, by announcement thereat, be adjourned to a designated
time and place by the vote of the holders of a majority of the shares
present and entitled to vote thereat, even though less than a quorum is
so present. If a meeting is adjourned to another time, not more than
thirty days thereafter, and/or to another place, and if an announcement
of the adjourned time and/or place is made at the meeting, it shall not
be necessary to give notice of the adjourned meeting unless the Board of
Directors, after adjournment, fixes a new record date for the adjourned
meeting.
SECTION 2.8 ACTION BY WRITTEN CONSENT IN LIEU OF MEETING OF
STOCKHOLDERS. - See Section 6.6 of the By-Laws.
SECTION 2.9 NEW BUSINESS AND NOMINATIONS. - (a) Only such
business shall be conducted as shall have been brought before the
meeting (i) by or at the direction of the Board of Directors, or (ii) by
any stockholder of the corporation who is entitled to vote with respect
thereto and who complies with the notice procedures set forth in this
Section 2.9. For business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered or mailed to and received at the
principal executive offices of the corporation not less than thirty (30)
days prior to the date of the annual meeting; provided, however, that,
in the event that less than forty (40) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be received not later than
the close of business on the tenth (10th) day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made.
A stockholder's notice to the Secretary shall set forth as to each
matter such stockholder proposes to bring before the annual meeting (i)
a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, (iii)
the class and number of the corporation's capital stock that are
beneficially owned by such stockholder, and (iv) any material interest
of such stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no
business shall be brought before or conducted at an annual meeting
except in accordance with the provisions of this Section 2.9(a). The
officer of the corporation or other person presiding over the annual
meeting shall, if the facts so warrant, determine and declare to the
meeting that business was not properly brought before the meeting in
accordance with the provisions of this Section 2.9(a) and, if he or she<PAGE>
should so determine, he or she shall so declare to the meeting and any
such business so determined to be not properly brought before the
meeting shall not be transacted. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of
stockholders of reports of officers, directors, and committees, but, in
connection with such reports, no new business shall be acted upon at
such annual meeting unless stated and filed as herein provided.
(b) At any special meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting by or
at the direction of the Board of Directors.<PAGE>
<PAGE> 3
(c) Only persons who are nominated in accordance with the
procedures set forth in these Bylaws shall be eligible for election as
directors. Nominations of persons for election to the Board of
Directors of the corporation may be made at a meeting of stockholders at
which directors are to be elected only (i) by or at the direction of the
Board of Directors, or (ii) by any stockholder of the corporation
entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 2.9(c).
Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the
Secretary of the corporation. To be timely, a stockholder's notice
shall be delivered or mailed to and received at the principal executive
offices of the corporation not less than thirty (30) days prior to the
date of the meeting; provided, however, that, in the event that less
than forty (40) days' notice or prior disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to
be timely must be so received not later than the close of business on
the tenth (10th) day following the day on which such notice of the date
of the meeting was mailed or such public disclosure was made.
Such stockholder's notice shall set forth (i) as to each person
whom such stockholder proposes to nominate for election or re-election
as a director, all information relating to such person that is required
to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (including such person's
written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); and (ii) as to the stockholder
giving the notice (A) the name and address, as they appear on the
corporation's books, of such stockholder, and (B) the class and number
of shares of the corporation's capital stock that are beneficially owned
by such stockholder. At the request of the Board of Directors, any
person nominated by the Board of Directors for election as a director
shall furnish to the Secretary of the corporation the information
required to be set forth in a stockholder's notice of nomination that
pertains to the nominee.
No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the provisions of this
Section 2.9(c). The officer of the corporation or other person
presiding at the meeting shall, if the facts so warrant, determine that
a nomination was not made in accordance with such provisions and, if he
or she should so determine, he or she shall so declare to the meeting
and the defective nomination shall be disregarded.
DIRECTORS
SECTION 3.1 NUMBER AND QUALIFICATION. (a) The first Board of
Directors shall be comprised of twenty-three (23) directors who shall
serve a one-year term and until their successors are elected and
qualified at the first annual meeting. Thereafter, the number of
directors shall be set by the Board of Directors; provided, however,
that, except for the first Board, the Board of Directors shall be
comprised of no more than twelve (12) and no less than five (5)
directors, each of whom shall serve a three-year staggered term and
until his or her successor is elected and qualified.
Notwithstanding the above, if the Board of Directors elects a<PAGE>
Chairman, pursuant to Sections 4.1 and 4.3 of the By-Laws, and/or a
President, pursuant to Sections 4.1 and 4.4 of these By-Laws, said
Chairman and/or President shall automatically become a director of the
corporation. The Chairman and/or President shall remain a director only
as long as he or she continues to be the Chairman and/or President of
the Corporation. As provided for in Section 4.1 of the By-Laws, the
Chairman and the President hold office at the pleasure of the Board, and
may be removed and/or replaced at any time, with or without cause.
(b) Upon the election qualification of the successor directors to
the first Board of Directors, the successor directors shall be elected
by the stockholders at the first stockholder meeting in members as
equally as possible, into three groups. Group A directors will have a
term of office expiring after one year and until the election and
qualification of their successors chosen at the next annual shareholders
meeting ensuing; Group B directors shall have a term of office expiring
one year thereafter and until the election and qualification of their
successors; Group C directors shall have a term of office expiring two
years thereafter and until the election and qualification of their
successors.<PAGE>
<PAGE> 4
(c) Each successor to a Group A, B, and C director shall hold
office until the third annual meeting of the stockholders next
succeeding his election, and until his successor is elected and
qualified, or until his prior death, resignation or removal; except
however, if additional directorships are established, the initial term
for such directorships shall be for one or more years not greater than
three as determined by the Board of Directors in order to ensure that
approximately one-third (1/3) of all the directors are elected at each
annual meeting of the stockholders.
(d) Notwithstanding the above, an individual is not qualified to
serve as a director if the individual is concurrently also a director of
M.D. Individual Practice Association, Inc., and Physicians Health Plan
of Maryland, Inc.
SECTION 3.2 POWERS. - The management of all the business, property
and affairs of the corporation shall be vested in the Board of
Directors. The Board may exercise all of the powers of the corporation
and do all lawful acts and things (including the adoption of such rules
and regulations for the conduct of its meetings, the exercise of its
powers, and the management of the corporation, as it may deem proper),
consistent with the Delaware General Corporation law, the Articles of
Incorporation, and these By-Laws, and not thereby conferred upon or
reserved to the stockholders.
SECTION 3.3 MEETINGS. - The annual meeting of the Board of
Directors may be held without notice within four (4) weeks after the
annual meeting of stockholders. Regular meetings and the time and place
of regular meetings of the Board may be established by the Board. If
the Board of Directors fixes a regular meeting at a time more than four
(4) weeks after the annual meeting of the stockholders, or changes the
time or place of any regular meeting, notice of such meeting, in
accordance with the By-Law requirements for notice of special meetings,
shall be given to each director who was not present at the meeting at
which such action was taken. Special meetings of the Board may be
called by the Chairman of the Board (if any) or the President, and shall
be called at the written request of three of more directors. Five (5)
days notice of special meetings shall be given by mail, or two (2) days
notice if given personally or by telegraph or cable, to each director.
Notice of special meetings need not state the purpose(s) thereof. A
majority of the Directors present at the time and place of any regular
or special meeting, although less than a quorum, may adjourn the same
from time to time without notice, until a quorum shall be present.
Notice of any special meeting shall not be required to be given to any
director who shall attend a meeting without protesting prior thereto or
at its commencement the lack of notice to him, or who submits a signed
waiver of notice, whether before or after the meeting. Notice of any
adjourned meeting shall be required to be given. Meetings of the Board
may be held at any place within or outside of the State of Delaware.
A director may attend a meeting of the Board of Directors, or any
committee thereof, either in person or by means of a telephone or
similar communications medium which allows all persons participating in
the meeting to hear and be heard by all others participating, and
participation pursuant to this subsection shall constitute presence in
person at the meeting.
SECTION 3.4 QUORUM AND ACTION. - A majority of the directors then<PAGE>
serving (but in no event less than one-third of the total number of
directors which the corporation would then have if there were no
vacancies) shall constitute a quorum for the transaction of business.
At any duly held meeting at which a quorum is present, the affirmative
vote of a majority of the directors present shall be the act of the
Board of Directors on any question, except where the act of a greater
number is required by these By-Laws, by the Certificate of
Incorporation, or by statute.
SECTION 3.5 ACTION BY WRITTEN CONSENT IN LIEU OF MEETINGS OF
DIRECTORS. - See Section 6.6 of these By-Laws.
SECTION 3.6 VACANCIES; REMOVAL. - (a) Any vacancy occurring in
the Board of Directors by reason of an increase in the number of
directors comprising the Board or for any other reason shall be filled
by action of a majority of the remaining directors, even if less than a
quorum, or by the sole remaining director. Vacancies shall be filled
for the unexpired portion of the term of the director whose vacancy is
being filled.<PAGE>
<PAGE> 5
(b) Except where the Certificate of Incorporation provides
otherwise, contains provisions authorizing cumulative voting or the
election of one or more directors by class or their election by holders
of bonds, or requires all action by stockholders to be by a greater
vote, any one or more of the directors may be removed, (1) either for or
without cause, at any time, by the holders of a majority of the shares
then entitled to vote at an election of directors (a) at any regular
meeting or (b) at any special meeting of the stockholders the notice of
which announces that a purpose of such meeting is to seek removal, or,
(2) for cause, by the affirmative vote of a majority of the entire Board
of Directors at any regular or special meeting of the Board. Three (3)
unexcused absences within one (1) calendar year from Board of Directors
meetings and/or committee meetings for committees on which such director
sits shall constitute cause for removal. The Chairman of the Board, if
a Chairman be elected, shall determine whether an absence is "excused"
for purposes of this paragraph, but this decision may be overruled by an
affirmative vote of a majority of the directors at any duly held meeting
at which a quorum is present. If no Chairman is then serving, the Board
members at any duly held meeting at which a quorum is present shall
determine whether an absence is excused.
SECTION 3.7 COMMITTEES. - The Board of Directors, by resolution
adopted by a majority of the entire Board (the total number of directors
which the Corporation would have if there were no vacancies), may
designate from its members an Executive Committee, and such other
committees as it shall choose to create, consisting of three or more
directors, with such powers and authority (to the extent permitted by
law) as may be provided in said resolution.
SECTION 3.8 REMUNERATION. - (a) Unless otherwise expressly
provided by resolution adopted by the Board of Directors, none of the
directors shall, as such, receive any stated remuneration for these
services but the Board of Directors may at any time and from time to
time by resolution provide that a specified sum shall be paid to a
director of the Corporation, either as his/her annual remuneration as
such director or member of any committee of the Board of Directors or as
remuneration for such directors attendance at each meeting of the Board
of Directors or any such committee. The Board of Directors may also
likewise provide that the Corporation shall reimburse each director for
any expenses paid by him/her on account of such attendance at any
meeting. Nothing in this section shall be construed to preclude any
director from serving the Corporation in any other capacity and
receiving remuneration thereof.
(b) Notwithstanding the above, if any director is also a director
of another corporation either directly or indirectly owned, controlled
by and/or under common control of the corporation, such director shall
receive remuneration as a director from only one corporation. The
director shall be remunerated by the corporation for which he or she
would receive the greater remuneration.
OFFICERS
SECTION 4.1 EXECUTIVE OFFICERS. - The executive officers of the
corporation shall be a President, a Treasurer and a Secretary, all of
whom shall be elected at its annual meeting by the Board, and shall hold
office at the pleasure of the Board. In addition, the Board may elect a
Chairman of the Board of Directors and one or more Vice-Presidents,<PAGE>
Assistant Secretaries and/or Assistant Treasurers. Any two or more
offices may be held by one person. All vacancies occurring among any of
the officers shall be filled by the Board for the unexpired portion of
the officer's term and may be filled at a meeting of the Board other
than its annual meeting. Any officer may be removed and/or replaced at
any time, with or without cause, by the affirmative vote of a majority
(unless the Certificate of Incorporation requires a larger vote) of the
directors present at a regular meeting of directors or at a special
meeting of directors called for the purpose.
SECTION 4.2 OTHER OFFICERS. - The Board may appoint, remove and
replace such other officers, including assistant officers and agents,
with such powers and duties as it shall deem necessary. The Board may
by resolution authorize the President to appoint and remove officers
which are not Executive Officers.<PAGE>
<PAGE> 6
SECTION 4.3 THE CHAIRMAN OF THE BOARD. - The Chairman of the Board
of Directors, if one be elected, shall preside at all meetings of the
Board of Directors and of the stockholders if the directors so resolve.
The Vice Chairman of the Board of Directors, if one be elected, shall
preside at all meetings of the Board of Directors and of the
stockholders in the absence of the Chairman. The Chairman and Vice
Chairman shall have and perform such other duties as from time to time
may be assigned to them by the Board of Directors or the Executive
Committee, if any.
SECTION 4.4 THE PRESIDENT. - The President shall, in the absence
or non-election of a Chairman of the Board, preside at all meetings of
the stockholders and directors. When the Board is not in session, he
shall have general management and control of the business and affairs of
the corporation.
SECTION 4.5 THE VICE-PRESIDENT. - The Vice-President, if any, or
if there be more than one, the senior Vice-President as determined by
the Board of Directors, shall in the absence or disability of the
President, exercise the powers and perform the duties of the President,
and each Vice-President shall exercise such other powers and perform
such other duties as shall be prescribed by the Board.
SECTION 4.6 THE TREASURER. - The Treasurer shall have custody of
all funds, securities and evidences of indebtedness of the corporation;
he shall receive and give receipts and acquittances for monies paid in
on account of the corporation, and shall pay out of the funds on hand
all bills, payrolls, and other just debts of the corporation, of
whatever nature, upon maturity; he shall enter regularly in books to be
kept by him for that purpose, full and accurate accounts of all monies
received and paid out by him on account of the corporation, and he shall
perform all other duties incident to the office of Treasurer and as may
be prescribed by the Board.
SECTION 4.7 THE SECRETARY. - The Secretary shall keep the minutes
of all proceedings of the Board of Directors and of the stockholders; he
shall attend to the giving and serving of all notices to the
stockholders and directors or other notice required by law, or by these
By-Laws; shall affix the seal of the corporation to deeds, contracts and
other instruments in writing requiring a seal, when duly signed or when
so ordered by the Board of Directors; shall have charge of the
certificate books and stock books and such other books and papers as the
Board may direct, and shall perform all other duties incident to the
office of the Secretary.
SECTION 4.8 SALARIES. - The salaries of all officers shall be
fixed by the Board of Directors, and the Board has the authority by
majority vote to reimburse expenses and to establish reasonable
compensation of all directors for services to the corporation as
directors, officers, or otherwise.
SECTION 4.9 SHARES OF OTHER CORPORATIONS. - Whenever the
corporation is the holder of shares of stock of any other corporation,
any right or power of the corporation as such stockholder (including the
attendance, acting and voting at stockholders' meetings and execution of
waivers, consents, proxies or other instruments) may be exercised on
behalf of the corporation by the President or such other person as the
Board of Directors may authorize.<PAGE>
CAPITAL STOCK
SECTION 5.1 FORM AND EXECUTION OF CERTIFICATES. - The shares of
the corporation shall be represented by certificates which shall be in
the form required by the laws of Delaware and as shall be adopted by the
Board of Directors. They shall be numbered and registered in the order
issued; shall be signed by the Chairman, the Vice-Chairman, the
President or a Vice-President and by the Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer, and shall be
sealed with the corporate seal or a facsimile thereof. When such a
certificate is counter-signed by a transfer agent or registered by a
registrar, the signatures of any such officers may be facsimile.
SECTION 5.2 TRANSFER. - Upon compliance with provisions restricting
the transfer or registration of transfer of shares of stock, if any,
transfer of shares shall be made upon the books of the corporation by
the registered holder in person or by attorney, duly authorized, but
only upon surrender of the certificate or certificates for such shares
properly assigned for transfer.<PAGE>
<PAGE> 7
SECTION 5.3 LOST OR DESTROYED CERTIFICATES. - The holder of any
certificate representing shares of stock of the corporation may notify
the corporation of any loss, theft or destruction thereof, and the Board
of Directors may thereupon, in its discretion, cause a new certificate
for the same number of shares to be issued to such holder upon
satisfactory proof of such loss, theft or destruction, and the deposit
of indemnity by way of bond or otherwise, in such form and amount and
with such surety or sureties as the Board may require, to indemnify the
corporation against loss or liability by reason of the issuance of such
new certificate.
SECTION 5.4 RECORD DATE. - (a) In order to make a determination
of stockholders for any proper purpose, the directors may close the
stock transfer books for a stated period not to exceed twenty (20) days;
and if the purpose of the closing is to determine stockholders entitled
to notice of or to vote at a meeting of the stockholders, the books
shall be closed for at least ten (10) days immediately preceding such
meeting.
(b) In lieu of closing the books, the directors may fix in advance
a record date for determination of stockholders for any proper purpose,
such date shall not be more than sixty (60) days, and in case of a
meeting of stockholders, not less than twenty-five (25) days, prior to
the date on which the particular action, requiring such determination of
stockholders, is to be taken.
(c) In the absence of such closing or fixed record date, the date
for determination of stockholders entitled (1) to notice of or to vote
at a meeting of stockholders, or (2) to receive a dividend or any right
shall be as provided by Section 213 of the General Corporation Law or
any successor provision.
MISCELLANEOUS
SECTION 6.1 DIVIDENDS. - The Board of Directors may declare
dividends from time to time on the outstanding shares of the corporation
from the surplus or net profits legally available therefor.
SECTION 6.2 SEAL. - The Board shall provide a suitable corporate
seal stating the corporate name, and state and year of incorporation,
which shall be in the charge of the Secretary and shall be used as
authorized by these By-Laws.
SECTION 6.3 FISCAL YEAR. - The fiscal year of the corporation
shall close annually on December 31.
SECTION 6.4 CHECKS, NOTES, ETC. - (a) Checks, notes, drafts,
bills of exchange and orders for the payment of money shall be signed or
endorsed in such manner as shall be determined by the Board.
(b) The funds of the corporation shall be deposited in such bank or
trust company, and checks drawn against such funds shall be signed in
such manner as may be determined from time to time by the Board.
SECTION 6.5 NOTICE AND WAIVER OF NOTICE. - (a) Any notice of
meetings required to be given under these By-Laws to stockholders and/or
directors may be waived in writing signed by the person or persons
entitled to such notice, whether before or after the time stated
therein.<PAGE>
(b) All notices required by these By-Laws shall be printed or
written, and shall be delivered either personally, by telegraph or
cable, or by mail, and, if mailed, shall be deemed to be delivered when
deposited in the United States mail, postage prepaid, addressed to the
stockholder or director at his address as it appears on the records of
the corporation.
SECTION 6.6 ACTION BY WRITTEN CONSENT IN LIEU OF MEETINGS. - Any
action required or permitted to be taken at a meeting of the
stockholders or of the Board of Directors or of any committee thereof
may be taken without a meeting if a consent in writing setting forth the
action so taken shall be signed by all of the stockholders entitled to
notice of or to vote with respect to the subject matter thereof, or by
all of the members of the Board or of such committee, as the case may
be, and such consent shall have the same force and effect as a unanimous
vote.<PAGE>
<PAGE> 8
AMENDMENTS
SECTION 7.1 AMENDMENTS. - These By-Laws may be altered, amended or
repealed:
(a) at any duly held stockholders' meeting by vote of the owners of
a majority (unless the Certificate of Incorporation requires a larger
vote) of the outstanding stock having voting power, present in person or
by proxy, provided notice of the amendment is included in the notice or
waiver of notice of such meeting, and
(b) except as provided below, at any regular or special meeting of
the Board of Directors by a majority (unless the Certificate of
Incorporation requires a larger vote) of the entire Board, but any By-
Laws so made by the Board may be altered or repealed by the
stockholders. The Board of Directors shall have no power to change the
quorum for meetings of stockholders or of the Board of Directors, or to
change any provisions of the By-Laws with respect to the removal of
directors or the filling of vacancies in the Board resulting from the
removal by the stockholders. If any By-Laws regulating an impending
election of directors are adopted, amended or repealed by the Board of
Directors, there shall be set forth in the notice of the next meeting of
stockholders for the election of directors, the by-laws so adopted,
amended or repealed, together with a concise statement of the changes
made.
INDEMNITY
SECTION 8.1 INDEMNITY. - The corporation shall indemnify its
officers, directors, employees and agents to the full extent permitted
by Section 145, or any successor provision, of the General Corporation
Law, and such rights of indemnification shall be in addition to any
rights to which any such director, officer, employee or agent may
otherwise be entitled under the Certificate of Incorporation, any
agreement or vote of the stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office, and shall continue as to
a person who has agreed to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of
such person.<PAGE>
<PAGE>
<PAGE> 1
THIRD AMENDMENT TO EMPLOYMENT CONTRACT
between
Mid Atlantic Medical Services, Inc,
and
MD-Individual Practice Association, Inc.
and
GEORGE T. JOCHUM
This Agreement shall be the Third Amendment to the Employment Agreement
between Mid Atlantic Medical Services, Inc.(the "Company"), MD-
Individual Practice Association, Inc. and George T. Jochum ("Executive")
which was signed and delivered the 18th day of December 1990. The first
Amendment was dated September 11, 1992. The second Amendment was dated
in 1993.
The original contract provides for a retirement benefit to be paid to
Mr. Jochum pursuant to Section 3.9. That provision provided for certain
benefits to be paid which were inclusive of amounts to be paid pursuant
to the defined benefit retirement plan offered by the Company to all
employees. The Mid Atlantic Medical Services Inc. and Their
Subsidiaries Retirement Plan ("Plan") was terminated effective November
17, 1995. Pursuant to the terms of that termination and based on
election made by the Executive, a lump sum payment will be rolled over
from the Plan into the Company's 401k Plan. The purpose of this
technical amendment is to clarify the fact that the amount of this lump
sum distribution shall be considered to decrease the Company's liability
for benefits payable under Section 3.9
(1) The parties reaffirm and ratify the Original Contract, the First
Amendment and the Second Amendment in all respects except as provided
below.
(2) Add to Section 3.9 [Retirement Benefits]
After the first paragraph, the following new paragraph shall be
added. "For purpose of the proceeding paragraph, the amount of the
liability determined by this calculation shall be reduced by the amount
rolled into the 401(k) Plan because of the termination of The Mid
Atlantic Medical Services, Inc. and Their Subsidiaries Retirement Plan."
Signed and delivered this 8th day of December 1995, in Rockville,
Maryland by Mid Atlantic Medical Service, Inc., MD-Individual Practice
Association, Inc. and George T. Jochum.
By:/s/ George T. Jochum
------------------------------------
George T. Jochum
Mid Atlantic Medical Services, Inc.
By:/s/ Joseph L. Guarriello
------------------------------------<PAGE>
Joseph L. Guarriello
Executive Vice President and General Counsel
MD-Individual Practice Association, Inc.
By:/s/ Joseph L. Guarriello
------------------------------------
Joseph L. Guarriello
Executive Vice President and General Counsel<PAGE>
<PAGE>
<PAGE> 1
1996 MANAGEMENT BONUS PLAN
Participants in the 1996 Management Bonus Plan shall include all full-
time non-sales positions from Level 10 up to Level 20 and the CEO.
Other than with respect to Mr. Jochum's special bonus, individual
performance bonuses are not included in the 1996 Management Bonus Plan.
Bonuses will be solely predicated on the consolidated performance of Mid
Atlantic Medical Services, Inc. (MAMSI) and will be accrued on at least
a quarterly basis as documented by the year end audited financial
statements.
Bonuses shall be paid according to the following guidelines:
1. MINIMUM BONUS - Minimum bonuses shall be paid if the Company (MAMSI)
achieves a profit of $106 million before income taxes, expansion or
acquisition costs, and prior to the physicians' return of withhold and
payment of physicians' bonuses.
2. MAXIMUM BONUS - Maximum bonuses shall be paid if the Company (MAMSI)
achieves a profit of $115 million before income taxes, expansion or
acquisition costs, and prior to the physicians' return of withhold and
payment of physicians' bonuses.
3. PRO-RATION - In the event that the Company earns between $106
million and $115 million, bonus will be pro-rated accordingly.
4. BONUS BASE - In general, bonus payments will be calculated on cash
payments made during the year for base salary, which would take into
account salary increases due to promotion or merit increases. Pro-rated
calculations will be made at each salary level for the portion of the
year that the new level is in effect. However, with respect to
executive officers hired prior to March 1, 1996, bonus payments will
disregard salary and grade level changes made after March 1, 1996.
5. NEW EMPLOYEES - New full-time employees are eligible to participate
in the plan during their first year of employment. The bonus payment
will be pro-rated accordingly for the portion of the year that the
employee was employed.
6. TERMINATION - No bonus shall be paid to bonus participants who
terminate or are terminated by the Company prior to the year end. In
the event of retirement or death, the employee or his/her beneficiary
will receive a pro-rated portion of the bonus.
7. TIME OF PAYMENT - Bonus payments shall be distributed immediately
following the receipt of the audited financial statement(s) for MAMSI
for the year 1996.
8. BONUS PERCENTAGES - The distribution of the bonus payments to the
Management personnel shall be limited according to the following
percentage ranges. These allocations will be reviewed annually and
adjusted if necessary.
CEO 25 - 50%
Grade 18 and above (excluding CEO) 12 - 35%
Grade 17 11 - 30%
Grade 16 10 - 28%
Grade 15 9 - 21%<PAGE>
Grade 14 8 - 16%
Grades 12 & 13 7 - 12%
Grades 10 & 11 5 - 7%
9. CEO'S SPECIAL BONUS - In addition to the above bonus, in 1996 the
CEO, Mr. Jochum, will receive an additional bonus of up to a maximum of
50 percent of his salary in effect on March 1, 1996 ("1996 base salary")
in the following circumstances: he will earn 20 percent of that bonus
if actual membership growth is 300,000 members, 40 percent of that bonus
if actual membership growth is 325,000 members, 60 percent of that bonus
if actual membership growth is 350,000 members, 80 percent of that bonus
if actual membership growth is 375,000 members, and 100 percent of that
bonus (or 50 percent of his 1996 base salary) if actual membership
growth for 1996 exceeds 400,000 members.
10. AMENDMENT - The Board of Directors may amend the 1996 Management
Bonus Plan to materially increase the amounts payable thereunder to
participants, other than executive officers, or for any other reason.<PAGE>
<PAGE>
<PAGE> 1
MID ATLANTIC MEDICAL SERVICES, INC.
1996 NON-QUALIFIED STOCK OPTION PLAN
Article I. PURPOSE, ADOPTION AND TERM OF THE PLAN
1.01 PURPOSE. The purpose of the Mid Atlantic Medical Services,
Inc. 1996 Non-Qualified Stock Option Plan (hereinafter referred to as
the "Plan") is to advance the interests of the Company (as hereinafter
defined) and its Subsidiaries (as hereinafter defined) by encouraging
and providing for the acquisition of an equity interest in the Company
by non-employee directors and key employees through the grant of options
to purchase Common Stock (as hereinafter defined). The Plan will enable
the Company to retain the services of non-employee directors and key
employees upon whose judgment, interest, and special effort the
successful conduct of its operations is largely dependent and to compete
effectively with other enterprises for the services of non-employee
directors and key employees as may be needed for the continued
improvement of its business.
1.02 ADOPTION AND TERM. The Plan shall become effective on May 1,
1996, subject to the prior approval of a simple majority of the holders
of Common Stock represented, by person or by proxy, and entitled to vote
at an annual or special meeting of the holders of Common Stock. The
Plan shall terminate on April 30, 2001, or such earlier date as shall be
determined by the Board (as hereinafter defined).
Article II. DEFINITIONS
For purposes of the Plan, capitalized terms shall have the
following meanings:
2.01 BENEFICIARY means an individual, trust or estate who or that,
by will or the laws of descent and distribution, succeeds to the rights
and obligations of the Participant under the Plan and an Option
Agreement upon the Participant's death.
2.02 BOARD means the Board of Directors of the Company.
2.03 CAUSE means, with respect to a Participant who is a Non-
Employee Director, removal as a director by the holders of Common Stock
or by the Board for cause; provided, however, that, if a Non-Employee
Director is not a director of the Company, removal as a director by the
holders of common stock of any Subsidiary on whose Board of Directors he
or she serves or by such Board of Directors for cause.
2.04 CODE means the Internal Revenue Code of 1986, as amended from
time to time, or any successor thereto. References to a section of the
Code shall include that section and any comparable section or sections
of any future legislation that amends, supplements, or supersedes said
section.
2.05 COMMITTEE means a committee of the Board as may be appointed,
from time to time, by the Board. The Board may, from time to time,
appoint members of the Committee in substitution for those members who
were previously appointed and may fill vacancies, however caused, in the
Committee. The Committee shall be composed of at least three directors
of the Company, each of whom is a "disinterested person" as defined in
Rule 16b-3, as promulgated by the SEC under the Exchange Act, and an<PAGE>
"outside director" within the meaning of Section 162(m) of the Code and
the regulations thereunder. The Committee shall have the power and
authority to administer the Plan in accordance with Article III.
2.06 COMMON STOCK means the Common Stock, par value $.01 per
share, of the Company.
2.07 COMPANY means Mid Atlantic Medical Services, Inc., a
corporation organized under the laws of the State of Delaware, and its
successors.
2.08 DATE OF GRANT means the date designated by the Committee (or
its designee pursuant to Section 3.01) as the date as of which it grants
an Option, which shall not be earlier than the date on which the
Committee (or such designee) approves the granting of such Option.
2.09 DISABILITY has the meaning specified in Section 22(e)(3) of
the Code.
2.10 DISABILITY DATE means the date as of which an Employee
Participant is determined by the Committee to have a Disability.<PAGE>
<PAGE> 2
2.11 EMPLOYEE PARTICIPANT means a Participant who is not a Non-
Employee Director.
2.12 ERISA means the Employee Retirement Income Security Act of
1974, as amended.
2.13 EXCHANGE ACT means the Securities Exchange Act of 1934, as
amended.
2.14 FAIR MARKET VALUE of a share of Common Stock means, as of any
given date, the closing sales price of a share of Common Stock on such
date on the principal national securities exchange on which the Common
Stock is then traded or, if the Common Stock is not then traded on a
national securities exchange, the closing sales price or, if none, the
average of the bid and asked prices of the Common Stock on such date as
reported on the National Association of Securities Dealers Automated
Quotation System ("Nasdaq"); provided, however, that, if there were no
sales reported as of such date, Fair Market Value shall be computed as
of the last date preceding such date on which a sale was reported;
provided, further, that, if any such exchange or quotation system is
closed on any day on which Fair Market Value is to be determined, Fair
Market Value shall be determined as of the first date immediately
preceding such date on which such exchange or quotation system was open
for trading. In the event the Common Stock is not admitted to trade on
a securities exchange or quoted on Nasdaq, the Fair Market Value of a
share of Common Stock as of any given date shall be as determined in
good faith by the Committee, which determination may be based on, among
other things, the opinion of one or more independent and reputable
appraisers qualified to value companies in the Company's line of
business. Notwithstanding the foregoing, the Fair Market Value of a
share of Common Stock shall never be less than par value per share.
2.15 NON-EMPLOYEE DIRECTOR means each member of the Board or of
the Board of Directors of a Subsidiary, in each case who is not an
employee of the Company or of any of its Subsidiaries.
2.16 NON-EMPLOYEE DIRECTOR OPTION means an Option granted in
accordance with Article VII.
2.17 OPTION AGREEMENT means a written agreement between the
Company and a Participant specifically setting forth the terms and
conditions of an Option granted to a Participant under the Plan.
2.18 OPTION means any option to purchase Common Stock granted to
an Employee Participant pursuant to Article V or to a Non-Employee
Director pursuant to Article VII. All Options granted under the Plan
shall be Options that do not qualify as incentive stock options under
Section 422 of the Code.
2.19 PARTICIPANT means any employee of the Company or any of its
Subsidiaries selected by the Committee to receive an Option under the
Plan in accordance with Article V and, solely to the extent provided in
Article VII, any Non-Employee Director.
2.20 PLAN means the Mid Atlantic Medical Services, Inc. 1996 Non-
Qualified Stock Option Plan as set forth herein, and as the same may be
amended from time to time.<PAGE>
2.21 SEC means the Securities and Exchange Commission.
2.22 SUBSIDIARY means a company more than 50% of the equity
interests of which are beneficially owned, directly or indirectly, by
the Company.
2.23 TERMINATION OF EMPLOYMENT means, with respect to an Employee
Participant, the voluntary or involuntary termination of a Participant's
employment with the Company or any of its Subsidiaries for any reason,
including death, Disability, retirement or as the result of the sale or
other divestiture of the Participant's employer or any similar
transaction in which the Participant's employer ceases to be the Company
or one of its Subsidiaries. Whether entering military or other
government service shall constitute Termination of Employment, and
whether a Termination of Employment is a result of Disability, shall be
determined in each case by the Committee.<PAGE>
<PAGE> 3
Article III. ADMINISTRATION
3.01 COMMITTEE. The Plan shall be administered by the Committee,
which shall have exclusive and final authority in each determination,
interpretation, or other action affecting the Plan and its Participants.
The Committee shall have the sole and absolute discretion to interpret
the Plan, to establish and modify administrative rules for the Plan, to
select the officers and other key employees to whom Options may be
granted, to determine the terms and provisions of the respective Option
Agreements (which need not be identical), to determine all claims for
benefits under the Plan, to impose such conditions and restrictions on
Options as it determines appropriate, to determine whether the shares
delivered on exercise of Options will be treasury shares or will be
authorized but previously unissued shares, and to take such steps in
connection with the Plan and Options granted hereunder as it may deem
necessary or advisable. No action of the Committee will be effective if
it contravenes or amends the Plan in any respect. The Committee may,
with respect to Participants who are not subject to Section 16 of the
Exchange Act or "covered employees" within the meaning of Section 162(m)
of the Code and the regulations thereunder, delegate such of its powers
and authority under the Plan as it deems appropriate to the Company's
President or any member of the Committee, provided that the Committee
shall regularly review all actions taken pursuant to such delegation of
authority.
3.02 ACTIONS OF THE COMMITTEE. All determinations of the
Committee shall be made by a majority vote of its members. Any decision
or determination reduced to writing and signed by all of the members
shall be fully as effective as if it had been made by a majority vote at
a meeting duly called and held. The Committee shall also have express
authorization to hold Committee meetings by conference telephone, or
similar communication equipment by means of which all persons
participating in the meeting can hear each other.
Article IV. SHARES OF COMMON STOCK
4.01 NUMBER OF SHARES OF COMMON STOCK ISSUABLE. Subject to
adjustments as provided in Section 8.05, 3,000,000 shares of Common
Stock shall be available for Options under the Plan. Any and all of
such shares may be issued pursuant to Options granted to Employee
Participants or to Non-Employee Directors. The Common Stock to be
offered under the Plan shall be authorized and unissued Common Stock, or
issued Common Stock that shall have been reacquired by the Company and
held in its treasury.
4.02 NUMBER OF SHARES OF COMMON STOCK AWARDED TO ANY PARTICIPANT.
In the event the purchase price of an Option is paid, or related tax or
withholding payments are satisfied, in whole or in part through the
delivery of shares of Common Stock issuable in connection with the
exercise of the Option, a Participant will be deemed to have received an
Option with respect to those shares of Common Stock.
4.03 SHARES OF COMMON STOCK SUBJECT TO TERMINATED OPTIONS. The
Common Stock covered by any unexercised portions of terminated Options
may again be subject to new Options under the Plan.
Article V. PARTICIPATION<PAGE>
5.01 ELIGIBLE PARTICIPANTS. Employee Participants in the Plan
shall be such officers and other key employees of the Company or its
Subsidiaries, whether or not directors of the Company, as the Committee,
in its sole discretion, may designate from time to time. In making such
designation, the Committee may take into account the nature of the
services rendered by the officers and key employees, their present and
potential contributions to the success of the Company, and such other
factors as the Committee, in its discretion, may deem relevant. The
Committee's designation of an Employee Participant in any year shall not
require the Committee to designate such person to receive Options in any
other year. The Committee shall consider such factors as it deems
pertinent in selecting Employee Participants and in determining the type
and amount of their respective Options.
Non-Employee Directors shall receive Non-Employee Director Options
in accordance with Article VII, the provisions of which are automatic
and non-discretionary in operation. Non-Employee Directors shall not be
eligible to receive any other Options under the Plan unless they are no
longer Non-Employee Directors on the Date of Grant of such Options.<PAGE>
<PAGE> 4
A Participant may hold more than one Option granted under the Plan.
Article VI. STOCK OPTIONS
6.01 GRANT OF OPTION. Any Option granted under the Plan shall
have such terms as the Committee may, from time to time, approve, and
the terms and conditions of Options need not be the same with respect to
each Participant. No Employee Participant may receive more than 200,000
Options under the Plan during the term of the Plan.
6.02 TERMS OF OPTIONS. Options granted under the Plan shall be
subject to the following terms and conditions and shall be in such form
and contain such additional terms and conditions, not inconsistent with
the terms of the Plan, as the Committee shall deem desirable:
(a) OPTION PRICE. The option price per share of Common Stock
purchasable under an Option shall be determined by the Committee at the
time of grant but shall not be less than 100% of the Fair Market Value
of a share of Common Stock on the Date of Grant.
(b) OPTION TERM. The term of each Option shall be fixed by
the Committee, but no Option shall be exercisable more than five years
after the Date of Grant.
(c) EXERCISABILITY. An Option Agreement with respect to
Options may contain such performance targets, waiting periods, exercise
dates and restrictions on exercise (including, but not limited to, a
requirement that an Option is exercisable in periodic installments), if
any, as may be determined by the Committee at the time of grant. To the
extent not exercised, installments shall cumulate and be exercisable, in
whole or in part, at any time after becoming exercisable, subject to the
limitations set forth in Sections 6.02(b) and (g).
(d) METHOD OF EXERCISE. Subject to whatever installment
exercise and waiting period provisions that apply under subsection (c)
above, Options may be exercised in whole or in part at any time during
the term of the Option, by giving written notice of exercise to the
Company specifying the number of shares of Common Stock to be purchased.
Such notice shall be accompanied by payment in full of the purchase
price in such form as the Committee may accept (including payment in
accordance with a cashless exercise program approved by the Committee).
A Participant shall also have the right to pay the exercise price, in
full or in part, in the form of Common Stock duly owned by the
Participant (and for which the Participant has good title, free and
clear of any liens and encumbrances). Any already issued Common Stock
used for payment must have been held by the Participant for at least six
months. No Common Stock shall be issued on exercise of an Option until
payment, as provided herein, therefor has been made. A Participant
shall generally have the right to dividends or other rights of a
stockholder with respect to Common Stock subject to the Option only when
certificates for shares of Common Stock are issued to the Participant.
(e) NON-TRANSFERABILITY OF OPTIONS. No Option shall be
transferable by the Participant otherwise than by will, by the laws of
descent and distribution, or pursuant at a qualified domestic relations
order as defined by the Code, Title I of ERISA or the rules thereunder.
(f) ACCELERATION OR EXTENSION OF EXERCISE TIME. The
Committee, in its sole discretion, shall have the right (but shall not<PAGE>
in any case be obligated) to permit purchase of Common Stock subject to
any Option granted to an Employee Participant prior to the time such
Option would otherwise become exercisable under the terms of the Option
Agreement. In addition, the Committee, in its sole discretion, shall
have the right (but shall not in any case be obligated) to permit any
Option granted to an Employee Participant to be exercised after its
expiration date, subject, however to the limitation set forth in Section
6.02(b).
(g) EXERCISE OF OPTIONS UPON TERMINATION OF EMPLOYMENT.
(i) EXERCISE OF VESTED OPTIONS UPON TERMINATION OF
EMPLOYMENT.<PAGE>
<PAGE> 5
(A) TERMINATION. Unless the Committee, in its sole
discretion, provides for a shorter or longer period of time in the
Option Agreement or a longer period of time in accordance with Section
6.02(f), upon an Employee Participant's Termination of Employment other
than by reason of death or Disability, the Employee Participant may,
within three months from the date of such Termination of Employment,
exercise all or any part of his or her Options as were exercisable at
the date of Termination of Employment. In no event, however, may any
Option be exercised later than the date determined pursuant to Section
6.02(b).
(B) DISABILITY. Unless the Committee, in its sole
discretion, provides for a shorter or longer period of time in the
Option Agreement or a longer period of time in accordance with Section
6.02(f), upon an Employee Participant's Disability Date, the Employee
Participant may, within one year after the Disability Date, exercise all
or a part of his or her Options, whether or not such Option was
exercisable on the Disability Date, but only to the extent not
previously exercised. In no event, however, may any Option be exercised
later than the date determined pursuant to Section 6.02(b).
(C) DEATH. Unless the Committee, in its sole
discretion, provides for a shorter or longer period of time in the
Option Agreement or a longer period of time in accordance with Section
6.02(f), in the event of the death of an Employee Participant while
employed by the Company, the right of the Employee Participant's
Beneficiary to exercise the Option in full (whether or not all or any
part of the Option was exercisable as of the date of death of the
Employee Participant, but only to the extent not previously exercised)
shall expire upon the expiration of one year from the date of the
Employee Participant's death or on the date of expiration of the Option
determined pursuant to Section 6.02(b), whichever is earlier.
(ii) EXPIRATION OF UNVESTED OPTIONS UPON TERMINATION OF
EMPLOYMENT. Subject to Sections 6.02(f) and 6.02(g)(i)(C), to the
extent all or any part of an Option granted to an Employee Participant
was not exercisable as of the date of Termination of Employment, such
right shall expire at the date of such Termination of Employment.
Notwithstanding the foregoing, the Committee, in its sole discretion and
under such terms as it deems appropriate, may permit an Employee
Participant who will continue to render significant services to the
Company after his or her Termination of Employment to continue to accrue
service with respect to the right to exercise his or her Options during
the period in which the individual continues to render such services.
Article VII. NON-EMPLOYEE DIRECTOR OPTIONS
7.01 GRANT OF NON-EMPLOYEE DIRECTOR OPTIONS; EXERCISE PRICE; TERM.
On May 1, 1996, each person who is a Non-Employee Director on such date
shall be granted a Non-Employee Director Option to purchase the number
of shares of Common Stock determined in accordance with Section 7.02. A
Non-Employee Director shall only receive one Non-Employee Director
Option on May 1, 1996, even if he or she serves as a Non-Employee
Director of the Company and/or of one or more of its Subsidiaries.
The exercise price per share for Non-Employee Director Options
shall be the Fair Market Value of a share of Common Stock on the Date of
Grant. All Non-Employee Director Options shall have a five year term.<PAGE>
7.02 NUMBER OF SHARES. Each Non-Employee Director Option shall
entitle the holder to purchase 3,000 shares of Common Stock; provided,
however, that, if a Non-Employee Director is not a Non-Employee Director
of the Company on the Date of Grant of the Option, his or her Non-
Employee Director Option shall only entitle him or her to purchase 2,400
shares of Common Stock.
Such number of shares is, however, subject to increase (but not
decrease) based on the application of both of the factors described in
Sections 7.02 (a) and (b) below; provided, however, that the number of
shares of Common Stock covered by a Non-Employee Director Option shall
be increased by one or two shares of Common Stock so that the number of
covered shares is divisible by three and provided further, however, that
a Non-Employee Director Option shall not entitle the holder to purchase
more than 6,000 shares (4,800 shares if a Non-Employee Director is not a
Non-Employee Director of the Company on the Date of Grant of the Option)
of Common Stock.<PAGE>
<PAGE> 6
(a) NUMBER OF YEARS OF SERVICE. Each Non-Employee Director
Option shall entitle the holder to purchase an additional 150 shares
(120 shares if a Non-Employee Director is not a Non-Employee Director of
the Company on the Date of Grant of the Option) of Common Stock for each
calendar year the Non-Employee Director has served as a director of the
Company or of one of its Subsidiaries, but only if such calendar year
has been completed prior to the Date of Grant of the Non-Employee
Director Option. The following rules shall apply in calculating years
of service as a director:
(i) PARTIAL SERVICE. If a person has served as a
director of the Company or as a director of any of its Subsidiaries at
any time during a calendar year, that calendar year shall count as one
year of service even if the person did not serve as such for a full
year;
(ii) MULTIPLE SERVICE. Notwithstanding the foregoing,
service as a director of the Company and/or as a director of one or more
of its Subsidiaries during any calendar year shall not be double
counted. Accordingly, if a person has served as a director of the
Company and as a director of one or more of its Subsidiaries during a
calendar year, that calendar year shall count as only one year of
service; and
(iii) SERVICE AS AN EMPLOYEE. Notwithstanding the
foregoing, if a Non-Employee Director served as an employee of the
Company or of one of its Subsidiaries at any time during a calendar
year, that calendar year shall not count as a year of service.
(b) INCREASE IN EARNINGS PER SHARE. The number of shares
covered by a Non-Employee Director Option shall also be increased (but
not decreased) by (i) the percentage increase in earnings per share of
Common Stock during the previous two completed fiscal years, multiplied
by (ii) 3,000 shares (2,400 shares if a Non-Employee Director is not a
Non-Employee Director of the Company on the Date of Grant of the
Option). Earnings per share of Common Stock shall be determined by
reference to the audited consolidated financial statements of the
Company, as adjusted to reflect any stock dividends or stock splits that
occur during such fiscal years.
The increase in earnings per share shall be determined by the
following calculation:
(A) earnings per share (expressed as a dollar amount) in
fiscal 1995 minus earnings per share (expressed as a dollar amount) in
fiscal 1994, divided by
(B) earnings per share (expressed as a dollar amount) in
fiscal 1994;
provided, however, that the number of shares covered by a Non-Employee
Director Option shall not be adjusted under this Section 7.02(b) if the
Company suffers a loss per share in fiscal 1995 or if earnings per share
in 1995 is not greater than earnings per share in 1994.
For example, if earnings per share of Common Stock in fiscal 1995
increased by 25% over fiscal 1994, each Non-Employee Director Option (1)
granted to a person who is a Non-Employee Director of the Company on May<PAGE>
1, 1996 would entitle the holder thereof to purchase an additional 750
shares of Common Stock (25% of 3,000 shares) (assuming the 6,000 share
limitation is not otherwise exceeded as a result of the application of
Section 7.02(a)) and (2) granted to a Non-Employee Director who is not
Non-Employee Director of the Company on May 1, 1996 would entitle the
holder thereof to purchase an additional 600 shares of Common Stock (25%
of 2,400 shares) (assuming the 4,800 share limitation is not otherwise
exceeded as a result of the application of Section 7.02(a)).
7.03 EXERCISABILITY. Each Non-Employee Director Option shall
become exercisable cumulatively in three equal installments on June 1,
1997, June 1, 1998 and June 1, 1999; provided, however, that, if a Non-
Employee Director is removed for Cause, any Option held by such Non-
Employee Director shall cease to continue to become exercisable on or
after the date of such removal.<PAGE>
<PAGE> 7
7.04 TERMINATION. If a Non-Employee Director's service with the
Company terminates for any reason or if such person ceases to be a Non-
Employee Director, such Option shall continue to become exercisable in
accordance with Section 7.03 and may be exercised until the expiration
of the stated term of the Option. Accordingly, if a Non-Employee
Director is removed for Cause, he or she may continue to exercise his or
her Non-Employee Director Option until the expiration of the stated term
of such Option, but only to the extent that such Option became
exercisable prior to the date of such removal and it was not previously
exercised.
7.05 OTHER PLAN PROVISIONS. All applicable provisions of the Plan
(other than Sections 6.02(f) and (g)) not inconsistent with this Article
VII shall apply to Options granted to Non-Employee Directors.
Article VIII. TERMS APPLICABLE TO ALL OPTIONS GRANTED UNDER THE PLAN
8.01 PLAN PROVISIONS CONTROL OPTION TERMS. The terms of the Plan
shall govern all Options granted under the Plan, and in no event shall
the Committee have the power to grant to a Participant any Option under
the Plan that is contrary to any provisions of the Plan. In the event
any provision of any Option granted under the Plan shall conflict with
any of the terms in the Plan as constituted on the Date of Grant of such
Option, the terms in the Plan as constituted on the Date of Grant of
such Option shall control. Except as provided in Section 8.03 or unless
otherwise provided by the Committee, in its sole discretion, in the
Option Agreement, the terms of any Option granted under the Plan may not
be changed after the Date of Grant of such Option so as to materially
decrease the value of the Option without the express written approval of
the holder.
8.02 OPTION AGREEMENT. No person shall have any rights under any
Option granted under the Plan unless and until the Company and the
Participant to whom such Option shall have been granted shall have
executed and delivered an Option Agreement authorized by the Committee
expressly granting the Option to such person and containing provisions
setting forth the terms of the Option. If there is any conflict between
the provisions of an Option Agreement and the terms of the Plan, the
terms of the Plan shall control.
8.03 MODIFICATION OF OPTION AFTER GRANT. Except as provided by
the Committee, in its sole discretion, in the Option Agreement or as
provided in Section 8.05, no Option granted under the Plan to a
Participant may be modified (unless such modification does not
materially decrease the value of the Option) after the Date of Grant
except by express written agreement between the Company and the
Participant, provided that any such change (a) shall not be inconsistent
with the terms of the Plan, and (b) shall be approved by the Committee.
8.04 TAXES. The Company shall be entitled, if the Committee deems
it necessary or desirable, to withhold (or secure payment from the
Participant in lieu of withholding) the amount of any withholding or
other tax required by law to be withheld or paid by the Company with
respect to any Common Stock issuable under such Participant's Option,
and the Company may defer issuance of Common Stock upon the grant or
exercise of an Option unless indemnified to its satisfaction against any
liability for any such tax. The amount of such withholding or tax
payment shall be determined by the Committee or its delegate and shall<PAGE>
be payable by the Participant at such time as the Committee determines.
A Participant shall be permitted to satisfy his or her tax or
withholding obligation by (a) having cash withheld from the
Participant's salary or other compensation payable by the Company,
(b) the payment of cash by the Participant to the Company, and/or (c)
with the approval of the Committee, the withholding from the Option, at
the appropriate time, of a number of shares of Common Stock sufficient,
based upon the Fair Market Value of such Common Stock, to satisfy such
tax or withholding requirements. A Participant's election to have
withheld shares of Common Stock that are otherwise issuable on exercise
of an Option shall be in writing, shall be irrevocable upon approval by
the Committee, shall be delivered to the Company prior to the date on
which the amount of tax to be withheld is determined, and shall
otherwise be made in conformity with SEC Rule 16b-3(e).<PAGE>
<PAGE> 8
8.05 ADJUSTMENTS TO REFLECT CAPITAL CHANGES; CHANGE IN CONTROL.
(a) RECAPITALIZATION. The number and kind of shares subject
to outstanding Options, the purchase price or exercise price of such
Options, the amount of Non-Employee Director Options to be granted on
any date under Section 7.02, and the number and kind of shares available
for Options subsequently granted under the Plan shall be appropriately
adjusted to reflect any stock dividend, stock split, combination or
exchange of shares, merger, consolidation or other change in
capitalization with a similar substantive effect upon the Plan or the
Options granted under the Plan. The Committee shall have the power and
sole discretion to determine the nature and amount of the adjustment to
be made in each case.
(b) SALE OR REORGANIZATION. After any reorganization,
merger, or consolidation in which the Company is the surviving entity,
each Participant shall, at no additional cost, be entitled upon the
exercise of an Option outstanding prior to such event to receive
(subject to any required action by stockholders), in lieu of the number
of shares of Common Stock receivable on exercise pursuant to such
Option, the number and class of shares of stock or other securities to
which such Participant would have been entitled pursuant to the terms of
the reorganization, merger, or consolidation if, at the time of such
reorganization, merger, or consolidation, such Participant had been the
holder of record of a number of shares of Common Stock equal to the
number of shares of Common Stock receivable on exercise pursuant to such
Option. Comparable rights shall accrue to each Participant in the event
of successive reorganizations, mergers, or consolidations of the
character described above.
(c) OPTIONS TO PURCHASE STOCK OF ACQUIRED COMPANIES. After
any reorganization, merger, or consolidation in which the Company shall
be a surviving entity, the Committee may grant substituted Options under
the provisions of the Plan, replacing old options granted under a plan
of another party to the reorganization, merger, or consolidation whose
stock subject to the old options may no longer be issued following such
reorganization, merger, or consolidation. The foregoing adjustments and
manner of application of the foregoing provisions shall be determined by
the Committee in its sole discretion. Any such adjustments may provide
for the elimination of any fractional shares of Common Stock that might
otherwise become subject to any Options.
(d) CHANGES IN CONTROL. (i) Upon the dissolution or
liquidation of the Company, (ii) upon a reorganization, merger, or
consolidation in which the Company is not the surviving corporation,
(iii) upon the sale of substantially all of the property or assets of
the Company to another corporation, or (iv) if at least 50% or more of
the voting stock of the Company is sold either through a tender offer or
otherwise to a party or an affiliated group of parties, then the Plan
and the Options issued thereunder shall terminate, unless provisions are
made in connection with such transaction for the assumption of Options
theretofore granted, or for the substitution for such Options of new
options of the successor corporation or a parent or subsidiary thereof,
with appropriate adjustment as to the number and kinds of shares and the
per share exercise prices. In the event such Options shall be
terminated, all outstanding Options shall be exercisable in full for at
least 30 days prior to such termination date, whether or not exercisable
during such period, subject, however, to the limitation set forth in<PAGE>
Sections 6.02(b) and 7.01. For purposes of this Section 8.05(d), the
Company refers to Mid Atlantic Medical Services, Inc., MD-Individual
Practice Association, Inc., Optimum Choice, Inc., and/or Physicians
Health Plan of Maryland, Inc., jointly or separately. The Committee
shall determine the date on which Options may become exercisable
pursuant to this Section 8.05(d).
8.06 SURRENDER OF OPTIONS. Any Option granted to a Participant
under the Plan may be surrendered to the Company for cancellation on
such terms as the Committee and holder approve.
8.07 NO RIGHT TO OPTION; NO RIGHT TO EMPLOYMENT. Except as
provided in Article VII, no director, employee or other person shall
have any claim or right to be granted an Option. Neither the Plan nor
any action taken hereunder shall be construed as giving any employee any
right to be retained in the employ of the Company or any of its
Subsidiaries.<PAGE>
<PAGE> 9
8.08 OPTIONS NOT INCLUDABLE FOR BENEFIT PURPOSES. Income
recognized by a Participant pursuant to the provisions of the Plan shall
not be included in the determination of benefits under any employee
pension benefit plan (as such term is defined in Section 3(2) of ERISA)
or group insurance or other benefit plans applicable to the Participant
that are maintained by the Company or any of its Subsidiaries, except as
may be provided under the terms of such plans or determined by
resolution of the Board.
8.09 GOVERNING LAW. The Plan and all determinations made and
actions taken pursuant to the Plan shall be governed by the laws of the
State of Delaware other than the conflict of laws provisions of such
laws, and shall be construed in accordance therewith.
8.10 NO STRICT CONSTRUCTION. No rule of strict construction shall
be implied against the Company, the Committee, or any other person in
the interpretation of any of the terms of the Plan, any Option granted
under the Plan or any rule or procedure established by the Committee.
8.11 COMPLIANCE WITH SEC RULE 16b-3 AND SECTION 162(m). It is
intended that the Plan be applied and administered in compliance with
SEC Rule 16b-3 and with Section 162(m) of the Code and the regulations
thereunder (Section 162(m) of the Code and such regulations are
collectively hereinafter referred to as "Section 162(m)"). If any
provision of the Plan would be in violation of Rule 16b-3 or Section
162(m) if applied as written, such provision shall not have effect as
written and shall be given effect so as to comply with Rule 16b-3 or
Section 162(m), as the case may be, as determined by the Committee. The
Board is authorized to amend the Plan and to make any such modifications
to Option Agreements to comply with Rule 16b-3 and Section 162(m), as
they may be amended from time to time, and to make any other such
amendments or modifications deemed necessary or appropriate to better
accomplish the purposes of the Plan in light of any amendments made to
Rule 16b-3 and Section 162(m).
8.12 CAPTIONS. The captions (i.e., all Section headings) used in
the Plan are for convenience only, do not constitute a part of the Plan,
and shall not be deemed to limit, characterize, or affect in any way any
provisions of the Plan, and all provisions of the Plan shall be
construed as if no captions have been used in the Plan.
8.13 SEVERABILITY. Whenever possible, each provision in the Plan
and every Option at any time granted under the Plan shall be interpreted
in such manner as to be effective and valid under applicable law, but if
any provision of the Plan or any Option at any time granted under the
Plan shall be held to be prohibited by or invalid under applicable law,
then (a) such provision shall be deemed amended to accomplish the
objectives of the provision as originally written to the fullest extent
permitted by law, and (b) all other provisions of the Plan and every
other Option at any time granted under the Plan shall remain in full
force and effect.
8.14 LEGENDS. All certificates for Common Stock delivered under
the Plan shall be subject to such transfer restrictions set forth in the
Plan and such other restrictions as the Committee may deem advisable
under the rules, regulations, and other requirements of the SEC, any
stock exchange upon which the Common Stock is then listed, and any
applicable federal or state securities law. The Committee may cause a<PAGE>
legend or legends to be put on any such certificates to make appropriate
references to such restrictions.
8.15 INVESTMENT REPRESENTATION. The Committee may, in its
discretion, demand that any Participant awarded an Option deliver to the
Committee at the time of exercise of such Option a written
representation that the shares of Common Stock to be acquired upon
exercise are to be acquired for investment and not for resale or with a
view to the distribution thereof. Upon such demand, delivery of such
written representation by the Participant prior to the delivery of any
shares of Common Stock pursuant to the exercise of his or her Option
shall be a condition precedent to the Participant's right to purchase or
otherwise acquire such shares of Common Stock by such exercise. The
Company is not legally obliged hereunder if fulfillment of its
obligations under the Plan would violate federal or state securities
laws.<PAGE>
<PAGE> 10
8.16 AMENDMENT AND TERMINATION.
(a) AMENDMENT. The Board shall have complete power and
authority to amend the Plan at any time it is deemed necessary or
appropriate; provided, however, that the Board shall not, without the
affirmative approval of a simple majority of the holders of Common
Stock, represented, by person or by proxy, and entitled to vote at an
annual or special meeting of the holders of Common Stock, make any
amendment that requires stockholder approval under SEC Rule 16b-3,
Section 162(m) or under any other applicable law, unless the Board
determines that compliance with Rule 16b-3, Section 162(m) and/or such
law is no longer desired. No termination or amendment of the Plan may,
without the consent of the Participant to whom any Option shall
theretofore have been granted under the Plan, adversely affect the right
of such individual under such Option; provided, however, that the
Committee may, in its sole discretion, make provision in an Option
Agreement for such amendments that, in its sole discretion, it deems
appropriate. Article VII shall not be amended or modified more
frequently than once in any period of six consecutive months other than
to comport with changes in the ERISA, the Code or the rules and
regulations promulgated thereunder.
(b) TERMINATION. The Board shall have the right and the
power to terminate the Plan at any time. No Option shall be granted
under the Plan after the termination of the Plan, but the termination of
the Plan shall not have any other effect and any Option outstanding at
the time of the termination of the Plan may be exercised after
termination of the Plan at any time prior to the expiration date of such
Option to the same extent such Option would have been exercisable had
the Plan not terminated.
8.17 COSTS AND EXPENSES. All costs and expenses incurred in
administering the Plan shall be borne by the Company.
8.18 UNFUNDED PLAN. The Plan shall be unfunded. The Company shall
not be required to establish any special or separate fund or make any
other segregation of assets to assure the payment of any award under the
Plan.<PAGE>
<PAGE>
<PAGE> 1
MID ATLANTIC MEDICAL SERVICES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT FOR EMPLOYEES
AGREEMENT ("Agreement") dated the date indicated on the attached
Face Sheet, by and between Mid Atlantic Medical Services, Inc., a
Delaware corporation ("Corporation"), and the person indicated on the
attached Face Sheet, an employee of the Corporation and/or one of its
subsidiaries ("Optionee").
WHEREAS, the Corporation desires to have Optionee continue in its
employ and to provide Optionee with an incentive by sharing in the
success of the Corporation;
WHEREAS, in order to provide such an incentive to its officers and
key employees, the Corporation has adopted the Mid Atlantic Medical
Services, Inc. 1996 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the Corporation desires to grant to Optionee under the
Plan options not intended to qualify as "incentive stock options" within
the meaning of Section 422 or any successor provision of the Internal
Revenue Code of 1986, as amended ("Code"); and
WHEREAS, unless otherwise provided herein, capitalized terms used
in this Agreement shall have the meaning given them in the Plan.
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the
parties hereto agree as follows:
1. NUMBER OF SHARES AND PRICE. The Corporation hereby grants to
the Optionee an option ("Option") to purchase the number of shares of
Common Stock set forth on the attached Face Sheet of this Agreement.
The exercise price per share of Common Stock of the Option shall be as
is set forth on the attached Face Sheet of this Agreement, such price
being the Fair Market Value per share of Common Stock on the Date of
Grant of the Option. The Option is not intended to qualify as an
"incentive stock option" under Section 422 of the Code.
2. TERM AND EXERCISE. The Option shall expire five (5) years from
the date hereof, subject to earlier termination as set forth in Section
3. Subject to the provisions of Section 3, the Option shall become
exercisable in installments as set forth on the attached Face Sheet of
this Agreement.
3. EXERCISE OF OPTION UPON TERMINATION OF EMPLOYMENT.
(a) TERMINATION OF VESTED OPTION UPON TERMINATION OF
EMPLOYMENT.
(i) TERMINATION. Upon the Optionee's Termination of
Employment, other than by reason of death or Disability, the Optionee
may, within three months from the date of such Termination of
Employment, exercise all or any part of the Option to the extent it was
exercisable at the date of Termination of Employment. In no event may
the Option be exercised later than the expiration date described in
Section 2.
(ii) DISABILITY. Upon the Optionee's Disability Date,<PAGE>
the Optionee may, within one year after such Disability Date, exercise
all or a part of the Option, whether or not it was exercisable on such
Disability Date, but only to the extent not previously exercised. In no
event, however, may the Option be exercised later than the expiration
date described in Section 2.
(iii) DEATH. In the event of the death of the Optionee
while employed by the Corporation, the right of the Optionee's
Beneficiary to exercise the Option in full (whether or not all or any
part of the Option was exercisable as of the date of death, but only to
the extent not previously exercised) shall expire upon the expiration of
one year from the date of the Optionee's death or, if earlier, on the
date of expiration of the Option determined pursuant to Section 2.
(b) TERMINATION OF UNVESTED OPTION UPON TERMINATION OF
EMPLOYMENT. Except as provided in Sections 3(a)(ii) and 3(a)(iii), to
the extent all or any part of the Option was not exercisable as of the
date of Termination of Employment, the unexercisable portion of the
Option shall expire at the date of such Termination of Employment.<PAGE>
<PAGE> 2
(c) CHANGE OF CONTROL. Notwithstanding anything to the
contrary in Section 2 or this Section 3, in the event one of the events
specified in Section 8.05(d)(i), (ii), (iii) or (iv) of the Plan occurs,
the provisions of such Section 8.05(d) shall determine when the Option
becomes exercisable, when it may be exercised and when it expires.
4. EXERCISE PROCEDURES. The Option shall be exercisable by
written notice to the Corporation, which must be received by the
Secretary of the Corporation not later than 5:00 P.M. local time at the
principal executive office of the Corporation on the expiration date of
the Option. Such written notice shall set forth (a) the number of
shares of Common Stock being purchased, (b) the total exercise price for
the shares of Common Stock being purchased, (c) the exact name as it
should appear on the stock certificate(s) to be issued for the shares of
Common Stock being purchased, and (d) the address to which the stock
certificate(s) should be sent. The exercise price of shares of Common
Stock purchased upon exercise of the Option shall be paid in full (a) in
cash, (b) by delivery to the Corporation of shares of Common Stock
(which shares of Common Stock must have been held for at least six
months), (c) in any combination of cash and shares of Common Stock, or
(d) by delivery of such other consideration as the Committee deems
appropriate and in compliance with applicable law (including payment in
accordance with a cashless exercise program under which, if so
instructed by the Optionee, shares of Common Stock may be issued
directly to the Optionee's broker or dealer upon receipt of the exercise
price in cash from the broker or dealer). In the event that any shares
of Common Stock shall be transferred to the Corporation to satisfy all
or any part of the exercise price, the part of the exercise price deemed
to have been satisfied by such transfer of shares of Common Stock shall
be equal to the product derived by multiplying the Fair Market Value as
of the date of exercise times the number of shares of Common Stock
transferred to the Corporation. Any shares of Common Stock tendered in
payment shall be duly endorsed in blank or accompanied by stock powers
duly endorsed in blank. The Optionee may not transfer to the
Corporation in satisfaction of the exercise price any fraction of a
share of Common Stock, and any portion of the exercise price that would
represent less than a full share of Common Stock must be paid in cash by
the Optionee. Subject to Section 8 hereof, certificates for the
purchased shares of Common Stock will be issued and delivered to the
Optionee as soon as practicable after the receipt of such payment of the
exercise price; PROVIDED, HOWEVER, that delivery of any such shares of
Common Stock shall be deemed effected for all purposes when a stock
transfer agent of the Corporation shall have deposited such certificates
in the United States mail, addressed to Optionee, at the address set
forth on the Face Sheet of this Agreement or to such other address as
Optionee may from time to time designate in a written notice to the
Corporation. The Optionee shall not be deemed for any purpose to be a
shareholder of the Corporation in respect of any shares of Common Stock
as to which the Option shall not have been exercised, as herein
provided, until such shares of Common Stock have been issued to Optionee
by the Corporation hereunder.
5. PLAN PROVISIONS CONTROL OPTION TERMS; MODIFICATIONS. The
Option is granted pursuant and subject to the terms and conditions of
the Plan, the provisions of which are incorporated herein by reference.
In the event any provision of this Agreement shall conflict with any of
the terms in the Plan as constituted on the Date of Grant, the terms of
the Plan as constituted on the Date of Grant shall control. Except as<PAGE>
provided in Section 8.05 of the Plan, the Option shall not be modified
after the Date of Grant except by express written agreement between the
Corporation and the Optionee; PROVIDED, HOWEVER, that any such
modification (a) shall not be inconsistent with the terms of the Plan,
and (b) shall be approved by the Committee. No modifications may be
made to the Option while the Optionee is subject to Section 16(b) of the
Exchange Act except in compliance with Rule 16b-3.
6. LIMITATIONS ON TRANSFER. The Option may not be assigned or
transferred other than by will, by the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the
Code, Title I of ERISA or the rules thereunder.<PAGE>
<PAGE> 3
7. TAXES. The Corporation shall be entitled to withhold (or
secure payment from the Optionee in lieu of withholding) the amount of
any withholding or other tax required by law to be withheld or paid by
the Corporation with respect to any shares of Common Stock issuable
under this Agreement, and the Corporation may defer issuance of shares
of Common Stock upon the exercise of the Option unless the Corporation
is indemnified to its satisfaction against any liability for any such
tax. The amount of such withholding or tax payment shall be determined
by the Committee or its delegate and shall be payable by the Optionee at
such time as the Committee determines. The Optionee may satisfy his or
her tax withholding obligation by the payment of cash to the Corporation
and/or by the withholding from the Option, at the appropriate time, of a
number of shares of Common Stock sufficient, based upon the Fair Market
Value of such shares of Common Stock, to satisfy such tax withholding
requirements. The Committee shall be authorized, in its sole
discretion, to establish such rules and procedures relating to any such
withholding methods as it deems necessary or appropriate, including,
without limitation, rules and procedures relating to elections to have
shares of Common Stock withheld upon exercise of the Option to meet such
withholding obligations.
8. NO EXERCISE IN VIOLATION OF LAW. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she
will not exercise the Option granted hereby, and that the Corporation
will not be obligated to issue any shares of Common Stock to the
Optionee hereunder, if the exercise thereof or the issuance of such
shares of Common Stock shall constitute a violation by the Optionee or
the Corporation of any provision of any law or regulation of any
governmental authority. Any determination in this connection by the
Committee shall be final, binding and conclusive.
9. SECURITIES LAW COMPLIANCE. The Optionee agrees, for the
Optionee and his or her Beneficiaries, with respect to all shares of
Common Stock acquired pursuant to the terms and conditions of the Plan
and the Option (or any other shares of Common Stock issued pursuant to a
stock dividend or stock split thereon or any securities issued in lieu
thereof or in substitution or exchange therefor), that the Optionee and
his or her Beneficiaries will not sell or otherwise dispose of these
shares except pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), or except in a
transaction that, in the opinion of counsel for the Corporation, is
exempt from registration under the Act. Further, the Corporation shall
not be required to sell or issue any shares under the Option if, in the
opinion of the Corporation, (a) the issuance of such shares would
constitute a violation by the Optionee or the Corporation of any
applicable law or regulation of any government authority or (b) the
consent or approval of any governmental body is necessary or desirable
as condition of, or in connection with, the issuance of such shares.
10. ADJUSTMENTS. The existence of the Option shall not affect in
any way the right or power of the Corporation or its directors or
shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the
Corporation's capital structure or its business, or any merger or
consolidation of the Corporation, or any issuance of bonds, debentures,
preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or<PAGE>
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
11. DISPUTE RESOLUTION. As a condition of granting the Option,
the Optionee agrees, for the Optionee and his or her Beneficiaries, that
any dispute or disagreement that may arise under or as a result of or
pursuant to the Plan and the Option shall be determined by the Committee
in its sole discretion, and any interpretation by the Committee of the
terms of the Plan and Option shall be final, binding and conclusive.<PAGE>
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
-------------------------- By: -------------------------------
George T. Jochum, Chairman,
President and Chief
Executive Officer
By: -------------------------------
Member of the Compensation
Committee
WITNESS: OPTIONEE
-------------------------- -------------------------------
(Signature)<PAGE>
<PAGE> 5
FACE SHEET
Notice Addresses:
Optionee:
-------------------------
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: --------------------------
Total Options Granted: -------------------
Exercise Price Per Share of Common Stock: $
--------
Vesting Schedule:
Number of Shares
Date (Non-Cumulative)
---- ----------------
06/01/1997 -------
06/01/1998 -------
06/01/1999 -------
Expiration Date:
Optioned shares must be purchased within five (5) years from the
date of grant, which is ---------. That is, all options must be
exercised by ----------.<PAGE>
<PAGE>
<PAGE> 1
MID ATLANTIC MEDICAL SERVICES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT FOR GEORGE T. JOCHUM
AGREEMENT ("Agreement") dated this ---- day of ---------, 199- by
and between Mid Atlantic Medical Services, Inc., a Delaware corporation
("Corporation"), and George T. Jochum, the Chairman of the Board,
President and Chief Executive Officer of the Corporation ("Optionee").
WHEREAS, the Corporation desires to have Optionee continue in its
employ and to provide Optionee with an incentive by sharing in the
success of the Corporation;
WHEREAS, in order to provide such an incentive to its officers and
key employees, the Corporation has adopted the Mid Atlantic Medical
Services, Inc. 1996 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the Corporation desires to grant to Optionee under the
Plan options not intended to qualify as "incentive stock options" within
the meaning of Section 422 or any successor provision of the Internal
Revenue Code of 1986, as amended ("Code"); and
WHEREAS, unless otherwise provided herein, capitalized terms used
in this Agreement shall have the meaning given them in the Plan;
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the
parties hereto agree as follows:
1. NUMBER OF SHARES AND PRICE. The Corporation hereby grants to
the Optionee an option ("Option") to purchase the number of shares of
Common Stock set forth on the attached Face Sheet of this Agreement.
The exercise price per share of Common Stock of the Option shall be as
is set forth on the attached Face Sheet of this Agreement, such price
being the Fair Market Value per share of Common Stock on the Date of
Grant of the Option. The Option is not intended to qualify as an
"incentive stock option" under Section 422 of the Code.
2. TERM AND EXERCISE. The Option shall expire five (5) years from
the date hereof, subject to earlier termination as set forth in Section
3. Subject to the provisions of Section 3, the Option shall become
exercisable in installments as set forth on the attached Face Sheet of
this Agreement.
3. EXERCISE OF OPTION UPON TERMINATION OF EMPLOYMENT.
(a) TERMINATION OF VESTED OPTION UPON TERMINATION OF
EMPLOYMENT.
(i) TERMINATION. Upon the Optionee's Termination of
Employment for any reason other than for Cause (as hereinafter defined),
the Optionee may exercise all or any part of the Option (whether or not
it was exercisable at the date of Termination of Employment), but only
to the extent not previously exercised, until the Option terminates in
accordance with Section 2.
(ii) CAUSE. In the event the Optionee's Termination of
Employment for Cause, the Optionee may exercise all or a part of the
Option, but only to the extent the Option was exercisable on the date of<PAGE>
Termination of Employment. In no event, however, may the Option be
exercised later than the expiration date described in Section 2.<PAGE>
<PAGE> 2
(iii) DEFINITION OF CAUSE. "Cause" means (A) failure or
refusal by the Optionee to perform his duties in accordance with his
Employment Agreement with the Corporation, including without limitation,
the duty to keep the Board or the Board of Directors of MD-Individual
Practice Association, Inc. adequately informed and to submit to each of
such Boards such written reports as it may reasonably require; (B) any
material act of self-dealing between the Optionee and the Corporation's
business that is not disclosed in full to, and approved by, the Board;
(C) misrepresentation of the performance and affairs of the Corporation
and other matters affecting the Corporation; (D) deliberate
falsification by the Optionee of any records or reports; (E) fraud on
the part of the Optionee; (F) theft, embezzlement or misappropriation by
the Optionee of any funds of the Corporation, or conviction of the
Optionee for any felony; (G) execution by the Optionee of any document
transferring or creating any material lien or encumbrance on any
property of the Corporation without authorization of the Board; or (H)
refusal to submit to such reasonable periodic examinations by a
physician or medical group as may be mutually acceptable to the
Corporation and the Optionee (or his legal representative) upon the
reasonable request of the Corporation and at its expense, or refusal to
make available to the Corporation the results of such examinations.
(b) TERMINATION OF UNVESTED OPTION UPON TERMINATION OF
EMPLOYMENT. Except as provided in Section 3(a)(i), to the extent all or
any part of the Option was not exercisable as of the date of Termination
of Employment, the unexercisable portion of the Option shall expire at
the date of such Termination of Employment.
(c) CHANGE OF CONTROL. Notwithstanding anything to the
contrary in Section 2 or this Section 3, in the event one of the events
specified in Section 8.05(d)(i), (ii), (iii) or (iv) of the Plan occurs,
the provisions of such Section 8.05(d) shall determine when the Option
becomes exercisable, when it may be exercised and when it expires.
4. EXERCISE PROCEDURES. The Option shall be exercisable by
written notice to the Corporation, which must be received by the
Secretary of the Corporation not later than 5:00 P.M. local time at the
principal executive office of the Corporation on the expiration date of
the Option. Such written notice shall set forth (a) the number of
shares of Common Stock being purchased, (b) the total exercise price for
the shares of Common Stock being purchased, (c) the exact name as it
should appear on the stock certificate(s) to be issued for the shares of
Common Stock being purchased, and (d) the address to which the stock
certificate(s) should be sent. The exercise price of shares of Common
Stock purchased upon exercise of the Option shall be paid in full (a) in
cash, (b) by delivery to the Corporation of shares of Common Stock
(which shares of Common Stock must have been held for at least six
months), (c) in any combination of cash and shares of Common Stock, or
(d) by delivery of such other consideration as the Committee deems
appropriate and in compliance with applicable law (including payment in
accordance with a cashless exercise program under which, if so
instructed by the Optionee, shares of Common Stock may be issued
directly to the Optionee's broker or dealer upon receipt of the exercise
price in cash from the broker or dealer). In the event that any shares
of Common Stock shall be transferred to the Corporation to satisfy all
or any part of the exercise price, the part of the exercise price deemed
to have been satisfied by such transfer of shares of Common Stock shall
be equal to the product derived by multiplying the Fair Market Value as<PAGE>
of the date of exercise times the number of shares of Common Stock
transferred to the Corporation. Any shares of Common Stock tendered in
payment shall be duly endorsed in blank or accompanied by stock powers
duly endorsed in blank. The Optionee may not transfer to the
Corporation in satisfaction of the exercise price any fraction of a
share of Common Stock, and any portion of the exercise price that would
represent less than a full share of Common Stock must be paid in cash by
the Optionee. Subject to Section 8 hereof, certificates for the
purchased shares of Common Stock will be issued and delivered to the
Optionee as soon as practicable after the receipt of such payment of the
exercise price; PROVIDED, HOWEVER, that delivery of any such shares of
Common Stock shall be deemed effected for all purposes when a stock
transfer agent of the Corporation shall have deposited such certificates
in the United States mail, addressed to Optionee, at the address set
forth on the last page of this Agreement or to such other address as
Optionee may from time to time designate in a written notice to the
Corporation. The Optionee shall not be deemed for any purpose to be a
shareholder of the Corporation in respect of any shares of Common Stock
as to which the Option shall not have been exercised, as herein
provided, until such shares of Common Stock have been issued to Optionee
by the Corporation hereunder.<PAGE>
<PAGE> 3
5. PLAN PROVISIONS CONTROL OPTION TERMS; MODIFICATIONS. The Option
is granted pursuant and subject to the terms and conditions of the Plan,
the provisions of which are incorporated herein by reference. In the
event any provision of this Agreement shall conflict with any of the
terms in the Plan as constituted on the Date of Grant, the terms of the
Plan as constituted on the Date of Grant shall control. Except as
provided in Section 8.05 of the Plan, the Option shall not be modified
after the Date of Grant except by express written agreement between the
Corporation and the Optionee; PROVIDED, HOWEVER, that any such
modification (a) shall not be inconsistent with the terms of the Plan,
and (b) shall be approved by the Committee. No modifications may be
made to the Option while the Optionee is subject to Section 16(b) of the
Exchange Act except in compliance with Rule 16b-3.
6. LIMITATIONS ON TRANSFER. The Option may not be assigned or
transferred other than by will, by the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the
Code, Title I of ERISA or the rules thereunder.
7. TAXES. The Corporation shall be entitled to withhold (or
secure payment from the Optionee in lieu of withholding) the amount of
any withholding or other tax required by law to be withheld or paid by
the Corporation with respect to any shares of Common Stock issuable
under this Agreement, and the Corporation may defer issuance of shares
of Common Stock upon the exercise of the Option unless the Corporation
is indemnified to its satisfaction against any liability for any such
tax. The amount of such withholding or tax payment shall be determined
by the Committee or its delegate and shall be payable by the Optionee at
such time as the Committee determines. The Optionee may satisfy his or
her tax withholding obligation by the payment of cash to the Corporation
and/or by the withholding from the Option, at the appropriate time, of a
number of shares of Common Stock sufficient, based upon the Fair Market
Value of such shares of Common Stock, to satisfy such tax withholding
requirements. The Committee shall be authorized, in its sole
discretion, to establish such rules and procedures relating to any such
withholding methods as it deems necessary or appropriate, including,
without limitation, rules and procedures relating to elections to have
shares of Common Stock withheld upon exercise of the Option to meet such
withholding obligations.
8. NO EXERCISE IN VIOLATION OF LAW. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she
will not exercise the Option granted hereby, and that the Corporation
will not be obligated to issue any shares of Common Stock to the
Optionee hereunder, if the exercise thereof or the issuance of such
shares of Common Stock shall constitute a violation by the Optionee or
the Corporation of any provision of any law or regulation of any
governmental authority. Any determination in this connection by the
Committee shall be final, binding and conclusive.
9. SECURITIES LAW COMPLIANCE. The Optionee agrees, for the
Optionee and his or her Beneficiaries, with respect to all shares of
Common Stock acquired pursuant to the terms and conditions of the Plan
and the Option (or any other shares of Common Stock issued pursuant to a
stock dividend or stock split thereon or any securities issued in lieu
thereof or in substitution or exchange therefor), that the Optionee and
his or her Beneficiaries will not sell or otherwise dispose of these
shares except pursuant to an effective registration statement under the<PAGE>
Securities Act of 1933, as amended (the "Act"), or except in a
transaction that, in the opinion of counsel for the Corporation, is
exempt from registration under the Act. Further, the Corporation shall
not be required to sell or issue any shares under the Option if, in the
opinion of the Corporation, (a) the issuance of such shares would
constitute a violation by the Optionee or the Corporation of any
applicable law or regulation of any government authority or (b) the
consent or approval of any governmental body is necessary or desirable
as condition of, or in connection with, the issuance of such shares.
10. ADJUSTMENTS. The existence of the Option shall not affect in
any way the right or power of the Corporation or its directors or
shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the
Corporation's capital structure or its business, or any merger or
consolidation of the Corporation, or any issuance of bonds, debentures,
preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.<PAGE>
<PAGE> 4
11. DISPUTE RESOLUTION. As a condition of granting the Option,
the Optionee agrees, for the Optionee and his or her Beneficiaries, that
any dispute or disagreement that may arise under or as a result of or
pursuant to the Plan and the Option shall be determined by the Committee
in its sole discretion, and any interpretation by the Committee of the
terms of the Plan and Option shall be final, binding and conclusive.<PAGE>
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
-------------------------- By:-------------------------------
Joseph L. Guarriello,
Executive Vice President,
General Counsel and
Secretary
By:-------------------------------
Member of the Compensation
Committee
WITNESS: OPTIONEE
-------------------------- ----------------------------------
George T. Jochum<PAGE>
<PAGE> 6
FACE SHEET
Notice Addresses:
Optionee:
George T. Jochum
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: --------------------
Total Options Granted: --------------
Exercise Price per share of Common Stock: $-----------
Vesting Schedule:
Number of Shares
Date (Non-Cumulative)
---- ----------------
06/01/1997 ----------
06/01/1998 ----------
06/01/1999 ----------
Expiration Date:
Optioned shares must be purchased within five (5) years from the
date of grant, which is -----------. That is, all options must be
exercised by --------------.<PAGE>
<PAGE>
<PAGE> 1
MID ATLANTIC MEDICAL SERVICES, INC.
STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS
AGREEMENT ("Agreement") dated this 1st day of May, 1996 by and
between Mid Atlantic Medical Services, Inc., a Delaware corporation
("Corporation"), and the person indicated on the attached Face Sheet, a
non-employee director of the Corporation and/or one of its subsidiaries
("Optionee").
WHEREAS, the Corporation desires to have Optionee continue to serve
on its Board of Directors and to provide Optionee with an incentive by
sharing in the success of the Corporation;
WHEREAS, in order to provide such an incentive to its key employees
and non-employee directors, the Corporation has adopted the Mid Atlantic
Medical Services, Inc. 1996 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the option granted hereby is not intended to qualify as an
"incentive stock option" within the meaning of Section 422 or any
successor provision of the Internal Revenue Code of 1986, as amended;
and
WHEREAS, unless otherwise provided herein, capitalized terms used
in this Agreement shall have the meaning given them in the Plan;
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the
parties hereto agree as follows:
1. NUMBER OF SHARES AND PRICE. The Corporation hereby grants to
the Optionee an option ("Option") to purchase the number of shares of
Common Stock set forth on the attached Face Sheet of this Agreement.
The exercise price per share of Common Stock of the Option shall be as
is set forth on the attached Face Sheet of this Agreement, such price
being the Fair Market Value per share of Common Stock on the Date of
Grant of the Option. The Option is not intended to qualify as an
"incentive stock option" under Section 422 of the Code.
2. TERM AND EXERCISE. The Option shall expire five (5) years from
the date hereof. The Option shall become exercisable in installments as
set forth on the attached Face Sheet of this Agreement; PROVIDED,
HOWEVER, that, if the Optionee is removed for Cause, the Option shall
cease to continue to become exercisable on or after the date of such
removal. If the Optionee's service with the Corporation terminates for
any reason or if the Optionee ceases to be a Non-Employee Director, the
Option shall continue to become exercisable in accordance with the
preceding sentence and may be exercised until the Option expires in
accordance with the first sentence of this Section 2. Accordingly, if
the Optionee is removed for Cause, he or she may continue to exercise
the Option until the Option expires in accordance with the first
sentence of this Section 2, but only to the extent that (a) the Option
became exercisable prior to the date of such removal and (b) it was not
previously exercised.
Notwithstanding anything to the contrary in this Section 2, in the
event one of the events specified in Section 8.05(d)(i), (ii), (iii) or
(iv) of the Plan occurs, the provisions of such Section 8.05(d) shall
determine when the Option becomes exercisable, when it may be exercised<PAGE>
and when it expires.<PAGE>
<PAGE> 2
3. EXERCISE PROCEDURES. The Option shall be exercisable by
written notice to the Corporation, which must be received by the
Secretary of the Corporation not later than 5:00 P.M. local time at the
principal executive office of the Corporation on the expiration date of
the Option. Such written notice shall set forth (a) the number of
shares of Common Stock being purchased, (b) the total exercise price for
the shares of Common Stock being purchased, (c) the exact name as it
should appear on the stock certificate(s) to be issued for the shares of
Common Stock being purchased, and (d) the address to which the stock
certificate(s) should be sent. The exercise price of shares of Common
Stock purchased upon exercise of the Option shall be paid in full (a) in
cash, (b) by delivery to the Corporation of shares of Common Stock
(which shares of Common Stock must have been held for at least six
months), (c) in any combination of cash and shares of Common Stock, or
(d) by delivery of such other consideration as the Committee deems
appropriate and in compliance with applicable law (including payment in
accordance with a cashless exercise program under which, if so
instructed by the Optionee, shares of Common Stock may be issued
directly to the Optionee's broker or dealer upon receipt of the exercise
price in cash from the broker or dealer). In the event that any shares
of Common Stock shall be transferred to the Corporation to satisfy all
or any part of the exercise price, the part of the exercise price deemed
to have been satisfied by such transfer of shares of Common Stock shall
be equal to the product derived by multiplying the Fair Market Value as
of the date of exercise times the number of shares of Common Stock
transferred to the Corporation. Any shares of Common Stock tendered in
payment shall be duly endorsed in blank or accompanied by stock powers
duly endorsed in blank. The Optionee may not transfer to the
Corporation in satisfaction of the exercise price any fraction of a
share of Common Stock, and any portion of the exercise price that would
represent less than a full share of Common Stock must be paid in cash by
the Optionee. Subject to Section 7 hereof, certificates for the
purchased shares of Common Stock will be issued and delivered to the
Optionee as soon as practicable after the receipt of such payment of the
exercise price; PROVIDED, HOWEVER, that delivery of any such shares of
Common Stock shall be deemed effected for all purposes when a stock
transfer agent of the Corporation shall have deposited such certificates
in the United States mail, addressed to Optionee, at the address set
forth on the last page of this Agreement or to such other address as
Optionee may from time to time designate in a written notice to the
Corporation. The Optionee shall not be deemed for any purpose to be a
shareholder of the Corporation in respect of any shares of Common Stock
as to which the Option shall not have been exercised, as herein
provided, until such shares of Common Stock have been issued to Optionee
by the Corporation hereunder.
4. PLAN PROVISIONS CONTROL OPTION TERMS; MODIFICATIONS. The
Option is granted pursuant and subject to the terms and conditions of
the Plan, the provisions of which are incorporated herein by reference.
In the event any provision of this Agreement shall conflict with any of
the terms in the Plan as constituted on the Date of Grant, the terms of
the Plan as constituted on the Date of Grant shall control. Except as
provided in Section 8.05 of the Plan, the Option shall not be modified
after the Date of Grant except by express written agreement between the
Corporation and the Optionee; PROVIDED, HOWEVER, that any such
modification (a) shall not be inconsistent with the terms of the Plan,
and (b) shall be approved by the Committee. No modifications may be
made to the Option while the Optionee is subject to Section 16(b) of the<PAGE>
Exchange Act except in compliance with Rule 16b-3.
5. LIMITATIONS ON TRANSFER. The Option may not be assigned or
transferred other than by will, by the laws of descent and distribution,
or pursuant to a qualified domestic relations order as defined by the
Code, Title I of ERISA or the rules thereunder.<PAGE>
<PAGE> 3
6. TAXES. The Corporation shall be entitled to withhold (or
secure payment from the Optionee in lieu of withholding) the amount of
any withholding or other tax required by law to be withheld or paid by
the Corporation with respect to any shares of Common Stock issuable
under this Agreement, and the Corporation may defer issuance of shares
of Common Stock upon the exercise of the Option unless the Corporation
is indemnified to its satisfaction against any liability for any such
tax. The amount of such withholding or tax payment shall be determined
by the Committee or its delegate and shall be payable by the Optionee at
such time as the Committee determines. The Optionee may satisfy his or
her tax withholding obligation by the payment of cash to the Corporation
and/or by the withholding from the Option, at the appropriate time, of a
number of shares of Common Stock sufficient, based upon the Fair Market
Value of such shares of Common Stock, to satisfy such tax withholding
requirements. The Committee shall be authorized, in its sole
discretion, to establish such rules and procedures relating to any such
withholding methods as it deems necessary or appropriate, including,
without limitation, rules and procedures relating to elections to have
shares of Common Stock withheld upon exercise of the Option to meet such
withholding obligations.
7. EXERCISE IN VIOLATION OF LAW. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she
will not exercise the Option granted hereby, and that the Corporation
will not be obligated to issue any shares of Common Stock to the
Optionee hereunder, if the exercise thereof or the issuance of such
shares of Common Stock shall constitute a violation by the Optionee or
the Corporation of any provision of any law or regulation of any
governmental authority. Any determination in this connection by the
Committee shall be final, binding and conclusive.
8. SECURITIES LAW COMPLIANCE. The Optionee agrees, for the
Optionee and his or her Beneficiaries, with respect to all shares of
Common Stock acquired pursuant to the terms and conditions of the Plan
and the Option (or any other shares of Common Stock issued pursuant to a
stock dividend or stock split thereon or any securities issued in lieu
thereof or in substitution or exchange therefor), that the Optionee and
his or her Beneficiaries will not sell or otherwise dispose of these
shares except pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), or except in a
transaction that, in the opinion of counsel for the Corporation, is
exempt from registration under the Act. Further, the Corporation shall
not be required to sell or issue any shares under the Option if, in the
opinion of the Corporation, (a) the issuance of such shares would
constitute a violation by the Optionee or the Corporation of any
applicable law or regulation of any government authority or (b) the
consent or approval of any governmental body is necessary or desirable
as condition of, or in connection with, the issuance of such shares.
9. ADJUSTMENTS. The existence of the Option shall not affect in
any way the right or power of the Corporation or its directors or
shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the
Corporation's capital structure or its business, or any merger or
consolidation of the Corporation, or any issuance of bonds, debentures,
preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or<PAGE>
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
10. DISPUTE RESOLUTION. As a condition of granting the Option,
the Optionee agrees, for the Optionee and his or her Beneficiaries, that
any dispute or disagreement that may arise under or as a result of or
pursuant to the Plan and the Option shall be determined by the Committee
in its sole discretion, and any interpretation by the Committee of the
terms of the Plan and Option shall be final, binding and conclusive.<PAGE>
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
-------------------------- By:-------------------------------
George T. Jochum, Chairman,
President and Chief
Executive Officer
By:-------------------------------
Member of the Compensation
Committee
WITNESS: OPTIONEE
-------------------------- -------------------------------<PAGE>
<PAGE> 5
FACE SHEET
Notice Addresses:
Optionee:
-------------------------
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: ------------------------
Total Options Granted: -----------------
Exercise Price per share of Common Stock: $------------
Vesting Schedule:
Number of Shares
Date (Non-Cumulative)
---- ----------------
06/01/1997 --------
06/01/1998 --------
06/01/1999 --------
Expiration Date:
Optioned shares must be purchased within five years from the date
of grant, which is May 1, 1996. That is, all options must be exercised
by April 30, 2001.<PAGE>
<PAGE>
<PAGE> 1
SUBSIDIARIES OF THE COMPANY
AS OF DECEMBER 31, 1995
1. MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI"): MAMSI, a Delaware
corporation, is the holding company for the subsidiaries listed below.
2. ALLIANCE PPO, INC. ("Alliance"): Owned 100 percent by MAMSI (1).
Alliance, a Maryland corporation, provides a delivery network of
physicians (called a preferred provider organization or "PPO") to
employers and insurance companies in association with various health
plans.
3. MAMSI INSURANCE AGENCY OF THE CAROLINAS, INC. ("MIACI"): Owned 100
percent by Alliance (2). MIACI, a North Carolina Corporation, contracts
with marketing representatives to sell MAMSI products in North Carolina
and South Carolina.
4. MAMSI LIFE AND HEALTH INSURANCE COMPANY ("MAMSI Life"): Owned 100
percent by MAMSI (1). MAMSI Life, a Maryland corporation, develops and
markets indemnity health products in addition to life, accidental death
and disability insurance.
5. MD - INDIVIDUAL PRACTICE ASSOCIATION, INC. ("M.D. IPA"): Owned 77
percent by PHYSICIANS HEALTH PLAN OF MARYLAND, INC. (11) and 23 percent
by MAMSI (1). M.D. IPA, a Maryland corporation, is a health maintenance
organization ("HMO") providing health care coverage for its members.
6. MD-IPA SURGICENTER, INC. ("Surgicenter"): Owned 100 percent by M.D.
IPA (5). Surgicenter, a Maryland corporation, is a general partner in a
partnership that in turn is the general partner in a limited partnership
that operates a surgery center.
7. MID ATLANTIC PSYCHIATRIC SERVICES, INC. ("MAPSI"): Owned 100
percent by MAMSI (1). MAPSI, a Maryland corporation, provides
psychiatric services to third party payors or self-insured employer
groups.
8. NATIONAL MANAGED CARE, INC. ("NMCI"): Owned 78 percent by MAMSI
(1). NMCI, a Delaware corporation, markets health care services with
individual practice association ("IPA") model HMOs thoughout the U.S.
9. OPTIMUM CHOICE, INC. ("OCI"): Owned 100 percent by MAMSI (1). OCI,
a Maryland corporation, is an HMO providing health care coverage for its
members.
10. OPTIMUM CHOICE OF THE CAROLINAS, INC. ("OCCI"): Owned 100 percent
by MAMSI (1). OCCI, a North Carolina corporation, is an HMO providing
health care coverage to members who are in North Carolina and South
Carolina.<PAGE>
11. PHYSICIANS HEALTH PLAN OF MARYLAND, INC. ("PHP-MD"): Owned 100
percent by MAMSI (1). PHP, a Maryland corporation, is an IPA that
provides health care services to certain of MAMSI's HMOs.
12. HOMECALL, INC. ("HomeCall"): Owned 100 percent by MAMSI (1).
HomeCall, a Maryland corporation, provides in-home medical care
including skilled nursing and therapy to MAMSI's HMO members and other
payors.
13. HOMECALL INFUSION SERVICES, INC. ("HIS"): Owned 100 percent by
MAMSI (1). HIS, a Maryland corporation, provides infusion services to
MAMSI's HMO members and other payors.
14. FIRSTCALL, INC. ("FirstCall"): Owned 100 percent by HomeCall (12).
FirstCall, a Maryland corporation, provides in-home medical care.<PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Number 33-22565 on Form S-8 dated June 14, 1988, as amended by Post-
Effective Amendment Number 1 dated April 4, 1989, in Registration
Statement Number 33-32777 on Form S-8 dated January 5, 1990, in
Registration Statement Number 33-34868 on Form S-8 dated May 11, 1990,
in Registration Statement Number 33-40975 on Form S-8 dated May 31,
1991, in Registration Statement Number 33-47593 on Form S-8 dated May 1,
1992, in Registration Statement Number 33-61896 on Form S-8 dated April
29, 1993, in Registration Statement Number 33-78258 on Form S-8 dated
April 28, 1994, and in Registration Statement Number 33-91294 on Form S-
8 dated April 17, 1995, of our report dated February 23, 1996 with
respect to the consolidated financial statements and schedule of Mid
Atlantic Medical Services, Inc. and subsidiaries included in the Annual
Report on Form 10-K for the year ended December 31, 1995.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Washington, D.C.
March 22, 1996<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> $10,874
<SECURITIES> 204,734
<RECEIVABLES> 61,263
<ALLOWANCES> 3,638
<INVENTORY> 0
<CURRENT-ASSETS> 290,224
<PP&E> 38,704
<DEPRECIATION> 15,091
<TOTAL-ASSETS> $354,182
<CURRENT-LIABILITIES> $136,556
<BONDS> 194
<COMMON> 466
0
0
<OTHER-SE> 216,750
<TOTAL-LIABILITY-AND-EQUITY> $354,182
<SALES> $0
<TOTAL-REVENUES> 955,395
<CGS> 0
<TOTAL-COSTS> 859,055
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 47
<INTEREST-EXPENSE> 1,010
<INCOME-PRETAX> 96,340
<INCOME-TAX> 35,216
<INCOME-CONTINUING> 61,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $61,124
<EPS-PRIMARY> $1.28
<EPS-DILUTED> $1.28
</TABLE>
