<PAGE> 1
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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 MARCH 31, 1998, 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
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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 54,414,762 shares of common stock, par value $.01, outstanding as of March
31, 1998.
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<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)
March 31, 1998 December 31, 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,861 $ 3,570
Short-term investments 175,414 152,080
Accounts receivable, net of allowance of $5,268 and $5,180 89,983 84,719
Prepaid expenses, advances and other 19,688 19,294
Deferred income taxes 311 303
----------- -----------
Total current assets 293,257 259,966
Property and equipment, net of accumulated
depreciation of $33,719 and $31,103 58,073 56,964
Statutory deposits 14,835 14,854
Other assets 10,630 10,427
Deferred income taxes 682 612
---------- -----------
Total assets $ 377,477 $ 342,823
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 60 $ 60
Short-term borrowings 2,628 2,249
Accounts payable 18,305 16,878
Medical claims payable 115,712 98,328
Deferred premium revenue 15,463 12,586
Deferred income taxes 3,247 1,800
----------- -----------
Total current liabilities 155,415 131,901
Notes payable 59 74
Deferred income taxes 2,655 2,541
----------- -----------
Total liabilities 158,129 134,516
----------- -----------
Stockholders' equity
Common stock, $.01 par, 100,000,000 shares authorized; 56,772,502 issued and
54,414,762 outstanding at March 31, 1998; 56,772,502 issued and
54,677,862 outstanding at December 31, 1997 567 567
Additional paid-in capital 166,022 162,892
Stock compensation trust (common stock held in trust) (98,497) (101,482)
Treasury stock, 2,357,740 shares at March 31, 1998; 2,094,640 shares at
December 31, 1997 (44,686) (41,211)
Accumulated other comprehensive income (Note 2) 2,657 946
Retained earnings 193,285 186,595
----------- -----------
Total stockholders' equity 219,348 208,307
----------- -----------
Total liabilities and stockholders' equity $ 377,477 $ 342,823
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1997 has been extracted from the
audited financial statements at that date.
See accompanying notes to these financial statements.
<PAGE> 3
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending
March 31, March 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 274,066 $ 271,246
Fee and other 5,095 4,521
Life and short-term disability premium 1,605 1,161
Home health services 5,025 5,066
Investment 3,711 1,171
----------- -----------
Total revenue 289,502 283,165
----------- -----------
Expense
Medical 241,042 244,644
Life and short-term disability claims 993 893
Home health patient services 4,185 3,687
Administrative (including interest expense of $138 and $107) 32,623 32,632
----------- -----------
Total expense 278,843 281,856
----------- -----------
Income before income taxes 10,659 1,309
Provision for income taxes (3,969) (503)
----------- -----------
Net income $ 6,690 $ 806
=========== ===========
Basic earnings per common share (Note 3) $ .14 $ .02
=========== ===========
Diluted earnings per common share (Note 3) $ .14 $ .02
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 4
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ending
March 31, 1998
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 6,690
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 2,878
Provision for bad debts 88
Provision for deferred income taxes 363
Increase in accounts receivable (5,352)
Increase in prepaid expenses, advances, and other (394)
Increase in accounts payable 1,427
Increase in medical claims payable 17,384
Increase in deferred premium revenue 2,877
-----------
Total adjustments 19,271
-----------
Net cash provided by operating activities 25,961
Cash flows used in investing activities:
Purchases of short-term investments (85,541)
Sales of short-term investments 65,038
Purchases of property and equipment (3,734)
Purchases of other assets (590)
Proceeds from sale of assets 153
-----------
Net cash used in investing activities (24,674)
Cash flows provided by financing activities:
Principal payments on notes payable (15)
Increase in short-term borrowings 379
Exercise of stock options 4,173
Stock option tax benefit 1,942
Purchase of treasury stock (3,475)
-----------
Net cash provided by financing activities 3,004
-----------
Net increase in cash and cash equivalents 4,291
Cash and cash equivalents at beginning of period 3,570
-----------
Cash and cash equivalents at end of period $ 7,861
===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 5
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ending
March 31, 1997
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 806
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 2,373
Provision for bad debts 115
Provision for deferred income taxes 85
Loss on sale and disposal of assets 2
Increase in accounts receivable (6,703)
Decrease in prepaid expenses, advances, and other 6,556
Decrease in accounts payable (303)
Increase in medical claims payable 12,989
Increase in deferred premium revenue 2,895
-----------
Total adjustments 18,009
-----------
Net cash provided by operating activities 18,815
Cash flows used in investing activities:
Purchases of short-term investments (54,072)
Sales of short-term investments 45,191
Purchases of property and equipment (6,003)
Maturities of statutory deposits 6
Purchases of other assets (48)
Proceeds from sale of assets 17
-----------
Net cash used in investing activities (14,909)
Cash flows provided by financing activities:
Principal payments on notes payable (14)
Decrease in short-term borrowings (14)
Exercise of stock options 1,534
Stock option tax benefit 730
-----------
Net cash provided by financing activities 2,236
-----------
Net increase in cash and cash equivalents 6,142
Cash and cash equivalents at beginning of period 4,065
-----------
Cash and cash equivalents at end of period $ 10,207
===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 6
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
Maryland, Virginia, the District of Columbia, Delaware, West Virginia, North
Carolina and Pennsylvania. MAMSI and its subsidiaries (collectively referred to
as the "Company") have developed a broad range of managed health care and
related ancillary products and deliver these services through health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), a life and
health insurance company, home health care and home infusion services companies,
a hospice company, a mail-order pharmacy, and part ownership in an outpatient
surgery center.
MAMSI delivers managed health care services principally through HMOs. The HMOs,
MD-Individual Practice Association, Inc. ("M.D. IPA"), Optimum Choice, Inc.
("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc.
of Pennsylvania ("OCIPA") arrange for health care services to be provided to an
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 delivery
network of physicians (called a preferred provider organization or "PPO") to
employers and insurance companies in association with various health plans, and
Mid Atlantic Psychiatric Services, Inc., which provides psychiatric services to
third party payors or self-insured employer groups. 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 and infusion therapy) and mail-order pharmacy services to
MAMSI's HMO members and other payors. HomeCall Hospice Services, Inc. provides
services to terminally ill patients and their families.
NOTE 1 - FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of March 31, 1998, the
consolidated statements of operations for the three months ended March 31, 1998
and 1997, and the consolidated statements of cash flows for the three months
ended March 31, 1998 and 1997 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, 1997 audited consolidated financial statements. The results of
operations for the three month periods ended March 31 are not necessarily
indicative of the operating results for the full year.
Certain balances in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
<PAGE> 7
NOTE 2 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains and losses on the Company's available for sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
During the first quarters of 1998 and 1997, total comprehensive income amounted
to $8,401,000 and $467,000, respectively.
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except share amounts):
Three Months Ended
March 31, March 31,
1998 1997
--------- ---------
Numerator:
Net income $ 6,690 $ 806
Denominator:
Denominator for basic earnings per share
- weighted average shares 46,771,933 45,770,763
Dilutive securities - employee stock options 206,859 726,623
Denominator for diluted earnings per share
- adjusted weighted average shares 46,978,792 46,497,386
Options to purchase approximately 6.9 million shares of common stock at various
prices were outstanding at March 31, 1998 but were not included in the
computation of diluted earnings per share because the option proceeds were
greater than the average market price and, therefore, the effect would be
antidilutive.
On April 15, 1998, the Stock Option Committee of the Company's Board of
Directors authorized a voluntary exchange (the "Exchange") of all existing stock
options with an exercise price of $16.00 or more per share. Each stock option
voluntarily tendered will be replaced with a newly issued stock option priced at
$16.00 per share. As a condition of the Exchange, option holders must agree to
extended vesting of one year. In addition, the newly issued stock options will
be exercisable for one additional year beyond the current expiration date. The
Company has notified its option holders of the availability of the Exchange and
is in the process of soliciting their intent. It is anticipated that
approximately 4.6 million options will be exchanged for a like number of newly
issued options.
NOTE 4 - NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("Statement
131"). Statement 131 significantly changes the way companies report segment
information in financial statements. Because Statement 131 concerns itself only
with how supplemental financial statement information is disclosed in annual and
interim reports, the adoption will not have a material impact on the Company's
consolidated financial statements. Statement 131 is effective for annual
financial statements for fiscal years beginning after December 15, 1997.
<PAGE> 8
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 that the Company is not able to increase its market share at
the anticipated premium rates.
3. The possibility of state or federal budget related mandates that reduce
premiums for Medicaid or Medicare recipients.
4. The potential for increased medical expenses due to: - Increased
utilization by the Company's membership. - Inflation in provider and
pharmaceutical costs. - Federal or state mandates that increase benefits or
limit the Company's oversight ability.
5. 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.
6. The possibility that one of the Company's vendors will experience year 2000
problems that disrupt the Company's operating or administrative systems.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1997
Consolidated net income of the Company was $6,690,000 and $806,000 for the first
quarters of 1998 and 1997, respectively. Diluted earnings per share was $.14 in
the first quarter of 1998 as compared to $.02 in the first quarter of 1997. This
increase in earnings is primarily attributable to an increase in premiums per
member, a reduction in the medical loss ratio and also an increase in investment
income. The medical loss ratio decreased principally due to an increase in
premiums per member and also increased efforts by the Company to control medical
costs through utilization review, enhanced claim adjudication, and increased
claims audit and claims reversal activity. The Company has priced its health
products competitively in order to increase its membership base and thereby
enhance its strategic position in its market place. 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 March 31, 1998 increased approximately $6.3
million or 2.2 percent over the three months ended March 31, 1997. A 2.6 percent
decrease in net average HMO and indemnity enrollment resulted in a decrease of
approximately $7.0 million in health premium revenue while a 3.7 percent
increase in average monthly premium per enrollee, combined for all products,
resulted in a $9.8 million increase in health premium revenue. The reduction in
HMO and indemnity enrollment is principally due to the net effect of the
Company's withdrawal from the Maryland Medicaid Program in mid 1997 and offset
significantly by increases in the Company's commercial members. Management
believes that commercial health premiums should continue to increase over the
next twelve months as the Company continues to increase its commercial
membership and as new and renewing groups are charged higher premium rates due
to legislatively mandated benefit enhancements and general price increases
initiated by the Company. This is a forward-looking statement. See "Forward
Looking Information" above for a description of the risk factors that may effect
health premiums per member.
<PAGE> 9
The Company has implemented increased premium rates across essentially all of
its commercial products, which began to take effect in 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. Commercial
premium rate increases are expected to continue in 1998 at the same rate as
1997, in the range of 5% to 7%. Management believes that these rate increases
may have the effect of slowing the Company's future membership growth. In
addition, management reevaluated premium reimbursement rates with regard to its
Medicare and Medicaid programs. Specifically, effective January 1, 1998, the
Company withdrew from participation in certain areas of the Virginia Medicaid
program. The Company also modified certain benefits for enrollees in its
Medicare program and began to charge additional premiums in certain areas. These
changes contributed to the approximately 19% reduction in the medical loss ratio
for the Medicare program in the first quarter of 1998 as compared to the same
period in 1997.
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 remained relatively stable and contributed
approximately $5.0 million in revenue in the first quarters of 1998 and 1997.
Revenue from life and short-term disability products contributed $1.6 million in
revenue in the first quarter of 1998 as compared to $1.2 million for the same
period in 1997.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased to 88.0 percent for the first quarter of 1998 as compared to
90.2 percent for the comparable period of 1997. On a per member per month basis,
medical expenses increased 1 percent. The decrease in the medical loss ratio is
due to a combination of factors including 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 maximums for health services,
the identification and possible termination of certain providers and specialists
from the delivery network following a continuing intensified peer review
analysis, and also increased premiums per member. The Company believes that it
has taken the appropriate action and implemented appropriate controls to ensure
that future claims are paid at the appropriate amounts although the complexity
of paying claims and the increasing sophistication of providers requires
constant evaluation of historical payment patterns which might indicate improper
payments. Additionally, the Company has greatly expanded its initial health
assessments of new Medicare members after they have enrolled and has also
increased its case management personnel. These initiatives should help to
control the Company's medical loss ratio. The statements in this paragraph and
the preceding paragraphs 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 11.3 percent for the first quarter of 1998 as compared to
11.5 percent for the same period in 1997. Management believes that the
administrative expense ratio will remain near the current level over the next
year. Management's expectation concerning the administrative expense ratio is a
forward-looking statement. The administrative expense ratio is affected by
changes in health premiums and other revenues, development of the Company's
expansion areas and increased administrative activity related to business
volume.
Investment income increased $2.5 million primarily due to an increase in
realized gains on sales of marketable equity securities.
<PAGE> 10
The net margin rate increased from 0.3 percent in the first quarter of 1997 to
2.3 percent in the current quarter. This increase is primarily due to an
increase in premiums per member, a reduction in the medical loss ratio and
increased investment income.
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,
coupled with the Company's operating line-of-credit, will continue to be
sufficient in the future.
The Company's cash and short-term investments increased from $155.7 million at
December 31, 1997 to $183.3 million at March 31, 1998, primarily due to net
income, proceeds from the exercise of stock options and the timing of medical
expense payments which traditionally lag behind increased premiums per member.
Accounts receivable also increased from $84.7 million at December 31, 1997 to
$90.0 million at March 31, 1998, principally due to increased membership.
Medical claims payable increased from $98.3 million at December 31, 1997 to
$115.7 million at March 31, 1998, primarily due to increased membership and
related claims accruals and an increase in medical expenses per member.
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 March 31, 1998, approximately $2.6 million was drawn
against these credit facilities.
Following is a schedule of the short-term capital resources available to the
Company (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 7,861 $ 3,570
Short-term investments 175,414 152,080
Working capital advances to Maryland hospitals 10,635 9,186
----------- -----------
Total available liquid assets 193,910 164,836
Credit line availability 21,147 21,526
----------- -----------
Total short-term capital resources $ 215,057 $ 186,362
=========== ===========
</TABLE>
The Company believes that cash generated from operations along with its current
liquidity and borrowing capabilities are adequate for both current and planned
expanded operations. Certain capital expenditures will be made over the
remainder of 1998 to enhance the Company's computer systems and to make
necessary improvements to new and existing administrative offices. The Company
closed on the sale of an office building in April, 1998 at a price of
approximately $3 million. The Company currently anticipates the sale of another
of its office buildings for approximately $10 million before the end of 1998.
The Company's purchase of an approximately 209,000 square foot office building
in Frederick, Maryland in 1997, and the resulting consolidation of its service
departments in this new facility, made the previously owned buildings
unnecessary for the Company's operations.
<PAGE> 11
In 1997, the Company began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue affects computer systems that have time-sensitive programs
that may not properly recognize the year 2000. This could result in major system
failures or miscalculations. The Company is currently addressing its internal
year 2000 issue with modifications to existing programs. The Company is also
communicating with vendors, financial institutions, software vendors and others
with which it conducts business to help them identify and resolve the year 2000
issue. While the Company has determined that certain of its software programs
require modification, it does not anticipate any future material impact on its
financial statements. The total cost associated with the required modifications
and conversions has been estimated and is not expected to be material to the
Company's results of operations or financial position. The statements in this
paragraph regarding future effects of the year 2000 issue is a forward looking
statement. See "Forward-Looking Information" for a description of risk factors.
At its February 1998 meeting, the Board of Directors authorized a $20 million
stock repurchase program. The Company may purchase its stock on the open market,
through block trades, or in private transactions over the next 12 months. The
program may be discontinued at any time. As of March 31, 1998, the Company has
repurchased approximately 263,000 shares of its common stock for a total cost of
approximately $3.5 million under the stock repurchase program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material developments occurred in any of the previously disclosed legal
proceedings during the quarter ended March 31, 1998.
The Company is involved in various legal actions arising in the normal course of
business, some of which seek substantial monetary damages. After review,
including consultation with legal counsel, management believes that any ultimate
liability that could arise from these other actions will not materially affect
the Company's consolidated financial position or results of operation.
During the quarter ended March 31, 1998, the Company became involved in a
dispute regarding the application of Section 15-1008 of the Insurance Title of
the Annotated Code of Maryland regarding retroactive denial of provider
reimbursements. Based upon the opinion of outside counsel, the Company believes
that it has acted appropriately. However, various providers including the
Maryland Hospital Association have filed complaints with the Maryland Insurance
Administration seeking the retraction of certain claim reversals adjudicated by
the Company. Additionally, the Maryland Insurance Administration has notified
the Company of their opinion which differs with that of the Company. Management
believes that the likelihood of a material adverse outcome from this matter is
remote.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the stockholders of MAMSI was held on April 27, 1998. The
following matters were submitted to a vote of the stockholders during the annual
meeting:
(1) The following individuals were elected to the Board of Directors for a three
year term with the indicated votes:
<TABLE>
<CAPTION>
For Against Abstain
----------- ----------- -----------
<S> <C> <C> <C>
John H. Cook III, M.D. 43,026,612 5,223,408 None
Raymond H. Cypess, D.V.M., Ph.D. 43,026,732 5,223,288 None
Robert E. Foss 43,021,942 5,228,078 None
Edward J. Muhl 42,910,683 5,339,337 None
</TABLE>
Board members whose term of office continued after the meeting are as follows:
Thomas P. Barbera
Francis C. Bruno, M.D.
Stanley M. Dahlman, Ph.D.
Mark D. Groban, M.D.
George T. Jochum
John P. Mamana, M.D.
William M. Mayer, M.D.
Gretchen P. Murdza
James A. Wild
(2) The adoption of the 1998 Non-Qualified Stock Option Plan was ratified by a
count of 37,799,530 affirmative votes, 10,129,737 negative votes and 320,753
abstentions.
(3) The adoption of the 1998 Senior Management Bonus Plan was ratified by a
count of 39,282,905 affirmative votes, 8,428,958 negative votes and 538,157
abstentions.
<PAGE> 13
There were no broker non-votes with respect to the election of directors, the
adoption of the 1998 Non-Qualified Stock Option Plan or the 1998 Senior
Management Bonus Plan.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index on page 15 of the Form 10-Q. (b) There were no reports
filed on Form 8-K during the quarter ended March 31, 1998.
<PAGE> 14
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: May 15, 1998 /s/ Robert E. Foss
----------------------------
Robert E. Foss
Executive Vice President
and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
<PAGE> 15
6(a) List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit In Sequential
Number Description of Document Numbering System
- ------- ----------------------- -------------------
10.94 Form of Agreement between MAMSI and
Employees Granting Options under the
1998 Non-Qualified Stock Option Plan . . . . . .
10.95 Form of Agreement between MAMSI and
George T. Jochum Granting Options under the
1998 Non-Qualified Stock Option Plan . . . . . .
10.96 Form of Agreement between MAMSI and
Non-Employee Directors Granting Options
under the 1998 Non-Qualified Stock Option
Plan . . . . . . . . . . . . . . . . . . . . . .
10.97 Memorandum to Employees and Form for Election
Of Exchange and Repricing of Stock Options . . .
27 Financial Data Schedule for the Three
Months Ended March 31, 1998. . . . . . . . . . .
MID ATLANTIC MEDICAL SERVICES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT FOR EMPLOYEES
AGREEMENT ("Agreement") dated the date indicated on the attached Face
Sheet, by and between Mid Atlantic Medical Services, Inc., a Delaware
corporation ("Corporation"), and the person indicated on the attached Face
Sheet, an employee of the Corporation and/or one of its subsidiaries
("Optionee"). WHEREAS, the Corporation desires to have Optionee continue in its
employ and to provide Optionee with an incentive by sharing in the success of
the Corporation;
WHEREAS, in order to provide such an incentive to its officers and key
employees, the Corporation has adopted the Mid Atlantic Medical Services, Inc.
1998 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the Corporation desires to grant to Optionee under the Plan
options not intended to qualify as "incentive stock options" within the meaning
of Section 422 or any successor provision of the Internal Revenue Code of 1986,
as amended ("Code"); and
WHEREAS, unless otherwise provided herein, capitalized terms used in this
Agreement shall have the meaning given them in the Plan.
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the parties
hereto agree as follows:
1. Number of Shares and Price. The Corporation hereby grants to the
Optionee an option ("Option") to purchase the number of shares of Common Stock
set forth on the attached Face Sheet of this Agreement. The exercise price per
share of Common Stock of the Option shall be as is set forth on the attached
Face Sheet of this Agreement, such price being the Fair Market Value per share
of Common Stock on the Date of Grant of the Option. The Option is not intended
to qualify as an "incentive stock option" under Section 422 of the Code.
2. Term and Exercise. The Option shall expire five (5) years from the
date hereof, subject to earlier termination as set forth in Section 3. Subject
to the provisions of Section 3, the Option shall become exercisable in
installments as set forth on the attached Face Sheet of this Agreement.
3. Exercise of Option Upon Termination of Employment.
(a) Termination of Vested Option Upon Termination of Employment.
(i) Termination. Upon the Optionee's Termination of
Employment, other than by reason of death or Disability, the
Optionee may, within three months from
<PAGE>
the date of such Termination of Employment, exercise all or
any part of the Option to the extent it was exercisable at the
date of Termination of Employment. In no event may the Option
be exercised later than the expiration date described in
Section 2.
(ii) Disability. Upon the Optionee's Disability Date, the
Optionee may, within one year after such Disability Date,
exercise all or a part of the Option, whether or not it was
exercisable on such Disability Date, but only to the extent not
previously exercised. In no event, however, may the Option be
exercised later than the expiration date described in Section 2.
(iii) Death. In the event of the death of the Optionee while
employed by the Corporation, the right of the Optionee's
Beneficiary to exercise the Option in full (whether or not all or
any part of the Option was exercisable as of the date of death,
but only to the extent not previously exercised) shall expire
upon the expiration of one year from the date of the Optionee's
death or, if earlier, on the date of expiration of the Option
determined pursuant to Section 2.
(b) Termination of Unvested Option Upon Termination of
Employment. Except as provided in Sections 3(a)(ii) and 3(a)(iii), to
the extent all or any part of the Option was not exercisable as of the
date of Termination of Employment, the unexercisable portion of the
Option shall expire at the date of such Termination of Employment. (c)
Change of Control. Notwithstanding anything to the contrary in Section
2 or this Section 3, in the event one of the events specified in
Section 8.05(d)(i), (ii), (iii) or (iv) of the Plan occurs, the
provisions of such Section 8.05(d) shall determine when the Option
becomes exercisable, when it may be exercised and when it expires.
4. Exercise Procedures. The Option shall be exercisable by written
notice to the Corporation, which must be received by the Secretary of the
Corporation not later than 5:00 P.M. local time at the principal executive
office of the Corporation on the expiration date of the Option. Such written
notice shall set forth (a) the number of shares of Common Stock being purchased,
(b) the total exercise price for the shares of Common Stock being purchased, (c)
the exact name as it should appear on the stock certificate(s) to be issued for
the shares of Common Stock being purchased, and (d) the address to which the
stock certificate(s) should be sent. The exercise price of shares of Common
Stock purchased upon exercise of the Option shall be paid in full (a) in cash,
(b) by delivery to the Corporation of shares of Common Stock (which shares of
Common Stock must have been held for at least six months), (c) in any
combination of cash and shares of Common Stock, or (d) by delivery of such other
consideration as the Committee deems appropriate and in compliance with
applicable law (including payment in accordance with a cashless exercise program
approved by the Committee). In the event that any shares of Common Stock shall
be transferred to the Corporation to satisfy all or any part of the exercise
price, the part of the exercise price deemed
<PAGE>
to have been satisfied by such transfer of shares of Common Stock shall be equal
to the product derived by multiplying the Fair Market Value as of the date of
exercise times the number of shares of Common Stock transferred to the
Corporation. Any shares of Common Stock tendered in payment shall be duly
endorsed in blank or accompanied by stock powers duly endorsed in blank. The
Optionee may not transfer to the Corporation in satisfaction of the exercise
price any fraction of a share of Common Stock, and any portion of the exercise
price that would represent less than a full share of Common Stock must be paid
in cash by the Optionee. Subject to Section 8 hereof, certificates for the
purchased shares of Common Stock will be issued and delivered to the Optionee as
soon as practicable after the receipt of such payment of the exercise price;
provided, however, that delivery of any such shares of Common Stock shall be
deemed effected for all purposes when a stock transfer agent of the Corporation
shall have deposited such certificates in the United States mail, addressed to
Optionee, at the address set forth on the Face Sheet of this Agreement or to
such other address as Optionee may from time to time designate in a written
notice to the Corporation. The Optionee shall not be deemed for any purpose to
be a shareholder of the Corporation in respect of any shares of Common Stock as
to which the Option shall not have been exercised, as herein provided, until
such shares of Common Stock have been issued to Optionee by the Corporation
hereunder.
5. Plan Provisions Control Option Terms; Modifications. The Option is
granted pursuant and subject to the terms and conditions of the Plan, the
provisions of which are incorporated herein by reference. In the event any
provision of this Agreement shall conflict with any of the terms in the Plan as
constituted on the Date of Grant, the terms of the Plan as constituted on the
Date of Grant shall control. Except as provided in Section 8.05 of the Plan, the
Option shall not be modified after the Date of Grant except by express written
agreement between the Corporation and the Optionee; provided, however, that any
such modification (a) shall not be inconsistent with the terms of the Plan, and
(b) shall be approved by the Committee. No modifications may be made to the
Option while the Optionee is subject to Section 16(b) of the Exchange Act except
in compliance with Rule 16b-3.
6. Limitations on Transfer. The Option may not be assigned or
transferred other than by will, by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code, Title I
of ERISA or the rules thereunder.
7. Taxes. The Corporation shall be entitled to withhold (or secure
payment from the Optionee in lieu of withholding) the amount of any withholding
or other tax required by law to be withheld or paid by the Corporation with
respect to any shares of Common Stock issuable under this Agreement, and the
Corporation may defer issuance of shares of Common Stock upon the exercise of
the Option unless the Corporation is indemnified to its satisfaction against any
liability for any such tax. The amount of such withholding or tax payment shall
be determined by the Committee or its delegate and shall be payable by the
Optionee at such time as the Committee determines. The Optionee may satisfy his
or her tax withholding obligation by (a) having cash withheld from the
Optionee's salary or other compensation payable by the Corporation or a
<PAGE>
Subsidiary, (b) the payment of cash to the Corporation, (c) the payment in
shares of Common Stock already owned by the Optionee valued at Fair Market
Value, and/or (d) the withholding from the Option, at the appropriate time, of a
number of shares of Common Stock sufficient, based upon the Fair Market Value of
such shares of Common Stock, to satisfy such tax withholding requirements. The
Committee shall be authorized, in its sole and absolute discretion, to establish
such rules and procedures relating to any such withholding methods as it deems
necessary or appropriate, including, without limitation, rules and procedures
relating to elections to have shares of Common Stock withheld upon exercise of
the Option to meet such withholding obligations.
8. No Exercise in Violation of Law. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she will not
exercise the Option granted hereby, and that the Corporation will not be
obligated to issue any shares of Common Stock to the Optionee hereunder, if the
exercise thereof or the issuance of such shares of Common Stock shall constitute
a violation by the Optionee or the Corporation of any provision of any law or
regulation of any governmental authority. Any determination in this connection
by the Committee shall be final, binding and conclusive.
9. Securities Law Compliance. The Optionee agrees, for the Optionee and
his or her Beneficiaries, with respect to all shares of Common Stock acquired
pursuant to the terms and conditions of the Plan and the Option (or any other
shares of Common Stock issued pursuant to a stock dividend or stock split
thereon or any securities issued in lieu thereof or in substitution or exchange
therefor), that the Optionee and his or her Beneficiaries will not sell or
otherwise dispose of these shares except pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Act"), or except in
a transaction that, in the opinion of counsel for the Corporation, is exempt
from registration under the Act. Further, the Corporation shall not be required
to sell or issue any shares under the Option if, in the opinion of the
Corporation, (a) the issuance of such shares would constitute a violation by the
Optionee or the Corporation of any applicable law or regulation of any
government authority or (b) the consent or approval of any governmental body is
necessary or desirable as condition of, or in connection with, the issuance of
such shares.
10. Adjustments. The existence of the Option shall not affect in any
way the right or power of the Corporation or its directors or shareholders to
make or authorize any or all adjustments, recapitalizations, reorganizations, or
other changes in the Corporation's capital structure or its business, or any
merger or consolidation of the Corporation, or any issuance of bonds,
debentures, preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
11. Dispute Resolution. As a condition of granting the Option, the
Optionee agrees, for the Optionee and his or her Beneficiaries, that any dispute
or disagreement that may arise under or
<PAGE>
as a result of or pursuant to the Plan and the Option shall be determined by the
Committee in its sole discretion, and any interpretation by the Committee of the
terms of the Plan and Option shall be final, binding and conclusive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
__________________________ By: __________________________________
George T. Jochum, Chairman,
President and Chief Executive Officer
By: __________________________________
Member of the Stock Option Committee
WITNESS: OPTIONEE
_______________________ _______________________________________
(Signature)
<PAGE>
FACE SHEET
Notice Addresses:
Optionee:
------------------------
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: ___________
Total Options Granted: ___________
Exercise Price Per Share of Common Stock: $__________
Vesting Schedule:
Number of Shares
Date (Non-Cumulative)
06/01/1999 ___
06/01/2000 ___
06/01/2001 ___
Expiration Date:
Optioned shares must be purchased within five (5) years from the date
of grant, which is _________. That is, all options must be exercised by
__________.
MID ATLANTIC MEDICAL SERVICES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT FOR GEORGE T. JOCHUM
AGREEMENT ("Agreement") dated this ____ day of ________, 199_ by and
between Mid Atlantic Medical Services, Inc., a Delaware corporation
("Corporation"), and George T. Jochum, the Chairman of the Board, President and
Chief Executive Officer of the Corporation ("Optionee").
WHEREAS, the Corporation desires to have Optionee continue in its
employ and to provide Optionee with an incentive by sharing in the success of
the Corporation;
WHEREAS, in order to provide such an incentive to its officers and key
employees, the Corporation has adopted the Mid Atlantic Medical Services, Inc.
1998 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the Corporation desires to grant to Optionee under the Plan
options not intended to qualify as "incentive stock options" within the meaning
of Section 422 or any successor provision of the Internal Revenue Code of 1986,
as amended ("Code"); and
WHEREAS, unless otherwise provided herein, capitalized terms used in
this Agreement shall have the meaning given them in the Plan;
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the parties
hereto agree as follows:
1. Number of Shares and Price. The Corporation hereby grants to the
Optionee an option ("Option") to purchase the number of shares of Common Stock
set forth on the attached Face Sheet of this Agreement. The exercise price per
share of Common Stock of the Option shall be as is set forth on the attached
Face Sheet of this Agreement, such price being the Fair Market Value per share
of Common Stock on the Date of Grant of the Option. The Option is not intended
to qualify as an "incentive stock option" under Section 422 of the Code.
2. Term and Exercise. The Option shall expire five (5) years from the
date hereof, subject to earlier termination as set forth in Section 3. Subject
to the provisions of Section 3, the Option shall become exercisable in
installments as set forth on the attached Face Sheet of this Agreement.
3. Exercise of Option Upon Termination of Employment.
(a) Termination of Vested Option Upon Termination of Employment.
(i) Termination. Upon the Optionee's Termination of
Employment for any reason other than for Cause (as hereinafter
defined), the Optionee may exercise all or any part of the
<PAGE>
Option (whether or not it was exercisable at the date of Termination of
Employment), but only to the extent not previously exercised, until the Option
terminates in accordance with Section 2.
(ii) Cause. In the event the Optionee's Termination
of Employment for Cause, the Optionee may exercise all or a part of the
Option, but only to the extent the Option was exercisable on the date of
Termination of Employment. In no event, however, may the Option be exercised
later than the expiration date described in Section 2.
(iii)Definition of Cause."Cause" means (A) failure or
refusal by the Optionee to perform his duties in accordance with his Employment
Agreement with the Corporation, including without limitation, the duty to keep
the Board adequately informed and to it such written reports as it may
reasonably require; (B) any material act of self-dealing between the Optionee
and the Corporation's business that is not disclosed in full to, and approved
by, the Board; (C) misrepresentation of the performance and affairs of the
Corporation and other matters affecting the Corporation; (D) deliberate
falsification by the Optionee of any records or reports; (E) fraud on the part
of the Optionee; (F) theft, embezzlement or misappropriation by the Optionee of
any funds of the Corporation, or conviction of the Optionee for any felony; (G)
execution by the Optionee of any document transferring or creating any material
lien or encumbrance on any property of the Corporation without authorization of
the Board; or (H) such other act as should cause material harm to the business
or property of the Corporation unless action was taken in good faith such as
with a reasonable belief that such act was in the best interest of the
Corporation. (b) Termination of Unvested Option Upon Termination of Employment.
Except as provided in Section 3(a)(i), to the extent all or any part of the
Option was not exercisable as of the date of Termination of Employment, the
unexercisable portion of the Option shall expire at the date of such Termination
of Employment. (c) Change of Control. Notwithstanding anything to the contrary
in Section 2 or this Section 3, in the event one of the events specified in
Section 8.05(d)(i), (ii), (iii) or (iv) of the Plan occurs, the provisions of
such Section 8.05(d) shall determine when the Option becomes exercisable, when
it may be exercised and when it expires.
4. Exercise Procedures. The Option shall be exercisable by written
notice to the Corporation, which must be received by the Secretary of the
Corporation not later than 5:00 P.M. local time at the principal executive
office of the Corporation on the expiration date of the Option. Such written
notice shall set forth (a) the number of shares of Common Stock being purchased,
(b) the total exercise price for the shares of Common Stock being purchased, (c)
the exact name as it should appear on the stock certificate(s) to be issued for
the shares of Common Stock being purchased, and (d) the address to which the
stock certificate(s) should be sent. The exercise price of shares of Common
Stock purchased upon exercise of the Option shall be paid in full (a) in cash,
(b) by delivery to the Corporation of shares of Common Stock (which shares of
Common Stock must have been held for at least six months), (c) in any
combination of cash and shares of Common
<PAGE>
Stock, or (d) by delivery of such other consideration as the Committee deems
appropriate and in compliance with applicable law (including payment in
accordance with a cashless exercise program approved by the Committee). In the
event that any shares of Common Stock shall be transferred to the Corporation to
satisfy all or any part of the exercise price, the part of the exercise price
deemed to have been satisfied by such transfer of shares of Common Stock shall
be equal to the product derived by multiplying the Fair Market Value as of the
date of exercise times the number of shares of Common Stock transferred to the
Corporation. Any shares of Common Stock tendered in payment shall be duly
endorsed in blank or accompanied by stock powers duly endorsed in blank. The
Optionee may not transfer to the Corporation in satisfaction of the exercise
price any fraction of a share of Common Stock, and any portion of the exercise
price that would represent less than a full share of Common Stock must be paid
in cash by the Optionee. Subject to Section 8 hereof, certificates for the
purchased shares of Common Stock will be issued and delivered to the Optionee as
soon as practicable after the receipt of such payment of the exercise price;
provided, however, that delivery of any such shares of Common Stock shall be
deemed effected for all purposes when a stock transfer agent of the Corporation
shall have deposited such certificates in the United States mail, addressed to
Optionee, at the address set forth on the last page of this Agreement or to such
other address as Optionee may from time to time designate in a written notice to
the Corporation. The Optionee shall not be deemed for any purpose to be a
shareholder of the Corporation in respect of any shares of Common Stock as to
which the Option shall not have been exercised, as herein provided, until such
shares of Common Stock have been issued to Optionee by the Corporation
hereunder.
5. Plan Provisions Control Option Terms; Modifications. The Option is
granted pursuant and subject to the terms and conditions of the Plan, the
provisions of which are incorporated herein by reference. In the event any
provision of this Agreement shall conflict with any of the terms in the Plan as
constituted on the Date of Grant, the terms of the Plan as constituted on the
Date of Grant shall control. Except as provided in Section 8.05 of the Plan, the
Option shall not be modified after the Date of Grant except by express written
agreement between the Corporation and the Optionee; provided, however, that any
such modification (a) shall not be inconsistent with the terms of the Plan, and
(b) shall be approved by the Committee. No modifications may be made to the
Option while the Optionee is subject to Section 16(b) of the Exchange Act except
in compliance with Rule 16b-3.
6. Limitations on Transfer. The Option may not be assigned or
transferred other than by will, by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code, Title I
of ERISA or the rules thereunder.
7. Taxes. The Corporation shall be entitled to withhold (or secure
payment from the Optionee in lieu of withholding) the amount of any withholding
or other tax required by law to be withheld or paid by the Corporation with
respect to any shares of Common Stock issuable under this Agreement, and the
Corporation may defer issuance of shares of Common Stock upon the exercise of
the Option unless the Corporation is indemnified to its satisfaction against any
liability
<PAGE>
for any such tax. The amount of such withholding or tax payment shall be
determined by the Committee or its delegate and shall be payable by the Optionee
at such time as the Committee determines. The Optionee may satisfy his or her
tax withholding obligation by (a) having cash withheld from the Optionee's
salary or other compensation payable by the Corporation or a Subsidiary, (b) the
payment of cash to the Corporation, (c) the payment in shares of Common Stock
already owned by the Optionee valued at Fair Market Value, and/or (d) the
withholding from the Option, at the appropriate time, of a number of shares of
Common Stock sufficient, based upon the Fair Market Value of such shares of
Common Stock, to satisfy such tax withholding requirements. The Committee shall
be authorized, in its sole and absolute discretion, to establish such rules and
procedures relating to any such withholding methods as it deems necessary or
appropriate, including, without limitation, rules and procedures relating to
elections to have shares of Common Stock withheld upon exercise of the Option to
meet such withholding obligations.
8. No Exercise in Violation of Law. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she will not
exercise the Option granted hereby, and that the Corporation will not be
obligated to issue any shares of Common Stock to the Optionee hereunder, if the
exercise thereof or the issuance of such shares of Common Stock shall constitute
a violation by the Optionee or the Corporation of any provision of any law or
regulation of any governmental authority. Any determination in this connection
by the Committee shall be final, binding and conclusive.
9. Securities Law Compliance. The Optionee agrees, for the Optionee and
his or her Beneficiaries, with respect to all shares of Common Stock acquired
pursuant to the terms and conditions of the Plan and the Option (or any other
shares of Common Stock issued pursuant to a stock dividend or stock split
thereon or any securities issued in lieu thereof or in substitution or exchange
therefor), that the Optionee and his or her Beneficiaries will not sell or
otherwise dispose of these shares except pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Act"), or except in
a transaction that, in the opinion of counsel for the Corporation, is exempt
from registration under the Act. Further, the Corporation shall not be required
to sell or issue any shares under the Option if, in the opinion of the
Corporation, (a) the issuance of such shares would constitute a violation by the
Optionee or the Corporation of any applicable law or regulation of any
government authority or (b) the consent or approval of any governmental body is
necessary or desirable as condition of, or in connection with, the issuance of
such shares.
10. Adjustments. The existence of the Option shall not affect in any
way the right or power of the Corporation or its directors or shareholders to
make or authorize any or all adjustments, recapitalizations, reorganizations, or
other changes in the Corporation's capital structure or its business, or any
merger or consolidation of the Corporation, or any issuance of bonds,
debentures, preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer
<PAGE>
of all or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
11. Dispute Resolution. As a condition of granting the Option, the
Optionee agrees, for the Optionee and his or her Beneficiaries, that any dispute
or disagreement that may arise under or as a result of or pursuant to the Plan
and the Option shall be determined by the Committee in its sole discretion, and
any interpretation by the Committee of the terms of the Plan and Option shall be
final, binding and conclusive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
__________________________ By: __________________________________
Joseph L. Guarriello,
Executive Vice President,
General Counsel
and Secretary
By: __________________________________
Member of the Stock Option Committee
WITNESS: OPTIONEE
- -------------------------- _________________________________________
George T. Jochum
<PAGE>
FACE SHEET
Notice Addresses:
Optionee:
George T. Jochum
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: _________________
Total Options Granted: _________________
Exercise Price per share of Common Stock: $________________
Vesting Schedule:
Number of Shares
Date (Non-Cumulative)
06/01/1999 ________________
06/01/2000 ________________
06/01/2001 ________________
Expiration Date:
Optioned shares must be purchased within five (5) years from the date
of grant, which is _________. That is, all options must be exercised by
__________.
MID ATLANTIC MEDICAL SERVICES, INC.
STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS
AGREEMENT ("Agreement") dated this 1st day of May, 1998 by and between
Mid Atlantic Medical Services, Inc., a Delaware corporation ("Corporation"), and
the person indicated on the attached Face Sheet, a non-employee director of the
Corporation and/or one of its subsidiaries ("Optionee").
WHEREAS, the Corporation desires to have Optionee continue to serve on
its Board of Directors and to provide Optionee with an incentive by sharing in
the success of the Corporation;
WHEREAS, in order to provide such an incentive to its key employees
and non-employee directors, the Corporation has adopted the Mid Atlantic Medical
Services, Inc. 1998 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the option granted hereby is not intended to qualify as an
"incentive stock option" within the meaning of Section 422 or any successor
provision of the Internal Revenue Code of 1986, as amended; and
WHEREAS, unless otherwise provided herein, capitalized terms used in
this Agreement shall have the meaning given them in the Plan;
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the parties
hereto agree as follows:
1. Number of Shares and Price. The Corporation hereby grants to the
Optionee an option ("Option") to purchase the number of shares of Common Stock
set forth on the attached Face Sheet of this Agreement. The exercise price per
share of Common Stock of the Option shall be as is set forth on the attached
Face Sheet of this Agreement, such price being the Fair Market Value per share
of Common Stock on the Date of Grant of the Option. The Option is not intended
to qualify as an "incentive stock option" under Section 422 of the Code.
2. Term and Exercise. The Option shall expire five (5) years from the
date hereof. The Option shall become exercisable in installments as set forth on
the attached Face Sheet of this Agreement; provided, however, that, if the
Optionee is removed for Cause, the Option shall cease to continue to become
exercisable on or after the date of such removal. If the Optionee's service with
the Corporation terminates for any reason or if the Optionee ceases to be a
Non-Employee Director, the Option shall continue to become exercisable in
accordance with the preceding sentence and may be exercised until the Option
expires in accordance with the first sentence of this Section 2. Accordingly, if
the Optionee is removed for Cause, he or she may continue to exercise the Option
until the Option expires in accordance with the first sentence of this Section
2, but only to the extent that (a) the Option became exercisable prior to the
date of such removal and (b) it was not previously exercised.
<PAGE>
Notwithstanding anything to the contrary in this Section 2, in the
event one of the events specified in Section 8.05(d)(i), (ii), (iii) or (iv) of
the Plan occurs, the provisions of such Section 8.05(d) shall determine when the
Option becomes exercisable, when it may be exercised and when it expires.
3. Exercise Procedures. The Option shall be exercisable by written
notice to the Corporation, which must be received by the Secretary of the
Corporation not later than 5:00 P.M. local time at the principal executive
office of the Corporation on the expiration date of the Option. Such written
notice shall set forth (a) the number of shares of Common Stock being purchased,
(b) the total exercise price for the shares of Common Stock being purchased, (c)
the exact name as it should appear on the stock certificate(s) to be issued for
the shares of Common Stock being purchased, and (d) the address to which the
stock certificate(s) should be sent. The exercise price of shares of Common
Stock purchased upon exercise of the Option shall be paid in full (a) in cash,
(b) by delivery to the Corporation of shares of Common Stock (which shares of
Common Stock must have been held for at least six months), (c) in any
combination of cash and shares of Common Stock, or (d) by delivery of such other
consideration as the Committee deems appropriate and in compliance with
applicable law (including payment in accordance with a cashless exercise program
approved by the Committee). In the event that any shares of Common Stock shall
be transferred to the Corporation to satisfy all or any part of the exercise
price, the part of the exercise price deemed to have been satisfied by such
transfer of shares of Common Stock shall be equal to the product derived by
multiplying the Fair Market Value as of the date of exercise times the number of
shares of Common Stock transferred to the Corporation. Any shares of Common
Stock tendered in payment shall be duly endorsed in blank or accompanied by
stock powers duly endorsed in blank. The Optionee may not transfer to the
Corporation in satisfaction of the exercise price any fraction of a share of
Common Stock, and any portion of the exercise price that would represent less
than a full share of Common Stock must be paid in cash by the Optionee. Subject
to Section 7 hereof, certificates for the purchased shares of Common Stock will
be issued and delivered to the Optionee as soon as practicable after the receipt
of such payment of the exercise price; provided, however, that delivery of any
such shares of Common Stock shall be deemed effected for all purposes when a
stock transfer agent of the Corporation shall have deposited such certificates
in the United States mail, addressed to Optionee, at the address set forth on
the last page of this Agreement or to such other address as Optionee may from
time to time designate in a written notice to the Corporation. The Optionee
shall not be deemed for any purpose to be a shareholder of the Corporation in
respect of any shares of Common Stock as to which the Option shall not have been
exercised, as herein provided, until such shares of Common Stock have been
issued to Optionee by the Corporation hereunder.
4. Plan Provisions Control Option Terms; Modifications. The Option is
granted pursuant and subject to the terms and conditions of the Plan, the
provisions of which are incorporated herein by reference. In the event any
provision of this Agreement shall conflict with any of the terms in the Plan as
constituted on the Date of Grant, the terms of the Plan as constituted on the
Date of Grant shall control. Except as provided in Section 8.05 of the Plan, the
Option shall not be modified after the Date of Grant except by express written
agreement between the Corporation and the Optionee; provided, however, that any
such modification (a) shall not be
2
<PAGE>
inconsistent with the terms of the Plan, and (b) shall be approved by the
Committee. No modifications may be made to the Option while the Optionee is
subject to Section 16(b) of the Exchange Act except in compliance with Rule
16b-3.
5. Limitations on Transfer. The Option may not be assigned or
transferred other than by will, by the laws of descent and distribution, or
pursuant to a qualified domestic relations order as defined by the Code, Title I
of ERISA or the rules thereunder.
6. Taxes. The Corporation shall be entitled to withhold (or secure
payment from the Optionee in lieu of withholding) the amount of any withholding
or other tax required by law to be withheld or paid by the Corporation with
respect to any shares of Common Stock issuable under this Agreement, and the
Corporation may defer issuance of shares of Common Stock upon the exercise of
the Option unless the Corporation is indemnified to its satisfaction against any
liability for any such tax. The amount of such withholding or tax payment shall
be determined by the Committee or its delegate and shall be payable by the
Optionee at such time as the Committee determines. The Optionee may satisfy his
or her tax withholding obligation by (a) having cash withheld from the
Optionee's salary or other compensation payable by the Corporation or a
Subsidiary, (b) the payment of cash to the Corporation, (c) the payment in
shares of Common Stock already owned by the Optionee valued at Fair Market
Value, and/or (d) the withholding from the Option, at the appropriate time, of a
number of shares of Common Stock sufficient, based upon the Fair Market Value of
such shares of Common Stock, to satisfy such tax withholding requirements. The
Committee shall be authorized, in its sole and absolute discretion, to establish
such rules and procedures relating to any such withholding methods as it deems
necessary or appropriate, including, without limitation, rules and procedures
relating to elections to have shares of Common Stock withheld upon exercise of
the Option to meet such withholding obligations.
7. No Exercise in Violation of Law. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she will not
exercise the Option granted hereby, and that the Corporation will not be
obligated to issue any shares of Common Stock to the Optionee hereunder, if the
exercise thereof or the issuance of such shares of Common Stock shall constitute
a violation by the Optionee or the Corporation of any provision of any law or
regulation of any governmental authority. Any determination in this connection
by the Committee shall be final, binding and conclusive.
8. Securities Law Compliance. The Optionee agrees, for the Optionee and
his or her Beneficiaries, with respect to all shares of Common Stock acquired
pursuant to the terms and conditions of the Plan and the Option (or any other
shares of Common Stock issued pursuant to a stock dividend or stock split
thereon or any securities issued in lieu thereof or in substitution or exchange
therefor), that the Optionee and his or her Beneficiaries will not sell or
otherwise dispose of these shares except pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Act"), or except in
a transaction that, in the opinion of counsel for the Corporation, is exempt
from registration under the Act. Further, the Corporation shall not be required
to sell or issue any shares under the Option if, in the opinion of the
Corporation, (a) the issuance of such shares would constitute a violation by the
Optionee or the Corporation of any
3
<PAGE>
applicable law or regulation of any government authority or (b) the consent or
approval of any governmental body is necessary or desirable as condition of, or
in connection with, the issuance of such shares.
9. Adjustments. The existence of the Option shall not affect in any way
the right or power of the Corporation or its directors or shareholders to make
or authorize any or all adjustments, recapitalizations, reorganizations, or
other changes in the Corporation's capital structure or its business, or any
merger or consolidation of the Corporation, or any issuance of bonds,
debentures, preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
10. Dispute Resolution. As a condition of granting the Option, the
Optionee agrees, for the Optionee and his or her Beneficiaries, that any dispute
or disagreement that may arise under or as a result of or pursuant to the Plan
and the Option shall be determined by the Committee in its sole discretion, and
any interpretation by the Committee of the terms of the Plan and Option shall be
final, binding and conclusive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
__________________________ By: ___________________________________
George T. Jochum, Chairman,
President and Chief Executive Officer
By: ____________________________________
Member of the Stock Option Committee
WITNESS: OPTIONEE
- -------------------------- ____________________________________
4
<PAGE>
FACE SHEET
Notice Addresses:
Optionee:
-----------------------
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: _________________
Total Options Granted: _________________
Exercise Price per share of Common Stock: $________________
Vesting Schedule:
Number of Shares
Date (Non-Cumulative)
06/01/1999 ___
06/01/2000 ___
06/01/2001 ___
Expiration Date:
Optioned shares must be purchased within five years from the date of
grant, which is May 1, 1998. That is, all options must be exercised by April 30,
2003.
TO: ALL STOCK OPTION PLAN PARTICIPANTS
FROM: GEORGE JOCHUM
DATE: APRIL 15, 1998
I am pleased to announce that effective as of April 15, 1998, MAMSI's Stock
Option Committee of the Board of Directors authorized the voluntary exchange of
all options whose current exercise price is in excess of $16 per share for newly
issued options with an exercise price of $16 per share, this program will not
include my options or the Board's options.
I am committed to retaining our valuable and contributing employees and it has
been proven by our past experience that stock options have been a key in our
success at keeping our good people. While this decision may be criticized by
some of MAMSI's current shareholders, I believe it is imperative to the
Company's future success. I personally look forward to continuing to work with
you toward MAMSI's continued growth.
All newly issued options will have an exercise price of $16 per share. As a
condition to the exchange, option holders must agree to an extended vesting.
This means that options which may have been vested, will on exchange, be
unvested for a period of one year. Additionally, the new options will be
exercisable for an additional year beyond the current expiration date. This, of
course, means that you must remain an employee until the options vest. Each
employee may elect to exchange their current options.
As an example, shares granted on May 13, 1996, which originally vested equally
on June 1, 1997, June 1, 1998 and June 1, 1999, will be replaced with options
which vest 2/3 on June 1, 1999 and 1/3 in June 1, 2000. Additionally, the new
option would be exercisable until May 1, 2002.
For your options to be exchanged, you will be required to turn in your old
options for the new options. All participants will be notified of this process,
which should begin in the next few weeks. In the meantime, if you have any
questions, please save them for the Manager's Meeting to be held on Tuesday,
April 22, 1998.
<PAGE>
April 21, 1998
ACTION REQUIRED BY APRIL 28, 1998
George T. Jochum
Chairman, President and CEO
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, MD 20850
Dear George:
I have received your memorandum dated April 15, 1998 in which MAMSI
offered each option holder the opportunity to voluntarily exchange previously
issued options whose exercise price is $16.00 or more per share for new options
whose exercise price will be $16.00 per share. I wish to (select one only):
[ ] Accept this offer for all qualifying options and surrender all
qualifying options. For all options surrendered, I waive all right,
title and interest that I have in those options and understand that the
tendered options are no longer in force or effect.
[ ] Accept the offer for options granted on the following dates only and
surrender all rights, title and interest in those options
_________________________ (insert dates of those to be surrendered) and
reject your offer for all other options.
[ ] I reject this offer and elect to retain the current options unchanged.
To the extent that I accept your offer, I understand that the vesting
dates and expiration dates of the newly issued options will be different (and
later than) those dates in the options that I am surrendering. I have reviewed
your memorandum of April 15, 1998 and understand the example included therein. I
understand that agreements evidencing the newly issued options will be sent to
me shortly and that these new options agreements will govern my rights in the
newly issued options. Furthermore to the extent that I accept the offer, the
newly issued options will be granted effective on the date noted below, the date
I have accepted the offer.
Very truly yours,
- ------------------------------------
Signature
- ------------------------------------
Name
- ------------------------------------
Address ONCE AN ELECTION IS MADE, NO CHANGES
WILL BE ACCEPTED
- ------------------------------------
Social Security Number
- ------------------------------------
Date
<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 MARCH 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,861
<SECURITIES> 175,414
<RECEIVABLES> 89,983
<ALLOWANCES> 5,268
<INVENTORY> 0
<CURRENT-ASSETS> 293,257
<PP&E> 58,073
<DEPRECIATION> 33,719
<TOTAL-ASSETS> 377,477
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0
0
<COMMON> 567
<OTHER-SE> 218,781
<TOTAL-LIABILITY-AND-EQUITY> 377,477
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<TOTAL-REVENUES> 289,502
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<TOTAL-COSTS> 246,220
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