<PAGE>
<PAGE> 1
-----------------------------------------------------------------------
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1996, or
[ ] Transition report pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
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
(State or other jurisdiction of
incorporation or organization)
52-1481661
(IRS Employer Identification Number)
4 TAFT COURT, ROCKVILLE, MARYLAND
(Address of principal executive offices)
20850
(Zip code)
(301) 294-5140
(Registrant's telephone number, including area code)
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
The number of shares outstanding of each of the issuer's classes of
common stock was 65,547,862 shares of common stock, par value $.01,
outstanding as of September 30, 1996.
-----------------------------------------------------------------------
-----------------------------------------------------------------------<PAGE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Note 1)
(in thousands except share amounts)
<TABLE>
<CAPTION>
(Unaudited) (Note)
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,523 $ 10,874
Short-term investments 161,588 204,734
Accounts receivable, net of allowance of $4,564 and $3,638 77,330 61,263
Prepaid expenses, advances and other 27,129 8,974
Deferred income taxes 3,894 4,379
----------- -----------
Total current assets 272,464 290,224
Property and equipment, net of accumulated
depreciation of $19,901 and $15,091 44,592 38,704
Statutory deposits 9,129 10,543
Other assets 11,385 11,373
Deferred income taxes 2,494 3,338
---------- -----------
Total assets $ 340,064 $ 354,182
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 60 $ 210
Short-term borrowings 1,752 1,651
Accounts payable 20,332 15,075
Medical claims payable 123,314 108,490
Deferred premium revenue 6,159 10,125
Deferred income taxes 114 1,005
----------- -----------
Total current liabilities 151,731 136,556
Notes payable 149 194
Deferred income taxes 216 216
----------- -----------
Total liabilities 152,096 136,966
----------- -----------
Stockholders' equity (Notes 2, 3 and 4)
Common stock, $.01 par, 100,000,000 shares authorized; 67,642,502 issued
and 65,547,862 outstanding at September 30, 1996; 46,631,327 issued and
46,585,387 outstanding at December 31, 1995 676 466
Additional paid-in capital 306,502 40,374
Stock compensation trust (common stock held in trust) (254,455)
Treasury stock, 2,094,640 shares at September 30, 1996; 45,940 shares at
December 31, 1995 (41,211) (33)
Unrealized gains on investments, net of tax of $628 and $1,004 961 1,535
Retained earnings 175,495 174,874
----------- -----------
Total stockholders' equity 187,968 217,216
----------- -----------
Total liabilities and stockholders' equity $ 340,064 $ 354,182
=========== ===========<PAGE>
</TABLE>
Note: The balance sheet at December 31, 1995 has been extracted from the
audited financial statements at that date.
See accompanying notes to these financial statements.<PAGE>
<PAGE> 3
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
1996 1995
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 275,147 $ 231,006
Fee and other 4,159 3,916
Life and disability premium 1,217 619
Home health services 5,539 4,162
Investment 2,167 3,577
----------- -----------
Total revenue 288,229 243,280
----------- -----------
Expense
Medical 259,811 191,317
Life and disability claims 810 351
Home health patient services 4,940 2,671
Administrative (including interest expense of $167 and $368) 29,878 25,749
----------- -----------
Total expense 295,439 220,088
----------- -----------
Income (loss) before income taxes (7,210) 23,192
Benefit (provision) for income taxes 2,499 (8,793)
----------- -----------
Net income (loss) $ (4,711) $ 14,399
=========== ===========
Income (loss) per common and common equivalent share:
Net income (loss) $ (.10) $ .30
=========== ===========
Weighted average common and common equivalent shares outstanding 46,394,158 47,955,851
=========== ===========
/TABLE
<PAGE>
See accompanying notes to these financial statements.<PAGE>
<PAGE> 4
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1996 1995
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 801,427 $ 665,963
Fee and other 12,285 11,616
Life and disability premium 2,870 863
Home health services 15,546 13,628
Investment 9,612 7,714
----------- -----------
Total revenue 841,740 699,784
----------- -----------
Expense
Medical 736,814 543,804
Life and disability claims 1,681 453
Home health patient services 11,901 9,447
Administrative (including interest expense of $592 and $910) 90,273 73,584
----------- -----------
Total expense 840,669 627,288
----------- -----------
Income before income taxes 1,071 72,496
Provision for income taxes (450) (27,354)
----------- -----------
Net income $ 621 $ 45,142
=========== ===========
Income per common and common equivalent share:
Net income $ .01 $ .95
=========== ===========
Weighted average common and common equivalent shares outstanding 47,176,616 47,731,721
=========== ===========
/TABLE
<PAGE>
See accompanying notes to these financial statements.<PAGE>
<PAGE> 5
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ending
September 30, 1996
------------
<S> <C> <C>
Cash flows used in operating activities:
Net income $ 621
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization $ 5,630
Provision for bad debts 926
Provision for deferred income taxes 27
Loss on sale and disposal of assets 8
Increase in accounts receivable (16,993)
Increase in prepaid expenses, advances, and other (18,155)
Increase in accounts payable 5,257
Increase in medical claims payable 14,824
Decrease in deferred premium revenue (3,966)
-----------
Total adjustments (12,442)
-----------
Net cash used in operating activities (11,821)
Cash flows provided by investing activities:
Purchases of short-term investments (291,978)
Sales of short-term investments 336,175
Purchases of property and equipment (10,836)
Purchases of statutory deposits (2,407)
Maturities of statutory deposits 1,820
Purchases of other assets (234)
Proceeds from sale of assets 319
-----------
Net cash provided by investing activities 32,859
Cash flows used in financing activities:
Principal payments on notes payable (195)
Increase in short-term borrowings 101
Exercise of stock options 5,866
Stock option tax benefit 6,017
Purchase of treasury stock (41,178)
-----------
Net cash used in financing activities (29,389)
-----------
Net decrease in cash and cash equivalents (8,351)
Cash and cash equivalents at beginning of period 10,874
-----------
Cash and cash equivalents at end of period $ 2,523
===========
/TABLE
<PAGE>
See accompanying notes to these financial statements.<PAGE>
<PAGE> 6
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ending
September 30, 1995
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 45,142
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 4,326
Provision for bad debts 16
Provision for deferred income taxes 3,081
Loss on sale and disposal of assets 78
Increase in accounts receivable (19,086)
Increase in prepaid expenses, advances, and other (1,581)
Decrease in accounts payable (206)
Increase in medical claims payable 13,157
Decrease in deferred premium revenue (3,778)
Increase in income taxes payable 2,115
-----------
Total adjustments (1,878)
-----------
Net cash provided by operating activities 43,264
Cash flows used in investing activities:
Purchases of short-term investments (313,267)
Sales of short-term investments 269,655
Purchases of property and equipment (7,078)
Purchases of statutory deposits (807)
Maturities of statutory deposits 135
Purchases of other assets (690)
Proceeds from sale of assets 682
-----------
Net cash used in investing activities (51,370)
Cash flows provided by financing activities:
Proceeds from notes payable 300
Principal payments on notes payable (5,786)
Increase in short-term borrowings 169
Exercise of stock options 4,065
Stock option tax benefit 5,683
-----------
Net cash provided by financing activities 4,431
-----------
Net decrease in cash and cash equivalents (3,675)
Cash and cash equivalents at beginning of period 17,054
-----------
Cash and cash equivalents at end of period $ 13,379
===========
/TABLE
<PAGE>
See accompanying notes to these financial statements.<PAGE>
<PAGE> 7
MID ATLANTIC MEDICAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
INTRODUCTION
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 principal markets currently
include all or parts of the states of Maryland, Virginia, Delaware, West
Virginia, North Carolina, Pennsylvania and the District of Columbia.
MAMSI and its subsidiaries (collectively referred to as the "Company")
have developed a broad range of managed health care, health insurance
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
companies and an outpatient surgery center.
MAMSI delivers managed health care services principally through HMOs.
In general, the HMOs, MD-Individual Practice Association, Inc. ("M.D.
IPA"), Optimum Choice, Inc. ("OCI"), Optimum Choice of the Carolinas,
Inc. ("OCCI") and Optimum Choice, Inc. of Pennsylvania ("OCIPA") 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.
Other MAMSI subsidiaries include Alliance PPO, Inc., which provides a
PPO delivery network to employers and insurance companies, and Mid
Atlantic Psychiatric Services, Inc., which provides specialized non-risk
mental health services. MAMSI Life and Health Insurance Company
develops and markets indemnity health products in addition to life and
short-term disability insurance. HomeCall, Inc., FirstCall, Inc., and
HomeCall Pharmaceutical Services, Inc. provide in-home medical care
including skilled nursing, infusion and therapy, and mail order pharmacy
services to both MAMSI's HMO and indemnity members and other payors.
NOTE 1 - FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of September 30, 1996,
the consolidated statements of operations for the three and nine months
ended September 30, 1996 and 1995, and the consolidated statements of
cash flows for the nine months ended September 30, 1996 and 1995 have
been prepared by MAMSI without audit. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 1995 audited consolidated
financial statements. The results of operations for the three and nine
month periods ended September 30 are not necessarily indicative of the
operating results for the full year.
Certain balances in the 1995 financial statements have been reclassified
to conform to the 1996 presentation.<PAGE>
NOTE 2 - STOCK OPTION PLANS
In 1996, the stockholders of MAMSI ratified the 1996 Non-Qualified Stock
Option Plan whereby options for the purchase of up to 3,000,000 shares
may be granted to officers, employees and non-employee directors of the
Company. Options under this plan are exercisable at 100% of the fair
market value per share on the date the options are granted.<PAGE>
<PAGE> 8
NOTE 3 - COMMON STOCK
The Company has implemented a stock repurchase program under which the
Company may expend up to $60.0 million (including brokerage commissions)
to repurchase shares of its common stock over a twelve month period. As
of September 30, 1996, the Company has repurchased approximately 2.1
million shares for an aggregate purchase price of approximately $41.2
million.
NOTE 4 - STOCK COMPENSATION TRUST
On August 26, 1996, the Company established the MAMSI Stock Compensation
Trust ("SCT") to fund its obligations arising from its various stock
compensation plans. MAMSI funded the SCT with 20,000,000 shares of
newly issued MAMSI stock. In exchange, the SCT has delivered a
promissory note to MAMSI for approximately $285.0 million which
represents the purchase price of the shares. Amounts owed by the SCT to
MAMSI will be repaid by cash received by the SCT or will be forgiven by
MAMSI, which will result in the SCT releasing shares to satisfy MAMSI
obligations for stock compensation.
For financial reporting purposes, the SCT is consolidated with MAMSI.
The fair market value of the shares held by the SCT is shown as a
reduction to stockholders' equity in the Company's consolidated balance
sheet. All transactions between the SCT and MAMSI are eliminated. The
difference between the cost and fair value of common stock held in the
SCT is included in consolidated additional paid-in capital. At
September 30, 1996, the SCT held 19,957,300 shares of common stock at a
fair market value of approximately $254.5 million.
Shares held by the SCT are excluded from weighted average shares
outstanding used in the computation of income or loss per common and
common equivalent share.
NOTE 5 - SHORT-TERM BORROWINGS
During the third quarter of 1996, the Company renegotiated its revolving
credit facilities to provide total revolving credit of $24.0 million. At
September 30, 1996, approximately $1.8 million was drawn against these
facilities.<PAGE>
<PAGE> 9
MID ATLANTIC MEDICAL SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 without a concurrent
reduction in required benefits which could cause the Company to reduce
or eliminate its participation in these markets.
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.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1995
Consolidated net income (loss) for the Company was $(4,711,000) and
$14,399,000 for the third quarters of 1996 and 1995, respectively.
Earnings (loss) per share on net income was $(.10) in the third quarter
of 1996 as compared to $.30 in the third quarter of 1995. The reduction
in earnings is primarily attributable to a significant increase in the
medical loss ratio for commercial products, continuing losses in the
Company's Medicare product and lower earnings from the Company's
Medicaid products. The medical loss ratio increased principally due to
increased member utilization. The Company has priced its health
products competitively in order to increase its membership base and
thereby enhance its strategic position in its marketplace. The Company
currently has one of the largest HMO and managed care enrollments and
also the largest network of contract providers of medical care 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 areas of West Virginia, North Carolina and Pennsylvania).
Revenue for the three months ended September 30, 1996 increased
approximately $44.9 million or 18.5 percent over the three months ended
September 30, 1995. A 15.7 percent increase in net average HMO and
indemnity enrollment resulted in an increase of approximately $36.4
million in health premium revenue and a 2.9 percent increase in average
premiums per HMO and indemnity enrollee increased health premium revenue<PAGE>
by approximately $7.8 million. Health premiums per member have
increased principally because of the Company s increased Medicare
membership with its significantly higher premiums, which over the
Company s Medicare enrollment, average three times the amount of a
typical commercial premium. Management believes that health premiums on
a per member per month basis should continue to increase over the next
twelve months as new and renewing groups are charged higher premium
rates due to legislatively mandated benefit enhancements and general
pricing increases initiated by the Company, a potential increase in
Medicaid premium rates for the Virginia mandated program, and a
reduction in certain low rate Medicare service areas. 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.<PAGE>
<PAGE> 10
The Company has implemented increased premium rates across essentially
all of its commercial products which began to take effect in July, 1996.
As the Company s contracts are generally for a one year period,
increased pricing cannot be initiated until a contract reaches its
renewal date. Therefore, price increases cannot be made across the
Company s membership at the same time. Additionally, the Company
received an approximate 2.5 percent premium rate increase in its
Virginia Medicaid program and an approximate 4 percent increase in its
Maryland Medicaid program, both effective July 1, 1996. Management
believes that the commercial premium rate increases will have the effect
of slowing down the Company's future membership growth. Therefore,
management's original membership goal for 1996 has been reduced and
management's current goal is to increase total membership by 15 percent.
This is a forward-looking statement. The Company's future membership
growth depends on several factors such as relative premium prices and
product availability, future increases or decreases in the Company's
service area, increased competition in the Company's service area and
changes in state mandated enrollment in Medicaid HMO programs in which
the Company participates. Enrollment may also decrease if the Company
determines that premium reimbursement rates related to certain state
Medicaid programs are inadequate which would cause the Company to
voluntarily withdraw from participation.
Service revenue from non-MAMSI affiliated entities earned by the
Company's home health care subsidiaries contributed $5.5 million in
revenue in the third quarter of 1996 as compared to $4.2 million for the
same period in 1995. This increase is the result of increasing business
volume for these subsidiaries, particularly in the home infusion area,
which is largely offset by an increasing relative percentage of business
conducted for MAMSI HMO and indemnity members. Revenue from life and
disability products contributed $1.2 million in the third quarter of
1996 as compared to $.6 million for the same period in 1995.
During the second quarter of 1996, the Company received a letter from
the Health Care Financing Administration ("HCFA") proposing a marketing
sanction based on assertions that, in the administration of its Medicare
product, the Company failed to comply with certain HCFA requirements.
The Company contested the assertions made by HCFA and was informed early
in November that, after reviewing the Company s response to the
allegations, HCFA will not pursue the imposition of sanctions as
proposed in their initial letter.
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 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. The NCQA is scheduled to return to MAMSI in
December, 1996, to begin another review process for accreditation.
Although the Company believes that the likelihood of NCQA accreditation
is good, there can be no assurance that accreditation will be received
or that MAMSI will not experience disenrollment if accreditation is not
ultimately received.<PAGE>
Medical expenses as a percentage of health premium revenue ("medical
loss ratio") increased to 94.4 percent for the third quarter of 1996 as
compared to 82.8 percent for the comparable period of 1995 and, on a per
member per month basis, medical expenses increased 17.3 percent. This
significant increase is due to a combination of factors including lower
commercial premiums charged due to competitive forces, higher than
expected utilization by commercial members, cost increases due to
legislatively mandated benefits and extremely high medical expenses
related to the Company s Medicare enrollment. The medical cost factor of
total medical costs may stabilize or only increase slightly from the
current level over the next twelve months due to continuing efforts by
the Company to implement product specific cost containment controls,
expanded activity in specialized subrogation areas and claims review for
dual health coverage, the adoption of regionalized and product specific
fee<PAGE>
<PAGE> 11
maximums for health services, and the identification and possible
termination of certain providers and specialists from the delivery
network following a continuing, intensified peer review analysis.
Additionally, the Company has greatly expanded its initial health
assessments of new Medicare members after they have enrolled and also
increased its Medicare case management personnel. The Company has also
advised HCFA that it is reducing the service area in which it offers its
Medicare risk plan. This reduction in service area, effective January
1, 1996, primarily targets those areas where the current Medicare
reimbursement is insufficient to support the Company s participation.
These initiatives should help to control and reduce the cost of high
cost cases which are driving the excessive medical loss ratio in the
Medicare line of business. The medical loss ratio is expected to
stabilize and decrease slowly from the current level over the next
twelve months due to the combined effects of expanded Medicare
utilization management controls, continuing cost containment efforts,
increases in commercial Medicare and Medicaid health premiums per
member, and the continuing analysis of expansion area and product line
profitability. The statements in this paragraph regarding future
utilization rates, cost containment initiatives, total medical costs and
future increases in health premiums per member are forward-looking
statements. See "Forward-Looking Information" above for a description
of risk factors that may affect medical expenses per member and the
medical loss ratio.
Administrative expenses as a percentage of revenue ("administrative
expense ratio") decreased to 10.4 percent for the third quarter of 1996
as compared to 10.6 percent for the same period in 1995. The decrease
in administrative expense is due primarily to the timing of the
incurrence of expenses rather than an absolute reduction in the level of
our administrative expenses. Management believes that the
administrative expense ratio will exceed the current level over the next
three months due to the continued expansion of utilization management
and other personnel. Management's expectations concerning the
administrative expense ratio are forward-looking statements. The
administrative expense ratio is affected by changes in health premiums
per member, development of the Company's expansion areas and increased
administrative activity related to business volume.
Investment income decreased $1.4 million or 39 percent primarily due to
a decrease in realized gains on sales of marketable equity securities.
The net margin rate decreased from 5.9 percent in the third quarter of
1995 to (1.6) percent in the current quarter. This decrease is
primarily due to increased medical expenses.
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1995
The Company's consolidated net income for the nine months ended
September 30, 1996 decreased to $621,000 from $45,142,000 for the nine
months ended September 30, 1995. Earnings per share on net income
decreased from $.95 in the first nine months of 1995 to $.01 for the
same period in 1996. The reduction in earnings is primarily
attributable to a significant increase in the medical loss ratio for
commercial products, continuing losses in the Company's Medicare
product, reduced income from the Company's Medicaid products and costs
and start-up losses related to expansion territories.<PAGE>
Revenue for the nine months ended September 30, 1996 increased
approximately $142.0 million or 20.3 percent over the nine months ended
September 30, 1995, and health premium revenue increased approximately
$135.5 million over the same periods. A 20.3 percent increase in
average HMO and indemnity enrollment resulted in an increase of
approximately $135.5 million in health premium revenue. Revenue from
life and disability products contributed $2.9 million for the first nine
months of 1996 as compared to $.9 million for the same period in 1995,
which was the second quarter of operations for this line of business.
The medical loss ratio increased to 91.9 percent for nine months ended
September 30, 1996 as compared to 81.7 percent for the comparable period
in 1995. Medical expenses on a per member per month basis increased
12.4 percent over the comparable period. The reasons for this increase
are consistent with the items discussed in the quarterly analysis.<PAGE>
<PAGE> 12
In order 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. Also during 1996, the Company has evaluated and
is in the process of adopting regionalized and product specific fee
maximums for health services which should contribute to cost containment
efforts for the Medicare and Medicaid programs. These reductions in
provider reimbursements have been more than offset by increases in
member utilization resulting in net increased medical costs on a per
member per month basis.
The administrative expense ratio for the first nine months of 1996
increased to 10.7 percent as compared to 10.5 percent for the same
period in 1995. The reasons for this increase are due primarily to
increased salaries and expenses in certain administrative areas of the
Company including utilization management and customer service
departments as well as additional sales expenses in new expansion areas
in 1996.
The net margin rate declined to .1 percent for the first nine months of
1996 as compared to 6.5 percent for the comparable period in 1995,
principally due to increased medical costs and a reduction in health
premiums per member. Management's strategies for reversing this trend
are discussed in the quarterly analysis.
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 health 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.
The Company's cash and short-term investments decreased from $215.6
million at December 31, 1995 to $164.1 million at September 30, 1996,
primarily due to purchases of MAMSI stock under the Company's stock
repurchase program. Accounts receivable increased from $61.3 million at
December 31, 1995 to $77.3 million at September 30, 1996. This $16.0
million increase is primarily due to the increase in membership during
1996 combined with a lower than normal balance in receivables at
December 31, 1995 due to a higher relative volume of payments made by
employer groups during the last month of the year.
Prepaid expenses, advances and other increased from $9.0 million at
December 31, 1995 to $27.1 million at September 30, 1996, principally
due to estimated tax refunds for net operating loss carrybacks available
for certain MAMSI subsidiaries and other reductions in estimated tax
liabilities related to the second and third quarter net losses plus
certain other tax deductions not related to book income. Statutory
deposits decreased from $10.5 million at December 31, 1995 to $9.1<PAGE>
million at September 30, 1996 principally due to the release by state
regulatory authorities of certain deposits related to an affiliated HMO
that was merged into M.D. IPA in 1993.
Medical claims payable increased from $108.5 million at December 31,
1995 to $123.3 million at September 30, 1996 primarily due to increased
member utilization and related claims accruals. Deferred premium
revenue decreased from $10.1 million at December 31, 1995 to $6.2
million at September 30, 1996 due to a reduction in advance cash
receipts.
Amounts recorded for treasury stock increased in 1996 by approximately
$41.2 million due to stock purchases under the Company's stock
repurchase program.
The Company currently has access to total revolving credit facilities of
$24.0 million, which is used to provide short-term capital resources for
routine cash flow fluctuations. At September 30, 1996, approximately
$1.8 million was drawn against these facilities.<PAGE>
<PAGE> 13
Following is a schedule of the short-term capital resources available to
the Company (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 2,523 $ 10,874
Short-term investments 161,588 204,734
Working capital advances to Maryland hospitals 6,432 4,053
----------- -----------
Total available liquid assets 170,543 219,661
Credit line availability 22,248 7,880
----------- -----------
Total short-term capital resources $ 192,791 $ 227,541
=========== ===========
</TABLE>
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. During the nine months
ended September 30, 1996, MAMSI repurchased approximately 2.1 million
shares of its common stock for a total cost of approximately $41.2
million under its stock repurchase program. Under this program, MAMSI
can expend up to a total of $60.0 million (including brokerage
commissions) to repurchase shares of its common stock over a twelve
month period. This program will continue to be financed through cash
flow from the Company's operations. Other capital expenditures will be
made during the remainder of 1996 to enhance the Company's computer
systems and make necessary improvements to existing administrative
offices.<PAGE>
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The class action litigation disclosed in prior filings was settled on
September 30, 1996. On that date, the Court in Maryland approved the
settlement on the terms described in the Company's Form 10-Q for the
three months ended March 31, 1996. The Court, pursuant to the
settlement, dismissed with prejudice the claims against the Company and
named individuals.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index on page 16 of the Form 10-Q.
(b) There were no reports filed on Form 8-K during the quarter ended
September 30, 1996.<PAGE>
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
undersigned thereto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC.
--------------------------------------------
(Registrant)
Date: November 13, 1996 Robert E. Foss
--------------------------------------------
Robert E. Foss
Executive Vice President and
Chief Financial Officer<PAGE>
<PAGE> 16
6(a) List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
------- ----------------------- -------------------
10 Stock Compensation Trust Agreement
dated August 26, 1996. . . . . . . . . . . . .
10.1 Common Stock Purchase Agreement dated
August 26, 1996. . . . . . . . . . . . . . . .
10.2 Promissory Note dated August 26, 1996. . . . .
27 Financial Data Schedule for the Nine
Months Ended September 30, 1996. . . . . . . .<PAGE>
<PAGE>
MID ATLANTIC MEDICAL SERVICES, INC.
STOCK COMPENSATION TRUST AGREEMENT
TRUST AGREEMENT made and entered into as of the 26th day of August,
1996, by and between Mid Atlantic Medical Services, Inc., a corporation
organized under the laws of the State of Delaware hereinafter referred
to as the "Company") and THE BANK OF NEW YORK, a New York banking
corporation (hereinafter referred to as the "Trustee").
WHEREAS, the Company (as defined below) desires to establish a
trust (the "Trust") in accordance with the laws of the State of New York
and for the purposes stated in this Agreement;
WHEREAS, the Trustee desires to act as trustee of the Trust, and to
hold legal title to the assets of the Trusts, in trust, for the purposes
hereinafter stated and in accordance with the terms hereof;
WHEREAS, the Company or its subsidiaries have previously adopted
the Plans (as defined below);
WHEREAS, the Company desires to provide assurance of the
availability of the shares of its common stock necessary to satisfy
certain of its obligations or those of its subsidiaries under the Plans
(as defined below);
WHEREAS, the Trustee has accepted such appointment as of the date
set forth first above;
WHEREAS, the Company intends, that the assets of the Trust Fund
shall be and remain subject to the claims of the Company's creditors as
herein provided and that the Plans not be deemed funded by virtue of the
existence of this Trust; and
WHEREAS, the Trust is intended to be a "grantor trust" with the
result that the corpus and income of the Trust are treated as assets and
income of the Company pursuant to Sections 671 through 679 of the Code;
and
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and the Trustee declare and agree as follows:<PAGE>
1. DEFINITIONS; ESTABLISHMENT OF TRUST
1.1. Definitions.
Whenever used in this Trust Agreement, unless otherwise
provided or the context otherwise requires:
AUTHORIZED OFFICER. "Authorized Officer" means the Chairman,
President, any Vice President, the Secretary or the Treasurer of the
Company or any other person or persons as may be designated by the
Company.
BOARD OF DIRECTORS. "Board of Directors" means the board of
directors of the Company.
CHANGE OF CONTROL. "Change of Control" means any of the
following events:
(a) an acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
50% or more of the combined voting power of the then outstanding voting
securities of the Company; PROVIDED, HOWEVER, that the following
acquisitions shall not constitute a Change of Control: (i) an
acquisition by or directly from the Company, (ii) an acquisition by any
employee benefit plan or trust sponsored or maintained by the Company;
and (iii) any acquisition described in subclauses (A) or (B) of
subsection (b) below; or
(b) approval by the stockholders of the Company of (i) a
complete dissolution or liquidation of the Company, (ii) a sale or other
disposition of all or substantially all of the Company's assets or (iii)
a reorganization, merger, or consolidation ("Business Combination")
unless either (A) all or substantially all of the stockholders of the
Company immediately prior to the Business Combination own more than 50%
of the voting securities of the entity surviving the Business
Combination, or the entity which directly or indirectly controls such
surviving entity, in substantially the same proportion as they owned the
voting securities of the Company immediately prior thereto, or (B) the
consideration (other than cash paid in lieu of fractional shares or
payment upon perfection of appraisal rights) issued to stockholders of
the Company in the Business Combination is solely common stock which is
publicly traded on an established securities exchange in the United
States.
CODE. "Code" means the Internal Revenue Code of 1986, as
amended.
COMMITTEE. "Committee" means a committee of officers selected
by the Board of Directors, except as provided in Section 9.2, or by an
individual or individuals authorized by the Board of Directors to make
such selection which is charged with administration of the Trust.
COMPANY. "Company" means Mid Atlantic Medical Services, Inc.,
a Delaware corporation, or any successor thereto. References to the
Company shall include its subsidiaries where appropriate.<PAGE>
COMPANY STOCK. "Company Stock" means shares of common stock,
par value $0.01 per share, issued by the Company or any successor
securities.
EXTRAORDINARY DIVIDEND. "Extraordinary Dividend" means any
dividend or other distribution of cash or other property (other than
Company Stock) made with respect to Company Stock, which the Board of
Directors declares generally to be other than an ordinary dividend.
FAIR MARKET VALUE. "Fair Market Value" means as of any date
the closing price quotation, or, if none, the average of the bid and
asked prices, as reported with respect to the Company Stock on the most
recently available date, on any national exchange on which the Company
Stock is then listed, or if not so listed, on the NASDAQ National
Market, or other consolidated reporting system reporting trades of the
Company Stock. If he Company Stock is not so listed, "Fair Market
Value" shall mean the average of the bid and asked prices as quoted by
all market makers in the Company Stock. In the event that a market for
the Company Stock does not exist, the Committee may determine, in any
case or cases, that "Fair Market Value" shall be determined on the basis
of the opinion of one or more independent and reputable appraisers
qualified to value companies in the Company's line of business.
INSOLVENCY. "Insolvency" means (i) the inability of the
Company to pay its debts as they become due, or (ii) the Company being
subject to a pending proceeding as a debtor under the provisions of
Title 11 of the United States Code (Bankruptcy Code).
LOAN. "Loan" means the loan and extension of credit to the
Trust evidenced by a promissory note dated as of the date of the Closing
(as defined in the Stock Purchase Agreement dated August 26, 1996
between the Trust and the Company), with which the Trustee will purchase
Company Stock.
OPTION GRANT. "Option Grant" means an option granted under
one of the Plans to a Plan Participant to acquire shares of Company
Stock.
PLAN COMMITTEE CERTIFICATION. "Plan Committee Certifications"
means a certification to be provided to the Trustee by the Committee
from time to time which (i) sets forth the number of shares of Company
Stock transferred to a Plan Participant, and (ii) certifies that the
determination of such number is in accordance with the terms of each
Plan.
PLANS. "Plans" means the employee plans listed on Schedule A
hereto and any other employee benefit plan of the Company designated as
such by the Board of Directors.
PLAN PARTICIPANT. "Plan Participant" means an individual who
has an Option Grant under any of the Plans.
RELIABLE SOURCE. "Reliable Source" means (i) a report filed
with the Securities and Exchange Commission, (ii) a public statement
issued by the Company, or a periodical of general circulation,
including, but not limited to, THE NEW YORK TIMES or THE WALL STREET
JOURNAL, or (iii) a certificate of the Company signed by the Chief
Executive Officer or by the Chairman of the Board of Directors.<PAGE>
SUSPENSE ACCOUNT. "Suspense Account" means the account in
which shares of Company Stock acquired with the Loan are held until they
are released pursuant to Section 3.1.
TRUST. "Trust" means the trust established pursuant to this
Trust Agreement.
TRUSTEE. "Trustee" means Bank of New York or any successor
trustee.
TRUST YEAR. "Trust Year" means the period beginning on the
date of the Closing (the "Closing Date") and ending on the next
following December 31st and on each December 31st thereafter.
1.2. Establishment of Trust.
TRUST. This Agreement and the Trust shall be known as the Mid
Atlantic Medical Services, Inc. Stock Compensation Trust. The parties
intend that the Trust will be an independent legal entity with title to
and power to convey all of its assets. The parties hereto further
intend that the Trust not be subject to the Employee Retirement Income
Security Act of 1974, as amended. The Trust is not a part of any of the
Plans and does not provide retirement or other benefits to any Plan
Participant. The assets of the Trust will be held, invested and
disposed of by the Trustee, in accordance with the terms of the Trust.
TRUSTEE. The trustee named above, and its successor or
successors, is hereby designated as the trustee hereunder, to receive,
hold, invest, administer and distribute the Trust Fund in accordance
with this Agreement, the provisions of which shall govern the power,
duties and responsibilities of the Trustee.
TRUST FUND. The assets held at any time and from time to time
under the Trust collectively are herein referred to as the "Trust Fund"
and shall consist of contributions received by the Trustee, proceeds of
any loans, investments and reinvestment thereof, the earnings and income
thereon, less disbursements therefrom. Except as herein otherwise
provided, title to the assets of the Trust Fund shall at all times be
vested in the Trustee and securities that are part of the Trust Fund
shall be held in such manner that the Trustee's name and the fiduciary
capacity in which the securities are held are fully disclosed, subject
to the right of the Trustee to hold title in bearer form or in the name
of a nominee, and the interests of others in the Trust Fund shall be
only the right to have such assets received, held, invested,
administered and distributed in accordance with the provisions of the
Trust.
IRREVOCABILITY. The Trust Fund shall be used for the
exclusive purpose of aiding the Company in delivering the benefits
provided by the Plans and defraying the expenses of the Trust in
accordance with this Trust Agreement. The Trustee, however, is under no
obligation to enforce the requirements set forth in the foregoing
sentence. No part of the income or corpus of the Trust Fund shall be
recoverable by the Company except as provided in Sections 2.1, 2.2 and
7.2.
TRUST FUND SUBJECT TO CLAIMS. Notwithstanding any provision
of this Agreement to the contrary, the Trust Fund shall at all times
remain subject to the claims of the Company's general creditors under
federal and state law as set forth herein.<PAGE>
2. CONTRIBUTIONS AND DIVIDENDS
2.1. CONTRIBUTIONS. For each Trust Year the Company shall
contribute to the Trust in cash such amount, which together with
dividends, as provided in Section 2.2, and any other earnings of the
Trust Fund, shall enable the Trustee to make all scheduled payments of
principal and interest due under the Loan on a timely basis. Unless
otherwise expressly provided herein, the Trustee shall apply all such
contributions, dividends and earnings to the payment of principal and
interest due under the Loan. The Company may from time to time, in its
sole discretion, make additional contributions to the Trust for the
purpose of enabling the Trust to make prepayments of principal with
respect to the Loan (a "Prepayment Contribution"). The Trustee shall
immediately use any Prepayment Contribution to make a prepayment of
principal with respect to the Loan. All contributions made under the
Trust shall be delivered to the Trustee. The Trustee shall be
accountable for all contributions received by it, but shall have no duty
to require any contributions to be made to it.
2.2. DIVIDENDS. Except as otherwise provided herein, dividends
paid in cash on Company Stock held by the Trust, including Company Stock
held in the Suspense Account, shall be applied to pay interest and repay
scheduled principal due under the Loan. In the event that cash
dividends paid on Company Stock held in the Trust, other than
Extraordinary Dividends, exceed the amount of scheduled principal and
interest due in any Trust Year, such excess shall be used to purchase
additional shares of Company Stock and/or shall be distributed to a
broad cross-section of individuals employed by the Company, as
determined in good faith by the Committee. Dividends which are not in
cash or in Company Stock (including Extraordinary Dividends, or portions
thereof) shall be reduced to cash by the Trustee and reinvested in
Company Stock as soon as practicable. For purposes of this Agreement,
Company Stock purchased with the proceeds of an Extraordinary Dividend,
any excess dividend or with the proceeds of a non-cash dividend and any
dividend paid in the form of Company Stock shall, for purposes of this
Agreement (including without limitation Section 3.1 hereof), be deemed
to have been acquired with the proceeds of the Loan. In the Trustee's
discretion, investments in Company Stock may be made through open-market
purchases, private transactions or (with the Company's consent)
purchases from the Company. In carrying out the duties as set forth in
this Section, the Trustee shall act solely pursuant to the directions of
the Committee.
3. RELEASE AND ALLOCATION OF COMPANY STOCK
3.1. RELEASE OF SHARES. Upon any payment (including a prepayment)
or forgiveness in any Trust Year of any principal on the Loan (a
"Principal Payment"), the following number of shares of Company Stock
acquired with the proceeds of the Loan shall be available for allocation
("Available Shares") as provided in this Article 3: the number of
shares so acquired and held in the Suspense Account immediately before
such payment or forgiveness, multiplied by a fraction the numerator of
which is the amount of the Principal Payment and the denominator of
which is the sum of such Principal Payment and the remaining principal
of the Loan outstanding after such Principal Payment.
3.2. PAYMENT OF BENEFITS. Available Shares shall be distributed,
as directed by the Committee, to the Plan Participants at such times as
may be required to provide shares in accordance with the Plans. Any
payments required by the Plan Participants shall be made in accordance<PAGE>
with the Plans.<PAGE>
4. TAX WITHHOLDING
4.1. WITHHOLDING OF TAXES. The Trustee shall, as directed by the
Committee, withhold, require withholding, or otherwise satisfy any
withholding obligation, on any distribution which it is directed to
make, such amount as the Committee shall reasonably estimate to be
necessary to comply with applicable federal, state and local withholding
requirements. Upon settlement of such tax liability, the Trustee shall
distribute the balance of such amount. Prior to making any distribution
hereunder, the Trustee may require such release of documents from any
taxing authority, or may require such indemnity, as the Trustee shall
reasonably deem necessary for its protection.
5. ADMINISTRATION OF TRUST FUND
5.1. MANAGEMENT AND CONTROL OF TRUST FUND. Subject to the terms
of this Agreement, the Trustee shall have exclusive authority and
responsibility to manage and control the assets of the Trust Fund.
5.2. INVESTMENT OF FUNDS. Except as otherwise provided in Section
2.2 and in this Section 5.2, the Trustee shall invest and reinvest the
Trust Fund exclusively in Company Stock, including any accretions
thereto resulting from the proceeds of a tender offer, recapitalization
or similar transaction which, if not in Company Stock, shall be reduced
to cash as soon as practicable. The Trustee may invest any portion of
the Trust Fund temporarily pending investment in Company Stock,
distribution or payment of expenses in (i) investments in United States
Government obligations with maturities of less than one year, (ii)
interest-bearing accounts including but not limited to certificates of
deposit, time deposits, saving accounts and money market accounts with
maturities of less than one year in any bank, including the Trustee's,
with aggregate capital in excess of $1,000,000,000 and a Moody's
Investor Services rating of at least P1, or an equivalent rating from a
nationally recognized ratings agency, which accounts are insured by the
Federal Deposit Insurance Corporation or other similar federal agency,
(iii) obligations issued or guaranteed by any agency or instrumentality
of the United States of America with maturities of less than one year or
(iv) short-term discount obligations of the Federal National Mortgage
Association.
5.3. TRUSTEE'S ADMINISTRATIVE POWERS. Except as otherwise
provided herein, and subject to the Trustee's duties hereunder, the
Trustee shall have the following powers and rights, in addition to those
provided elsewhere in this Agreement or by law:
(a) to retain any asset of the Trust Fund;
(b) subject to Section 5.4 and Article 3, to sell, transfer,
mortgage, pledge, lease or otherwise dispose of, or grant options with
respect to, any Trust Fund assets at public or private sale;
(c) upon direction from the Committee and with the Trustee's
consent, to borrow from any lender (including the Company pursuant to
the Loan), to acquire Company Stock as authorized by this Agreement, to
enter into lending agreements upon such terms (including reasonable
interest and security for the loan and rights to renegotiate and prepay
such loan) as may be determined by the Committee; provided, however,
that any collateral given by the Trustee for the Loan shall be limited
to cash and property contributed by the Company to the Trust and
dividends paid on Company Stock held in the Trust and shall not include<PAGE>
Company Stock acquired with the proceeds of Loan;<PAGE>
(d) with the consent of the Committee, to settle, submit to
arbitration, compromise, contest, prosecute or abandon claims and
demands in favor of or against the Trust Fund initiated by a party other
than the Trustee;
(e) to vote or to give any consent with respect to any securities,
including any Company Stock, held by the Trust either in person or by
proxy for any purpose, provided that the Trustee shall vote, tender or
exchange all shares of Company Stock as provided in Section 5.4;
(f) to exercise any of the powers and rights of an individual
owner with respect to any asset of the Trust Fund and to perform any and
all other acts that in its judgment are necessary or appropriate for the
proper administration of the Trust Fund, even though such powers, rights
and acts are not specifically enumerated in this Agreement;
(g) to employ such accountants, actuaries, investment bankers,
appraisers, other advisors and agents as may be reasonably necessary in
collecting, managing, administering, investing, valuing, distributing
and protecting the Trust Fund or the assets thereof or any borrowings of
the Trustee made in accordance with Section 5.3(c); and to pay their
reasonable fees and out-of-pocket expenses, which shall be deemed to be
expenses of the Trust and for which the Trustee shall be reimbursed in
accordance with Section 4.1;
(h) to cause any asset of the Trust Fund to be issued, held or
registered in the Trustee's name or in the name of its nominee, or in
such form that title will pass by delivery, provided that the records of
the Trustee shall indicate the true ownership of such asset;
(i) to utilize another entity as custodian to hold, but not invest
or otherwise manage or control, some or all of the assets of the Trust
Fund; and
(j) to consult with legal counsel (who may also be counsel for the
Trustee generally) with respect to any of its duties or obligations
hereunder; and to pay the reasonable fees and out-of-pocket expenses of
such counsel, which shall be deemed to be expenses of the Trust and for
which the Trustee shall be reimbursed in accordance with Section 4.1.
Notwithstanding the foregoing, neither the Trust nor the Trustee shall
have any power to, and shall not, engage in any trade or business. Any
loan obtained by the Trustee pursuant to Section 5.3(c) shall be in its
capacity as Trustee and not in its individual corporate capacity.
5.4. VOTING AND TENDERING OF COMPANY STOCK.
(a) VOTING OF COMPANY STOCK. The Trustee shall follow the
directions of each Plan Participant, as to the manner in which shares of
Company Stock held by the Trust are to be voted on each matter brought
before an annual or special stockholders' meeting of the Company or the
manner in which any consent is to be executed, in each case as provided
below. Before each such meeting of stockholders, the Trustee shall
cause to be furnished to each Plan Participant, a copy of the proxy
solicitation material received by the Trustee, together with a form
requesting confidential instructions as to how to vote the shares of
Company Stock held by the Trustee. Upon timely receipt of directions
from the Plan Participants, the Trustee shall on each such matter vote
the number of shares (including fractional shares) of Company Stock held
by the Trust as follows:<PAGE>
The Company Stock shall be voted by the Trustee with each Plan
Participant directing a number of shares of Company Stock (the
"Participant Directed Amount") equal to the quotient of (x) the total
number of shares of Company Stock held by the Trust and (y) the number
of Plan Participants on the relevant date. Any Participant Shares for
which the Trustee does not receive a signed voting-direction instrument
shall be voted for, against or to abstain in the same proportions as
those shares of Company Stock for which the Trustee did receive
instructions.
Similar provisions shall apply in the case of any action by
shareholder consent without a meeting.
(b) TENDER OR EXCHANGE OF COMPANY STOCK. The Trustee shall use
its best efforts timely to distribute or cause to be distributed to each
Plan Participant any written materials distributed to stockholders of
the Company generally in connection with any tender offer or exchange
offer, together with a form requesting confidential instructions as to
whether or not to tender or exchange shares of Company Stock held in the
Trust. Upon timely receipt of instructions from a Plan Participant, the
Trustee shall tender such Participant's Participant Directed Amount if
such Plan Participant has directed the Trustee to tender.
(c) The Company shall maintain appropriate procedures to ensure
that all instructions by Participants in the Plans are collected,
tabulated, and transmitted to the Trustee without being divulged or
released to any person affiliated with the Company or its affiliates.
All actions taken by Plan Participants shall be held confidential by the
Trustee and shall not be divulged or released to any person, other than
(i) agents of the Trustee who are not affiliated with the Company or its
affiliates or (ii) by virtue of the execution by the Trustee of any
proxy, consent or letter of transmittal for the shares of Company Stock
held in the Trust.
6. CONCERNING THE TRUSTEE
6.1. NOTICES TO THE TRUSTEE.
The Trustee may rely on the authenticity, truth and accuracy of,
and will be fully protected in acting upon:
(a) any notice, direction, certification, approval or other
writing of the Company, if evidenced by an instrument signed in the name
of the Company by an Authorized Officer; and
(b) any copy of a resolution of the Board of Directors of the
Company, if certified by the Secretary or an Assistant Secretary of the
Company under its corporate seal; or
(c) any notice, direction, certification, approval or other
writing, oral or other transmitted form of instruction received by the
Trustee and believed by it to be genuine and to be sent by or on behalf
of the Committee.
6.2. EXPENSES OF THE TRUST FUND.
The Trustee is authorized to pay out of the Trust Fund: (a) all
brokerage fees and transfer tax expenses and other expenses incurred in
connection with the sale or purchase of investments; (b) all real and
personal property taxes, income taxes and other taxes of any kind at any
time levied or assessed under any present or future law upon, or with<PAGE>
respect to, the Trust Fund or any property included in the Trust Fund;
(c) the Trustee's compensation and expenses as provided in Section 6.3
hereof; and (d) all other expenses of administering the Trust, unless
promptly paid to the Trustee by the Company.<PAGE>
6.3. COMPENSATION OF THE TRUSTEE.
The Company will pay to the Trustee such compensation for its
services as set forth on Exhibit A as from time to time amended by the
Company and the Trustee and will reimburse the Trustee for all expenses
(including reasonable attorney's fees) incurred by the Trustee in the
administration of the Trust. If not promptly paid on request, the
Trustee may charge such fees and expenses to and pay the same from the
Trust Fund. The compensation and expenses of the Trustee shall
constitute a lien on the Trust Fund.
6.4. PROTECTION OF THE TRUSTEE.
The Company shall pay and shall protect, indemnify and save
harmless the Trustee and its officers, employees and agents from and
against any and all losses, liabilities (including liabilities for
penalties), actions, suits, judgments, demands, damages, costs and
expenses (including, without limitation, attorneys' fees and expenses)
of any nature arising from or relating to any action or any failure to
act by the Trustee, its officers, employees and agents or the
transactions contemplated by this Trust Agreement, including, but not
limited to, any claim made by a Plan Participant or his or her
beneficiary with respect to payments made or to be made by the Trustee,
any claim made by the Company or its successor, whether pursuant to a
sale of assets, merger, consolidation, liquidation or otherwise, that
this Trust Agreement is invalid or ultra vires, except to the extent
that any such loss, liability, action, suit, judgment, demand, damage,
cost or expense has been determined by a final judgment of a court of
competent jurisdiction to be solely the result of the gross negligence
or wilful misconduct of the Trustee, its officers, employees or agents.
To the extent that the Company has not fulfilled its obligations under
the foregoing provisions of this Section, the Trustee shall be
reimbursed out of the assets of the Trust Fund or may set up reasonable
reserves for the payment of such obligations. The Trustee assumes no
obligation or responsibility with respect to any action required by this
Trust Agreement on the part of the Company or the Committee.
6.5. DUTIES OF THE TRUSTEE.
The Trustee will be under no duties whatsoever, except such duties
as are specifically set forth as such in this Trust Agreement, and no
implied covenant or obligation will be read into this Trust Agreement
against the Trustee. The Trustee will not be liable for any action or
failure to act except if such action or failure to act constitutes gross
negligence or wilful misconduct. The Trustee will not be compelled to
take any action toward the execution or enforcement of the Trust or to
prosecute or defend any suit in respect thereof, unless indemnified to
its satisfaction against loss, cost, liability and expense; and the
Trustee will be under no liability or obligation to anyone with respect
to any failure on the part of the Company, the Committee or a Plan
Participant. Nothing in this Trust Agreement shall be construed as
requiring the Trustee to make any payment in excess of the amounts held
in the Trust Fund at the time of such payment or otherwise to risk its
own funds. The Trustee has no duty to maintain records with respect to
Option Grants or with respect to the shares in the Suspense Account.<PAGE>
6.6. SETTLEMENT OF ACCOUNTS OF THE TRUSTEE.
The Trustee shall keep or cause to be kept accurate and detailed
accounts of all investments, receipts, disbursements and other
transactions hereunder. Such accounts shall be open to inspection and
audit at all reasonable times during normal business hours by any person
designated by the Company or the Committee. At least annually after the
end of each Plan Year, the Trustee shall file with the Company and the
Committee a written account, listing the investments of the Trust Fund
and any uninvested cash balance thereof, and setting forth all receipts,
disbursements, payments, and other transactions respecting the Trust
Fund not included in any such previous account. Any account, when
approved by the Company and the Committee, will be binding and
conclusive on the Company, the Committee and all Plan Participants, and
the Trustee will thereby be released and discharged from any liability
or accountability to the Company, the Committee and all Plan
Participants with respect to all matters set forth therein. Omission by
the Company or the Committee to object in writing to any specific items
in any such account within sixty (60) days after its delivery will
constitute approval of the account by the Company and the Committee. No
other accounts or reports shall be required to be given to the Company,
the Committee or a Plan Participant except as stated herein or except as
otherwise agreed to in writing by the Trustee. The Trustee shall not be
required to file, and no Plan Participant or beneficiary shall have
right to compel, an accounting, judicial or otherwise, by the Trustee.
6.7. RIGHT TO JUDICIAL SETTLEMENT.
Nothing contained in this Trust Agreement shall be construed as
depriving the Trustee of the right to have a judicial settlement of its
accounts, and upon any proceeding for a judicial settlement of the
Trustee's accounts or for instructions the only necessary parties
thereto in addition to the Trustee shall be the Company and the
Committee.
6.8. RESIGNATION OR REMOVAL OF THE TRUSTEE.
The Trustee may at any time resign and may at any time be removed
by the Company upon thirty (30) days' notice in writing.
6.9. APPOINTMENT OF SUCCESSOR TRUSTEE.
In the event of the resignation or removal of the Trustee, or in
any other event in which the Trustee ceases to act, a successor trustee
may be appointed by the Company by instrument in writing delivered to
and accepted by the successor trustee. Notice of such appointment and
approval, if applicable, will be given by the Company to the retiring
trustee, and the successor trustee will deliver to the retiring trustee
an instrument in writing accepting such appointment. Notwithstanding
the foregoing, if no appointment and approval, if applicable, of a
successor trustee is made by the Company within a reasonable time after
such a resignation, removal or other event, any court of competent
jurisdiction may appoint a successor trustee after such notice, if any,
solely to the Company and the retiring trustee, as such court may deem
suitable and proper.
In the event of such resignation, removal or other event, the
retiring trustee or its successors and assigns shall file with the
Company a final account to which the provisions of Section 6.6 hereof
relating to annual accounts shall apply.<PAGE>
In the event of the appointment of a successor trustee, such
successor trustee will succeed to all the right, title and estate of,
and will be, the Trustee; and the retiring trustee will after the
settlement of its final account and the receipt of any compensation or
expenses due it, deliver the Trust Fund to the successor trustee
together with all such instruments of transfer, conveyance, assignment
and further assurance as the successor trustee may reasonably require.
The retiring trustee will retain a lien upon the Trust Fund to secure
all amounts due the retiring trustee pursuant to the provisions of this
Trust Agreement.
6.10. MERGER OR CONSOLIDATION OF THE TRUSTEE.
Any corporation continuing as the result of any merger or resulting
from any consolidation to which merger or consolidation the Trustee is a
party, or any corporation to which substantially all the business and
assets of the Trustee may be transferred, will be deemed automatically
to be continuing as the Trustee.
7. ENFORCEMENT; INSOLVENCY OF THE COMPANY
7.1. ENFORCEMENT OF TRUST AGREEMENT AND LEGAL PROCEEDINGS.
The Company shall have the right to enforce any provision of this
Trust Agreement. In any action or proceeding affecting the Trust, the
only necessary parties shall be the Company, the Trustee and the
Committee and, except as otherwise required by applicable law, no other
person shall be entitled to any notice or service of process. Any
judgment entered in such an action or proceeding shall, to the maximum
extent permitted by applicable law, be binding and conclusive on all
persons having or claiming to have any interest in the Trust.
7.2. INSOLVENCY OF THE COMPANY.
(a) If at any time (i) the Company or a person claiming to be a
creditor of the Company alleges in writing to the Trustee that the
Company has become Insolvent, (ii) the Trustee is served with any order,
process or paper from which it appears that an allegation to the effect
that the Company is Insolvent has been made in a judicial proceeding or
(iii) the Trustee has actual knowledge of a current report or statement
from a nationally recognized credit reporting agency or from a Reliable
Source to the effect that the Company is Insolvent, the Trustee shall
discontinue allocations under Section 3 under this Trust Agreement,
shall hold the Trust Fund for the benefit of the Company's creditors,
and shall resume allocations under Section 3 under this Trust Agreement,
only upon receipt of an order of a court of competent jurisdiction
requiring such payment or if the Trustee has actual knowledge of a
current report or statement from a nationally recognized credit
reporting agency or other Reliable Source (other than a Reliable Source
described in clause (iii) of the definition thereof) to the effect that
the Company is not Insolvent; provided, however, that in the event that
allocations under Section 3 were discontinued by reason of a court order
or injunction, the Trustee shall resume allocations only upon receipt of
an order of a court of competent jurisdiction requiring such allocation.
The Company and its Chief Executive Officer shall be obligated to give
the Trustee prompt written notice in the event that the Company becomes
Insolvent. The Trustee shall not be liable to anyone in the event
benefit payments are discontinued pursuant to this Section 7.2. For
purposes of this Section 7.2, the term Company shall include any and all
of the Company's subsidiaries.<PAGE>
8. AMENDMENT, REVOCATION AND TERMINATION
8.1. AMENDMENTS. Except as otherwise provided herein, the Company
may amend the Trust at any time and from time to time in any manner
which it deems desirable, provided that no amendment which would
adversely affect the rights, duties, interests, fees or obligations of
the Trustee shall be made without the Trustee's written consent, which
consent shall not be unreasonably withheld. Notwithstanding the
foregoing, the Company shall retain the power under all circumstances to
amend the Trust to correct any errors or clarify any ambiguities or
similar issues of interpretation in this Agreement.
8.2. TERMINATION. Subject to the terms of this Section 8.2, the
Trust shall terminate on the later of (i) the date all Available Shares
are distributed and (ii) the date on which the Loan is paid in full (the
"Termination Date"). The Company may terminate the Trust at any time
prior to the Termination Date. The Trust shall also terminate
automatically upon the Company giving the Trustee written notice of a
Change of Control (The Trustee shall have no duty to authenticate the
occurrence of a Change of Control). Immediately upon a termination of
the Trust, the Company shall be deemed to have forgiven all amounts then
outstanding under the Loan. As soon as practicable after receiving
notice from the Company of a Change of Control or upon any other
termination of the Trust, the Trustee shall sell all of the Company
Stock and other non-cash assets (if any) then held in the Trust Fund as
directed by the Committee in good faith taking into account the
interests of a broad cross-section of individuals employed by the
Company. The proceeds of such sale shall first be returned to the
Company up to an amount equal to the principal amount, plus any accrued
interest, of the Loan that was forgiven upon such termination. Any
funds remaining in the Trust after such payment to the Company (the
"Excess Funds") shall be allocated and distributed with reasonable
promptness to Plan Participants among a broad cross-section of the
Company's employees as determined by the Committee.
8.3. FORM OF AMENDMENT OR TERMINATION. Any amendment or
termination of the Trust shall be evidenced by an instrument in writing
signed by an Authorized Officer of the Company, certifying that said
amendment or termination has been authorized and directed by the Company
or the Board of Directors, as applicable, and, in the case of any
amendment, shall be consented to by signature of an authorized officer
of the Trustee, if required by Section 8.1.
9. MISCELLANEOUS PROVISIONS
9.1. SUCCESSORS.
This Trust Agreement shall be binding upon and inure to the benefit
of the Company and the Trustee and their respective successors and
assigns.
9.2. COMMITTEE ACTION.
Any action required or permitted to be taken by the Committee may
be taken on behalf of the Committee by any individual so authorized.
The Company (or the Committee after a Change of Control) shall furnish
to the Trustee the name and specimen signature of each member of the
Committee upon whose statement of a decision or direction the Trustee is
authorized to rely. Until notified of a change in the identity of such
person or persons, the Trustee shall act upon the assumption that there<PAGE>
has been no change. After the Company has given the Trustee notice that
a Change of Control has occurred, the Board of Directors shall no longer
have the authority to remove or appoint members of the Committee and the
members of the Committee in place immediately preceding such a Change of
Control shall continue as such members and shall appoint new members to
replace any members who resign or otherwise cease to be members after
the Change of Control.<PAGE>
9.3. NONALIENATION.
Except insofar as applicable law may otherwise require, (a) no
amount payable to or in respect of any Plan Participant at any time
under the Trust shall be subject in any manner to alienation by
anticipation, sale, transfer, assignment, bankruptcy, pledge,
attachment, charge or encumbrance of any kind, and any attempt to so
alienate, sell, transfer, assign, pledge, attach, charge or otherwise
encumber any such amount, whether presently or thereafter payable, shall
be void; and (b) the Trust Fund shall in no manner be liable for or
subject to the debts or liabilities of any Plan Participant.
9.4. COMMUNICATIONS.
(a) Communications to the Company shall be addressed to the
Company at 4 Taft Court, Rockville, MD 20850 Attn: Joseph L.
Guarriello, provided, however, that upon the Company's written request,
such communications shall be sent to such other address as the Company
may specify.
(b) Communications to the Trustee shall be addressed to it at One
Wall Street, New York, New York 10286, Attn: Division Head, Master
Trust/Custody Division; provided, however, that upon the Trustee's
written request, such communications shall be sent to such other address
as the Trustee may specify.
(c) No communication shall be binding on the Trustee until it is
received by officer the Trustee having primary responsibility for this
Trust, and no communication shall be binding on the Company until it is
received by the Company.
9.5. HEADINGS.
Titles to the Sections of this Trust Agreement are included for
convenience only and shall not control the meaning or interpretation of
any provision of this Trust Agreement.
9.6. THIRD PARTIES.
A third party dealing with the Trustee shall not be required to
make inquiry as to the authority of the Trustee to take any action nor
be under any obligation to follow the proper application by the Trustee
of the proceeds of sale of any property sold by the Trustee or to
inquire into the validity or propriety of any act of the Trustee.
9.7. GOVERNING LAW.
This Trust Agreement and the Trust established hereunder shall be
governed by and construed, enforced, and administered in accordance with
the internal laws of the State of New York without regard to principles
of conflicts of laws and the Trustee shall be liable to account only in
the courts of that state.
9.8. COUNTERPARTS.
This Trust Agreement may be executed in any number of counterparts,
each of which shall be deemed to be the original although the others
shall not be produced.<PAGE>
IN WITNESS WHEREOF, this Trust Agreement has been duly executed by
the parties hereto as of the day and year first above written.
MID ATLANTIC MEDICAL SERVICES, INC.
By: /s/ Joseph L. Guarriello
----------------------------------
Attest
By: /s/ Robert E. Foss
---------------------------
THE BANK OF NEW YORK, as TRUSTEE
By: /s/ Wolfgang Strauss
----------------------------------
Attest
By: /s/ Katarina Antens-Miller
---------------------------<PAGE>
STATE OF Maryland )
ss.:
COUNTY OF Montgomery)
On this 31st day of October, 1996, before me personally came Joseph
L. Guarriello, to me known, who, being by me duly sworn, said that he
resides at Montgomery County; that he is a Executive Vice President of
Mid Atlantic Medical Services, Inc., the corporation described in and
which executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation; and that he signed his name thereto by like order.
By: /s/ Donna M. Tilghman
------------------------------------
Notary Public
Commission Expires: 3/1/99
STATE OF NEW YORK )
ss.:
COUNTY OF NEW YORK)
On this 26th day of August, 1996, before me personally came
Wolfgang Strauss, to me known, who, being by me duly sworn, said that he
resides at Hammouth County, NY; that he is a Vice President of THE BANK
OF NEW YORK, the corporation described in and which executed the
foregoing instrument; that he knows the seal of said corporation; that
the seal affixed to said instrument is such corporate seal; that it was
so affixed by order of the Board of Directors of said corporation; and
that he signed his name thereto by like order.
By: /s/ Sylvia Cohen
------------------------------------
Notary Public
Commission Expires: 7/31/98<PAGE>
SCHEDULE A
MAMSI 1990 Non-Qualified Stock Option Plan
MAMSI 1991 Non-Qualified Stock Option Plan
MAMSI 1992 Non-Qualified Stock Option Plan
MAMSI 1993 Non-Qualified Stock Option Plan
MAMSI 1994 Non-Qualified Stock Option Plan
MAMSI 1995 Non-Qualified Stock Option Plan
MAMSI 1996 Non-Qualified Stock Option Plan<PAGE>
The Bank of New York
Schedule of Fees
for
Grantor Trust Services
for
MID ATLANTIC MEDICAL SERVICES, INC.
The following schedule of fees would apply to the subject trust. Fees
are rendered quarterly.
Administration Fees: $15,000 annually
Special Asset Fee:
$10,000 per annum for the first company stock account held as an asset
per issuer.
$3,000 per annum for each additional account.
Transaction Fees:
Security Transaction $15.00 per security
transaction
Lump Sum/Expense Payments $12.50 per check plus
postage
Periodic Payments $2.00 per check plus
postage
Wire Transfers (outgoing) $15.00 per transfer
Special Transaction Fees
Change of Control $10,000 per event
Insolvency $10,000 per event
Termination of the Trust $3,000 per event
Tax Form Preparation $150 per hour as incurred
Convert to Pay Status $100 per participant
Proxy Services $150/hour
Corporate Action Administrative Services $150/hour
Legal Fees/Out-of-Pocket Expenses As Incurred
Special Reporting Fees - Sub Plan Accounting
$1,500 annually per investment pool
$250 per plan within each pool
Fees as quoted above do not include any direct out-of-pocket or legal
expenses which would become payable in accordance with the grantor trust
agreement. There are no initial set-up fees, except legal fees,
incurred with the establishment/conversion of the trust to The Bank of
New York.
Exhibit A<PAGE>
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
-------------------------------
THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement"),
made this 26rd day of August, 1996 between Mid Atlantic Medical
Services, Inc., a Delaware corporation (the "Seller") and The Bank of
New York, not in its individual or corporate capacity, but solely in its
capacity as trustee (the "Trustee") of the Stock Compensation Trust (the
"Trust") (the Trust is hereinafter sometimes referred to as the
"Purchaser") under a trust agreement between the Seller and the Trustee
dated August 26, 1996 (the "Trust Agreement").
W I T N E S S E T H:
- - - - - - - - - --
WHEREAS, as contemplated by the Trust Agreement, the
Purchaser is to purchase from the Seller, and the Seller is to sell to
the Purchaser, shares of the Seller's common stock, $0.01 par value (the
"Common Stock"), all as more specifically provided herein;
NOW, THEREFORE, in consideration of the mutual covenants
and undertakings contained herein, and subject to and on the terms and
conditions herein set forth, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 PURCHASE AND SALE. Subject to the terms and
conditions set forth herein, the Seller will sell to the Purchaser, and
the Purchaser will purchase from the Seller, at the Closing (as
hereinafter defined), twenty million (20,000,000) shares of Common Stock
at $14.25 per share which is the Fair Market Value (as defined in the
Trust) of the Common Stock on the last full trading day prior to the
Closing. The shares of Common Stock to be purchased by the Purchaser
and sold by the Seller at the Closing are referred to in this Agreement
as the "Common Shares." In consideration for the Common Shares, the
Purchaser will deliver to the Seller cash in the amount of $200,000,
representng the par value of the Common Stock and a note in the form of
Schedule 1.1 to this Agreement in the principal amount of $284,800,000
(the "Note").
1.2 CLOSING. The closing of the sale and purchase of the
Common Shares hereunder (the "Closing"), will be held at the offices of
the Seller on August 26, 1996 or at such other time, date and place as
agreed to by the parties.<PAGE>
1.3 DELIVERY AND PAYMENT. At the Closing, the Seller will
deliver to the Purchaser a certificate representing the Common Shares,
which certificate shall be registered in the name of the Trustee, or the
name of its nominee, against payment by the Purchaser to the Seller of
the aggregate purchase price therefor. Notwithstanding the foregoing,
the Seller may accomplish the transfer of shares to the Trustee by book
entry, in which event a cross receipt shall be executed by the parties.
The Seller will pay all stamp and other transfer taxes, if any, which
may be payable in respect of the sale and delivery of the Common Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller represents and warrants to the Purchaser as
follows:
2.1 CORPORATE EXISTENCE AND AUTHORITY. The Seller (i) is
a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; (ii) has all requisite
corporate power to execute, deliver and perform this Agreement; and
(iii) has taken all necessary corporation action to authorize the
execution, delivery and performance of this Agreement.
2.2 NO CONFLICT. The execution and delivery of this
Agreement does not, and the consummation of the transactions
contemplated hereby will not, conflict with or constitute a default
under (i) the Seller's certificate of incorporation or by-laws, (ii) any
agreement, indenture or other instrument to which the Seller is a party
or by which the Seller or its assets may be bound or (iii) any law,
regulation, order, arbitration, award, judgment or decree applicable to
the Seller.
2.3 VALIDITY. This Agreement has been duly executed and
delivered by the Seller and is a valid and binding agreement of the
Seller enforceable against the Seller in accordance with its terms,
except as the enforceability thereof may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other laws affecting the enforcement of creditors' rights
generally, and by general principles of equity.
2.4 THE COMMON SHARES. The Common Shares have been duly
authorized and are (or when issued as contemplated hereby will be)
validly issued and constitute fully-paid and non-assessable shares of
Common Stock, $0.01 par value, of the Seller. No stockholder of the
Seller has any preemptive or other subscription right to acquire any
shares of Common Stock. The Seller will convey to the Purchaser, on the
date of Closing, good and valid title tot he Common Shares free and
clear of any liens, claims, security interests and encumbrances.<PAGE>
2.5 LITIGATION. There are no actions, suits, proceedings
or arbitrations or investigations pending, or to the Seller's best
knowledge, threatened in any court or before any governmental agency or
instrumentality or arbitration panel or otherwise against or by the
Seller which seek to or could restrain, prohibit, rescind or declare
unlawful, or result in substantial damages in respect of this Agreement
or the performance hereof by the Seller (including, without limitation,
the delivery of the Common Shares).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Seller
as follows:
3.1 AUTHORITY; VALIDITY. The Purchaser has full power and
authority to execute and deliver this Agreement and the Note as Trustee
and to consummate the transactions contemplated hereby. The Note has
been duly executed by the Trustee on behalf of the Trust and, upon the
execution and delivery by the Trustee on behalf of the Trust, the Note
will be a valid and binding agreement of the Purchaser enforceable in
accordance with its terms, except as the enforceability thereof may be
limited by any applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other laws affecting the
enforcement of creditors' rights generally, and by general principles of
equity.
ARTICLE IV
RESTRICTIONS ON DISPOSITION OF THE COMMON SHARES
4.1 RESTRICTED SECURITIES. The Purchaser acknowledges
that the Purchaser is acquiring the Common Shares pursuant to a
transaction exempt from registration under the 1933 Act. The Purchaser
represents, warrants and agrees that all Common Shares acquired by the
Purchaser pursuant to this Agreement are being acquired for investment
without any intention of making a distribution thereof, or of making any
sale or other disposition thereof which would be in violation of the
1933 Act or any applicable state securities law, and that the Purchaser
will not dispose of any of the Common Shares except that the Trustee
will, from time to time, convey a portion of the Common Shares to the
participants in the Plans to satisfy the obligations of the Company
thereunder, and except upon termination of the Trust to the extent that
the Trust then holds any Common Shares, all in compliance with all
provisions of applicable federal and state law regulating the issuance,
sale and distribution of securities.<PAGE>
4.2 LEGEND. Until such time as the Common Shares are
registered pursuant to the provisions of the 1933 Act, any certificate
or certificates representing the Common Shares delivered pursuant to
Section 1.3, will bear a legend in substantially the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended,
and may not be sold, transferred or otherwise disposed
of unless they have first been registered under such Act
or unless an exemption from registration is available."
The Seller may place stop transfer orders against the registration or
transfer of any shares evidenced by such a certificate or certificates
until such time as the requirements of the foregoing are satisfied.
ARTICLE V
CONDITIONS TO CLOSING
5.1 CONDITIONS TO OBLIGATIONS OF THE PURCHASER. The
obligation of the Purchaser to purchase the Common Shares is subject to
the satisfaction of the following conditions on the date of Closing:
(a) The representations and warranties of the Seller
set forth in Article II hereof shall be true and
correct; and if the Closing shall occur on a date
other than the date of this Agreement, the
Purchaser shall have been furnished with a
certificate, dated the date of Closing, to such
effect, signed by an authorized officer of the
Seller;
(b) All permits, approvals, authorizations and
consents of third parties necessary for the
consummation of the transactions herein shall have
been obtained, and no order of any court or
administrative agency shall be in effect which
restrains or prohibits the transactions
contemplated by this Agreement, and no suit, action or
other proceeding by any governmental body or other
person shall have been instituted which questions the
validity or legality of the transactions contemplated
by this Agreement; and<PAGE>
5.2 CONDITIONS TO OBLIGATIONS OF THE SELLER. The
obligation of the Seller to issue, sell and deliver the Common Shares to
the Purchaser is subject to the satisfaction of the following conditions
on the date of Closing:
(a) The representations and warranties of the
Purchaser set forth in Article III hereof shall be
true and correct; and if the Closing shall occur
on a date other than the date of this Agreement,
the Seller shall have been furnished with a
certificate dated the date of Closing, to such
effect, signed by an authorized office of the
Trustee; and
(b) No order of any court or administrative agency
shall be in effect which restrains or prohibits the
transactions contemplated by this Agreement, and no
suit, action or other proceeding by any governmental
body or other person shall have been instituted which
questions the validity or legality of the transactions
contemplated by this Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 EXPENSES. The Seller shall pay all of its expenses,
and it shall pay the Purchaser's expenses, in connection with the
authorization, preparation, execution and performance of this Agreement,
including without limitation the reasonable fees and expenses of the
Trustee, its agents, representatives, counsel, financial advisors and
consultants.
6.2 SURVIVAL OF SELLER'S REPRESENTATIONS AND WARRANTIES.
All representations and warranties made by the Seller to the Purchaser
in this Agreement shall survive the Closing.
6.3 NOTICES. All notices, requests or other
communications required or permitted to be delivered hereunder shall be
in writing, delivered by registered or certified mail, return receipt
requested, as follows:<PAGE>
(a) To the Seller:
Joseph L. Guarriello, Executive Vice
President and General Counsel
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, MD 20850
(b) To the Purchaser:
Katarina Antens-Miller, AVP
Relationship Manager
The Bank of New York
One Wall Street
New York, NY 10286
Any party hereto may from time to time, by written notice given as
aforesaid, designate any other address to which notices, requests or
other communications addressed to it shall be sent.
6.4 SPECIFIC PERFORMANCE. The parties hereto acknowledge
that damages would be an inadequate remedy for any breach of the
provisions of this Agreement and agree that the obligations of the
parties hereunder shall be specifically enforceable, and neither party
will take any action to impede the other from seeking to enforce such
rights of specific performance.
6.5 SUCCESSORS AND ASSIGNS; INTEGRATION; ASSIGNABILITY.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto, and their respective legal
representatives, successors and assigns. This Agreement (a)
constitutes, together with the Note, the Trust Agreement, and any other
written agreements between the Purchaser and the Seller executed and
delivered on the date hereof, the entire agreement between the parties
hereto and supersedes all other prior agreements and understandings,
both written and oral, among the parties, with respect to the subject
matter hereof; (b) shall not confer upon any person other than the
parties hereto any rights or remedies hereunder; and (c) shall not be
assignable by operation of law or otherwise, except that the Trustee may
assign all its rights hereunder to any corporation or other institution
exercising trust powers in connection with any such institution assuming
the duties of a trustee under the Trust.
6.6 GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the state of New York.<PAGE>
6.7 FURTHER ASSURANCES. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do,
or cause to be done, all things necessary, proper or advisable to
consummate and make effective the transactions contemplated by this
Agreement.
6.8 AMENDMENT AND WAIVER. No amendment or waiver of any
provision of this Agreement or consent to departure therefrom shall be
effective unless in writing and signed by the Purchaser and the Seller.
6.9 COUNTERPARTS. This Agreement may be executed in any
number of counterparts with the same effect as if the signatures thereto
were upon one instrument.
6.10 CERTAIN LIMITATIONS. The execution and delivery of
this Agreement and the performance by the Trustee of this Agreement and
under the terms of the Trust have been or will be, effected by the
Trustee in its capacity as Trustee. Nothing in this Agreement shall be
interpreted to increase, decrease or modify in any manner any liability
of the Trustee to the Seller or to any trustee, representative or other
claimant by right of the Seller resulting from the Trustee's performance
of its duties under the constituent instruments of the Trust, and no
personal liability shall be asserted or enforceable against said entity
by reason of any of the covenants, statements or representations
contained in this Agreement.
6.11 INCORPORATION. The terms and conditions of the
Trust Agreement relating to the nature of the responsibilities of the
Trustee and the indemnification of the Trustee by the Seller are
incorporated herein by reference and made applicable to this Agreement.<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this
Agreement on the date and year first above written.
Mid Atlantic Medical Services, Inc.
By: /s/ Joseph L. Guarriello
--------------------------------
Title: Executive Vice President
---------------------------
Attest: /s/ Robert E. Foss
----------------------------
Title: Executive Vice President
---------------------------
The Bank of New York in its capacity
as trustee of the Mid Atlantic
Medical Services, Inc. Stock
Compensation Trust
By: /s/ Wolfgang Strauss
--------------------------------
Title: Vice President
---------------------------
Attest: /s/ Katarina Antens-Miller
----------------------------
Title: AVP
---------------------------<PAGE>
Schedule 1.1
PROMISSORY NOTE
$284,800,000 August 26, 1996
FOR VALUE RECEIVED, the undersigned, The Bank of New York, not in its
individual or corporate capacity but solely in its capacity as Trustee
of the Mid Atlantic Medical Services, Inc. Stock Compensation Trust (the
"Trust") hereby promises on behalf of the Trust to pay to the order of
Mid Atlantic Medical Services, a Delaware corporation (the "Company"),
at the principal offices of the Company, the aggregate principal amount
of $284,800,000 as shown on Schedule A attached hereto as such may be
amended from time to time, with interest in arrears thereon, as
hereinafter provided.
Principal shall be paid in installments in the amounts and on the dates
set forth on the Maturity Schedule attached hereto as Schedule A, the
last such installment due on August 26, 2011 (the fifteenth anniversary
of the Closing); PROVIDED, HOWEVER, that this Note may be prepaid in
whole or in part at any time without penalty; and PROVIDED FURTHER that
the principal amount of this Note shall be forgiven in the event that
the Trust shall have been terminated in accordance with Section 8.2
thereof and the Trustee shall have complied with the requirements of
such Section. Interest on the unpaid principal balance, at an annual
interest rate (the "Interest Rate") equal to 8%, shall be paid
quarterly, in arrears, on each January 15th, April 15th, July 15th and
October 15th commencing August 26, 1996 and shall be calculated on the
basis of a 360-day year of 30-day months. Whenever any payment falls
due on a Saturday, Sunday or public holiday, such payment shall be made
on the next succeeding business day. Certain provisions of the Trust
Agreement made effective as of August 26, 1996 between the Company and
the Trustee relating to the Trust affect the Company's obligations to
make payments of principal and interest on the Note.
This Note shall be construed under the laws of the State of New York.
The undersigned represents and warrants that the indebtedness
represented by this Note was incurred for the purpose of purchasing
shares of Common Stock of the Company.<PAGE>
This Note may not be assigned by the Company, other than by operation of
law, without the prior express written consent of the undersigned.
The Company shall have no recourse whatsoever to any assets of the
Trustee for repayment. The Trustee is entering into this Agreement not
in its individual or corporate capacity but solely as Trustee, and no
personal or corporate liability or personal or corporate
responsibilities are assumed by, or shall at any time be asserted or
enforceable against, the Trustee in its individual or corporate capacity
under, or with respect to, this Agreement.
The Bank of New York not in its
individual or corporate capacity but
solely in its capacity as Trustee of
the Mid Atlantic Medical Services,
Inc. Stock Compensation Trust
By:
--------------------------------
Title:
-----------------------------
ATTEST:
----------------------------
Title:
-----------------------------<PAGE>
SCHEDULE A
Trust Year Principal Payment
---------- -----------------
1997 9,000,000
1998 19,000,000
1999 19,000,000
2000 19,000,000
2001 19,000,000
2002 19,000,000
2003 19,000,000
2004 19,000,000
2005 19,000,000
2006 19,000,000
2007 19,000,000
2008 19,000,000
2009 19,000,000
2010 19,000,000
2011 28,800,000<PAGE>
<PAGE>
PROMISSORY NOTE
$284,800,000 August 26, 1996
FOR VALUE RECEIVED, the undersigned, The Bank of New York, not in its
individual or corporate capacity but solely in its capacity as Trustee
of the Mid Atlantic Medical Services, Inc. Stock Compensation Trust (the
"Trust") hereby promises on behalf of the Trust to pay to the order of
Mid Atlantic Medical Services, a Delaware corporation (the "Company"),
at the principal offices of the Company, the aggregate principal amount
of $284,800,000 as shown on Schedule A attached hereto as such may be
amended from time to time, with interest in arrears thereon, as
hereinafter provided.
Principal shall be paid in installments in the amounts and on the dates
set forth on the Maturity Schedule attached hereto as Schedule A, the
last such installment due on August 26, 2011 (the fifteenth anniversary
of the Closing); PROVIDED, HOWEVER, that this Note may be prepaid in
whole or in part at any time without penalty; and PROVIDED FURTHER that
the principal amount of this Note shall be forgiven in the event that
the Trust shall have been terminated in accordance with Section 8.2
thereof and the Trustee shall have complied with the requirements of
such Section. Interest on the unpaid principal balance, at an annual
interest rate (the "Interest Rate") equal to 8%, shall be paid
quarterly, in arrears, on each January 15th, April 15th, July 15th and
October 15th commencing August 26, 1996 and shall be calculated on the
basis of a 360-day year of 30-day months. Whenever any payment falls
due on a Saturday, Sunday or public holiday, such payment shall be made
on the next succeeding business day. Certain provisions of the Trust
Agreement made effective as of August 26, 1996 between the Company and
the Trustee relating to the Trust affect the Company's obligations to
make payments of principal and interest on the Note.
This Note shall be construed under the laws of the State of New York.
The undersigned represents and warrants that the indebtedness
represented by this Note was incurred for the purpose of purchasing
shares of Common Stock of the Company.<PAGE>
This Note may not be assigned by the Company, other than by operation of
law, without the prior express written consent of the undersigned.
The Company shall have no recourse whatsoever to any assets of the
Trustee for repayment. The Trustee is entering into this Agreement not
in its individual or corporate capacity but solely as Trustee, and no
personal or corporate liability or personal or corporate
responsibilities are assumed by, or shall at any time be asserted or
enforceable against, the Trustee in its individual or corporate capacity
under, or with respect to, this Agreement.
The Bank of New York not in its
individual or corporate capacity but
solely in its capacity as Trustee of
the Mid Atlantic Medical Services,
Inc. Stock Compensation Trust
By: /s/ Wolfgang Strauss
--------------------------------
Title: Vice President
-----------------------------
ATTEST: /s/ Katarina Antens-Miller
----------------------------
Title: AVP
-----------------------------<PAGE>
SCHEDULE A
Trust Year Principal Payment
---------- -----------------
1997 9,000,000
1998 19,000,000
1999 19,000,000
2000 19,000,000
2001 19,000,000
2002 19,000,000
2003 19,000,000
2004 19,000,000
2005 19,000,000
2006 19,000,000
2007 19,000,000
2008 19,000,000
2009 19,000,000
2010 19,000,000
2011 28,800,000<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> $2,523
<SECURITIES> 161,588
<RECEIVABLES> 77,330
<ALLOWANCES> 4,564
<INVENTORY> 0
<CURRENT-ASSETS> 272,464
<PP&E> 44,592
<DEPRECIATION> 19,901
<TOTAL-ASSETS> $340,064
<CURRENT-LIABILITIES> $151,731
<BONDS> 149
0
0
<COMMON> 676
<OTHER-SE> 187,292
<TOTAL-LIABILITY-AND-EQUITY> $340,064
<SALES> $0
<TOTAL-REVENUES> 841,740
<CGS> 0
<TOTAL-COSTS> 750,396
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 926
<INTEREST-EXPENSE> 592
<INCOME-PRETAX> 1,071
<INCOME-TAX> 450
<INCOME-CONTINUING> 621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $621
<EPS-PRIMARY> $.01
<EPS-DILUTED> $.01
</TABLE>
