<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] For fiscal year ended DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] For the transition period from to
Commission file number 1-13340
Mid Atlantic Medical Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1481661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 Taft Court, Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
(301) 294-5140
(Registrant's telephone number, including area code) Securities registered
pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- ---------------------
Common Stock, $0.01 par value The New York Stock
per share. Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ ]
Aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity February 27,
1998: Approximately $531 million.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
54,677,862 shares of common stock as of February 27, 1998
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders to be
held on April 27, 1998 is incorporated by reference into Part III of this Form
10-K.
<PAGE> 3
FORM 10-K
INDEX
ITEM NO. DISCLOSURE REQUIRED PAGE
PART I
Item 1 Business .............................................. 4
Item 2 Properties ............................................ 17
Item 3 Legal Proceedings ..................................... 17
Item 4 Submission of Matters to a Vote of Security Holders ... 17
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 18
Item 6 Selected Financial Data .............................. 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation ................. 20
Item 7a Quantitative and Qualitative Disclosures About
Market Risk ........................................ 26
Item 8 Financial Statements and Supplementary Data .......... 27
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 48
PART III
Item 10 Directors and Executive Officers of the Registrant ... 49
Item 11 Executive Compensation ............................... 49
Item 12 Security Ownership of Certain Beneficial Owners
and Management ..................................... 49
Item 13 Certain Relationships and Related Transactions ....... 49
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 50
<PAGE> 4
PART I
ITEM 1. BUSINESS
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company for
subsidiaries active in managed health care and other life and health insurance
related activities. MAMSI and its subsidiaries (the "Company") have developed a
broad range of managed health care and related ancillary products and deliver
these services through health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs"), a life and health insurance company, a home
health care company, a pharmaceutical services company and a hospice company.
The Company also has a partnership interest in an outpatient surgery center.
GENERAL DEVELOPMENT OF BUSINESS
MAMSI was incorporated in Delaware in 1986 to serve as a holding company for MD
- - Individual Practice Association, Inc. ("M.D. IPA") and Physicians Health Plan
of Maryland, Inc. ("PHP- MD"). MAMSI made an exchange offer for all of the
issued and outstanding shares of common stock of M.D. IPA and PHP-MD in 1987.
M.D. IPA, a Federally qualified HMO, was organized as a nonstock corporation in
1979. M.D. IPA operated as a non-profit organization until 1985 when it amended
its articles of incorporation and was reorganized into a stock corporation.
PHP-MD, an individual practice association ("IPA"), was organized as a nonstock
corporation in 1979 to provide physician and other medical services to M.D. IPA
enrollees. PHP-MD operated as a non-stock organization until it amended its
articles of incorporation and was reorganized into a stock corporation in 1984.
MANAGED HEALTH ORGANIZATIONS
MAMSI's primary business is providing access to and managing health care through
its HMOs and its life and health insurance company. MAMSI currently offers HMO
coverage through four licensed HMO subsidiaries - M.D. IPA, Optimum Choice, Inc.
("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc.
of Pennsylvania ("OCIPA") and offers life and health insurance through MAMSI
Life and Health Insurance Company ("MAMSI Life").
M.D. IPA became a licensed HMO in Maryland in 1981 and in Virginia in 1985. M.D.
IPA's present service area (which includes all geographic areas where the HMO
has received regulatory approval to provide health care services) includes the
entire state of Maryland, the District of Columbia and most counties and cities
in Virginia including the Northern Virginia, Richmond/Tidewater and Roanoke
areas ("HMO Service Area"). In addition to serving governmental entities such as
the Office of Personnel Management of the United States Government under the
Federal Employees Health Benefit Plan, M.D. IPA generally provides coverage to
the larger commercial group market.
OCI, a non-Federally qualified HMO, became a licensed HMO in Maryland in 1988,
in Virginia in 1990, in Delaware in 1993 and in West Virginia in 1994. OCI
generally operates within the small business market segment, which is comprised
of both small and large group employers and also covers Medicaid and Medicare
recipients. OCI's present commercial service area includes the entire states of
Maryland and Delaware, the District of Columbia, most counties and cities in
Virginia, and certain areas of West Virginia. For the Medicare Program, OCI is
licensed in Northern Virginia, Maryland, Delaware and the District of Columbia.
OCCI, a non-Federally qualified HMO, became a licensed HMO in North Carolina in
1995 and South Carolina in 1996. OCCI operates in both the small and large group
commercial market. OCCI's present service area includes certain areas of North
Carolina and South Carolina.
<PAGE> 5
OCIPA, a non-Federally qualified HMO, became a licensed HMO in Pennsylvania in
1996. OCIPA operates in both the small and large group commercial market.
OCIPA's present service area includes five counties in south-central
Pennsylvania.
MAMSI Life, a life and health insurance company, is licensed in over 30 states
and actively markets in the states in which MAMSI has licensed HMO's. MAMSI Life
sells group health insurance as well as a preferred point of service product to
large and small employers and individuals. MAMSI Life also sells group term life
insurance as well as short-term disability insurance.
GENERAL
HMOs typically provide or arrange for the provision of comprehensive medical
care (including physician and hospital care) to enrollees for a fixed, prepaid
premium regardless of the amount of care provided. Enrollees generally receive
care from participating primary care physicians ("PCPs") who, as required, refer
enrollees to participating specialists and hospitals. HMOs require patients to
utilize participating physicians and other participating health care providers.
This allows HMOs to negotiate favorable rates and control utilization to a
greater extent than traditional health insurers, while monitoring and enhancing
the quality of care provided to enrollees.
The goal of an HMO is to combine quality health care with management controls
designed to encourage efficient and economical use of health care services. Such
controls include monitoring physician services, hospital admissions and lengths
of stay and maximizing the use of non-hospital based medical services. Because
an HMO generally receives fixed monthly premiums from its enrollees regardless
of the health care services provided, an HMO has an incentive to maintain the
health of its enrollees, while carefully monitoring expenses through the
implementation of various cost control strategies and effective management.
MAMSI's HMO provider network is organized as an Individual Practice Association
("IPA"). Under the IPA model, the HMO contracts with a broadly dispersed group
of physicians to provide medical services to enrollees in the physicians' own
offices and in hospitals; the physicians are generally paid on a capitated or a
negotiated fee maximum basis. Physicians may contract directly with the HMO or
through a designated organization that, in turn, contracts with the HMO.
MAMSI'S HMO PRODUCTS
MAMSI's HMOs offer a range of benefit plans for providing health care to
enrollees. Generally, enrollees arrange for coverage through their employer.
However, group enrollees can convert their coverage to an individual contract
upon separation from their employer. There is no assurance that HMO agreements
with employers will be renewed annually or that, within each employer group, the
HMO will not experience disenrollment by individual enrollees. MAMSI's HMOs also
offer individual coverage to the commercial, Medicaid and Medicare markets.
Under traditional HMO coverage, the enrollee selects a PCP from the HMO's
provider network. All medical care provided to the enrollee must be authorized
and coordinated by the PCP. Generally, the enrollee pays a copayment for all PCP
and specialist office visits and may also be required to pay a copayment for
hospital admissions and emergency room services. Except in emergencies,
enrollees are generally required to utilize only those participating
professional and institutional health care providers that have contracted with
the IPA (see further discussion under "HMO Arrangements with Physician and
Institutional Providers").
MAMSI's HMOs, in cooperation with MAMSI Life, a wholly owned subsidiary of
MAMSI, also offer point-of-service coverage (the "preferred plan"), which is
marketed to appeal to the following customers:
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1. Individuals who will not consider a closed delivery system. These
individuals prefer the flexibility of the traditional indemnity plan but are
also seeking a lower-cost alternative such as an HMO.
2. Small to mid-sized employers who are looking to limit the number of health
care plan options. In this case, the HMO would seek to be offered as an
exclusive health care provider.
In the preferred plan, enrollees have the choice of seeking care from the PCP or
from any physician of their choice (point-of-service option). Whenever care is
provided under the point-of-service option and the enrollee visits a provider
outside of the HMO network, MAMSI Life, which underwrites this indemnity
benefit, generally covers the lesser of 80% of the bill or 100% of the
established fee maximum for the service provided. The enrollee is responsible
for the remainder of the charge.
Additionally, MAMSI, through its subsidiaries, offers hybrid products to large
employer groups. These products offer the ability to tailor employee health care
offerings by varying benefit designs, funding methods and insurance risk. Hybrid
products generally compete in the so-called self-funded employer plan
marketplace. A typical MAMSI hybrid product combines the use of capitated PCPs
to serve as gatekeepers, employer funding of specialist and institutional claims
on an "as paid" basis and MAMSI's underwriting of risk of loss on a specific
and/or aggregate stop loss basis.
OCI offers HMO coverage to recipients of Title XIX Medical Assistance
("Medicaid") in certain states. The Medicaid plan operates in a manner similar
to the traditional HMO plan. The participating states pay a monthly premium
based upon the age, sex and geographic location of the recipients for which OCI
provides comprehensive medical coverage. At December 31, 1997, MAMSI's Medicaid
service area includes certain areas of Virginia, nine counties in West Virginia
and Mecklenburg and Gaston Counties in North Carolina.
Effective January 1, 1997, because of insufficient reimbursement rates, OCI
withdrew from the mandated Medicaid Program in the Tidewater area of Virginia
which reduced the Company's membership by approximately 26,000 members. In July,
1997, OCI declined to participate in the State of Maryland mandated Medicaid
program, again due to insufficient rates, which resulted in OCI's Maryland
Medicaid membership of approximately 38,000 being reassigned to other managed
care organizations. Effective January 1, 1998, OCI withdrew from the Northern
Virginia area due to insufficient reimbursement rates. It is anticipated that
this will reduce OCI's Virginia Medicaid membership by approximately 6,000
members.
Under all coverage options, enrollees receive the following basic benefits:
primary and specialist physician services; hospital services such as diagnostic
tests, x-rays, drugs, medication, nursing and maternity services; outpatient
diagnostic tests such as laboratory tests, x-rays, and allergy testing and
injections.
OCI also offers health coverage to Title XVIII Medicare recipients. Under a
contractual arrangement with the United States Health Care Financing
Administration ("HCFA"), OCI receives a monthly premium based upon age, sex,
county of residence and enrollment status for which OCI provides comprehensive
medical coverage to those individuals. Currently, approximately only 11% of the
Medicare recipients in MAMSI's Medicare service area (which includes Delaware,
the District of Columbia, several counties in Northern Virginia, and most of the
State of Maryland) are covered through MAMSI or other HMOs. Effective January 1,
1997, OCI reduced the size of its Medicare service area. This reduction in
service area reduced the Company's Medicare membership by approximately 5,000
members. Effective January 1, 1998, the Company again reduced the size of its
service area and changed the benefit structure. It is anticipated that these
changes will further reduce MAMSI's Medicare membership.
<PAGE> 7
The Company's total health plan (managed care full risk and hybrid, ASO and
indemnity health insurance) membership in the HMOs and MAMSI Life decreased to
approximately 691,000 at December 31, 1997 from 745,000 at December 31, 1996, a
decrease of 7 percent.
The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 1997:
Employer Groups Served 30,500
Population of Aggregate HMO
Service Area 33,500,000
Service Area Penetration 2.1%
Primary Care Physicians 5,200
Specialist Physicians 14,200
Other Affiliated Health
Care Providers 7,500
Hospitals and Outpatient
Facilities 1,500
Pharmacies 8,800
A significant portion of the Company's premium revenue is derived from Federal,
state and local government agencies including governmental employees and
Medicaid and Medicare recipients. For the years ended December 31, 1997, 1996
and 1995, approximately 11%, 11% and 7%, respectively, of premium revenue was
derived from Federal government agencies, and approximately 25%, 26% and 21%,
respectively, was derived from state and local government agencies located in
the Company's service area.
HMO ARRANGEMENTS WITH PHYSICIAN AND INSTITUTIONAL PROVIDERS
M.D. IPA and OCI contract with PHP-MD to provide physician services to their
enrollees while OCCI (North Carolina and South Carolina) and OCIPA
(Pennsylvania) generally contract directly with providers. The HMOs are
ultimately responsible for ensuring that an adequate number of physicians and
other health care providers are maintained in order to service enrollees.
The Company contracts with many different kinds of health care providers,
including primary care and specialist physicians, dentists, social workers,
psychologists, physical therapists and podiatrists. PCPs are paid a monthly
capitation payment for each enrollee who has chosen that PCP. This capitation
payment varies according to the age and sex of the enrollee and according to the
primary care designation of the provider chosen by the enrollee. The primary
care designations on which premiums are based fall into one of two types: (1)
family and general practice, pediatrics and internal medicine, and (2)
obstetrics and gynecology.
PCPs may receive, in addition to capitation payments, fees for specified
procedures and an annual payment that is based on a Quality Review
Reconciliation. This payment generally does not exceed 3 percent of their annual
capitation payments. The reconciliation evaluates the physician's practice
performance as well as quality issues such as grievance rates from members,
sanctions by a MAMSI HMO, and member transfer rate. As part of the Quality
Review Reconciliation, the Company provides a quarterly report to each PCP that
compares the physician's practice performance based on outpatient and inpatient
expenses to those of his/her peers and allows the PCP not only to monitor the
number of referrals consistent with quality medical standards, but also to
evaluate the most cost-effective consultants and facilities within each
specialty area.
Prior to July, 1, 1995, specialist providers and participating non-physician
providers were compensated on a discounted fee maximum basis. This compensation
was limited to an established maximum rate that reflected the amount that
similar providers of a similar service would typically charge. Effective July 1,
1995, the Company modified the method used to compensate providers and adopted
the Medicare Resource Based Relative Value Scale
<PAGE> 8
methodology of provider reimbursement. This methodology, which applies generally
to specialist health claims, has resulted in the lowering of some reimbursement
levels, mainly those having to do with office and hospital-based procedures,
while increasing payments for many evaluation and management tasks. Management
believes that this change has allowed the Company to continue to be competitive
within its marketplace.
The HMOs have contractual arrangements with a combined total of 1,500
facilities, consisting of 300 hospitals and 1,200 non-hospital facilities, as of
December 31, 1997. These facilities are located in the Company's HMO Service
Area. Contracts with facilities are renewable annually.
HMO ARRANGEMENTS FOR OTHER SERVICES
The HMOs have contracted with a number of entities to arrange for the provision
of other services:
EMERGENCY CARE - Enrollees may receive urgent care services as an alternative to
hospital emergency room treatment. Enrollees can use local urgent care centers
and any hospital emergency room in emergency situations.
HOME HEALTH CARE - A number of medical care providers are engaged to provide
health care services (such as nursing, pediatric, neonatal, orthopedic,
psychiatric, geriatric, dialysis treatments, physical therapy, speech therapy
and respiratory therapy) at the home of the enrollee. MAMSI's home health care
subsidiary, HomeCall, Inc. ("HomeCall"), provides these services throughout much
of the Company's service area.
PHARMACEUTICAL ASSISTANCE - The Company has arrangements with participating
pharmacies so that an enrollee is only responsible for the deductibles and/or
copayments that are indicated on his or her enrollment card. The Company's
pharmaceutical company, HomeCall Pharmaceutical Services, Inc. provides home
infusion, delivery of drugs to physician offices and mail order prescription
services to its members and other payors.
LABORATORY TESTING - The Company has an arrangement with a laboratory that
conducts much of the laboratory work required by HMO providers. Enrollees in
MAMSI's PPO are similarly referred to this laboratory for testing.
DENTAL - The Company has several dental products available including a dental
indemnity product available from MAMSI Life, subcontracted capitated
arrangements with a dental HMO, and a discount dental services network through a
dental PPO.
QUALITY ASSESSMENT/IMPROVEMENT AND COST CONTAINMENT
MAMSI conducts a multidisciplinary approach to its Quality Assessment/Quality
Improvement ("QA/QI") Program, utilizing the resources of all of its
subsidiaries to ensure the provision of quality health care and services to its
HMO enrollees in an appropriate and cost-efficient manner.
MAMSI recognizes the importance of a Continuous Quality Improvement Program to
determine and allocate appropriate resources that will have the greatest impact
for the members. The QA/QI Program is designed to meet and serve the needs of
employers, members and providers as well as to monitor the timeliness,
appropriateness and effectiveness of services via ongoing and systematic reviews
of key indicators and aspects of care. The QA/QI Program conducts member
satisfaction surveys, identifies opportunities for improvements in providing
care, adopts strategies to improve outcomes and monitors the improvement to
report progress.
<PAGE> 9
MAMSI's QA/QI Committee, which operates under the direction and oversight of
MAMSI's Board of Directors, includes administrative, clinical and provider
representation. The Committee evaluates numerous quality related issues and
outcomes measuring overall services provided to enrollees.
In addition, MAMSI utilizes several cost control and quality review mechanisms.
Provider applications are reviewed by a Credentials Committee in order to
determine whether the applicant meets MAMSI's criteria, including Board
Certification or eligibility.
MAMSI maintains a physician review process to determine whether the needed
levels of medical service are being provided in a timely and efficient manner.
The Company conducts medical reviews to monitor the quality of care provided.
The Company also monitors the hospital and out-of-plan referrals issued by
primary care providers.
In most situations, prior authorization must be obtained for non-emergency
hospital admissions. Failure to secure prior authorization for non-emergency
hospital admissions of enrollees may cause claims to be denied, and in some
situations, providers may be sanctioned. Prior to admission for non-emergency
hospital services, MAMSI applies certain medical criteria to authorize the
admission.
After admission of an HMO enrollee, MAMSI monitors the course of hospital
treatment and coordinates discharge planning in the hope of preventing unneeded
use of medical resources. Although the Utilization Management staff is not
permitted to interfere with a physician's medical judgment regarding the course
of treatment, if the physician decides to extend an enrollee's stay beyond that
authorized, the physician must provide medical justification for the necessity
of such proposed action and obtain specific approval.
The HMOs have established a grievance procedure to respond to enrollee and
provider complaints. Enrollees are encouraged to use this procedure before
proceeding further with a complaint. Once this procedure is exhausted, any
unresolved complaint or grievance may be settled by binding arbitration rather
than through the courts. There is a similar grievance procedure for physician
complaints.
In 1993, MAMSI invited the National Committee for Quality Assurance ("NCQA"), a
private, non-profit organization, to evaluate the Company's methodologies in an
effort to receive NCQA accreditation. NCQA accreditation is a voluntary process.
In the 1993 review, the Company did not meet certain of NCQA's criteria and,
therefore, did not receive NCQA accreditation. In response, MAMSI adopted
methodologies and programs designed to respond to concerns and questions raised
in NCQA's assessment. The Company requested the NCQA to perform another
accreditation review which took place in December of 1996. In May, 1997, NCQA
informed the Company that its flagship HMOs received one year accreditation. The
Company has implemented the Health Plan and Employer Data and Information Set
("HEDIS") 3.0 which represents a core set of performance measures developed by
NCQA to serve the employer as a purchaser. In addition, in October, 1997 the
Maryland Health Care Access and Cost Commission released the results of
Maryland's first ever statewide HMO report card. MAMSI's Maryland HMOs exceeded
the state wide average in overall satisfaction, accessibility and quality. In
another survey of member satisfaction taken by the U.S. Office of Personnel
Management, federal employees expressed satisfaction with the Company's
federally qualified HMO.
The Company's home health care and home infusion subsidiaries underwent
voluntary accreditation review by the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO") during 1995. Full accreditation status was
awarded as a result of this process.
COMPETITION AND MARKETING STRATEGY
The health care industry is characterized by intense competition. MAMSI
recognizes the possibility that other entities with greater resources may enter
into competition with MAMSI
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in the future by either entering its HMO Service Area or by designing
alternative health care delivery systems. HMOs compete not only with other HMOs
and managed care organizations such as provider sponsored organizations, but
also with insurance companies that offer indemnity insurance products.
MAMSI's HMOs compete with approximately 21 HMOs or other prepaid alternative
health care delivery systems that have a presence in at least one of the cities
or counties in MAMSI's non expansion service areas. The following table sets
forth MAMSI's best estimate of 1997 enrollment of HMOs operating in its non
expansion HMO Service Areas. Certain of the HMOs are part of a larger entity and
the enrollees estimated herein include only those in MAMSI's HMO Service Area.
<TABLE>
<CAPTION>
Approximate
Number
HMO Plan Type of Enrollees
- ------------- --------- ------------
<S> <C> <C>
Mid Atlantic Medical Services, Inc.* .......... IPA 547,000
Kaiser Permanente Health Care Program ......... Group 518,000
NYLCARE of the Mid Atlantic.................... IPA 439,000
FreeState Health Plan** ....................... IPA 270,000
Trigon ........................................ IPA 261,000
Prudential Healthcare.......................... IPA 176,000
Optima/Sentara Health Plans.................... IPA/Staff 176,000
AETNA/U.S. Healthcare.......................... IPA 166,000
United Healthcare ............................. IPA 91,000
George Washington University Health Plan ...... Group 60,000
Southern Health Services (Coventry Corp.) ..... IPA 53,000
Capital Care***................................ IPA 72,000
CIGNA Health Plans ............................ IPA 70,000
Qualchoice .................................... IPA 54,000
Other HMOs .................................... Various 259,000
</TABLE>
* - Includes individuals covered by the Company's HMOs only.
** - This company is owned by Blue Cross/Blue Shield of Maryland.
*** - This company is owned by Blue Cross/Blue Shield of the National Capital
Area.
MAMSI's HMOs compete with other HMOs and insurance companies on the basis of
price, network and range of services offered to enrollees. PHP-MD competes with
the same entities and with other IPAs for physician services. PHP-MD believes
that its capitation payments to PCPs and the fee for service payments to
specialists are competitive with other HMOs. MAMSI believes that the freedom
IPA-model HMOs offer their enrollees in choosing from a greater number of
physicians constitutes a competitive advantage over group or staff model HMOs.
The ability to retain and attract enrollees will depend, in part, on how present
enrollees assess their benefit packages, quality of service, provider network,
rates and the HMOs' responsiveness to enrollee needs.
MAMSI subsidiaries employed approximately 455 full-time individuals who provide
marketing services for the Company's products as of December 31, 1997. MAMSI's
marketing strategy includes identifying and contacting employers in its HMO
Service Area. In addition, the Company employs prospecting, telemarketing,
employer group consultation, referrals by consultants, and the use of a minimum
number of selected brokers to acquire new accounts. Since 1994, the Company's
strategy has included reducing the use of brokers for new business while
increasing its internal sales force. New members acquired by the Company's
dedicated sales force accounted for 48 percent of total large group new members
and 97 percent of total small group new members in 1997.
<PAGE> 11
RISK MANAGEMENT
With the exception of certain small group markets, OCI uses underwriting
criteria as a part of its risk management efforts. Underwriting is the process
of analyzing the risk of enrolling employer groups in order to establish an
appropriate premium rate. Utilizing underwriting criteria, OCI seeks to avoid
contracting with employers that are likely to experience an actuarially higher
than expected need for medical care. OCI's use of underwriting techniques is
restricted in certain situations by state small group reform legislation (see
further discussion under "Government Regulation").
The Company maintains professional, directors and officers, errors and
omissions, general liability and property insurance coverage in amounts believed
to be adequate. The Company requires participating hospitals to maintain
professional liability coverage and physicians to have malpractice insurance. A
professional liability insurance policy provides coverage in the event that
legal action is taken against any entity as a result of medical malpractice
committed by a physician.
In addition, MAMSI's HMOs reduce the financial impact of catastrophic losses by
maintaining reinsurance coverage for hospital costs. The reinsurer indemnifies
80% of the eligible in and out of service area medical expenses in excess of
$200,000 per enrollee per year up to a lifetime maximum of $2,000,000 in
eligible medical costs.
Through June 30, 1996, PHP-MD generally placed 5% to 15% of the payments due to
participating physicians in a Claims Reserve Risk Pool. The Claims Reserve Risk
Pool constitutes a financial risk-sharing arrangement among the participating
physicians and PHP-MD. Amounts held in the Claims Reserve Risk Pool were
distributed from time to time by PHP-MD to participating physicians if, in the
judgment of PHP-MD's Board of Directors, PHP-MD's financial condition permits
such distribution. Effective July 1, 1996, Maryland regulations eliminated the
use of such risk pools by HMOs, therefore, commencing on that date the majority
of PHP-MD payments to physicians are not reduced. Amounts placed in such risk
pools, in jurisdictions where it is still permitted, are minor. The following
table sets forth information regarding the portion of the amount in the Claims
Reserve Risk Pool that was distributed to participating physicians in each
calendar year.
Percentage
Distributed
Year to Providers
- ---- ------------
1990 16
1991 5
1992 4
1993 59
1994 58
1995 4
1996 0
1997 0
GOVERNMENT REGULATION
MAMSI's HMOs are subject to state and, in some instances, Federal regulation.
Among the areas regulated are: (i) premium rate setting; (ii) benefits provided;
(iii) marketing; (iv) provider contracts; (v) quality assurance and utilization
review programs; (vi) adherence to confidentiality and medical records
requirements; (vii) enrollment requirements; and (viii) financial reserves and
other fiscal solvency requirements.
<PAGE> 12
Under applicable law, HMOs must generally provide services to enrollees
substantially on a fixed, prepaid basis without regard to the actual degree of
utilization of services. The Company generally fixes the premiums charged to
employers for a 12 month period and revises the premium with each renewal. In
setting premiums, the Company forecasts health care utilization rates based on
the relevant demographics and also considers competitive conditions and the
average number of enrollees in the employer group. In addition to these
premiums, enrollees also make copayments to providers as required.
Although premiums established may vary from account to account through composite
rate factors and special treatment of certain broad classes of enrollees,
Federal regulations generally prohibit Federally qualified HMOs from traditional
experience rating of accounts on a retrospective basis. Consistent with the
practices of other Federally qualified HMOs, M.D. IPA, in some situations, bases
the premiums it charges employers in part on the age, sex and geographic
location of the enrolled employees. M.D. IPA believes that its premiums are
competitive with other HMOs and health insurers and its health coverage is a
better value for members because of the range of physician and hospital
selection and other benefits provided.
M.D. IPA contracts with the Office of Personnel Management ("OPM") to provide or
arrange health services under the Federal Employees Health Benefit Program
("FEHBP"). The contract with OPM and applicable government regulations establish
premium rating requirements for the FEHBP. The premiums established under the
OPM contract are subject to periodic review and audit to determine if they were
established in compliance with the community rating and other requirements under
the program.
MAMSI's HMOs must file periodic reports with, and are subject to periodic review
by, state regulatory authorities. Although MAMSI's HMOs are not regulated
specifically as insurance companies, they must comply with certain provisions of
state insurance laws as well as other laws specifically enacted to regulate
HMOs.
MAMSI Life, the Company's insurance subsidiary, is domiciled in Maryland and is
licensed in over 30 states. MAMSI Life is subject to regulation by the
department of insurance in each state in which it is licensed. These regulations
subject MAMSI Life to extensive review of the terms, administration and
marketing of insurance products offered and minimum net worth and deposit
requirements. In addition, MAMSI Life is required to file periodic reports and
is subject to periodic audits and continuing oversight. The offering of certain
new insurance products may require the approval of regulatory agencies.
The Company's home health care operations are regulated principally in four
areas: home health care licensing; certification for participation in private
insurance and government reimbursement programs; employee licensure and training
requirements; and Federal occupational safety guidelines. The Company believes
that it is in compliance with all applicable regulations, which include
possessing the required Certificates of Need in all locations in which such
certificates are required. Additionally, the Company's infusion and mail order
prescription businesses have obtained the necessary licenses and permits to
operate as a full service retail pharmacy.
MAMSI's customers include employee health benefit plans subject to the Employee
Retirement Income Security Act of 1974 ("ERISA"). To the extent that the Company
has discretionary authority in the operation of these plans, the Company could
be considered a plan fiduciary under ERISA. Plan fiduciaries are barred from
engaging in various prohibited transactions, including self-dealing. They are
also required to conduct the operations of employee benefit plans in accordance
with each plan's terms.
Due to the continued increase in health care costs and the inability of many
individuals to obtain health care insurance, numerous proposals relating to
health care reform have been made, and additional proposals may be introduced,
in the United States Congress and the legislatures of the states in which the
Company operates or may seek to operate.
<PAGE> 13
Recently, the "Health Insurance Portability and Accountability Act of 1996,
Public Law 104- 191", commonly called the Kennedy-Kassebaum Bill for its primary
sponsors, was enacted. This bill establishes certain Federal requirements for
large group, small group, and individual health benefit plans, and applies not
only to insurers and HMOs but also to ERISA plans.
Kennedy-Kassebaum is intended to make coverage more portable and available by
limiting pre-existing condition requirements; providing special enrollment
periods for employees who lose other coverage or whose family status changes;
prohibiting group plans from denying an individual coverage or charging a higher
premium based on the individual's health status or history; and by guaranteeing
coverage availability and renewability in certain circumstances in the small
group and individual markets. Kennedy-Kassebaum also allows for the
establishment of Medical Savings Accounts; increases the penalties for health
care fraud and abuse; and calls for standardized health care information in
order to reduce administrative costs.
The effect of Kennedy-Kassebaum differs from state to state. In the group
market, state laws remain in effect unless they prevent the application of the
new federal requirements, and in the individual market, state laws govern if the
Health and Human Services Secretary determines that they provide an "acceptable
alternative mechanism" to the federal requirement. This means that in those
states, like Maryland, where state reforms have already been enacted, the
legislation has little, if any, effect in the small group market, but may have
some effect in the individual market. In other states, the legislation has a
greater effect.
Most of the provisions of Kennedy-Kassebaum took effect on July 1, 1997, but
some, like the provisions pertaining to Medical Savings Accounts, took effect
earlier and others, like administrative simplification, took effect later.
In recent years, state legislatures in the Company's service area have been
active in health care reform legislation targeted at the small group market,
i.e., usually for groups of 2 to 50 employees. This small group reform is now in
place in Maryland, Virginia, Delaware and North Carolina, but not in
Pennsylvania, Washington, D.C. or West Virginia. Although different in many of
the details, this type of legislation generally requires all HMOs and insurers
that offer small group coverage to accept all small employers who apply for
coverage and to guarantee coverage to their employees seeking coverage
regardless of their health status. The legislation also requires renewal of
these small group employer plans, limits rate renewal increases, mandates
adjusted community rating and eliminates pre-existing condition limitations
either entirely or within a short period of time, usually six months. In
addition, many states have begun to legislate certain mandated benefits like
minimum hospital length of stays and required coverages.
The Company believes that the current political environment in which it operates
will result in continued legislative scrutiny of health care reform and may lead
to additional legislative initiatives. The Company is unable to predict the
ultimate impact on the Company of any Federal or state restructuring of the
health care delivery or health care financing systems, but such changes could
have a material adverse impact on the operations and financial condition of the
Company.
The District of Columbia, which has not previously regulated HMOs, enacted
legislation effective July 1, 1997, providing for regulatory oversight similar
to that currently provided by other states. The Company does not anticipate any
significant negative impact on its operations because of the new regulatory
oversight in the District of Columbia.
PREFERRED PROVIDER ORGANIZATIONS
MAMSI offers PPO coverage through two subsidiaries: Alliance PPO, Inc.
("Alliance") and Mid Atlantic Psychiatric Services, Inc. ("MAPSI").
<PAGE> 14
PPOs allow enrollees to receive care from participating physicians at
contractually negotiated rates. A PPO is different from an HMO in that a PPO
does not assume any financial risk from medical utilization nor does it
typically process claims payments to providers. All medical charges are paid
directly by the payor, which can be a self-funded employer, a health benefits
trust fund or another health insurance company. In return for access to the
PPO's network, the PPO charges the payor either a per employee rate or a
percentage of the savings of actual claims processed for the services accessed.
MAMSI's PPOs provide access to substantially the same provider network as
MAMSI's HMOs.
A PPO operates by being incorporated into an employer's current benefit program,
and offers some or all of the following: access to physician, hospital and
facility services; utilization management and quality assurance; and claims
screening and repricing. The employer determines the level of the benefits and
any applicable copayments.
Alliance is marketed primarily to and through insurance companies, insurance
brokers, consultants, third party administrators ("TPAs"), self-insured
employers and union trusts. The advantages of a TPA marketing approach are
minimized marketing costs and maximized market coverage through established
TPA-employer relationships. Alliance also works directly with employers and
unions that are self-insured and uses direct marketing efforts. The major
competition comes from other PPOs and individual insurance carriers. At December
31, 1997, Alliance had contracts with approximately 20,900 employer groups that
had access to the entire IPA provider network.
The MAPSI PPO is comprised of providers specializing in mental health and
substance abuse care. MAPSI's products are marketed directly to TPAs,
self-insured groups, brokers, indemnity plans, union funds and consultants. In
addition, MAPSI contracts with indemnity insurers that want to offer groups a
managed care mental health product. MAPSI believes it has a competitive
advantage with its unique mental health screening process that offers the
employer the benefit of enhanced coordinated treatment for employees as well as
increased cost savings. MAPSI's major competitors include Merit Behavioral
Health, Inc., Green Spring Mental Health and MCC Inc. At December 31, 1997,
MAPSI had a provider network of approximately 4,000 psychiatrists,
psychologists, social workers, and other affiliated licensed mental health
providers.
Alliance and MAPSI are most often marketed jointly and the prospective purchaser
usually also purchases the MAPSI PPO if the Alliance PPO is purchased. The total
number of lives covered under one or both of these PPO products as of December
31, 1997 was approximately 1,006,000.
PPOs are not subject to HMO regulations by virtue of their business. However,
PPOs are subject to certain state regulations governing the provision of PPO
services such as mandatory state registration. It is possible that PPOs may be
subject to increased regulatory oversight in the future.
OTHER PRODUCTS
MAMSI Life currently underwrites the indemnity coverage of the HMO's preferred
plans in addition to offering stand-alone indemnity health and dental insurance,
aggregate and specific stop loss insurance for self-insured groups, and group
life, accidental death and short-term disability policies. In addition, in 1995
MAMSI Life began providing an administrative services only ("ASO") product to
the State of Maryland. ASO business consists of allowing access to MAMSI's
provider network, without gatekeeper PCPs, and the payment of claims. MAMSI has
no insurance risk on this product. MAMSI Life holds insurance licenses in over
30 jurisdictions including Maryland, Virginia, the District of Columbia, West
Virginia, Delaware and North Carolina. MAMSI Life also became licensed in
Pennsylvania in 1995.
<PAGE> 15
In October, 1994, MAMSI acquired all of the outstanding stock of HomeCall and
its wholly owned subsidiary, FirstCall, Inc. ("FirstCall"), for approximately
$10 million, including direct expenses. HomeCall is a state licensed, Medicare
certified home health agency. The combined operations of HomeCall and FirstCall
include 17 branch locations that serve virtually all of Maryland, the District
of Columbia, Northern Virginia and the Panhandle area of West Virginia. HomeCall
achieved full accreditation from the Joint Commission of Accreditation of
Healthcare Organizations ("JCAHO"), following its survey of all services in
November, 1995.
Also during 1994, the Company formed a home infusion services company, HomeCall
Pharmaceutical Services, Inc. ("HCPS"), which received its pharmacy license in
1994 and its Federal license from the Drug Enforcement Agency in 1995.
HomeCall, FirstCall and HCPS provide services that are generally lower cost
alternatives to institutional treatment and care. The Company believes that it
will provide better care to its members and reduce its medical costs by
substituting, where medically appropriate, in- home medical treatment for
treatment in an institutional setting.
Medical services provided by HomeCall, FirstCall and HCPS include skilled
nursing, advanced nursing in support of infusion therapy, maternal/infant
nursing, physical, speech and occupational therapy, medical social work,
nutrition consultation and home health care aides. Services provided by HCPS
include a comprehensive range of in home drug infusion therapies, the delivery
of infusion ready drugs for physician office based infusion therapy, mail order
pharmacy (as described below) and some hospice (as described below).
In April, 1996, HCPS started a mail-order pharmacy, HomeCall Mail Rx, which
received its pharmacy license and its Federal license in 1996. HomeCall Mail Rx
fills and delivers prescription oral medications via common carrier to patients
in their homes. Approximately 12,000 prescriptions are filled each month.
In November, 1996, the Company started HomeCall Hospice Services, Inc.
("Hospice"), which received its Maryland state license to operate a general
hospice care program on December 3, 1996. Based in Columbia, Maryland, Hospice
was organized to address the needs of terminally ill patients and their
families. This hospice program will provide services to individuals in the
comfort of their homes.
Hospice currently serves the Baltimore and Washington, D.C. metropolitan areas.
It is the goal of Hospice to extend its service delivery area to all
geographical areas served by MAMSI. The addition of hospice services complements
MAMSI's other home care products by having a full range of services available to
its members.
In addition to providing in-home medical care to the Company's members,
HomeCall, FirstCall, Hospice and HCPS will continue to provide services to other
payors, including insurance companies, other HMOs and individuals.
The Company also has an equity interest in an ambulatory surgery center located
in Rockville, Maryland. The surgery center conducts outpatient surgery and
services to HMO enrollees and other patients.
<PAGE> 16
A summary of MAMSI's membership enrollment in all product lines is as follows:
<TABLE>
<CAPTION>
MEMBERSHIP DATA AT DECEMBER 31
---------------------------------
PRODUCT LINE 1995 1996 1997
- ------------ ---------------------------------
(in thousands)
<S> <C> <C> <C>
Commercial HMO (1) 430.1 430.8 398.1
Hybrid HMO (2) 94.5 106.7 103.5
Medicaid 91.0 82.5 34.0
Medicare 6.0 14.4 11.2
Indemnity 23.6 99.2 132.7
ASO (3) 13.2 11.0 11.0
------- ------- -------
658.4 744.6 690.5
PPO (4) 825.0 935.0 1,006.0
------- ------- -------
Total Membership 1,483.4 1,679.6 1,696.5
======= ======= ========
</TABLE>
(1) Commercial HMO includes traditional HMO and point-of-service members.
(2) Hybrid HMO includes any business that uses MAMSI's network and gatekeeper
PCPs, utilization management services, claims adjudication and payment services
and that has a self-funded component. Generally, these products include specific
and/or aggregate stop loss provisions.
(3) ASO includes administrative services only business without gatekeeper PCPs
and no assumption of insurance risk by any MAMSI affiliate.
(4) PPO includes all business whereby access is granted to MAMSI's provider
network. MAMSI assumes no risk and does not provide claims payment services on
this business.
INVESTMENTS
The majority of the Company's investments are held by its state regulated
subsidiaries to provide capital for those subsidiaries' operations and to
satisfy capital, surplus and deposit requirements of the HMO and insurance laws
of the various states in which the Company is licensed. HMO and insurance laws
generally protect consumers of insurance products with one of the principal
focuses being on financial solvency of the companies that underwrite insurance
risk. These laws and regulations limit the types of investments that can be made
by the regulated entities with appropriate investments being deemed "admitted
assets." Admitted assets are those assets that can be used to fulfill capital
and surplus requirements. The Company's current investment policy generally
prohibits investments that would be "non-admitted" for statutory reporting
purposes. The Company has no investments in derivative financial instruments and
has no current intention of owning such investments.
EMPLOYEES
As of December 31, 1997, the Company had a total of 2,639 employees, including
2,041 full-time and 598 part-time employees. MAMSI's home health care
subsidiaries employed 733 of these employees (284 on a full-time basis and 449
on a part-time basis). None of the Company's employees are covered by a
collective bargaining agreement and the Company has not experienced any work
stoppage since its inception. The Company believes that it has a good
relationship with its employees.
<PAGE> 17
ITEM 2. PROPERTIES
To accommodate the Company's rapid growth, the Company has purchased seven
office buildings since 1988. These buildings are located in Rockville and
Frederick, Maryland and total approximately 453,000 square feet of office and
warehouse space. The Company's headquarters is located at 4 Taft Court,
Rockville, Maryland 20850.
In addition, the Company leases approximately 163,000 square feet of office
space and approximately 5,200 square feet of warehouse space in various
locations within its service areas to support sales and administrative
operations.
During 1997, the Company purchased an office building in Frederick, Maryland in
order to consolidate existing office space needs and plan for future growth. As
a result, the Company intends to sell and is actively marketing two office
buildings it currently owns.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as the defendant in a suit filed by certain medical
providers on March 26, 1997 in the Circuit Court for Anne Arundel County,
Maryland, which alleges that the Company improperly reduced payments to
participating providers in the form of "withhold". It is the plaintiffs'
allegation that certain payments should not have been reduced in this manner and
seek unspecified damages. This matter has been filed as a class action against
the Company. On August 18, 1997, the court stayed further proceedings in the
litigation pending plaintiff's pursuit of arbitration as provided for under the
contract.
The Company is involved in other various legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes that any
ultimate liability that could arise from these other actions will not materially
affect the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for shareholder vote in the fourth quarter of
1997.
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently listed on The New York Stock Exchange,
Inc. ("NYSE") under the trading symbol MME. The following table sets forth for
the indicated periods the high and low reported sale prices of the common stock
as furnished by the NYSE.
1997 1996
----------------- -----------------
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $15.25 $10.75 $24.38 $20.38
Second Quarter 15.56 10.25 24.00 14.25
Third Quarter 17.00 13.88 14.75 11.75
Fourth Quarter 16.75 10.81 13.38 10.13
The Company has never paid any cash dividends on its common stock and presently
anticipates that no cash dividends will be declared in the foreseeable future.
Any dividends will depend on future earnings, the financial condition of the
Company and regulatory requirements. See Note 13 to the Consolidated Financial
Statements.
As of February 27, 1998, there were approximately 765 stockholders of record of
the Company's common stock.
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(in thousands except share amounts, key ratios and operating data)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA
Revenue $1,111,653 $1,133,742 $ 954,907 $ 749,898 $ 648,225
Expense 1,090,213 1,138,677 858,567 663,343 605,779
Income (loss) before income taxes and
cumulative effect of accounting change 21,440 (4,935) 96,340 86,555 42,446
Income (loss) before cumulative effect
of accounting change 14,489 (2,768) 61,124 54,530 25,496
Net income (loss) 14,489 (2,768) 61,124 54,530 24,833
Earnings (loss) per common share (1):
Basic
Income (loss) before cumulative effect
of accounting change $0.31 ($0.06) $1.33 $1.21 $0.58
Net income (loss) $0.31 ($0.06) $1.33 $1.21 $0.57
Diluted
Income (loss) before cumulative effect
of accounting change $0.31 ($0.06) $1.28 $1.15 $0.57
Net income (loss) $0.31 ($0.06) $1.28 $1.15 $0.55
Weighted Average Shares
Basic 46,273,484 45,978,864 46,127,112 45,030,113 43,607,402
Diluted 46,885,666 45,978,864 47,908,379 47,370,211 45,109,230
Dividends --- --- --- --- ---
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital 128,065 118,870 153,668 91,983 39,758
Total assets 342,823 334,719 354,182 268,522 189,561
Long-term debt 74 134 194 5,331 5,763
Stockholders' equity 208,307 184,400 217,216 141,326 71,963
Cash dividends per common share (2) --- --- --- --- ---
KEY RATIOS
Medical loss ratio 89.4% 92.4% 81.9% 80.8% 86.3%
Administrative expense ratio 11.7% 10.7% 10.5% 9.4% 8.3%
Net income margin 1.3% (.2%) 6.4% 7.3% 3.9%
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services 297 331 313 312 321
HMO only (3) 192 203 222 238 251
Medicare 2,566 2,698 2,531 --- ---
Medicaid 552 454 405 466 ---
Annualized hospital admissions per
1,000 enrollees 78 77 80 76 69
HMO, hybrid, ASO and indemnity
health enrollees at year end 691,000 745,000 658,000 508,000 440,000
PPO enrollees at year end 1,006,000 935,000 825,000 698,000 510,000
Participating providers at year end 28,400 24,300 21,077 16,950 15,500
</TABLE>
Notes
1. Earnings (loss) per common share have been adjusted to reflect stock
dividends on a retroactive basis and to reflect adoption of Financial Accounting
Standards No. 128. All previously reported earnings per share amounts have been
restated to reflect the adoption of this statement. See Note 1 to the
Consolidated Financial Statements.
2. MAMSI has not declared or paid cash dividends on its common stock.
3. Days are presented exclusive of skilled nursing, neonatal intensive care and
psychiatric inpatient care.
<PAGE> 20
ITEM 7. 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.
3. 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.
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.
5. The possibility that the Company is not able to increase its market share at
the anticipated premium rates.
GENERAL
During the three year period ended December 31, 1997, the Company experienced
rapid expansion through 1996, followed by a year of relative stability. While
membership in certain products continues to grow, others have shown substantial
decreases when compared with 1996. The Company has achieved its overall size by
continually expanding its product lines which include point-of-service, small
group, indemnity health, hybrid products, Medicaid and Medicare, group term-life
and through expansion into new geographic markets. Premium rates during this
time have remained at or near competitive levels for the Company's market place.
During 1997, the Company's consolidated operating margin showed a profit after
being slightly negative in 1996. The Company achieved 1997's results, in part,
by implementing product price increases and reducing membership in products or
effectively terminating groups that had the potential for continued
unprofitability. The Company anticipates that it will continue to increase
premium rates during 1998. This is a forward-looking statement. See
"Forward-Looking Information" above for a description of those risk factors.
The Company generally receives a fixed premium amount per member per month while
the majority of medical expenses are variable and significantly affected by
spontaneous member utilization. Even with managed care controls, unusual medical
conditions can occur, such as an outbreak of influenza or a higher than normal
incidence of high cost cases (such as premature births, complex surgeries, or
rare diseases). As a result, the Company's quarterly results can be materially
effected and irregular. However, over the longer business cycle, the Company
believes that its managed care control systems, underwriting procedures (when
allowed) and network of providers will result in continued profitability.
Due to the continued escalation of health care costs and the inability of many
individuals to obtain health care insurance, numerous proposals relating to
health care reform have been made, and additional proposals may be introduced,
in the United States Congress and the legislatures of the states in which the
Company operates or may seek to operate.
<PAGE> 21
Recently, the "Health Insurance Portability and Accountability Act of 1996,
Public Law 104- 191", commonly called the Kennedy-Kassebaum Bill for its primary
sponsors, was enacted. This bill establishes certain Federal requirements for
large group, small group, and individual health benefit plans, and applies not
only to insurers and HMOs but also to ERISA plans.
Kennedy-Kassebaum is intended to make coverage more portable and available by
limiting pre-existing condition requirements; providing special enrollment
periods for employees who lose other coverage or whose family status changes;
prohibiting group plans from denying an individual coverage or charging a higher
premium based on the individual's health status or history; and by guaranteeing
coverage availability and renewability in certain circumstances in the small
group and individual markets. Kennedy-Kassebaum also allows for the
establishment of Medical Savings Accounts, increases the penalties for health
care fraud and abuse, and calls for standardized health care information in
order to reduce administrative costs.
The effect of Kennedy-Kassebaum differs from state to state. In the group
market, state laws remain in effect unless they prevent the application of the
new federal requirements, and in the individual market, state laws govern if the
Health and Human Services Secretary determines that it provides an "acceptable
alternative mechanism" to the federal requirement. This means that in those
states like Maryland, where state reforms have already been enacted, the
legislation has little, if any, effect in the small group market, but may have
some effect on the individual market. In other states, the legislation has
greater effect.
Most of the provisions of Kennedy-Kassebaum took effect on July 1, 1997, but
some, like the provisions pertaining to Medical Savings Accounts, took effect
earlier and some, like administrative simplification, take effect later.
In recent years, state legislatures in the Company's service area have been
active in health care reform legislation targeted at the small group market,
i.e., usually for groups of 2 to 50 employees. This small group reform is now in
place in Maryland, Virginia, Delaware and North Carolina, but not in
Pennsylvania, Washington, D.C. or West Virginia. Although different in many of
the details, this type of legislation generally requires all HMOs and insurers
that offer small group coverage to accept all small employers who apply for
coverage and to guarantee coverage to their employees seeking coverage
regardless of their health status. The legislation also requires renewal of
these small group employer plans, limits rate renewal increases, mandates
adjusted community rating and eliminates pre-existing condition limitations
either entirely or within a short period of time, usually six months. In
addition, many states have begun to legislate certain mandated benefits like
minimum hospital length of stays and required coverages.
The Company believes that the current political environment in which it operates
will result in continued legislative scrutiny of health care reform and may lead
to additional legislative initiatives. The Company is unable to predict the
ultimate impact upon the Company of any Federal or state restructuring of the
health care delivery or health care financing systems, but such changes could
have a material adverse impact on the operations and financial condition of the
Company.
The District of Columbia, which has not previously regulated HMOs, enacted
legislation effective July 1, 1997 providing for regulatory oversight similar to
that currently provided by other states. The Company does not anticipate any
significant negative impact on its operations because of the new regulatory
oversight in the District of Columbia.
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------
<PAGE> 22
RESULTS OF OPERATIONS
Consolidated net income (loss) of the Company was $14,489,000 and $(2,768,000)
in 1997 and 1996, respectively. Net earnings (loss) per share was $.31 in 1997
as compared to $(.06) in 1996. The increase in earnings is primarily
attributable to a decrease in the medical loss ratio for commercial products
which was slightly offset by an increase in the administrative expense ratio.
The medical loss ratio decreased principally due to 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 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 year ended December 31, 1997 decreased approximately $22.1
million or 2.0 percent over the year ended December 31, 1996. A 4.4 percent
decrease in net average HMO and indemnity enrollment resulted in a decrease of
approximately $47.5 million in health premium revenue while a 2.0 percent
increase in the average monthly premium per enrollee, combined for all products,
resulted in a $20.2 million increase in health premium revenue. The net decrease
in revenue is mainly related to the Company's withdrawal from the Maryland
Medicaid program and from certain areas of the Virginia Medicaid program due to
inadequate premiums paid by the states. Management believes that commercial
health premiums should increase over the next twelve months as the Company
increases 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. Effective January 1, 1998, the
Company has modified its Medicare product offering. This modification has the
potential to significantly reduce the Company's Medicare membership and related
premium revenue. 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.
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 5 percent premium rate
increase in its Virginia Medicaid program effective July 1, 1997, an approximate
8 percent premium rate decrease in its North Carolina Medicaid program effective
August 1, 1997, and an approximate 2 percent premium rate increase in its
Medicare program, effective January 1, 1998. Management believes that the
commercial premium rate increases may have the effect of slowing the Company's
future membership growth as compared to membership growth in 1994 through 1996.
In addition, management reevaluated premium reimbursement rates with regard to
its Medicare and Medicaid participation and reduced or eliminated certain
service areas. Specifically, effective January 1, 1997, 59 counties and cities
were eliminated from the Company's Medicare service area. Effective January 1,
1998, the Company again reduced its Medicare service area, modified certain
benefits and began charging an additional premium in certain areas. Also
effective January 1, 1997, the Company discontinued participation in the
mandated portion of the Virginia Medicaid program which serves Medicaid
eligibles in the Tidewater area of Virginia. In addition, the Company has
withdrawn from the Maryland Medicaid program due to changes to premium and
benefit levels and other requirements made by the State of Maryland after it
obtained an 1115 waiver and became a mandated state. As the Company was the
largest provider of managed care Medicaid in Maryland, the Company continued to
provide services in 1997 until an orderly transition was accomplished. The
Company was compensated during the transition period at a rate higher than the
mandated program allows but lower than historical reimbursement. In 1996, the
Company became licensed to serve portions of the Medicaid populations in West
Virginia and North Carolina. The Company's
<PAGE> 23
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. As previously described, this determination was made in
connection with the Maryland Medicaid program and part of the Virginia Medicaid
program.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries contributed $21.0 million in revenue in 1997 as
compared to $20.5 million in 1996. 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 which is eliminated in
consolidation. Revenue from life and short-term disability products contributed
$5.3 million in 1997 as compared to $3.2 million in 1996.
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.
In the 1993 review, the Company did not meet certain of NCQA's criteria and,
therefore, did not receive NCQA accreditation. In response, MAMSI adopted
methodologies and programs designed to respond to concerns and questions raised
in NCQA's assessment. The Company requested the NCQA to perform another
accreditation review which took place in December of 1996. In May, 1997, NCQA
informed the Company that its flagship HMOs received one year accreditation. The
Company has implemented the Health Plan and Employer Data and Information Set
("HEDIS") 3.0 which represents a core set of performance measures developed by
NCQA to serve the employer as a purchaser. In addition, in October, 1997 the
Maryland Health Care Access and Cost Commission released the results of
Maryland's first ever statewide HMO report card. MAMSI's Maryland HMOs exceeded
the state wide average in overall satisfaction, accessibility and quality. In
another survey of member satisfaction taken by the U.S. Office of Personnel
Management, federal employees expressed satisfaction with the Company's
federally qualified HMO.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased to 89.4 percent for 1997 as compared to 92.4 percent for 1996
and, on a per member per month basis, medical expenses decreased 1.4 percent.
This decrease 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, and the identification and possible termination of certain
providers and specialists from the delivery network following a continuing
intensified peer review analysis. In addition, during 1997, the Company
identified certain claims which had been overpaid and recorded as a reduction of
medical expenses approximately $12 million relating to claims incurred and paid
in 1996. 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 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.
<PAGE> 24
The administrative expense ratio for 1997 increased to 11.7 percent as compared
to 10.7 percent for 1996. This increase is due primarily to increased salaries
and expenses in certain administrative areas of the Company, including
utilization management, claims audit, and customer service departments, as well
as reduced revenue. Management believes that the administrative expense ratio
will remain near the current level over the next year. 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.
The net margin rate increased from (.2) percent in 1996 to 1.3 percent in 1997.
This increase is primarily due to the decrease in the medical loss ratio.
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated net income (loss) of the Company was $(2,768,000) and $61,124,000
in 1996 and 1995, respectively. Diluted net earnings (loss) per share was $(.06)
in 1996 as compared to $1.28 in 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.
Revenue for the year ended December 31, 1996 increased approximately $178.8
million or 18.7 percent over the year ended December 31, 1995. A 19 percent
increase in net average HMO and indemnity enrollment resulted in an increase of
approximately $171.5 million in health premium revenue while the average monthly
premium per enrollee, combined for all products, remained approximately the
same.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries contributed $20.5 million in revenue in 1996 as
compared to $18.9 million for 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 which is eliminated in
consolidation. Revenue from life and short-term disability products contributed
$3.2 million in 1996 as compared to $1.0 million in 1995.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") increased to 92.4 percent in 1996 as compared to 81.9 percent for 1995
and, on a per member per month basis, medical expenses increased 12.8 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 administrative expense ratio for 1996 increased to 10.7 percent from 10.5
percent in 1995. This increase is 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.
Investment income increased $2.4 million or 20 percent primarily due to an
increase of $1.5 million in realized gains on sales of marketable equity
securities.
<PAGE> 25
The net margin rate decreased from 6.4 percent in 1995 to (.2) percent in 1996.
This decrease is primarily due to the increase in the medical loss ratio.
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 be sufficient in the
future.
Accounts receivable increased from $77.0 million at December 31, 1996 to $84.7
million at December 31, 1997. This $7.7 million increase is primarily due to
amounts due from the Federal government related to the Company's Federal
Employees Health Benefit Program participation.
Prepaid expenses, advances and other current assets decreased from $32.3 million
at December 31, 1996 to $19.3 million at December 31, 1997, principally due to
the receipt of 1996 tax refunds for net operating loss carrybacks. Statutory
deposits increased from $9.1 million at December 31, 1996 to $14.9 million at
December 31, 1997 due to the increase in state regulatory deposits related to
certain of the Company's regulated subsidiaries.
Property and equipment increased from $45.2 million at December 31, 1996 to
$57.0 million at December 31, 1997 due to the purchase of a new office building
for existing and future office space needs as well as the replacement and
upgrade of certain of the Company's computer equipment.
Short-term investments are marked to market at the end of every quarter and the
resulting unrealized gain or loss is reflected in the ending stockholders'
equity balance. Accordingly, stockholders' equity at December 31, 1997 reflects
an unrealized gain of $.9 million, net of tax, on the Company's short-term
investments.
Medical claims payable decreased from $118.7 million at December 31, 1996 to
$98.3 million at December 31, 1997 primarily due to decreased membership,
decreased member utilization and related claims accruals and reversals of claims
previously paid.
Additional paid-in capital decreased from $173.3 million at December 31, 1996 to
$162.9 million at December 31, 1997, principally due to activity in the
Company's stock compensation trust. This trust is used to provide shares of the
Company's stock to meet its stock option plan obligations.
Deferred tax assets are recognized for deductible temporary differences that, in
management's opinion, are more likely than not to be realized in the current or
future periods. The Company's history of operating revenue and income growth,
and expectation of future operating income, provides strong positive evidence
that these deferred tax assets will be realized. A valuation allowance has been
recorded for net operating loss carryforwards generated by certain subsidiaries
that are not deductible on a consolidated tax return. Management intends to
continue to monitor the realizability of deferred tax assets in light of future
circumstances and assess the reasonableness of the valuation allowance.
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 December 31, 1997, approximately $2.5 million was drawn
against these facilities.
<PAGE> 26
Following is a schedule of the short-term capital resources available to the
Company:
December 31
(in thousands) 1997 1996
--------------------
Cash and cash equivalents $ 3,570 $ 4,065
Short-term investments 152,080 151,359
Working capital advances to Maryland
hospitals 9,186 6,432
-------- --------
Total available liquid assets 164,836 161,856
Credit line availability 21,526 21,802
-------- --------
Total short-term capital resources $186,362 $183,658
======== ========
Certain MAMSI subsidiaries that are subject to regulation by state insurance
departments must notify state regulators before the payment of any dividends to
MAMSI and, in certain circumstances, must receive positive affirmation prior to
such payment. The Company does not perceive these requirements to be a
significant restriction on the subsidiaries' ability to pay appropriate future
dividends to the parent company.
The Company does not anticipate any adverse impact on future liquidity due to
medical malpractice issues because the Company carries substantial professional
liability insurance.
The Company believes that 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 next
year to enhance the Company's computer systems, and to make necessary
improvements to new and existing administrative offices.
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 is not known at this time, however, it is not expected to be
material to the Company's results of operations or financial position. The
statements in the preceding 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 1997 and 1996..... 28
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995............................... 29
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995........... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................... 31
Notes to Consolidated Financial Statements....................... 32
Report of Ernst & Young LLP Independent Auditors................. 47
Selected Quarterly Financial Data for Fiscal Years 1997 and
1996 (Unaudited)............................................... 48
<PAGE> 28
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands except share amounts) 1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,570 $ 4,065
Short-term investments (Note 2) 152,080 151,359
Accounts receivable, net (Note 3) 84,719 77,042
Prepaid expenses, advances and other 19,294 32,323
Deferred income taxes (Note 7) 303 4,033
-------- --------
Total current assets 259,966 268,822
Property and equipment, net (Note 4) 56,964 45,210
Statutory deposits (Note 2) 14,854 9,125
Other assets 10,427 10,261
Deferred income taxes (Note 7) 612 1,301
-------- --------
Total assets $342,823 $334,719
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable (Note 5) $ 60 $ 60
Short-term borrowings (Note 5) 2,249 1,973
Accounts payable 16,878 18,755
Medical claims payable, net 98,328 118,649
Deferred premium revenue 12,586 10,479
Deferred income taxes (Note 7) 1,800 36
-------- --------
Total current liabilities 131,901 149,952
Notes payable (Note 5) 74 134
Deferred income taxes (Note 7) 2,541 233
-------- --------
Total liabilities 134,516 150,319
Stockholders' equity (Notes 10, 11 and 13) Common stock, $0.01 par, 100,000,000
shares authorized,
56,772,502 issued and 54,677,862 outstanding at
December 31, 1997 and December 31, 1996 567 567
Additional paid-in capital 162,892 173,325
Stock compensation trust (common stock held in trust) (101,482) (120,652)
Treasury stock, 2,094,640 shares at December 31, 1997 and 1996 (41,211) (41,211)
Unrealized gains and losses on investments, net of tax
of $618 and $174 at December 31, 1997 and December 31, 1996 946 265
Retained earnings 186,595 172,106
-------- --------
Total stockholders' equity 208,307 184,400
-------- --------
Total liabilities and stockholders' equity $342,823 $334,719
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 29
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands except share amounts) 1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Revenue
Health premium $1,051,923 $1,079,223 $907,694
Fee and other 18,351 16,376 15,334
Life and short-term disability premium 5,313 3,240 961
Home health services 21,025 20,519 18,910
Investment 15,041 14,384 12,008
---------- ---------- --------
Total revenue 1,111,653 1,133,742 954,907
---------- ---------- --------
Expense
Medical expense
Referral and ancillary care (Notes 8 and 9) 406,840 432,487 320,412
Hospitalization, net of coordination of benefits 323,435 349,445 247,870
Primary care (Notes 8 and 9) 83,183 100,692 93,320
Prescription drugs 127,187 115,544 80,438
Reinsurance premiums, net (Note 6) (49) (600) 1,587
---------- ---------- ---------
940,596 997,568 743,627
---------- ---------- ---------
Life and short-term disability claims 2,811 2,314 934
---------- ---------- ---------
Home health patient services 16,808 17,141 13,684
---------- ---------- ---------
Administrative expense
Salaries and benefits 80,700 76,627 62,706
Promotion and advertising 3,543 4,182 3,246
Professional services 6,499 5,837 3,717
Facilities, maintenance and supplies 26,609 23,398 19,134
Other (including interest expense of $540, $691 and $1,010) 12,647 11,610 11,519
---------- ---------- ---------
129,998 121,654 100,322
---------- ---------- ---------
Total expense 1,090,213 1,138,677 858,567
---------- ---------- ---------
Income (loss) before income taxes 21,440 (4,935) 96,340
Income tax benefit (expense) (Note 7) (6,951) 2,167 (35,216)
---------- ---------- ---------
Net income (loss) $ 14,489 $ (2,768) $ 61,124
========== ========== =========
Basic earnings (loss) per common share (Note 11) $ .31 $ (.06) $ 1.33
=========== =========== ===========
Diluted earnings (loss) per common share (Note 11) $ .31 $ (.06) $ 1.28
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 30
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Additional Stock Unrealized
Common Paid-In Compensation Treasury Gains and Retained
(in thousands except share amounts) Stock Capital Trust Stock (Losses) Earnings Total
------ ---------- ------------ -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 456 $ 29,431 $ (33) (2,278) $113,750 $141,326
Exercise of stock options for
967,800 shares of MAMSI
common stock 10 4,533 4,543
Stock option tax benefit 6,410 6,410
Change in unrealized gains
and (losses), net of tax of $2,494 3,813 3,813
Net Income 61,124 61,124
------ -------- --------- ------- -------- -------- --------
Balance, December 31, 1995 466 40,374 (33) 1,535 174,874 217,216
Exercise of stock options for
1,011,175 shares of MAMSI
common stock 10 5,682 5,692
Stock option tax benefit 6,162 6,162
Establishment of Stock
Compensation Trust for
9,130,000 shares of MAMSI
common stock 91 130,011 $(130,102)
Exercise of stock options
for 109,300 shares released from
the Stock Compensation Trust (1,011) 1,557 546
Adjustment to market value
for shares held in Stock
Compensation Trust (7,893) 7,893
Repurchase of 2,048,700 shares of
MAMSI common stock (41,178) (41,178)
Change in unrealized gains
and (losses), net of tax
of $830 (1,270) (1,270)
Net loss (2,768) (2,768)
------ -------- --------- -------- -------- -------- --------
Balance, December 31, 1996 $ 567 $173,325 $(120,652) $(41,211) $ 265 $172,106 $184,400
Exercise of stock options for
1,061,325 shares released from the
Stock Compensation Trust (10,265) 15,124 4,859
Stock option tax benefit 3,878 3,878
Adjustment to market value for shares
held in Stock Compensation Trust (4,046) 4,046
Change in unrealized gains and (losses),
net of tax of $444 681 681
Net income 14,489 14,489
------ -------- --------- -------- -------- -------- --------
Balance, December 31, 1997 $ 567 $162,892 $(101,482) $(41,211) $ 946 $186,595 $208,307
====== ======== ========= ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 31
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 14,489 $ (2,768) $ 61,124
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,179 7,874 6,026
Provision for bad debts (187) 1,728 47
Provision for deferred income taxes 7,260 2,261 4,971
Loss on sale and disposal of assets 13 78
Increase in accounts receivable (7,490) (17,507) (24,279)
Decrease (increase) in prepaid expenses, advances and other 13,029 (23,349) (3,231)
Increase (decrease) in accounts payable (1,877) 3,680 (2,490)
Decrease in income taxes payable (2,589)
Increase (decrease) in medical claims payable, net (20,321) 10,159 23,476
Increase (decrease) in deferred premium revenue 2,107 354 (3,219)
-------- -------- --------
Total adjustments 2,700 (14,787) (1,210)
-------- -------- --------
Net cash provided by (used in) operating activities 17,189 (17,555) 59,914
-------- -------- --------
Cash flows (used in) provided by investing activities:
Purchases of short-term investments (100,647) (338,943) (426,601)
Sales of short-term investments 104,052 392,219 365,076
Purchases of property and equipment (21,016) (13,469) (10,027)
Purchases of statutory deposits (8,761) (2,407) (1,405)
Maturities of statutory deposits 10 1,824 739
Purchases of other assets (406) (247) (725)
Proceeds from sale of assets 131 435 946
-------- -------- --------
Net cash (used in) provided by investing activities (26,637) 39,412 (71,997)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Proceeds from notes payable 300
Principal payments on notes payable (60) (210) (5,953)
Increase in short-term borrowings 276 322 603
Exercise of stock options 4,859 6,238 4,543
Stock option tax benefit 3,878 6,162 6,410
Purchase of treasury stock (41,178)
-------- -------- --------
Net cash provided by (used in) financing activities 8,953 (28,666) 5,903
-------- -------- --------
Net decrease in cash and cash equivalents (495) (6,809) (6,180)
Cash and cash equivalents at beginning of year 4,065 10,874 17,054
-------- -------- --------
Cash and cash equivalents at end of year $ 3,570 $ 4,065 $ 10,874
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 32
Mid Atlantic Medical Services, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose
subsidiaries are active in managed health care and other life and health
insurance related activities. MAMSI's 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.
The following are other significant wholly owned subsidiaries of MAMSI:
Physicians Health Plan of Maryland, Inc. ("PHP-MD") is an individual practice
association ("IPA") that provides physician services to certain of the Company's
HMOs.
Alliance PPO, Inc. ("Alliance") provides a delivery network of physicians
(called a preferred provider organization) to employers and insurance companies
in association with various health plans.
Mid Atlantic Psychiatric Services, Inc. ("MAPSI") provides psychiatric services
to third party payors or self-insured employer groups.
MAMSI Life and Health Insurance Company ("MAMSI Life") develops and markets
indemnity health products and group life, accidental death and short-term
disability insurance.
HomeCall, Inc., FirstCall, Inc. and HomeCall Pharmaceutical Services, Inc.
("HCPS") provide in-home medical care including skilled nursing, infusion and
therapy to MAMSI's HMO members and other payors. In addition, HCPS provides
mail-order pharmacy services to MAMSI's HMO members and other payors.
HomeCall Hospice Services, Inc. ("HCHS") began operations in December, 1996 and
provides services to terminally ill patients and their families.
The significant accounting policies followed by MAMSI and its subsidiaries are
described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MAMSI and its
subsidiaries. All significant intercompany balances have been eliminated in
consolidation.
<PAGE> 33
MAJOR CUSTOMERS
The Company's operations are conducted within one business segment. A
significant portion of the Company's premium revenue is derived from federal,
state and local government agencies, including governmental employees and
Medicaid and Medicare recipients. For the years ended December 31, 1997, 1996
and 1995, approximately 11%, 11% and 7%, respectively, of premium revenue was
derived from federal government agencies, and approximately 25%, 26% and 21%,
respectively, was derived from state and local government agencies.
CASH EQUIVALENTS
Floating rate municipal putable bonds, which possess an insignificant risk of
loss from changes in interest rates, that have been held less than three months,
are classified as cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments, consisting principally of marketable equity securities,
municipal bonds and tax-free bond funds, are classified as available-for-sale.
These securities are carried at fair market value plus accrued interest and any
unrealized gains and losses are reported as a separate component of
stockholders' equity, net of the related tax effect. Gains and losses are
reported in earnings when realized. Gains and losses on sales of securities are
computed using the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the property and equipment. Leasehold improvements are amortized on a
straight-line basis over the lesser of the life of the improvement or the term
of the related lease.
STATUTORY DEPOSITS
Statutory deposits, consisting principally of municipal bonds and treasury notes
held in custodial accounts by state regulatory agencies, are classified as
held-to-maturity. These securities are stated at amortized cost.
GOODWILL
The excess of cost over the fair value of net assets of the acquired company in
the 1994 purchase transaction is recorded as goodwill and is classified in the
consolidated balance sheets as an other asset. Goodwill is amortized on a
straight-line basis over 15 years.
HEALTH PREMIUM
Amounts charged for health care services are recognized as premium revenue in
the month for which enrollees are entitled to receive care. Included in premium
revenue are amounts due from customers that utilize the Company's capitated
primary care physician network, its medical utilization management services and
other services related to health management and who self-fund, generally up to
specified limits, certain elements of medical costs, such as hospitalization and
specialist physicians. Premium revenue received in advance is recorded as
deferred premium revenue.
<PAGE> 34
FEE AND OTHER
Amounts charged to third party payors solely for use of the Company's provider
network and its discounted fee-for-service rate structure are recognized as fee
revenue. Amounts charged for administrative services only arrangements entailing
only claims payment services and utilization of the provider network without
utilization of the Company's primary care physician network and utilization
management services and under which the Company bears no insurance risk, are
recognized as fee revenue.
HOME HEALTH SERVICES
Amounts charged to patients, third party payors and others for home health
services are recorded at net realizable amounts, including retroactive
adjustments under cost reimbursement agreements with third party payors.
MEDICAL EXPENSE
Medical expense consists principally of medical claims and capitation costs.
Medical claims include payments to be made on claims reported as of the balance
sheet date and estimates of health care services incurred but not reported
("IBNR") to the Company as of the balance sheet date. The IBNR is estimated
using an expense forecasting model that is based on historical claims incurrence
patterns modified to consider current trends in enrollment, member utilization
patterns, timeliness of claims submissions and other factors. This estimate
includes medical costs to be incurred beyond the premium paying date that are
contractually required.
Capitation costs represent monthly fixed fees to participating physicians and
other medical providers as retainers for providing continuing medical care.
Medical claims reversals result from the determination that the Company has paid
claims in excess of contractually obligated amounts. Amounts recognized (through
specific identification or estimation) are recorded at their net realizable
value as a reduction of medical expense in the consolidated statements of
operations and as a reduction of medical claims payable in the consolidated
balance sheets.
The Company believes that its claims reserves are adequate to satisfy its
ultimate claims liabilities; however, the liability as established may vary
significantly from actual claims amounts, both negatively or positively, and as
such adjustments are deemed necessary, they are included in current operations.
Establishment of claims estimates is an inherently uncertain process and there
can be no certainty that currently established reserves will prove adequate to
cover actual ultimate expenses. Subsequent actual experience could result in
reserves being too high or too low which could positively or negatively impact
the Company's earnings in future periods.
COORDINATION OF BENEFITS
Coordination of benefits ("COB") results from the determination that the Company
has paid for medical claims expenses for which an enrollee has duplicate
coverage and for which another insurer is primarily liable. In the consolidated
statements of operations, such identified amounts are classified as a reduction
of hospitalization expense and, in the consolidated balance sheets, such amounts
are classified as a reduction of medical claims payable.
INCOME TAXES
The income tax provision includes Federal and state income taxes both currently
payable and deferred because of differences between financial reporting and tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
<PAGE> 35
EARNINGS (LOSS) PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", resulting in the restatement of earnings per share for all
prior periods. Basic earnings per common share are based upon the weighted
average shares outstanding. Outstanding stock options are treated as common
stock equivalents for purposes of computing diluted earnings per share. Shares
held in the Company's Stock Compensation Trust (see Note 11) are excluded from
the calculation of basic and diluted earnings per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" ("Statement No. 107"), requires disclosure of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. Statement
No. 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
Cash and cash equivalents - The carrying amount reported in the consolidated
balance sheets approximates fair value.
Short-term investments - Fair values are based on quoted market prices.
Statutory deposits - Fair values are based on quoted market prices.
Short-term borrowings - The carrying amount reported in the consolidated balance
sheets approximates fair value.
ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock option plans. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
value of the underlying stock on the date of grant, no compensation expense is
recognized.
NEW ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board issued Statement No. 130
"Reporting Comprehensive Income" ("Statement 130") and Statement No. 131
"Disclosure About Segments of an Enterprise and Related Information" ("Statement
131"). Statement 130 establishes standards for reporting and display of
comprehensive income in a full set of general purpose financial statements, and
Statement 131 significantly changes the way companies report segment information
in annual 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
<PAGE> 36
statements. The Company is currently evaluating the effect of Statement 130 on
its financial statements. Each of these statements is effective for periods
beginning after December 15, 1997.
NOTE 2 - INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("Statement No. 115"). Under this statement, securities are
classified into categories and are valued based upon this designation.
Securities classified as available-for-sale, which include debt and equity
securities that the Company does not have the positive intent to hold to
maturity, are marked to market with the resulting unrealized gain or loss
reflected in stockholders' equity. Securities classified as held-to-maturity,
which are debt securities that the Company has both the positive intent and
ability to hold to maturity, are carried at amortized cost. The Company
classifies its statutory deposits as held-to-maturity with no effect on the
recorded value. All other investments are classified as available-for-sale.
Management re-evaluates these designations annually. During 1997, statutory
deposit investments with an amortized cost of $3,001,000 were released by state
regulatory agencies and transferred to the Company's short-term investment
portfolio. The unrealized gain at the date of transfer was $94,000.
The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1997:
<TABLE>
<CAPTION>
-----------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Obligations of states and political subdivisions $ 85,433 $ 1,615 $ 21 $ 87,027
Municipal bond funds 15,775 15,775
Other debt securities 462 46 508
Accrued interest 1,170 1,170
-------- ------- ------ --------
Debt securities 102,840 1,661 21 104,480
Equity securities 46,220 2,812 2,893 46,139
Mutual funds 1,456 5 1,461
-------- ------- ------ --------
Short-term investments $150,516 $ 4,478 $2,914 $152,080
======== ======= ====== ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 3,943 $ 85 $ 2 $ 4,026
Obligations of states and political subdivisions 10,661 187 10,848
Other investments 250 250
-------- ------- ------ --------
Statutory deposits $ 14,854 $ 272 $ 2 $ 15,124
======== ======= ====== ========
</TABLE>
<PAGE> 37
The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1996:
<TABLE>
<CAPTION>
----------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Obligations of states and political subdivisions $ 98,115 $ 885 $ 107 $ 98,893
Municipal bond funds 8,201 8,201
Other debt securities 1,478 57 1,535
Accrued interest 1,031 1,031
-------- -------- --------- --------
Debt securities 108,825 942 107 109,660
Equity securities 39,184 1,554 1,671 39,067
Mutual funds 2,911 142 421 2,632
-------- -------- --------- --------
Short-term investments $150,920 $ 2,638 $ 2,199 $151,359
======== ======== ======== ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 6,224 $ 100 $ 15 $ 6,309
Obligations of states and political subdivisions 2,003 121 3 2,121
Other investments 898 898
-------- -------- -------- --------
Statutory deposits $ 9,125 $ 221 $ 18 $ 9,328
======== ======== ======== ========
</TABLE>
For the years ended December 31, 1997 and 1996, marketable equity
available-for-sale securities with a fair value at the date of sale of
$62,804,000 and $53,037,000, respectively, were sold. The gross realized gains
on such sales totaled $11,027,000 and $8,971,000, and the gross realized losses
totaled $2,935,000 and $3,072,000 for each of the respective periods. Realized
gains and losses are included in investment income. Other sales of short-term
investments consisted principally of redemptions from municipal bond funds.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1997, by contractual maturity, are shown below.
Actual maturities may differ from contractual maturities because the issuers of
the securities may have the right to prepay obligations without prepayment
penalties.
<PAGE> 38
<TABLE>
<CAPTION>
-------------------------
Estimated
Fair
(in thousands) Cost Value
-------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 23,939 $ 23,955
Due after one year through five years 38,157 38,853
Due after five years through ten years 22,449 22,921
Due after ten years 18,295 18,751
-------- --------
Debt securities 102,840 104,480
Equity securities 46,220 46,139
Mutual funds 1,456 1,461
-------- --------
$150,516 $152,080
======== ========
HELD-TO-MATURITY
Due in one year or less $ 250 $ 250
Due after one year through five years 11,987 12,103
Due after five years through ten years 2,012 2,065
Due after ten years 605 706
-------- --------
$ 14,854 $ 15,124
======== ========
</TABLE>
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1997 1996
-------------------------
<S> <C> <C>
Premium and fee accounts $ 65,507 $ 58,756
Home health service accounts 2,735 2,677
Medical recoverables 11,726 11,707
Other 9,931 9,268
Less: allowance for doubtful accounts (5,180) (5,366)
-------- --------
$ 84,719 $ 77,042
======== ========
</TABLE>
Medical recoverables consist of refunds identified on paid claims. This amount
has been recorded as a reduction of medical expense in the consolidated
statements of operations. Other receivables consist primarily of amounts due for
reinsurance recoveries and pharmacy rebates.
<PAGE> 39
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
------------------------
(in thousands) 1997 1996
------------------------
<S> <C> <C>
Land, buildings and improvements $31,355 $20,906
Computer equipment and software 38,757 30,151
Office furniture and equipment 17,267 15,566
Leasehold improvements 688 495
------- -------
88,067 67,118
Less: accumulated depreciation and
amortization (31,103) (21,908)
------- -------
$56,964 $45,210
======= =======
</TABLE>
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
------------------------
(in thousands) 1997 1996
------------------------
<S> <C> <C>
Notes payable $ 134 $ 194
Current portion (60) (60)
------- -------
Noncurrent portion $ 74 $ 134
======= =======
</TABLE>
The noncurrent portion of notes at December 31, 1997 mature in future years as
follows (in thousands):
1999 $60
2000 14
The Company has access to total line-of-credit and letter-of-credit facilities
of $24 million, which are subject to annual renewal. Borrowings bear interest at
a rate based on either the bank's prime rate or the Federal Funds rate plus .75%
and are secured by certain cash balances and short-term investments. At December
31, 1997, approximately $2.25 million was outstanding on one of the
lines-of-credit at an interest rate of 7.43% and approximately $225,000 was
outstanding in letters-of-credit.
Interest expense paid in cash during 1997, 1996 and 1995 was approximately
$538,000, $688,000, and $1,541,000, respectively.
NOTE 6 - REINSURANCE
M.D. IPA, OCI, OCCI, OCIPA and MAMSI Life maintain reinsurance coverage to
provide for reimbursement of claims in excess of certain limits. Reinsurance for
health claims generally covers 80% of all hospital costs in excess of a
deductible amount per enrollee per year (subject to a $2,000,000 maximum
lifetime reinsurance limit per person) but excludes coverage of costs in excess
of certain per diem rates. The deductible per enrollee was raised from $100,000
to $200,000 effective October 1, 1994. Reinsurance for life and accidental death
<PAGE> 40
claims generally covers all settlements in excess of $50,000 per person subject
to a $1,000,000 maximum recovery per person. Reinsurance recoveries for the
years ended December 31, 1997, 1996 and 1995 were approximately $2,045,000,
$2,288,000 and $128,000, respectively. In the consolidated statements of
operations, reinsurance premiums are shown net of the related recoveries.
NOTE 7 - INCOME TAXES
At December 31, 1997, the Company has net federal operating loss carryforwards
of approximately $1.3 million for income tax purposes that expire in various
years beginning in the year 2002. Approximately $1.2 million of these
carryforwards relate to HomeCall, Inc. operations prior to MAMSI's acquisition.
The Company's ability to utilize these net operating loss carryforwards is
limited.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows as of December
31:
<TABLE>
<CAPTION>
--------------------------
(in thousands) 1997 1996
--------------------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation $ 3,422 $ 3,558
Receivable valuation adjustments 3,314
Unrealized investment gains 618 174
------- -------
Total deferred tax liabilities 7,354 3,732
------- -------
Deferred tax assets:
Accrued medical expenses 3,259 4,510
Premium revenue adjustments 784 725
Allowance recapture 1,753
Accrued pension expenses 915 1,405
Other 32 1,166
------- -------
Total deferred tax assets 4,990 9,559
Valuation allowance for deferred tax assets (1,062) (762)
------- -------
Net deferred tax assets 3,928 8,797
------- -------
$(3,426) $ 5,065
======= =======
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 303 $ 4,033
Non-current assets - deferred income taxes 612 1,301
Current liabilities - deferred income taxes (1,800) (36)
Non-current liabilities - deferred
income taxes (2,541) (233)
------- -------
Net deferred tax (liability) asset $(3,426) $ 5,065
======= =======
</TABLE>
<PAGE> 41
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
<TABLE>
<CAPTION>
---------------------------------------
(in thousands) 1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (1,363) $ (4,239) $ 32,217
State 1,054 (189) 5,844
--------- --------- ---------
Total current (309) (4,428) 38,061
--------- --------- ---------
Deferred:
Federal 7,279 1,828 (2,207)
State (19) 433 (638)
--------- --------- ---------
Total deferred 7,260 2,261 (2,845)
--------- --------- ---------
$ 6,951 $ (2,167) $ 35,216
========= ========= =========
</TABLE>
The Company's tax provision differs from the statutory rate for Federal income
taxes for the years ended December 31 as follows:
<TABLE>
<CAPTION>
-------------------------------------
(in thousands) 1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Statutory rate (35%) $ 7,504 (1,727) $33,719
Tax-exempt interest (1,582) (1,912) (1,872)
State income taxes, net of Federal benefit 461 (254) 3,399
Increase (decrease) in valuation allowance for
deferred tax assets 325 634 (11)
Other non-deductible items 575 785 754
Other, net (332) 307 (773)
------- ------- -------
$ 6,951 $(2,167) $35,216
======= ======= =======
</TABLE>
Total tax deposits made by the Company in 1997, 1996 and 1995 were approximately
$2,461,000, $10,320,000 and $27,266,000, respectively.
NOTE 8 - RISK POOL WITHHOLDINGS
Prior to July 1, 1996, contracts with participating physicians allowed for
withholdings generally ranging from 5% to 15% from primary care physicians and
participating specialists on capitation and fee-for-service payments. The
withheld amounts ultimately paid back to providers is generally less than the
total amount withheld. Withheld liabilities and related medical expenses were
reduced by $14,535,000 and $22,802,000 in 1996 and 1995, respectively, to
reflect amounts not returned to providers. Commencing July 1, 1996, the Company,
pursuant to state law changes, discontinued withholding from payments in
substantially all areas of operations. Amounts placed in such risk pools, in
jurisdictions where it is still permitted, were insignificant in 1997.
<PAGE> 42
NOTE 9 - RELATED PARTIES
For the years ended December 31, 1997, 1996 and 1995, certain members of the
Boards of Directors of MAMSI and subsidiary corporations who are also
participating physicians provided medical services to enrollees totaling
$6,103,000, $8,406,000 and $9,699,000, respectively, which represents
approximately 1% in 1997 and 2% in all other years of payments to all
physicians. Board members are remunerated at the same contractual level as all
other participating physicians and are selected by enrollees to render medical
services under the same guidelines as all other participating physicians.
NOTE 10 - EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a defined contribution 401(k) savings plan covering all
full-time employees. Employees are allowed to contribute up to 10% of their
pre-tax earnings annually and the Company makes a matching contribution of 50%
on the first 4% of contributions made by employees. Employees vest immediately
in the employee contributions and ratably over six years in the Company
contributions. During 1997, 1996 and 1995, the Company's contribution to the
401(k) plan aggregated $577,000, $540,000 and $433,000, respectively.
Effective December 31, 1994, the Company discontinued its non-contributory
defined benefit pension plan (the "Plan"). Benefits earned under the Plan, which
covered substantially all employees, were fully vested at that date. The
obligation to provide these benefits was satisfied as of December 31, 1995
through a combination of purchases of annuity contracts, transfers of vested
funds into the 401(k) plan and cash withdrawals. The Company recognized a gain
on the curtailment of the defined benefit pension plan of approximately
$345,000.
In accordance with a personal service contract negotiated by the Company, its
Chairman is entitled to supplemental pension benefits based upon years of
service and attained salary levels. Expense recognized related to this plan was
$818,000 and $1,682,000 for the years ended December 31, 1996 and 1995,
respectively. During 1997, the service contract was renegotiated, at which time
the supplemental pension benefits package was amended to include a fixed payment
benefit of $450,000 per year for a fixed term of 15 years. The reduction in
pension expense recognized in 1997 related to this change was approximately $1.1
million.
STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Statement 123 prescribes accounting and
reporting standards for all stock based compensation plans. Statement 123
requires that the company either adopt the fair value method of accounting for
its stock option plans or continue to apply the existing accounting rules but
provide supplemental pro forma disclosures as if the new rules had been adopted.
The Company elected to follow the existing rules and make the required pro forma
disclosures for the first time, in its 1996 consolidated financial statements.
Although Statement 123 first became effective in 1996, it requires that the pro
forma disclosures include the effects of all awards granted in fiscal years
beginning after December 15, 1994, the majority of which were issued under the
Company's 1995 and 1996 stock option plans.
Pro forma information regarding net income and earnings per share are required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.4%, 6.3% and 6.7%; volatility factors of the expected market price of the
Company's common stock of .42, .47 and .53 and a weighted average life of the
options of 3 years. The Company anticipates that it will declare no dividends.
<PAGE> 43
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially effect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows (in thousands except share amounts):
1997 1996 1995
------ ------- -------
Pro forma net income (loss) $9,007 $(8,409) $58,670
Pro forma basic earnings (loss) per share .19 (.18) 1.28
Pro forma diluted earnings (loss) per share .19 (.18) 1.23
The effects of applying Statement 123 as computed above are not likely to be
representative of the pro forma effects on reported net income in future years
as the above only considers options granted in 1997, 1996 and 1995.
In each year 1990 through 1996, MAMSI implemented a non-qualified stock option
plan whereby options for the purchase of shares of common stock may be granted
to directors, officers and employees of the Company. Shares authorized under the
plans total 15,500,000. Options under the plans generally vest over a three-year
period and are exercisable at 100% of the fair market value per share on the
date the options are granted. The Company accounts for these stock option grants
in accordance with APB 25, and, accordingly, recognizes no compensation expense
for these stock option grants. Transactions relating to the 1990 - 1996 plans
through 1997 are summarized as follows:
<PAGE> 44
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
1997 Exercise 1996 Exercise 1995 Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding, January 1 8,864,021 $ 17.02 7,400,405 $ 14.94 6,425,465 $ 12.51
Granted 1,128,500 $ 12.79 3,122,371 $ 17.72 2,270,100 $ 18.22
Exercised (1,061,325) $ 4.58 (1,120,475) $ 5.57 (967,800) $ 4.69
Forfeited (831,965) $ 19.92 (538,280) $ 20.67 (327,360) $ 19.92
--------- --------- ---------
Outstanding, December 31 8,099,231 $ 17.76 8,864,021 $ 17.02 7,400,405 $ 14.94
========= ========= =========
Available for grant, end of year 1,188,744 1,494,829 1,081,670
Exercisable, end of year 4,887,992 4,107,450 3,281,405
Option price range for exercised
shares $3.29-14.75 $2.58-22.38
Option price range at end of year $4.54-28.50 $3.29-28.50
Weighted average fair value of
options granted during year $4.26 $7.32
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- --------------------------------
Outstanding Weighted-Average Exercisable
Range of as of Remaining Weighted-Average as of Weighted-Average
Exercise Prices 12/31/1997 Contractual Life Exercise Price 12/31/1997 Exercise Price
- ------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$4.54 - $ 5.00 15,000 0.2 $4.80 15,000 $4.80
$5.01 - $10.00 938,975 0.3 $5.86 938,975 $5.86
$10.01 - $15.00 1,466,100 4.0 $12.61 271,700 $12.99
$15.01 - $20.00 3,698,046 2.9 $18.49 1,779,307 $18.29
$20.01 - $25.00 481,350 2.5 $22.45 383,250 $22.46
$25.01 - $28.50 1,499,760 1.3 $27.07 1,499,760 $27.07
--------- ------- ------ --------- ------
8,099,231 2.5 $17.76 4,887,992 $18.59
========= ======= ====== ========= ======
</TABLE>
The Company has an incentive compensation plan whereby officers and key
employees receive bonuses based upon the annual operating results of the
Company. No management bonus was earned in 1997, 1996 or 1995. In addition,
certain individuals receive a cash bonus based upon the achievement of certain
measurable criteria other than the annual operating results of the Company.
These bonus amounts are not significant.
<PAGE> 45
NOTE 11 - COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $14,489,000 $(2,768,000) $61,124,000
Denominator:
Denominator for basic earnings per share
- weighted average shares 46,273,484 45,978,864 46,127,112
Dilutive securities - employee stock options 612,182 0 1,781,267
Denominator for diluted earnings per share
- adjusted weighted average shares 46,885,666 45,978,864 47,908,379
</TABLE>
On April 17, 1995, the stockholders of MAMSI approved an increase in the number
of authorized shares of common stock from 60,000,000 to 100,000,000.
On 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 9,130,000 shares of newly issued MAMSI stock.
In exchange, the SCT has delivered a promissory note to MAMSI for approximately
$129.9 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 the
consolidated financial statements as additional paid-in capital. At December 31,
1997 and 1996, the SCT held 7,959,375 and 9,020,700 shares of common stock at a
fair market value of approximately $101.5 and $120.7 million, respectively.
Shares held by the SCT are excluded from weighted average shares outstanding
used in the computation of income or loss per common share.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office space under the terms of
noncancellable operating leases that expire at various dates through 2000. Rent
expense relating to these operating leases approximated $3,552,000, $3,316,000
and $2,593,000 in 1997, 1996 and 1995, respectively.
Future minimum lease commitments under non-cancelable operating leases are as
follows for the years ended December 31 (in thousands):
1998 $ 3,428
1999 2,687
2000 1,194
2001 418
2002 297
-------
$ 8,024
=======
<PAGE> 46
The Company has been named as the defendant in a suit filed by certain medical
providers on March 26, 1997 in the Circuit Court for Anne Arundel County,
Maryland, which alleges that the Company improperly reduced payments to
participating providers in the form of "withhold". It is the plaintiffs'
allegation that certain payments should not have been reduced in this manner and
seek unspecified damages. This matter has been filed as a class action against
the Company. On August 18, 1997, the court stayed further proceedings in the
litigation pending plaintiff's pursuit of arbitration as provided for under the
contract. While the Company believes that no significant liability exists, it is
too early to assess the final outcome.
The Company is involved in other various legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes any
ultimate liability that could arise from these other actions will not materially
affect the Company's consolidated financial position or results of operations.
NOTE 13 - STATUTORY REQUIREMENTS
M.D. IPA, OCI, OCCI and OCIPA are subject to insurance department regulations in
the states in which they are licensed. MAMSI Life is subject to insurance
department regulations in Maryland, its state of domicile.
Minimum required statutory net worth and actual statutory net worth are as
follows:
<TABLE>
<CAPTION>
1997 1996
Minimum Actual Minimum Actual
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
M.D. IPA $3,000,000 $43,300,000 $3,000,000 $27,200,000
OCI 3,000,000 49,800,000 3,000,000 43,100,000
MLH 500,000 28,300,000 500,000 16,400,000
OCCI 2,500,000 1,800,000 2,500,000 2,700,000
OCIPA 1,000,000 2,700,000 1,500,000 2,600,000
</TABLE>
M.D. IPA, OCI, OCCI, OCIPA and MAMSI Life were in compliance with state
depository rules at December 31, 1997 and 1996. OCCI failed to meet its net
worth requirement of $2.5 million and working capital requirement of $1.6
million at December 31, 1997. In February, 1998, additional capital was provided
so that each of these requirements was met. In addition, MAMSI Life was in
compliance with the applicable risk-based capital requirements for life and
health insurance companies at December 31, 1997 and 1996. These MAMSI
subsidiaries must notify state regulators before the payment of any dividends to
MAMSI and, in certain circumstances, must receive positive affirmation prior to
such payment.
NOTE 14 - RISK CONCENTRATIONS
Financial instruments that potentially subject the Company to credit risk
consist primarily of investments in marketable securities (including money
market funds, floating rate municipal putable bonds, intermediate term municipal
bonds, and common stocks) and premiums receivable. The Company receives advice
through or assigns direct management of short-term investments in marketable
securities to professional investment managers selected for their expertise in
various markets, within guidelines established by the Board of Directors. These
guidelines include broad diversification of investments. Concentrations of
credit risk and business volume with respect to commercial premiums receivable
are generally limited due to the large number of employer groups comprising the
Company's customer base. As of December 31, 1997, approximately 24% of premium
and home health service receivables were due from federal government agencies.
The Company performs ongoing credit evaluations of customers and generally does
not require collateral.
<PAGE> 47
Report of Independent Auditors
Board of Directors and Stockholders
Mid Atlantic Medical Services, Inc.
We have audited the accompanying consolidated balance sheets of Mid Atlantic
Medical Services, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mid
Atlantic Medical Services, Inc. and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Washington, D.C.
February 25, 1998
<PAGE> 48
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1997 AND 1996 (1)
<TABLE>
<CAPTION>
1997 1997 1997 1997 1996 1996 1996 1996
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(in thousands except share amounts)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $283,165 $282,443 $269,875 $276,170 $271,558 $281,455 $287,960 $292,769
Expense 281,856 278,014 262,685 267,658 252,528 292,204 295,170 298,775
Income (loss) before income taxes 1,309 4,429 7,190 8,512 19,030 (10,749) (7,210) (6,006)
Net income (loss) 806 2,788 4,726 6,169 11,869 (6,537) (4,711) (3,389)
Basic earnings (loss) per share .02 .06 .10 .13 .25 (.14) (.10) (.07)
Diluted earnings (loss) per share .02 .06 .10 .13 .25 (.14) (.10) (.07)
</TABLE>
Notes
1. Certain 1996 quarterly revenue and expense amounts are different from the
amounts originally reported due to reclassifications necessary to conform to the
current presentation.
2. During 1997, the Company adopted Financial Accounting Standards No. 128. All
previously reported earnings per share amounts have been restated to reflect the
adoption of this Statement. See Note 1 to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 49
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to "Directors
and Executive Officers" in the Proxy Statement for MAMSI's annual meeting of
shareholders to be held on April 27, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to "Directors
and Executive Officers -- Directors' Compensation" and "Executive Management
Compensation" in the Proxy Statement for MAMSI's annual meeting of shareholders
to be held on April 27, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to "Stock
Owned by Management" and "Principal Stockholders" in the Proxy Statement for
MAMSI's annual meeting of shareholders to be held on April 27, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to "Executive
Management Compensation" in the Proxy Statement for MAMSI's annual meeting of
shareholders to be held on April 27, 1998.
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of December 31, 1996 and 1995 ... 28
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 ............................. 29
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 ......... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ............................. 31
Notes to Consolidated Financial Statements ..................... 32
Report of Ernst & Young LLP Independent Auditors ............... 47
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
1997, 1996 and 1995 ..................................... 51
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted because they
are not required under the related instructions or are inapplicable.
<PAGE> 51
Mid Atlantic Medical Services, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at ------------------------------
Beginning Charged to Charged to Balance
of Costs Other Deductions- at End
Description Period and Expenses Accounts Write-Offs of Period
- ----------- ---------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
DEDUCTED FROM ASSET ACCOUNTS:
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts - accounts receivable
$ 3,591 $ 25 $ 22(1) $ $ 3,638
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 139 $ $ $ (11) $ 128
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts - accounts receivable
$ 3,638 $ $ 1,756(1) $ (28) $ 5,366
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 128 $ $ 634 $ $ 762
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts - accounts receivable
$ 5,366 $ $ (93)(1) $ (93) $ 5,180
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 762 $ $ 325 $ (25) $ 1,062
======== ======== ======== ======== ========
</TABLE>
(1) The changes to the allowance were charged to premium revenue.
<PAGE> 52
(a)(3)
EXHIBITS
See the Exhibit Index on pages 55-56 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by undersigned
thereunto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI")
(Registrant)
By: /s/ George T. Jochum 3/28/98
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President, and Director
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Thomas P. Barbera 3/28/98
--------------------------------------------------
Thomas P. Barbera Date
Vice Chairman, Executive Vice President and
Director
By: /s/ Francis C. Bruno, M.D. 3/28/98
---------------------------------------------------
Francis C. Bruno, M.D. Date
Director
By: /s/ Stanley M. Dahlman, Ph.D. 3/28/98
--------------------------------------------------
Stanley M. Dahlman, Ph.D. Date
Director
By: /s/ Peter L. Flaherty, Jr., M.D. 3/28/98
--------------------------------------------------
Peter L. Flaherty, Jr., M.D. Date
Director
By: /s/ Robert E. Foss 3/28/98
--------------------------------------------------
Robert E. Foss Date
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Walter Girardin 3/28/98
--------------------------------------------------
Walter Girardin Date
Director
By: /s/ Mark D. Groban, M.D. 3/28/98
--------------------------------------------------
Mark D. Groban, M.D. Date
Assistant Medical Director for Mental Health Services
and Director
By: /s/ George T. Jochum 3/28/98
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President and Director
(Principal Executive Officer)
By: /s/ John P. Mamana, M.D. 3/28/98
--------------------------------------------------
John P. Mamana, M.D. Date
Director
By: /s/ William M. Mayer, M.D. 3/28/98
--------------------------------------------------
William M. Mayer, M.D. Date
Director
<PAGE> 54
By: /s/ Gretchen P. Murdza 3/28/98
--------------------------------------------------
Gretchen P. Murdza Date
Chief Executive Officer of Homecare and Pharmacy
Subsidiaries and Director
By: /s/ Creighton R. Schneck 3/28/98
--------------------------------------------------
Creighton R. Schneck Date
Director
By: /s/ Mary E. Shocklee 3/28/98
--------------------------------------------------
Mary E. Shocklee Date
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ Alfred Talamantes 3/28/98
--------------------------------------------------
Alfred Talamantes Date
Executive Vice President,
Chief Operating Officer and Director
By: /s/ James A. Wild 3/28/98
--------------------------------------------------
James A. Wild Date
Director
<PAGE> 55
(a)(3), (b) and (c) List of Exhibits.
<TABLE>
<CAPTION>
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
- ------- ----------------------- -------------------
<S> <C> <C>
3.1 Copy of Certificate of Incorporation of MAMSI dated
October 7, 1986..........................................................(1)
3.2 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated April 23, 1990.......................................(4)
3.3 Amended and Restated By-laws of MAMSI as of February 25, 1998............
3.4 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated June 2, 1994.........................................(4)
10.5 Copy of Agreement between M.D. IPA and the United States
Secretary of Health and Human Services dated December 20, 1985...........(1)
10.20 Copy of Amendments to Agreement between M.D. IPA and the United
States Secretary of Health and Human Services dated December 24, 1987....(3)
10.26 1990 Non-Qualified Stock Option Plan.....................................(4)
10.27 Copy of 1990 Non-Qualified Stock Option Letter sent to Key Employees.....(4)
10.32 Copy of Contract between George T. Jochum and M.D. IPA for the period
January 1, 1991 through January 1, 1994..................................(4)
10.35 1991 Non-Qualified Stock Option Plan.....................................(4)
10.36 Copy of 1991 Non-Qualified Stock Option Letter sent to Key Employees.....(4)
10.41 Copy of Agreement between M.D. IPA and Surgical Care Affiliates, Inc.,
dated April 22, 1985.....................................................(4)
10.44 1992 Non-Qualified Stock Option Plan.....................................(4)
10.45 Copy of 1992 Non-Qualified Stock Option Letter sent to Key Employees.....(4)
10.48 Equipment Term Loan Agreement with Signet Bank dated March 25, 1991......(4)
10.50 Amendment to Revolving Loan Agreement with Signet Bank dated
June 19, 1991............................................................(4)
10.53 Amendments to the Stock Option Plans effective May 15, 1991..............(4)
10.54 Summary Plan Description of the Employees Cash or Deferred Profit
Sharing (401k) Plan dated October, 1991..................................(4)
10.55 Defined Benefit Plan Agreement with the Principal Financial Group which
was approved September 12, 1991..........................................(4)
10.57 Mortgage and Loan Agreement with Aid Association for Lutherans dated
October 4, 1990..........................................................(4)
10.60 1993 Non-Qualified Stock Option Plan.....................................
10.61 1993 Non-Qualified Stock Option Letter Sent to Key Employees.............
10.62 1992 Amendment to Employment Agreement Between George T. Jochum and
the Company..............................................................
10.65 Agreement to Purchase 2301 Research Boulevard dated September 30, 1993...(2)
10.66 1994 Management Bonus Program............................................(3)
10.67 1994 Non-Qualified Stock Option Plan.....................................(3)
10.68 1994 Non-Qualified Stock Option Letter sent to Key Employees.............(3)
10.69 Revolving Loan Agreement with Signet Bank dated September 30, 1993.......(3)
10.71 Agreement between OCI and the State of Maryland governing the Medical
Assistance Program ("Medicaid") dated August 5, 1993.....................(3)
10.72 List of States in which MAMSI Life is Licensed to Operate................(3)
10.73 1995 Management Bonus Program............................................(4)
10.74 1995 Non-Qualified Stock Option Plan.....................................(4)
10.75 1995 Non-Qualified Stock Option Plan letter sent to Key Employees........(4)
10.76 Agreement between OCI and the Commonwealth of Virginia governing the
Medical Assistance Program ("Medicaid") dated May 27, 1994...............(4)
10.77 1995 Amendment to Employment Agreement between George T. Jochum and
the Company..............................................................(5)
10.78 1996 Management Bonus Program............................................(5)
10.79 1996 Non-Qualified Stock Option Plan.....................................(5)
10.80 Form of Agreement between MAMSI and Employees Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................(5)
10.81 Form of Agreement between MAMSI and George T. Jochum Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................(5)
10.82 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1996 Non-Qualified Stock Option Plan...................(5)
10 Amended and Restated Compensation Trust Agreement dated
December 20, 1996........................................................(7)
10.1 Amended and Restated Common Stock Purchase Agreement dated
December 20, 1996........................................................(7)
10.2 Replacement Promissory Note dated December 20, 1996......................(7)
10.83 1997 Management Bonus Program............................................(8)
<PAGE> 56
10.84 Form of Non-Qualified Stock Option Agreement for Options Granted
under 1991, 1992, 1993, 1994 and 1995 Non-Qualified Stock Option Plan....(9)
10.85 Agreement of Purchase of Real Property by Mid-Atlantic
Medical Services, Inc....................................................(10)
10.86 1997 Amendment to Employment Agreement between George T. Jochum
and the Company..........................................................
10.87 1998 Non-Qualified Stock Option Plan.....................................
10.88 1998 Senior Management Bonus Plan........................................
10.89 1998 Management Bonus Plan...............................................
10.90 Amendment to 1994 Non-Qualified Stock Option Plan........................
10.91 Amendment to 1995 Non-Qualified Stock Option Plan........................
10.92 Amendment to 1996 Non-Qualified Stock Option Plan........................
10.93 1999 Employment Agreement Between George T. Jochum and the Company.......
21 Subsidiaries of the Company..............................................
23 Consent of Independent Auditors..........................................
27 Financial Data Schedule..................................................
</TABLE>
(1) Incorporated by reference to exhibits filed with the Company's Registration
Statement filed under the Securities Act of 1933 on Form S-4 (Registration No.
33-9803).
(2) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
Quarterly Period Ended September 30, 1993.
(3) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1993.
(4) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1994.
(5) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1995.
(6) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q for the Quarterly
Period Ended March 31, 1996.
(7) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q/A for the Quarterly
Period Ended September 31, 1996.
(8) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1996.
(9) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q for the Quarterly
Period Ended March 31, 1997.
(10) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q for the Quarterly
Period Ended June 30, 1997.
AMENDED AND RESTATED BY-LAWS
OF
MID ATLANTIC MEDICAL SERVICES, INC.
AS OF FEBRUARY 25, 1998
OFFICES
SECTION 1.1 PRINCIPAL OFFICE. - The principal office of the corporation
shall be at 4 Taft Court, Rockville, Maryland 20850. The principal address of
the corporation in Delaware is 229 South State Street, Dover, Delaware 19901.
SECTION 1.2 OTHER OFFICES. - The corporation may have such
other offices and places of business within or without the State
of Delaware as the Board of Directors shall determine.
STOCKHOLDERS
SECTION 2.1 PLACE OF MEETINGS. - Meetings of the stockholders may be
held at such place or places within or without the State of Delaware as shall be
fixed by the Board of Directors and stated in the notice of the meeting.
SECTION 2.2 ANNUAL MEETING. - An annual meeting of stockholders for the
election of directors and the transaction of such other business as may properly
come before the meeting shall be held within five months after the close of the
fiscal year of the corporation.
SECTION 2.3 SPECIAL MEETINGS. - Special meetings of the stockholders
for any purpose(s) may be called by the Board of Directors or by the President
stating the purpose(s) of the meeting. No matters, except those set forth in the
notice of special meeting, may be considered at the special meeting.
SECTION 2.4 NOTICE OF MEETINGS. - Notice stating the time and place,
and in the case of a special meeting the purpose(s) thereof and by whom called,
shall be delivered to each stockholder entitled to vote, not less than
twenty-five (25) nor more than sixty (60) days prior to the meeting. If mailed,
notice shall be directed to each such stockholder at his address as it appears
on the records of the stockholders of the corporation, unless he shall have
previously filed with the Secretary of the corporation a written request that
notices intended for him be mailed to some other address, in which case it shall
be mailed to the address designated in the request. Notice of any meeting need
not be given to any person who may
- 1 -
<PAGE>
become a stockholder of record after the mailing of such notice and prior to the
meeting, or to any stockholder who attends such meeting, in person or by proxy,
for purposes other than solely to object to the lack of proper notice, or to any
stockholder who, in person or by proxy, submits a signed waiver of notice either
before or after such meeting. Notice of any adjourned meeting of stockholders
need not be given, unless otherwise required by statute.
SECTION 2.5 QUORUM AND ACTION. - (a) At any duly held meeting of
stockholders, the presence in person or by proxy of stockholders entitled to
cast a majority of the votes thereat shall constitute a quorum, except as
otherwise provided by law or the Certificate of Incorporation.
(b) A majority of the votes cast at a duly held meeting of stockholders
at which a quorum is present (stockholders represented by proxy shall be deemed
present), shall be sufficient to take or authorize action upon any matter which
may properly come before the meeting, unless a greater vote, or voting by
classes, is required by law or by the Certificate of Incorporation or by these
By-Laws on any question, and except that in elections of directors, those
receiving the greatest number of votes shall be deemed elected even though not
receiving a majority.
Notwithstanding the above, at all meetings of the stockholders, any
vacancy in the Board of Directors by reason of an increase in the number of
directors, the resignation of a director, or for any other cause other than the
removal of a director by the stockholders, may be filled only the affirmative
vote of three-quarters (3/4) of the votes cast at the meeting.
SECTION 2.6 VOTING. - At each meeting of the stockholders, every holder
of stock then entitled to vote may vote in person or by proxy and, except as may
be otherwise provided by the Certificate of Incorporation, shall have one vote
for each share of stock registered in his name. No proxy shall be valid after
eleven (11) months from the date of its execution, unless a longer period is
provided for in the proxy. Proxies shall be exhibited to the Secretary at the
meeting and filed with the records of the corporation.
SECTION 2.7 ADJOURNED MEETINGS. - Any duly called meeting
of stockholders may, by announcement thereat, be adjourned to a
designated time and place by the vote of the holders of a
- 2 -
<PAGE>
majority of the shares present and entitled to vote thereat, even though less
than a quorum is so present. If a meeting is adjourned to another time, not more
than thirty days thereafter, and/or to another place, and if an announcement of
the adjourned time and/or place is made at the meeting, it shall not be
necessary to give notice of the adjourned meeting unless the Board of Directors,
after adjournment, fixes a new record date for the adjourned meeting.
SECTION 2.8 ACTION BY WRITTEN CONSENT IN LIEU OF MEETING OF
STOCKHOLDERS. - See Section 6.6 of the By-Laws.
SECTION 2.9 NEW BUSINESS AND NOMINATIONS. - (a) Only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the Board of Directors, or (ii) by any stockholder of the
corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 2.9. For business to be properly
brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the corporation. To
be timely, a stockholder's notice must be delivered or mailed to and received at
the principal executive offices of the corporation not less than thirty (30)
days prior to the date of the annual meeting; provided, however, that, in the
event that less than forty (40) days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made.
A stockholder's notice to the Secretary shall set forth as to each
matter such stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of the corporation's capital
stock that are beneficially owned by such stockholder, and (iv) any material
interest of such stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be brought before or conducted at an annual meeting except in accordance
with the provisions of this Section
- 3 -
<PAGE>
2.9(a). The officer of the corporation or other person presiding over the annual
meeting shall, if the facts so warrant, determine and declare to the meeting
that business was not properly brought before the meeting in accordance with the
provisions of this Section 2.9(a) and, if he or she should so determine, he or
she shall so declare to the meeting and any such business so determined to be
not properly brought before the meeting shall not be transacted. This provision
shall not prevent the consideration and approval or disapproval at the annual
meeting of stockholders of reports of officers, directors, and committees, but,
in connection with such reports, no new business shall be acted upon at such
annual meeting unless stated and filed as herein provided.
(b) At any special meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders at which directors are to be elected
only (i) by or at the direction of the Board of Directors, or (ii) by any
stockholder of the corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
2.9(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive offices of the corporation not
less than thirty (30) days prior to the date of the meeting; provided, however,
that, in the event that less than forty (40) days' notice or prior disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the tenth (10th) day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made.
Such stockholder's notice shall set forth (i) as to each person whom
such stockholder proposes to nominate for election or re-election as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities
- 4 -
<PAGE>
Exchange Act of 1934, as amended (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (ii) as to the stockholder giving the notice (A) the name and
address, as they appear on the corporation's books, of such stockholder, and (B)
the class and number of shares of the corporation's capital stock that are
beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the corporation the information
required to be set forth in a stockholder's notice of nomination that pertains
to the nominee.
No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the provisions of this Section
2.9(c). The officer of the corporation or other person presiding at the meeting
shall, if the facts so warrant, determine that a nomination was not made in
accordance with such provisions and, if he or she should so determine, he or she
shall so declare to the meeting and the defective nomination shall be
disregarded.
DIRECTORS
SECTION 3.1 NUMBER AND QUALIFICATION. (a) The first Board of Directors
shall be comprised of twenty-three (23) directors who shall serve a one-year
term and until their successors are elected and qualified at the first annual
meeting. Thereafter, the number of directors shall be set by the Board of
Directors; provided, however, that, except for the first Board, the Board of
Directors shall be comprised of no more than twelve (12) and no less than five
(5) directors, each of whom shall serve a three-year staggered term and until
his or her successor is elected and qualified.
Notwithstanding the above, if the Board of Directors elects a Chairman,
pursuant to Sections 4.1 and 4.3 of the By-Laws, and/or a President, pursuant to
Sections 4.1 and 4.4 of these ByLaws, said Chairman and/or President shall
automatically become a director of the corporation. The Chairman and/or
President shall remain a director only as long as he or she continues to be the
Chairman and/or President of the Corporation. As provided for in Section 4.1 of
the By-Laws, the Chairman and the President hold office at the pleasure of the
Board, and may be removed and/or replaced at any time, with or without cause.
- 5 -
<PAGE>
(b) Upon the election qualification of the successor directors to the
first Board of Directors, the successor directors shall be elected by the
stockholders at the first stockholder meeting in members as equally as possible,
into three groups. Group A directors will have a term of office expiring after
one year and until the election and qualification of their successors chosen at
the next annual shareholders meeting ensuing; Group B directors shall have a
term of office expiring one year thereafter and until the election and
qualification of their successors; Group C directors shall have a term of office
expiring two years thereafter and until the election and qualification of their
successors.
(c) Each successor to a Group A, B, and C director shall hold office
until the third annual meeting of the stockholders next succeeding his election,
and until his successor is elected and qualified, or until his prior death,
resignation or removal; except however, if additional directorships are
established, the initial term for such directorships shall be for one or more
years not greater than three as determined by the Board of Directors in order to
ensure that approximately one-third (1/3) of all the directors are elected at
each annual meeting of the stockholders.
(d) Notwithstanding the above, an individual is not qualified to serve
as a director if the individual is concurrently also a director of M.D.
Individual Practice Association, Inc., and Physicians Health Plan of Maryland,
Inc.
SECTION 3.2 POWERS. - The management of all the business, property and
affairs of the corporation shall be vested in the Board of Directors. The Board
may exercise all of the powers of the corporation and do all lawful acts and
things (including the adoption of such rules and regulations for the conduct of
its meetings, the exercise of its powers, and the management of the corporation,
as it may deem proper), consistent with the Delaware General Corporation law,
the Articles of Incorporation, and these By-Laws, and not thereby conferred upon
or reserved to the stockholders.
SECTION 3.3 MEETINGS. - The annual meeting of the Board of Directors
may be held without notice within four (4) weeks after the annual meeting of
stockholders. Regular meetings and the time and place of regular meetings of the
Board may be established by the Board. If the Board of Directors fixes a regular
meeting at a time more than four (4) weeks after the
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annual meeting of the stockholders, or changes the time or place of any regular
meeting, notice of such meeting, in accordance with the By-Law requirements for
notice of special meetings, shall be given to each director who was not present
at the meeting at which such action was taken. Special meetings of the Board may
be called by the Chairman of the Board (if any) or the President, and shall be
called at the written request of three of more directors. Five (5) days notice
of special meetings shall be given by mail, or two (2) days notice if given
personally or by telegraph or cable, to each director. Notice of special
meetings need not state the purpose(s) thereof. A majority of the Directors
present at the time and place of any regular or special meeting, although less
than a quorum, may adjourn the same from time to time without notice, until a
quorum shall be present. Notice of any special meeting shall not be required to
be given to any director who shall attend a meeting without protesting prior
thereto or at its commencement the lack of notice to him, or who submits a
signed waiver of notice, whether before or after the meeting. Notice of any
adjourned meeting shall be required to be given. Meetings of the Board may be
held at any place within or outside of the State of Delaware.
A director may attend a meeting of the Board of Directors, or any
committee thereof, either in person or by means of a telephone or similar
communications medium which allows all persons participating in the meeting to
hear and be heard by all others participating, and participation pursuant to
this subsection shall constitute presence in person at the meeting.
SECTION 3.4 QUORUM AND ACTION. - A majority of the directors then
serving (but in no event less than one-third of the total number of directors
which the corporation would then have if there were no vacancies) shall
constitute a quorum for the transaction of business. At any duly held meeting at
which a quorum is present, the affirmative vote of a majority of the directors
present shall be the act of the Board of Directors on any question, except where
the act of a greater number is required by these By-Laws, by the Certificate of
Incorporation, or by statute.
SECTION 3.5 ACTION BY WRITTEN CONSENT IN LIEU OF MEETINGS
OF DIRECTORS. - See Section 6.6 of these By-Laws.
SECTION 3.6 VACANCIES; REMOVAL. - (a) Any vacancy
occurring in the Board of Directors by reason of an increase in
the number of directors comprising the Board or for any other
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reason shall be filled by action of a majority of the remaining directors, even
if less than a quorum, or by the sole remaining director. Vacancies shall be
filled for the unexpired portion of the term of the director whose vacancy is
being filled.
(b) Except where the Certificate of Incorporation provides otherwise,
contains provisions authorizing cumulative voting or the election of one or more
directors by class or their election by holders of bonds, or requires all action
by stockholders to be by a greater vote, any one or more of the directors may be
removed, (1) either for or without cause, at any time, by the holders of a
majority of the shares then entitled to vote at an election of directors (a) at
any regular meeting or (b) at any special meeting of the stockholders the notice
of which announces that a purpose of such meeting is to seek removal, or, (2)
for cause, by the affirmative vote of a majority of the entire Board of
Directors at any regular or special meeting of the Board. Three (3) unexcused
absences within one (1) calendar year from Board of Directors meetings and/or
committee meetings for committees on which such director sits shall constitute
cause for removal. The Chairman of the Board, if a Chairman be elected, shall
determine whether an absence is "excused" for purposes of this paragraph, but
this decision may be overruled by an affirmative vote of a majority of the
directors at any duly held meeting at which a quorum is present. If no Chairman
is then serving, the Board members at any duly held meeting at which a quorum is
present shall determine whether an absence is excused.
SECTION 3.7 COMMITTEES. - The Board of Directors, by resolution adopted
by a majority of the entire Board (the total number of directors which the
Corporation would have if there were no vacancies), may designate from its
members an Executive Committee, and such other committees as it shall choose to
create, consisting of one or more directors, with such powers and authority (to
the extent permitted by law) as may be provided in said resolution.
SECTION 3.8 REMUNERATION. - (a) Unless otherwise expressly provided by
resolution adopted by the Board of Directors, none of the directors shall, as
such, receive any stated remuneration for these services but the Board of
Directors may at any time and from time to time by resolution provide that a
specified sum shall be paid to a director of the Corporation, either as his/her
annual remuneration as such director or member of any committee of the Board of
Directors or as remuneration for such directors attendance at each meeting of
the Board of Directors or any such
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committee. The Board of Directors may also likewise provide that the Corporation
shall reimburse each director for any expenses paid by him/her on account of
such attendance at any meeting. Nothing in this section shall be construed to
preclude any director from serving the Corporation in any other capacity and
receiving remuneration thereof.
(b) Notwithstanding the above, if any director is also a director of
another corporation either directly or indirectly owned, controlled by and/or
under common control of the corporation, such director shall receive
remuneration as a director from only one corporation. The director shall be
remunerated by the corporation for which he or she would receive the greater
remuneration.
OFFICERS
SECTION 4.1 EXECUTIVE OFFICERS. - The executive officers of the
corporation shall be a President, a Treasurer and a Secretary, all of whom shall
be elected at its annual meeting by the Board, and shall hold office at the
pleasure of the Board. In addition, the Board may elect a Chairman of the Board
of Directors and one or more Vice-Presidents, Assistant Secretaries and/or
Assistant Treasurers. Any two or more offices may be held by one person. All
vacancies occurring among any of the officers shall be filled by the Board for
the unexpired portion of the officer's term and may be filled at a meeting of
the Board other than its annual meeting. Any officer may be removed and/or
replaced at any time, with or without cause, by the affirmative vote of a
majority (unless the Certificate of Incorporation requires a larger vote) of the
directors present at a regular meeting of directors or at a special meeting of
directors called for the purpose.
SECTION 4.2 OTHER OFFICERS. - The Board may appoint, remove and replace
such other officers, including assistant officers and agents, with such powers
and duties as it shall deem necessary. The Board may by resolution authorize the
President to appoint and remove officers which are not Executive Officers.
SECTION 4.3 THE CHAIRMAN OF THE BOARD. - The Chairman of
the Board of Directors, if one be elected, shall preside at all
meetings of the Board of Directors and of the stockholders if the
directors so resolve. The Vice Chairman of the Board of
Directors, if one be elected, shall preside at all meetings of
the Board of Directors and of the stockholders in the absence of
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the Chairman. The Chairman and Vice Chairman shall have and perform such other
duties as from time to time may be assigned to them by the Board of Directors or
the Executive Committee, if any.
SECTION 4.4 THE PRESIDENT. - The President shall, in the absence or
non-election of a Chairman of the Board, preside at all meetings of the
stockholders and directors. When the Board is not in session, he shall have
general management and control of the business and affairs of the corporation.
SECTION 4.5 THE VICE-PRESIDENT. - The Vice-President, if any, or if
there be more than one, the senior Vice-President as determined by the Board of
Directors, shall in the absence or disability of the President, exercise the
powers and perform the duties of the President, and each Vice-President shall
exercise such other powers and perform such other duties as shall be prescribed
by the Board.
SECTION 4.6 THE TREASURER. - The Treasurer shall have custody of all
funds, securities and evidences of indebtedness of the corporation; he shall
receive and give receipts and acquittances for monies paid in on account of the
corporation, and shall pay out of the funds on hand all bills, payrolls, and
other just debts of the corporation, of whatever nature, upon maturity; he shall
enter regularly in books to be kept by him for that purpose, full and accurate
accounts of all monies received and paid out by him on account of the
corporation, and he shall perform all other duties incident to the office of
Treasurer and as may be prescribed by the Board.
SECTION 4.7 THE SECRETARY. - The Secretary shall keep the minutes of
all proceedings of the Board of Directors and of the stockholders; he shall
attend to the giving and serving of all notices to the stockholders and
directors or other notice required by law, or by these By-Laws; shall affix the
seal of the corporation to deeds, contracts and other instruments in writing
requiring a seal, when duly signed or when so ordered by the Board of Directors;
shall have charge of the certificate books and stock books and such other books
and papers as the Board may direct, and shall perform all other duties incident
to the office of the Secretary.
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SECTION 4.8 SALARIES. - The salaries of all officers shall be fixed by
the Board of Directors, and the Board has the authority by majority vote to
reimburse expenses and to establish reasonable compensation of all directors for
services to the corporation as directors, officers, or otherwise.
SECTION 4.9 SHARES OF OTHER CORPORATIONS. - Whenever the corporation is
the holder of shares of stock of any other corporation, any right or power of
the corporation as such stockholder (including the attendance, acting and voting
at stockholders' meetings and execution of waivers, consents, proxies or other
instruments) may be exercised on behalf of the corporation by the President or
such other person as the Board of Directors may authorize.
CAPITAL STOCK
SECTION 5.1 FORM AND EXECUTION OF CERTIFICATES. - The shares of the
corporation shall be represented by certificates which shall be in the form
required by the laws of Delaware and as shall be adopted by the Board of
Directors. They shall be numbered and registered in the order issued; shall be
signed by the Chairman, the Vice-Chairman, the President or a Vice- President
and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and shall be sealed with the corporate seal or a facsimile thereof.
When such a certificate is counter-signed by a transfer agent or registered by a
registrar, the signatures of any such officers may be facsimile.
SECTION 5.2 TRANSFER. - Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfer of
shares shall be made upon the books of the corporation by the registered holder
in person or by attorney, duly authorized, but only upon surrender of the
certificate or certificates for such shares properly assigned for transfer.
SECTION 5.3 LOST OR DESTROYED CERTIFICATES. - The holder of any
certificate representing shares of stock of the corporation may notify the
corporation of any loss, theft or destruction thereof, and the Board of
Directors may thereupon, in its discretion, cause a new certificate for the same
number of shares to be issued to such holder upon satisfactory proof of such
loss, theft or destruction, and the deposit of indemnity by way of bond or
otherwise, in such form and amount and with such surety or sureties as the Board
may require, to indemnify the corporation
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against loss or liability by reason of the issuance of such new
certificate.
SECTION 5.4 RECORD DATE. - (a) In order to make a determination of
stockholders for any proper purpose, the directors may close the stock transfer
books for a stated period not to exceed twenty (20) days; and if the purpose of
the closing is to determine stockholders entitled to notice of or to vote at a
meeting of the stockholders, the books shall be closed for at least ten (10)
days immediately preceding such meeting.
(b) In lieu of closing the books, the directors may fix in advance a
record date for determination of stockholders for any proper purpose, such date
shall not be more than sixty (60) days, and in case of a meeting of
stockholders, not less than twenty-five (25) days, prior to the date on which
the particular action, requiring such determination of stockholders, is to be
taken.
(c) In the absence of such closing or fixed record date, the date for
determination of stockholders entitled (1) to notice of or to vote at a meeting
of stockholders, or (2) to receive a dividend or any right shall be as provided
by Section 213 of the General Corporation Law or any successor provision.
MISCELLANEOUS
SECTION 6.1 DIVIDENDS. - The Board of Directors may declare dividends
from time to time on the outstanding shares of the corporation from the surplus
or net profits legally available therefor.
SECTION 6.2 SEAL. - The Board shall provide a suitable corporate seal
stating the corporate name, and state and year of incorporation, which shall be
in the charge of the Secretary and shall be used as authorized by these By-Laws.
SECTION 6.3 FISCAL YEAR. - The fiscal year of the
corporation shall close annually on December 31.
SECTION 6.4 CHECKS, NOTES, ETC. - (a) Checks, notes, drafts, bills of
exchange and orders for the payment of money shall be signed or endorsed in such
manner as shall be determined by the Board.
(b) The funds of the corporation shall be deposited in such bank or
trust company, and checks drawn against such funds shall
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be signed in such manner as may be determined from time to time
by the Board.
SECTION 6.5 NOTICE AND WAIVER OF NOTICE. - (a) Any notice of meetings
required to be given under these By-Laws to stockholders and/or directors may be
waived in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein.
(b) All notices required by these By-Laws shall be printed or written,
and shall be delivered either personally, by telegraph or cable, or by mail,
and, if mailed, shall be deemed to be delivered when deposited in the United
States mail, postage prepaid, addressed to the stockholder or director at his
address as it appears on the records of the corporation.
SECTION 6.6 ACTION BY WRITTEN CONSENT IN LIEU OF MEETINGS. - Any action
required or permitted to be taken at a meeting of the stockholders or of the
Board of Directors or of any committee thereof may be taken without a meeting if
a consent in writing setting forth the action so taken shall be signed by all of
the stockholders entitled to notice of or to vote with respect to the subject
matter thereof, or by all of the members of the Board or of such committee, as
the case may be, and such consent shall have the same force and effect as a
unanimous vote.
AMENDMENTS
SECTION 7.1 AMENDMENTS. - These By-Laws may be altered,
amended or repealed:
(a) at any duly held stockholders' meeting by vote of the owners of a
majority (unless the Certificate of Incorporation requires a larger vote) of the
outstanding stock having voting power, present in person or by proxy, provided
notice of the amendment is included in the notice or waiver of notice of such
meeting, and
(b) except as provided below, at any regular or special meeting of the
Board of Directors by a majority (unless the Certificate of Incorporation
requires a larger vote) of the entire Board, but any By-Laws so made by the
Board may be altered or repealed by the stockholders. The Board of Directors
shall have no power to change the quorum for meetings of stockholders or of the
Board of Directors, or to change any provisions of the By-Laws with respect to
the removal of directors or the filling
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of vacancies in the Board resulting from the removal by the stockholders. If any
By-Laws regulating an impending election of directors are adopted, amended or
repealed by the Board of Directors, there shall be set forth in the notice of
the next meeting of stockholders for the election of directors, the by-laws so
adopted, amended or repealed, together with a concise statement of the changes
made.
INDEMNITY
SECTION 8.1 INDEMNITY. - The corporation shall indemnify its officers,
directors, employees and agents to the full extent permitted by Section 145, or
any successor provision, of the General Corporation Law, and such rights of
indemnification shall be in addition to any rights to which any such director,
officer, employee or agent may otherwise be entitled under the Certificate of
Incorporation, any agreement or vote of the stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has agreed to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
1993 NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSE. The purpose of this 1993 Non-Qualified Stock Plan ("Plan")
is to advance the interests of Mid Atlantic Medical Services, Inc. ("MAMSI") and
its subsidiaries (collectively referred to as "Company") by encouraging and
providing for the acquisition of an equity interest in the Company by key
employees through the grant of stock options to purchase Common Stock of MAMSI.
Such Plan will enable the Company to retain the services of key employees upon
whose judgment, interest, and special effort the successful conduct of its
operations is largely dependent and to compete effectively with other
enterprises for the services of key employees as may be needed for the continued
improvement of the business.
2. STOCK SUBJECT TO PLAN. The stock to be subject to options
("Options") under the Plan shall be shares of Mid Atlantic Medical Services,
Inc. Common Stock, par value of $.01 per share ("Common Stock"), either
authorized and unissued or treasury shares. The aggregate number of shares of
Common Stock for which Options may be granted under the Plan shall not exceed
650,000 shares, subject to adjustment in accordance with the provisions of
Section 7 hereof. The shares subject to the unexercised portion of any
terminated or expired Options under the Plan may again be available for new
grants of Options under the Plan.
3. ADMINISTRATION. The Plan shall be administered by the Committee
referred to in Section 4. Subject to the express provisions of the Plan, the
Committee shall have complete authority, in its discretion, to determine those
key employees to whom Options shall be granted. In making such determinations,
the Committee may take into account the nature of the services rendered by the
respective key employees, their present and potential contributions to the
success of the Company, and such other factors as the Committee, in its
discretion, shall deem relevant. Subject to the express provisions of the Plan,
the Committee shall also have complete authority to interpret the Plan, to
prescribe, amend, and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of the respective Option agreements (which
need not be identical), to determine whether the shares delivered upon exercise
of Options will be treasury shares or will be authorized but previously unissued
shares and to make all other determinations necessary or advisable for the
administration of the Plan; provided, however, that no action of the Committee
will be effective if it contravenes or amends this Plan in any respect. The
Committee's determinations on the matters referred to in this paragraph shall be
conclusive.
4. COMMITTEE. The Committee shall consist of at least three members of
the Board of MAMSI. No member of the Committee shall be or, during the one year
prior to service as a member, have been granted or awarded equity securities
pursuant to the Plan or any other plan of the Company, except as permitted by
Rule 16b-3(c) (2) (i). The Committee shall be appointed, from time to time, by
the Board of Directors, which may, from time to time, appoint members of the
Committee in substitution for members previously appointed and may fill
vacancies, however caused, in the Committee. A majority of the Committee's
members shall constitute a quorum. All determinations of the Committee shall
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be made by a majority vote of its members. Any decision or determination reduced
to writing and signed by all of the members shall be fully as effective as if it
had been made by a majority vote at a meeting duly called and held. The
Committee shall also have express authorization to hold Committee Meetings by
conference, telephone, or similar communication equipment by means of which all
persons participating in the meeting can hear each other. The Committee may, in
its sole discretion, delegate all or any portion of its authority, with respect
to Options to be granted to eligible employees who are not officers or directors
of MAMSI, to the President of MAMSI, or any member of the Committee, as it deems
appropriate, provided that the Committee shall regularly review all actions
taken pursuant to such delegation of authority.
5. ELIGIBILITY. Options may be granted to such key employees of the
Company as the Committee shall select from time to time. No director who is not
an employee of the Company shall be eligible to receive Options under the Plan.
An individual may hold more than one Option.
6. GRANT TERMS AND CONDITIONS OF OPTIONS. Options may be granted at any
time after the effective date of the Plan and from time to time prior to the
termination of the Plan. Except as hereinafter provided, Options granted
pursuant to the Plan shall be subject to the following terms and conditions:
a. Price. The purchase price of the shares of stock covered by
all Options granted pursuant to this Plan shall be no less than the Fair Market
Value of the Common Stock of MAMSI as of the date of grant of the Option as
determined by the Committee. In the event a public market for the Common Stock
exists, Fair Market Value shall mean the most recent closing price quotation,
or, if none, the average of the bid and asked prices, as reported with respect
to Common Stock on the most recent available date, on any national stock
exchange on which the Common Stock is then listed, or if not so listed, on the
NASDAQ National Market System, or other consolidated reporting system reporting
trades of the Common Stock. If the Common Stock is not so listed, Fair Market
Value shall mean the average of the bid and the asked prices as quoted by all
market makers in the Common Stock. In the event that a market for the Company's
Common 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.
b. Payment Upon Exercise. Upon exercise of an Option, the
Option Price shall be payable to the Company in cash, in shares of Common Stock
valued at the Fair Market Value thereof on the date of payment, or in a
combination of cash and shares of Common Stock. However, any stock used for
payment must have been held by the Option holder for at least six months.
c. Duration and Exercise of Options. The Committee may grant
Options for such term as it determines, provided that the term of any Options
shall not exceed 5
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years after the date of the grant. Each Option shall be exercisable in such
installments and at such times as designated by the Committee. To the extent not
exercised, installments shall accumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, but not later than the date the
Option expires. Except as hereafter provided, all Options granted pursuant to
the Plan shall be nontransferable, except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined by
the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act, or the rules thereunder.
d. Exercise after Termination of Employment. Subject to the
condition that no Option granted under this Plan shall be exercisable after
expiration of 5 years from the date of the grant, or such shorter period as
provided in any Option agreement with an optionee, the optionee shall have the
following rights upon death, disability or other termination of employment:
(1) Death. If the optionee's employment is terminated by death, his estate
or the person who acquired the right to exercise such Option by bequest or
inheritance from the optionee shall be entitled, for a period of one year
following the date of his death, to exercise the Option with respect to all or
any part of the shares subject thereto, whether or not the Option had become
exercisable at the time of death.
(2) Disability. If the optionee's employment terminates because of
disability within the meaning of Section 22(e)(3) of the Internal Revenue Code
of 1986, as amended, the optionee shall have the right for a period of one year
following the date of such termination to exercise the Option with respect to
all or any part of the shares subject thereto, whether or not the Option had
become exercisable at the time of his disability or termination.
(3) Other Reasons. If the optionee's employment is terminated for any
reason other than death or disability, as provided above, the optionee holding
an Option under the Plan shall have the right for a period of three months
following such termination to exercise any Option with respect to all or any
part of the shares subject thereto, to the extent the Option had become
exercisable at the time of such termination.
e. Other Terms and Conditions. The Committee may provide for
such other terms and conditions which shall not be inconsistent with any of the
terms herein with respect to any Option grant as it shall deem appropriate. Any
award under the Plan shall be evidenced by an agreement, which, subject to the
provisions of the Plan, may contain such terms and conditions as may be approved
by the Committee, and shall be executed by an officer on behalf of the Company
and by the recipient of the award. The Committee may use a stock option
agreement substantially in the form attached to this Plan or any other form
approved by the Committee.
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f. Restriction on Resale. To the extent the Committee
determines that any restrictions on a resale of the shares issued upon exercise
of an Option is required under any rule promulgated by the Securities and
Exchange Commission, the Committee may include in any stock option agreement a
provision requiring that the stock issued on exercise of the Option granted
under such agreement cannot be resold for a specified period of time after the
date of exercise.
g. Effect of Expiration, Termination or Surrender of Options.
If an Option shall expire or terminate unexercised as to any shares of Common
Stock covered thereby, such shares of Common Stock shall not be deducted from
the number available under Section 2 hereof.
7. ADJUSTMENT OF AND CHANGES IN STOCK. In the event that the shares of
Common Stock, as presently constituted, shall be changed into or exchanged for a
different number or kind of shares of stock of MAMSI or of another employer
corporation (whether by reason of corporate merger, consolidation, acquisition
of property or stock separation, reorganization or liquidation) or if the number
of such shares of Common Stock shall be changed through payment of a stock
dividend, stock split, or otherwise, then there shall be substituted for or
added to each share of stock theretofore appropriated or thereafter subject or
which may become subject to an Option under this Plan, the number and kind of
such shares of stock into which each outstanding share of Common Stock shall be
so changed, or for which each such shares shall be exchanged, or to which such
shares shall be entitled, as the case may be. Outstanding Options shall also be
appropriately amended as to price and other terms as may be necessary to reflect
the foregoing events.
8. CHANGES IN CONTROL. Upon dissolution or liquidation of the Company,
or upon a reorganization, merger or consolidation in which the Company is not
the surviving corporation, or upon the sale of substantially all of the property
of the Company to another corporation, the Plan and the Options issued
thereunder shall terminate, unless provisions are made in connection with such
transaction for the assumption of Options theretofore granted, or for the
substitution for such Options of new options of the successor employer
corporation or a parent or subsidiary thereof, with appropriate adjustment as to
the number and kinds of shares and the per share exercise prices. In the event
of such termination, all outstanding Options shall be exercisable in full for at
least 30 days prior to the termination date whether or not exercisable during
such period. This acceleration for vesting will also occur if at least 50% or
more of the voting stock of the Company is sold either through a tender offer or
otherwise to a party or an affiliated group of parties. For purposes of this
Section 8, Company refers to MAMSI, MD-Individual Practice Association, Inc.,
Optimum Choice, Inc., and/or Physicians Health Plan of Maryland, Inc., jointly
and/or separately.
9. AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN. The Committee,
without further approval of the stockholders, but with the approval of the Board
of Directors, may at any time terminate this Plan or any part thereof and may
from time to time amend this Plan as it may deem advisable. The termination or
amendment of
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the Plan shall not, without the consent of the employee, affect such employee's
rights under an award previously granted.
10. TERM OF THE PLAN. The Plan shall become effective on May 1, 1993.
The Plan shall terminate 5 years after its effective date, or on such earlier
date as may be determined by the Board of Directors. Termination of the Plan,
however, shall not affect the right of the optionees under Options previously
granted to them, and all unexpired Options shall continue in force and operation
after termination of the Plan except as they may lapse or be terminated by their
own terms and conditions.
11. MISCELLANEOUS PROVISIONS.
a. Right to Awards. No employee or other person shall have any claim or
right to be granted any award under the Plan.
b. Rights as Stockholders. An optionee shall have no rights as a holder of
Common Stock by reason of Options granted under the Plan, unless and until
certificates for shares of Common Stock are issued to the optionee.
c. No Assurance of Employment. Neither the Plan nor any action taken
thereunder shall be construed as giving any employee any right to be retained in
the employ of the Company or any subsidiary.
d. Costs and Expenses. All costs and expenses incurred in administering the
Plan shall be borne by the Company.
e. Unfunded Plan. The Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund nor to make any other
segregation of assets to assure the payment of any award under the Plan.
f. Withholding Taxes. Each optionee shall arrange with the Company a means
of paying any federal, state, local or foreign withholding tax as required by
law upon the exercise of an Option under the Plan. Amounts to which the Company
is entitled pursuant to Paragraph 11(f) may be paid, at the election of the
optionee, either (i) in cash withheld from the employee's salary or other
compensation payable by the Company, (ii) with the approval of the Committee, in
shares of Common Stock otherwise issuable to the employee upon exercise of an
Option that have a Fair Market Value on the date on which the amount of tax to
be withheld is determined ("Tax Date") equal to the amount of tax the Company is
entitled to withhold, or (iii) cash paid to the Company by the optionee. An
optionee's election to have withheld shares of Common Stock that are otherwise
issuable shall be in writing, shall be irrevocable upon approval by the
Committee, and shall be delivered to the Company prior to the Tax Date with
respect to the exercise of an Option.
5
<PAGE>
g. Assignment or Transfer. Options or other awards granted under the Plan
or any rights or interests therein shall not be assignable or transferable by
the recipient thereof except by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Internal
Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income
Security Act, or the rules thereunder.
h. Investment Representation. The Committee may, in its discretion, demand
that any employee awarded an Option shall deliver to the Committee at the time
of exercise of such Option a written representation that the shares of Common
Stock to be acquired upon exercise are to be acquired for investment and not for
resale or with a view to the distribution thereof. Upon such demand, delivery of
such written representation by the employee prior to the delivery of any shares
of Common Stock pursuant to the exercise of his Option shall be a condition
precedent to the employee's right to purchase or otherwise acquire such shares
of Common Stock by such exercise. The Company is not legally obligated hereunder
if fulfillment of its obligations under the Plan would violate federal or state
securities laws.
i. Nature of Benefits. Awards under the Plan, and payments made pursuant
thereto, are not a part of salary or base compensation, and will not be
considered in determining an employee's benefits or contributions under any
retirement plan.
j. Registration. Management is directed to register stock issued pursuant
to this plan with the Securities and Exchange Commission.
6
1993 Non-Qualifed Stock Option Letter sent to Key Employees
_______, 1993
- ------------
4 Taft Court
Rockville, MD 20850
Re: 1993 Non-Qualified Stock Option Plan
Dear ________:
Mid Atlantic Medical Services, Inc. (the "Corporation") has adopted the
1993 Non-Qualified Stock Option Plan (the "Plan") which provides for the grant
of options to purchase shares of the Corporation's common stock ("stock") to
certain key employees of the Corporation and its subsidiaries. Since you are
considered a key employee, and since the Corporation desires you to remain, you
are being provided with a means to acquire a proprietary interest in the
Corporation's success. You have been granted, subject to the following terms and
conditions, the right to acquire shares of the Corporation's stock. The date of
grant will be _______, 1993. The terms and conditions governing this grant to
you are set forth below.
1. Subject to the terms and conditions of the Plan (a copy of
which is attached hereto and made a part hereof) and this
letter, the Corporation grants to you the option to purchase
from the Corporation all or any part of an aggregate number
of two thousand one hundred (2,100) shares of stock
(hereinafter such shares of stock are referred to as the
"optioned shares" and the option to purchase the optioned
shares is referred to as the "option").
2. The price to be paid for the optioned shares shall be 100% of the fair
market value of the stock as of ______, 1993.
3. Subject to the terms and conditions of the Plan and this letter, the
options may be exercised by you while in the employ of the Corporation,
in whole or in part, from time to time. You can exercise options for up
to seven hundred (___) shares beginning June 1, 1994, for up to seven
hundred (___) shares beginning June 1, 1995 and for up to seven hundred
(___) shares beginning June 1, 1996. The
<PAGE>
Corporation will use its best efforts to register option shares of
stock under the Securities Act of 1933, as amended, using a Form S-8
registration statement.
Optioned shares must be purchased within 5 years from the date of
grant, _______, 1993. That is, all options must be exercised by
_______, 1998, provided you remain an employee. Upon termination of
your employment, option shares must be purchased as provided for in
Section 6d of the Plan for any shares which you have a right to
purchase as of the date of termination.
4. In the event that the shares of the Corporation's stock, as presently
constituted, shall be changed, as provided for in Section 7 of the
Plan, the number of options issued to you will be adjusted accordingly.
5. The options may be exercised only by written notice, delivered or
mailed by registered or certified mail addressed to the Treasurer of
the Corporation at the Corporation's principal business office. Such
notice shall be accompanied by payment of the entire option price of
the optioned shares being purchased either (i) in cash or its
equivalent, (ii) by tendering previously acquired shares of stock
valued at their Fair Market Value at the time of exercise as long as
the tendered shares have been held by you for at least six months, or
(iii) by any combination of (i) and (ii). Fair Market Value shall be
determined as provided in Paragraph 6a of the Plan. Any shares of
stock tendered in payment for optioned shares shall be duly endorsed
in blank or accompanied by stock powers duly endorsed in blank. Upon
receipt of the payment of the entire price of the optioned shares so
purchased, certificates representing such optioned shares shall be
issued to you. The optioned shares so purchased shall be fully paid
and nonassessable except insofar as statutory liability may be imposed
under any applicable law.
6. Upon dissolution or liquidation of the Corporation, or upon a
reorganization, merger or consolidation in which the Corporation is not
the surviving corporation, or upon the
<PAGE>
sale of substantially all of the property of the Corporation to another
corporation, the Plan and the options issued thereunder shall
terminate, unless provisions are made in connection with such
transaction for the assumption of options theretofore granted, or for
the substitution for such options of new options of the successor
employer corporation or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kinds of shares and the
per share exercise prices. In the event of such termination, all
outstanding options shall be exercisable in full for at least 30 days
prior to the termination date whether or not exercisable during such
period. This acceleration for vesting will also occur if at least 50%
or more of the voting stock of the Corporation is sold either through a
tender offer or otherwise to a party or an affiliated group of parties.
For purposes of this Paragraph 6, Corporation refers to Mid Atlantic
Medical Services, Inc., MD-Individual Practice Association, Inc.,
and/or Physicians Health Plan of Maryland, Inc., jointly and/or
separately.
<PAGE>
-3-
7. You shall not be deemed for any purposes to be a stockholder of the
Corporation with respect to any shares which may be acquired hereunder
except to the extent that the options shall have been exercised and the
stock certificate issued with respect thereto.
8. The options herein granted shall not be transferable by you otherwise
than by will, by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Internal Revenue
Code of 1986, as amended, or Title I of the Employee Retirement Income
Security Act, or the rules thereunder.
9. You agree for yourself and your heirs, legatees, and legal
representatives, with respect to all shares of stock
acquired pursuant to the terms and conditions of the Plan
and this letter (or any other shares of stock issued
pursuant to a stock dividend or stock split thereon or any
securities issued in lieu thereof or in substitution or
exchange therefore), that you and your heirs, legatees and
legal representatives 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 which, 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 an outstanding
option if, in the opinion of the Corporation, (a) the
issuance of such shares would constitute a violation by you
or the Corporation of any applicable law of 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. The existence of the options herein granted shall not affect
in any way the right or power of the Corporation or its
directors or stockholders 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 or prior
preferences stock ahead of or affecting the 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 corporation act or
<PAGE>
proceeding, whether of a similar character or otherwise.
11. As a condition of granting the options to you, you agree,
for yourself and your legal representatives, that any
dispute or disagreement which may arise under or as a result
of or pursuant to the Plan and this letter shall be
determined by the Stock Option Committee in its sole
discretion, and any interpretation by the Committee of the
terms of the Plan and this letter shall be final, binding
and conclusive.
Very truly yours,
George T. Jochum
Chairmen, President and
Chief Executive Officer of
MAMSI
Peter L. Flaherty, Jr. M.D.
Vice Chairman of MAMSI
Seen and Accepted:
- -----------------
Signature
- -----------------
Date
FIRST AMENDMENT TO EMPLOYMENT CONTRACT
between
Mid Atlantic Medical Services, Inc.
and
MD-Individual Practice Association, Inc.
and
GEORGE T. JOCHUM
This agreement shall be the First Amendment to the Employment Agreement between
Mid Atlantic Medical Services, Inc., MD-Individual Practice Association, Inc.
and George T. Jochum which was signed and delivered the 18th day of December
1990.
(1) The parties reaffirm and ratify the Original Contract in all
respects except as provided below.
(2) Add to Section 3.9 [Retirement Benefits]
"Payment, if any, of the augmented retirement benefit will be made
in the form of an annuity for a fixed term of years payable to the
Executive, or his estate, heirs, or assignees as determined by the
Executive. Such term of the annuity shall be the actuarially
equivalent of a fixed and certain term as compared to the average
life expectancy for an individual of the age and status of the
Executive at the date of retirement or death"
(3) Change to Section 1.1 [Term of Employment] by
deleting "ending December 31, 1994", and
inserting "ending December 31, 1998"
(4) Add to Section 3.1 (Base Compensation) at end of first paragraph.
"Notwithstanding the above, in no event will Executive's
Compensation be reduced by more than 25% in any one year"
<PAGE>
(5) Change to Section 3.1 (Base Compensation) by
deleting "March" and inserting "January"
(6) Add new section 3.10
"Health Insurance. Either the Executive or the spouse of the Executive
at the time of retirement or death of the Executive will be eligible for
health coverage from the Company or its successor during the term of their
respective lives. Such health coverage to be paid for by Executive or the
spouse of the Executive."
Signed and delivered this 11th day of September, 1992, in Rockville, Maryland by
Mid Atlantic Medical Services, Inc., MD-Individual Practice Association, Inc.
and George T. Jochum.
/s/
George T. Jochum
Mid Atlantic Medical Services, Inc. MD-Individual Practice Association, Inc.
By: /s/ Joseph L. Guarriello By: /s/ Joseph L. Guarriello
------------------------ ------------------------
Joseph L. Guarriello Joseph L. Guarriello
Executive Vice President Executive Vice President
and General Counsel and General Counsel
FOURTH AMENDMENT TO EMPLOYMENT CONTRACT
between
Mid Atlantic Medical Services, Inc.
and
MD-Individual Practice Association, Inc.
and
GEORGE T. JOCHUM
This Agreement shall be the Fourth Amendment to the Employment Agreement between
Mid Atlantic Medical Services, Inc. (the Company), MD-Individual Practice
Association, Inc., and George T. Jochum (Executive) which was signed and
delivered the 18th day of December, 1990. The first Amendment was dated
September 11, 1992. The second Amendment was dated in 1993. The third Amendment
was dated December 8, 1995.
The original contract provides for a special bonus to be paid to Mr. Jochum
pursuant to Section 3.2. That provision provided for a bonus payment if certain
criteria were attained. Mr. Jochum has agreed to forego this bonus for 1998.
Additionally, the formula compensation adjustment of Section 3.1 did not
anticipate a loss year. Therefore, a salary increase cannot be calculated. The
purpose of this technical amendment is to clarify the above issues.
(1) The parties reaffirm and ratify the Original Contract, the First Amendment,
the Second Amendment, and the Third Amendment in all respects except as
provided below.
(2) Add the following at the end of Section 3.1: Notwithstanding the above,
salary to be paid to the Executive for calendar year 1998 will be set at
$1,350,000.00.
(3) Add the following to Section 3.2 after the sentence which begins
Additionally, a bonus and ends with certain ascertainable criteria:
Notwithstanding the previous sentence, there shall be no such additional
bonus for 1998.
Signed and delivered this 23rd day of February, 1998, in Rockville, Maryland
by Mid Atlantic Medical Services, Inc., MD-Individual Practice Association,
Inc., and George T. Jochum.
/s/ George T. Jochum
- -------------------------------------
George T. Jochum
Mid Atlantic Medical Services, Inc. MD-Individual Practice Association, Inc.
By: /s/ Joseph L. Guarriello By: /s/ Joseph L. Guarriello
--------------------------- ---------------------------
Joseph L. Guarriello Joseph L. Guarriello
Executive Vice President Executive Vice President
and General Counsel and General Counsel
MID ATLANTIC MEDICAL SERVICES, INC.
1998 NON-QUALIFIED STOCK OPTION PLAN
Article I. Purpose, Adoption and Term of the Plan
1.01 Purpose. The purpose of the Mid Atlantic Medical Services, Inc.
1998 NonQualified Stock Option Plan (hereinafter referred to as the "Plan") is
to advance the interests of the Company (as hereinafter defined) and its
Subsidiaries (as hereinafter defined) by encouraging and providing for the
acquisition of an equity interest in the Company by non-employee directors,
officers and key employees through the grant of options to purchase Common Stock
(as hereinafter defined). The Plan will enable the Company to retain the
services of non-employee directors and key employees upon whose judgment,
interest, and special effort the successful conduct of its operations is largely
dependent and to compete effectively with other enterprises for the services of
non-employee directors, officers and key employees as may be needed for the
continued improvement of its business.
1.02 Adoption and Term. The Plan shall become effective on May 1, 1998,
subject to the prior approval of a simple majority of the holders of Common
Stock represented, by person or by proxy, and entitled to vote at an annual or
special meeting of the holders of Common Stock. The Plan shall terminate on
April 30, 2003, or such earlier date as shall be determined by the Board (as
hereinafter defined); provided, however, that, in the event the Plan is not
approved by a simple majority of the holders of Common Stock represented, by
person or by proxy, and entitled to vote at an annual or special meeting at or
before the Company's 1998 annual meeting of holders of Common Stock, the Plan
shall terminate on such date and any Options (as hereinafter defined) made under
the Plan prior to such date shall be void and of no force and effect.
Article II. Definitions
For purposes of the Plan, capitalized terms shall have the following
meanings:
2.01 "Beneficiary" means an individual, trust or estate who or that, by
will or the laws of descent and distribution, succeeds to the rights and
obligations of the Participant under the Plan and an Option Agreement upon the
Participant's death.
2.02 "Board" means the Board of Directors of the Company.
2.03 "Cause" means, with respect to a Participant who is a Non-Employee
Director, removal as a director by the holders of Common Stock or by the Board
for cause; provided, however, that, if a Non-Employee Director is not a director
of the Company, removal as a director by the holders of common stock of any
Subsidiary on whose Board of Directors he or she serves or by such Board of
Directors for cause.
- 1 -
<PAGE>
2.04 "Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor thereto. References to a section of the Code
shall include that section and any comparable section or sections of any future
legislation that amends, supplements, or supersedes said section.
2.05 "Committee" means a committee of the Board as may be appointed,
from time to time, by the Board.
(a) The Board may appoint more than one Committee to
administer the Plan. If it appoints more than one Committee, one
Committee (the "Stock Option Committee") shall have the authority to
grant Options to a Participant who is either, at the Date of Grant of
the Option, a "covered employee" as defined in Section 162(m) or who is
subject to Section 16 of the Exchange Act; however, such Committee
shall also have the authority to grant Options to other Participants.
The Stock Option Committee shall be composed of at least two directors
of the Company, each of whom is a "non-employee director" as defined in
Rule 16b-3 and an "outside director" within the meaning of Section
162(m). If, however, at least two of the Company's directors are not
both "non-employee directors" and "outside directors," the Board may
grant Options to a Participant who is either a "covered employee" or
subject to Section 16 of the Exchange Act, in which case the Board may
also administer the Plan and the term "Committee" as used herein shall
also include the Board. The other Committee (the "Select Committee")
shall be composed of at least one director, who may be an officer of
the Company. The Select Committee shall have authority to grant Options
to a Participant who is not, at the Date of Grant of the Option, either
a "covered employee" as defined in Section 162(m) or subject to Section
16 of the Exchange Act.
(b) The Board may, from time to time, appoint members of each
Committee in substitution for those members who were previously
appointed and may fill vacancies, however caused, in the Committee.
(c) The Stock Option Committee and the Select Committee shall
each have the power and authority to administer the Plan in accordance
with Article III with respect to particular classes of Participants (as
specified in Section 2.05(a)) and, when used herein, the term
"Committee" shall mean either the Stock Option Committee or the Select
Committee if the Board appoints more than one Committee to administer
the Plan. If, however, there is a conflict between the determinations
made by the Stock Option Committee and the Select Committee, the
determinations made by the Stock Option Committee shall control.
2.06 "Common Stock" means the Common Stock, par value $.01 per share,
of the Company.
- 2 -
<PAGE>
2.07 "Company" means Mid Atlantic Medical Services, Inc., a corporation
organized under the laws of the State of Delaware, and its successors.
2.08 "Date of Grant" means the date designated by the Committee as the
date as of which it grants an Option, which shall not be earlier than the date
on which the Committee approves the granting of such Option.
2.09 "Disability" has the meaning specified in Section 22(e)(3) of
the Code.
2.10 "Disability Date" means the date as of which an Employee
Participant is determined by the Committee to have a Disability.
2.11 "Employee Participant" means a Participant who is not a
Non-Employee Director.
2.12 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
2.13 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.14 "Fair Market Value" of a share of Common Stock means, as of any
given date, the closing sales price of a share of Common Stock on such date on
the principal national securities exchange on which the Common Stock is then
traded or, if the Common Stock is not then traded on a national securities
exchange, the closing sales price or, if none, the average of the bid and asked
prices of the Common Stock on such date as reported on the National Association
of Securities Dealers Automated Quotation System ("Nasdaq"); provided, however,
that, if there were no sales reported as of such date, Fair Market Value shall
be computed as of the last date preceding such date on which a sale was
reported; provided, further, that, if any such exchange or quotation system is
closed on any day on which Fair Market Value is to be determined, Fair Market
Value shall be determined as of the first date immediately preceding such date
on which such exchange or quotation system was open for trading. In the event
the Common Stock is not admitted to trade on a securities exchange or quoted on
Nasdaq, the Fair Market Value of a share of Common Stock as of any given date
shall be as determined in good faith by the Committee, in its sole and absolute
discretion, which determination may be based on, among other things, the opinion
of one or more independent and reputable appraisers qualified to value companies
in the Company's line of business. Notwithstanding the foregoing, the Fair
Market Value of a share of Common Stock shall never be less than par value per
share.
2.15 "Non-Employee Director" means each member of the Board or of the
Board of Directors of a Subsidiary, in each case who is not an employee of the
Company or of any of its Subsidiaries; provided, however, that Francis C. Bruno
shall be considered to be a Non-Employee Director.
2.16 "Non-Employee Director Option" means an Option granted in
accordance with Article VII.
- 3 -
<PAGE>
2.17 "Option Agreement" means a written agreement between the Company
and a Participant specifically setting forth the terms and conditions of an
Option granted to a Participant under the Plan.
2.18 "Option" means any option to purchase Common Stock granted to an
Employee Participant pursuant to Articles V and VI or to a Non-Employee Director
pursuant to Article VII. All Options granted under the Plan shall be Options
that do not qualify as incentive stock options under Section 422 of the Code.
2.19 "Participant" means any employee of the Company or any of its
Subsidiaries selected by the Committee to receive an Option under the Plan in
accordance with Articles V and VI and, solely to the extent provided in Article
VII, any Non-Employee Director.
2.20 "Plan" means the Mid Atlantic Medical Services, Inc. 1998
Non-Qualified Stock Option Plan as set forth herein, and as the same may be
amended from time to time.
2.21 "Rule 16b-3" means Rule 16b-3 promulgated by the SEC under Section
16 of the Exchange Act and any successor rule.
2.22 "SEC" means the Securities and Exchange Commission.
2.23 "Section 162(m)" means Section 162(m) of the Code and the
regulations thereunder.
2.24 "Subsidiary" means a company more than 50% of the equity interests
of which are beneficially owned, directly or indirectly, by the Company.
2.25 "Termination of Employment" means, with respect to an Employee
Participant, the voluntary or involuntary termination of a Participant's
employment with the Company or any of its Subsidiaries for any reason,
including, without limitation, death, Disability, retirement or as the result of
the sale or other divestiture of the Participant's employer or any similar
transaction in which the Participant's employer ceases to be the Company or one
of its Subsidiaries. Whether entering military or other government service shall
constitute Termination of Employment, and whether a Termination of Employment is
a result of Disability, shall be determined in each case by the Committee in its
sole and absolute discretion.
Article III. Administration
3.01 Committee. The Plan shall be administered by the Committee, which
shall have exclusive and final authority in each determination, interpretation,
or other action affecting the Plan and its Participants. The Committee shall
have the sole and absolute discretion to interpret the Plan, to establish and
modify administrative rules for the Plan, to select the officers and other key
employees to whom Options may be granted, to determine the terms and provisions
of the respective Option Agreements (which need not be identical), to determine
all claims for benefits under the Plan, to impose such conditions and
restrictions on Options as it determines appropriate, to determine
- 4 -
<PAGE>
whether the shares delivered on exercise of Options will be treasury shares or
will be authorized but previously unissued shares, and to take such steps in
connection with the Plan and Options granted hereunder as it may deem necessary
or advisable. No action of the Committee will be effective if it contravenes or
amends the Plan in any respect.
3.02 Actions of the Committee. Except when the "Committee" is the
"Board" in the circumstance described in the last sentence of Section 2.05, all
determinations of the Committee shall be made by a majority vote of its members.
A majority of a Committee's members shall constitute a quorum. Any decision or
determination reduced to writing and signed by all of the members shall be fully
as effective as if it had been made by a majority vote at a meeting duly called
and held. The Committee shall also have express authorization to hold Committee
meetings by conference telephone, or similar communication equipment by means of
which all persons participating in the meeting can hear each other.
Article IV. Shares of Common Stock
4.01 Number of Shares of Common Stock Issuable. Subject to adjustments
as provided in Section 8.05, 1,500,000 shares of Common Stock shall be available
for Options under the Plan. Any and all of such shares may be issued pursuant to
Options granted to Employee Participants or to Non-Employee Directors. The
Common Stock to be offered under the Plan shall be authorized and unissued
Common Stock, or issued Common Stock that shall have been reacquired by the
Company and held in its treasury.
4.02 Number of Shares of Common Stock Awarded to any Participant. In
the event the purchase price of an Option is paid, or related tax or withholding
payments are satisfied, in whole or in part through the delivery of shares of
Common Stock issuable in connection with the exercise of the Option, a
Participant will be deemed to have received an Option with respect to those
shares of Common Stock.
4.03 Shares of Common Stock Subject to Terminated Options. The Common
Stock covered by any unexercised portions of terminated Options may again be
subject to new Options under the Plan.
Article V. Participation
5.01 Eligible Participants. Employee Participants in the Plan shall be
such officers and other key employees of the Company or its Subsidiaries,
whether or not directors of the Company, as the Committee, in its sole and
absolute discretion, may designate from time to time. In making such
designation, the Committee may take into account the nature of the services
rendered by the officers and key employees, their present and potential
contributions to the success of the Company, and such other factors as the
Committee, in its sole and absolute discretion, may deem relevant. The
Committee's designation of an Employee Participant in any year shall not require
the Committee to designate such person to receive Options in any other year. The
Committee shall consider such factors as it deems pertinent in selecting
Employee Participants and in determining the type and
- 5 -
<PAGE>
amount of their respective Options. A Participant may hold more than one Option
granted under the Plan. During the term of the Plan, no Employee Participant may
receive Options to purchase more than one million shares of Common Stock under
the Plan.
Non-Employee Directors shall receive Non-Employee Director Options in
accordance with Article VII, the provisions of which are automatic and
non-discretionary in operation. Non-Employee Directors shall not be eligible to
receive any other Options under the Plan unless they are no longer Non-Employee
Directors on the Date of Grant of such Options.
Article VI. Stock Options
6.01 Grant of Option. Any Option granted under the Plan shall have such
terms as the Committee may, from time to time, approve, and the terms and
conditions of Options need not be the same with respect to each Participant.
6.02 Terms of Options. Options granted under the Plan shall be subject
to the following terms and conditions and shall be in such form and contain such
additional terms and conditions, not inconsistent with the terms of the Plan, as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock
purchasable under an Option shall be determined by the Committee at the
time of grant but shall not be less than 100% of the Fair Market Value
of a share of Common Stock on the Date of Grant; provided, however,
that, except as required by Rule 16b- 3 with respect to Options granted
to persons subject to Section 16 of the Exchange Act, no amendment of
an Option shall be deemed to be the grant of a new Option for purposes
of this Section 6.02(a). Notwithstanding the foregoing, the option
price per share of Common Stock of an Option shall never be less than
par value per share.
(b) Option Term. The term of each Option shall be fixed by the
Committee, but no Option shall be exercisable more than five years
after the Date of Grant.
(c) Exercisability. An Option Agreement with respect to
Options may contain such performance targets, waiting periods, exercise
dates and restrictions on exercise (including, but not limited to, a
requirement that an Option is exercisable in periodic installments),
and restrictions on transfer of the underlying shares of Common Stock,
if any, as may be determined by the Committee at the time of grant. To
the extent not exercised, installments shall cumulate and be
exercisable, in whole or in part, at any time after becoming
exercisable, subject to the limitations set forth in Sections 6.02(b),
(f) and (g).
- 6 -
<PAGE>
(d) Method of Exercise. Subject to whatever installment
exercise and waiting period provisions that apply under Section 6.02
(c) above, Options may be exercised in whole or in part at any time
during the term of the Option, by giving written notice of exercise to
the Company specifying the number of shares of Common Stock to be
purchased. Such notice shall be accompanied by payment in full of the
purchase price in such form as the Committee may accept (including
payment in accordance with a cashless exercise program approved by the
Committee). If and to the extent the Committee determines in its sole
and absolute discretion at or after grant, payment in full or in part
may also be made in the form of shares of Common Stock already owned by
the Participant (and for which the Participant has good title, free and
clear of any liens or encumbrances) based on the Fair Market Value of
the shares of Common Stock on the date the Option is exercised;
provided, however, that any already owned Common Stock used for payment
must have been held by the Participant for at least six months. No
Common Stock shall be issued on exercise of an Option until payment, as
provided herein, therefor has been made. A Participant shall generally
have the right to dividends or other rights of a stockholder with
respect to Common Stock subject to the Option only when certificates
for shares of Common Stock are issued to the Participant.
(e) Non-Transferability of Options. No Option shall be
transferable by the Participant otherwise than by will, by the laws of
descent and distribution, or pursuant at a qualified domestic relations
order as defined by the Code, Title I of ERISA or the rules thereunder.
(f) Acceleration or Extension of Exercise Time. The Committee,
in its sole and absolute discretion, shall have the right (but shall
not in any case be obligated) to permit purchase of Common Stock
subject to any Option granted to an Employee Participant prior to the
time such Option would otherwise become exercisable under the terms of
the Option Agreement. In addition, the Committee, in its sole and
absolute discretion, shall have the right (but shall not in any case be
obligated) to permit any Option granted to an Employee Participant to
be exercised after its expiration date, subject, however to the
limitation set forth in Section 6.02(b).
(g) Exercise of Options Upon Termination of Employment. The
following provisions apply to Options granted to Employee Participants:
(i) Exercise of Vested Options Upon Termination of
Employment.
(A) Termination. Unless the Committee, in
its sole and absolute discretion, provides for a
shorter or longer period of time in the Option
Agreement or a longer period of time in accordance
with Section 6.02(f), upon an Employee Participant's
Termination of Employment other than by
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reason of death or Disability, the Employee
Participant may, within three months from the date of
such Termination of Employment, exercise all or any
part of his or her Options as were exercisable at the
date of Termination of Employment. In no event,
however, may any Option be exercised later than the
date determined pursuant to Section 6.02(b).
(B) Disability. Unless the Committee, in its
sole and absolute discretion, provides for a shorter
or longer period of time in the Option Agreement or a
longer period of time in accordance with Section
6.02(f), upon an Employee Participant's Disability
Date, the Employee Participant may, within one year
after the Disability Date, exercise all or a part of
his or her Options, whether or not such Option was
exercisable on the Disability Date, but only to the
extent not previously exercised. In no event,
however, may any Option be exercised later than the
date determined pursuant to Section 6.02(b).
(C) Death. Unless the Committee, in its sole
and absolute discretion, provides for a shorter or
longer period of time in the Option Agreement or a
longer period of time in accordance with Section
6.02(f), in the event of the death of an Employee
Participant while employed by the Company or a
Subsidiary, the right of the Employee Participant's
Beneficiary to exercise the Option in full (whether
or not all or any part of the Option was exercisable
as of the date of death of the Employee Participant,
but only to the extent not previously exercised)
shall expire upon the expiration of one year from the
date of the Employee Participant's death or on the
date of expiration of the Option determined pursuant
to Section 6.02(b), whichever is earlier.
(ii) Expiration of Unvested Options Upon Termination
of Employment. Subject to Sections 6.02(f) and 6.02(g)(i)(B)
and (C), to the extent all or any part of an Option granted to
an Employee Participant was not exercisable as of the date of
Termination of Employment, such right shall expire at the date
of such Termination of Employment. Notwithstanding the
foregoing, the Committee, in its sole and absolute discretion
and under such terms as it deems appropriate, may permit an
Employee Participant who will continue to render significant
services to the Company or a Subsidiary after his or her
Termination of Employment to continue to accrue service with
respect to the right to exercise his or her Options during the
period in
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<PAGE>
which the individual continues to render such services.
Article VII. Non-Employee Director Options
7.01 Grant of Non-Employee Director Options; Exercise Price; Term. On
May 1, 1998, each person who is a Non-Employee Director on such date shall be
granted a Non-Employee Director Option to purchase the number of shares of
Common Stock determined in accordance with Section 7.02. A Non-Employee Director
shall only receive one Non-Employee Director Option on May 1, 1998, even if he
or she serves as a Non-Employee Director of the Company and/or of one or more of
its Subsidiaries.
The exercise price per share for Non-Employee Director Options shall be
the Fair Market Value of a share of Common Stock on the Date of Grant. All
Non-Employee Director Options shall have a five year term.
7.02 Number of Shares. Each Non-Employee Director Option shall entitle
the holder to purchase 3,000 shares of Common Stock; provided, however, that, if
a Non-Employee Director is not a Non-Employee Director of the Company on the
Date of Grant of the Option, his or her Non- Employee Director Option shall only
entitle him or her to purchase 2,400 shares of Common Stock.
(a) Adjustments. Such number of shares is, however, subject to
increase (but not decrease) based on the application of the factor
described in Section 7.02(b) below; provided, however, that the number
of shares of Common Stock covered by a Non-Employee Director Option
shall be increased by one or two shares of Common Stock so that the
number of covered shares is divisible by three and provided further,
however, that a Non-Employee Director Option shall not entitle the
holder to purchase more than 6,000 shares (4,800 shares if a
Non-Employee Director is not a Non-Employee Director of the Company on
the Date of Grant of the Option) of Common Stock.
(b) Number of Years of Service. Each Non-Employee Director
Option shall entitle the holder to purchase an additional 150 shares
(120 shares if a Non- Employee Director is not a Non-Employee Director
of the Company on the Date of Grant of the Option) of Common Stock for
each calendar year the Non-Employee Director has served as a director
of the Company or of one of its Subsidiaries, but only if such calendar
year has been completed prior to the Date of Grant of the Non- Employee
Director Option. The following rules shall apply in calculating years
of service as a director:
(i) Partial Service. If a person has served as a
director of the Company or as a director of any of its
Subsidiaries at any time during a calendar year, that calendar
year shall count as one year of service even if the person did
not serve as such for a full year;
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<PAGE>
(ii) Multiple Service. Notwithstanding the foregoing,
service as a director of the Company and/or as a director of
one or more of its Subsidiaries during any calendar year shall
not be double counted. Accordingly, if a person has served as
a director of the Company and as a director of one or more of
its Subsidiaries during a calendar year, that calendar year
shall count as only one year of service; and
(iii) Service as an Employee. Notwithstanding the
foregoing, if a Non-Employee Director served as an employee of
the Company or of one of its Subsidiaries at any time during a
calendar year, that calendar year shall not count as a year of
service.
7.03 Exercisability. Each Non-Employee Director Option shall become
exercisable cumulatively in three equal installments on June 1, 1999, June 1,
2000 and June 1, 2001; provided, however, that, if a Non-Employee Director is
removed for Cause, any Option held by such Non- Employee Director shall cease to
continue to become exercisable on or after the date of such removal.
7.04 Termination. If a Non-Employee Director's service with the Company
terminates for any reason or if such person ceases to be a Non-Employee
Director, such Option shall continue to become exercisable in accordance with
Section 7.03 and may be exercised until the expiration of the stated term of the
Option. Accordingly, if a Non-Employee Director is removed for Cause, he or she
may continue to exercise his or her Non-Employee Director Option until the
expiration of the stated term of such Option, but only to the extent that (a)
such Option became exercisable prior to the date of such removal and (b) it was
not previously exercised.
7.05 Other Plan Provisions. All applicable provisions of the Plan
(other than Sections 6.02(f) and (g)) not inconsistent with this Article VII
shall apply to Options granted to Non-Employee Directors.
Article VIII. Terms Applicable to All Options Granted Under the Plan
8.01 Plan Provisions Control Option Terms. The terms of the Plan shall
govern all Options granted under the Plan, and in no event shall the Committee
have the power to grant to a Participant any Option under the Plan that is
contrary to any provisions of the Plan. In the event any provision of any Option
granted under the Plan shall conflict with any of the terms in the Plan as
constituted on the Date of Grant of such Option, the terms in the Plan as
constituted on the Date of Grant of such Option shall control.
8.02 Option Agreement. No person shall have any rights under any Option
granted under the Plan unless and until the Company and the Participant to whom
such Option shall have been granted shall have executed and delivered an Option
Agreement authorized by the Committee expressly granting the Option to such
person and containing provisions setting forth the terms of the
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<PAGE>
Option. If there is any conflict between the provisions of an Option Agreement
and the terms of the Plan, the terms of the Plan shall control.
8.03 Modification of Option After Grant. Except as provided by the
Committee, in its sole and absolute discretion, in the Option Agreement or as
provided in Section 8.05, no Option granted under the Plan to a Participant may
be modified (unless such modification does not materially decrease the value of
the Option) after the Date of Grant except by express written agreement between
the Company and the Participant, provided that any such change (a) shall not be
inconsistent with the terms of the Plan, and (b) shall be approved by the
Committee.
8.04 Taxes. The Company shall be entitled, if the Committee deems it
necessary or desirable, to withhold (or secure payment from the Participant in
lieu of withholding) the amount of any withholding or other tax required by law
to be withheld or paid by the Company with respect to any Common Stock issuable
under such Participant's Option, and the Company may defer issuance of Common
Stock upon the grant or exercise of an Option unless indemnified to its
satisfaction against any liability for any such tax. The amount of such
withholding or tax payment shall be determined by the Committee or its delegate
and shall be payable by the Participant at such time as the Committee
determines. A Participant shall be permitted to satisfy his or her tax or
withholding obligation by (a) having cash withheld from the Participant's salary
or other compensation payable by the Company or a Subsidiary, (b) the payment of
cash by the Participant to the Company, (c) the payment in shares of Common
Stock already owned by the Participant 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 Common
Stock, to satisfy such tax or withholding requirements. The Committee shall be
authorized, in its sole and absolute discretion, to establish rules and
procedures relating to any such withholding methods it deems necessary or
appropriate (including, without limitation, rules and procedures relating to
elections by Participants who are subject to the provisions of Section 16 of the
Exchange Act to have shares of Common Stock withheld from an Award to meet those
withholding obligations).
8.05 Adjustments to Reflect Capital Changes; Change in Control.
(a) Recapitalization. The number and kind of shares subject to
outstanding Options, the purchase price or exercise price of such
Options, the amount of Non- Employee Director Options to be granted on
any date under Section 7.02, the limit set forth in the last sentence
of the first paragraph of Section 5.01 of the Plan, and the number and
kind of shares available for Options subsequently granted under the
Plan shall be appropriately adjusted to reflect any stock dividend,
stock split, combination or exchange of shares, merger, consolidation
or other change in capitalization with a similar substantive effect
upon the Plan or the Options granted under the Plan. The Committee
shall have the power and sole and absolute discretion to determine the
nature and amount of the adjustment to be made in each case.
(b) Sale or Reorganization. After any reorganization,
merger, or
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<PAGE>
consolidation in which the Company is the surviving entity, each
Participant shall, at no additional cost, be entitled upon the exercise
of an Option outstanding prior to such event to receive (subject to any
required action by stockholders), in lieu of the number of shares of
Common Stock receivable on exercise pursuant to such Option, the number
and class of shares of stock or other securities to which such
Participant would have been entitled pursuant to the terms of the
reorganization, merger, or consolidation if, at the time of such
reorganization, merger, or consolidation, such Participant had been the
holder of record of a number of shares of Common Stock equal to the
number of shares of Common Stock receivable on exercise pursuant to
such Option. Comparable rights shall accrue to each Participant in the
event of successive reorganizations, mergers, or consolidations of the
character described above.
(c) Options to Purchase Stock of Acquired Companies. After any
reorganization, merger, or consolidation in which the Company shall be
a surviving entity, the Committee may grant substituted Options under
the provisions of the Plan, replacing old options granted under a plan
of another party to the reorganization, merger, or consolidation whose
stock subject to the old options may no longer be issued following such
reorganization, merger, or consolidation. The foregoing adjustments and
manner of application of the foregoing provisions shall be determined
by the Committee in its sole and absolute discretion. Any such
adjustments may provide for the elimination of any fractional shares of
Common Stock that might otherwise become subject to any Options.
(d) Changes in Control. (i) Upon the dissolution or
liquidation of the Company, (ii) upon a reorganization, merger, or
consolidation in which the Company is not the surviving corporation,
(iii) upon the sale of substantially all of the property or assets of
the Company to another corporation, or (iv) if at least 50% or more of
the voting stock of the Company is sold either through a tender offer
or otherwise to a party or an affiliated group of parties, then the
Plan and the Options issued thereunder shall terminate, unless
provisions are made in connection with such transaction for the
assumption of Options theretofore granted, or for the substitution for
such Options of new options of the successor corporation or a parent or
subsidiary thereof, with appropriate adjustment as to the number and
kinds of shares and the per share exercise prices. In the event such
Options shall be terminated, all outstanding Options shall be
exercisable in full for at least 30 days prior to such termination
date, whether or not exercisable during such period, subject, however,
to the limitation set forth in Sections 6.02(b) and 7.01. For purposes
of this Section 8.05(d), the Company refers to Mid Atlantic Medical
Services, Inc., MD-Individual Practice Association, Inc., Optimum
Choice, Inc., and/or Physicians Health Plan of Maryland, Inc., jointly
or separately. [Additional entities?] The Committee shall determine the
date on which Options may become exercisable pursuant to this Section
8.05(d).
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<PAGE>
8.06 Surrender of Options. Any Option granted to a Participant under
the Plan may be surrendered to the Company for cancellation on such terms as the
Committee and holder approve.
8.07 No Right to Option; No Right to Employment. Except as provided in
Article VII, no director, employee or other person shall have any claim or right
to be granted an Option. Neither the Plan nor any action taken hereunder shall
be construed as giving any employee any right to be retained in the employ of
the Company or any of its Subsidiaries.
8.08 Options Not Includable for Benefit Purposes. Income recognized by
a Participant pursuant to the provisions of the Plan shall not be included in
the determination of benefits under any employee pension benefit plan (as such
term is defined in Section 3(2) of ERISA) or group insurance or other benefit
plans applicable to the Participant that are maintained by the Company or any of
its Subsidiaries, except as may be provided under the terms of such plans or
determined by resolution of the Board.
8.09 Governing Law. The Plan and all determinations made and actions
taken pursuant to the Plan shall be governed by the laws of the State of
Delaware other than the conflict of laws provisions of such laws, and shall be
construed in accordance therewith.
8.10 No Strict Construction. No rule of strict construction shall be
implied against the Company, the Committee, or any other person in the
interpretation of any of the terms of the Plan, any Option granted under the
Plan or any rule or procedure established by the Committee.
8.11 Compliance with Rule 16b-3 and Section 162(m). It is intended that
the Plan be applied and administered in compliance with Rule 16b-3 and with
Section 162(m). If any provision of the Plan would be in violation of Section
162(m) if applied as written, such provision shall not have effect as written
and shall be given effect so as to comply with Section 162(m) as determined by
the Committee in its sole and absolute discretion. The Board is authorized to
amend the Plan and the Committee is authorized to make any such modifications to
Option Agreements to comply with Rule 16b-3 and Section 162(m), as they may be
amended from time to time, and to make any other such amendments or
modifications deemed necessary or appropriate to better accomplish the purposes
of the Plan in light of any amendments made to Rule 16b-3 and Section 162(m).
Notwithstanding the foregoing, the Board may amend the Plan so that it (or
certain of its provisions) no longer comply with either or both of Rule 16b-3 or
Section 162(m) if the Board specifically determines that such compliance is no
longer desired and the Committee may grant Options that do not comply with Rule
16b-3 and/or Section 162(m) if the Committee determines, in its sole and
absolute discretion, that it is in the interest of the Company to do so.
8.12 Captions. The captions (i.e., all Article and Section headings)
used in the Plan are for convenience only, do not constitute a part of the Plan,
and shall not be deemed to limit, characterize, or affect in any way any
provisions of the Plan, and all provisions of the Plan shall be construed as if
no captions have been used in the Plan.
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<PAGE>
8.13 Severability. Whenever possible, each provision in the Plan and
every Option at any time granted under the Plan shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of the Plan or any Option at any time granted under the Plan shall be held to be
prohibited by or invalid under applicable law, then (a) such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law, and (b) all other provisions of
the Plan and every other Option at any time granted under the Plan shall remain
in full force and effect.
8.14 Legends. All certificates for Common Stock delivered under the
Plan shall be subject to such transfer restrictions set forth in the Plan and
such other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the SEC, any stock exchange upon which
the Common Stock is then listed, and any applicable federal or state securities
law. The Committee may cause a legend or legends to be put on any such
certificates to make appropriate references to such restrictions.
8.15 Investment Representation. The Committee may, in its sole and
absolute discretion, demand that any Participant awarded an Option deliver to
the Committee at the time of grant or exercise of such Option a written
representation that the shares of Common Stock to be acquired upon exercise are
to be acquired for investment and not for resale or with a view to the
distribution thereof. Upon such demand, delivery of such written representation
by the Participant prior to the delivery of any shares of Common Stock pursuant
to the exercise of his or her Option shall be a condition precedent to the
Participant's right to purchase or otherwise acquire such shares of Common Stock
by such grant or exercise. The Company is not legally obliged hereunder if
fulfillment of its obligations under the Plan would violate federal or state
securities laws.
8.16 Amendment and Termination.
(a) Amendment. The Board shall have complete power and
authority to amend the Plan at any time it is deemed necessary or
appropriate; provided, however, that the Board shall not, without the
affirmative approval of a simple majority of the holders of Common
Stock, represented, by person or by proxy, and entitled to vote at an
annual or special meeting of the holders of Common Stock, make any
amendment that requires stockholder approval under applicable law or
rule, unless the Board determines that compliance with such law or rule
is no longer desired with respect to the Plan as a whole or the
provision to be amended. No termination or amendment of the Plan may,
without the consent of the Participant to whom any Option shall
theretofore have been granted under the Plan, adversely affect the
right of such individual under such Option; provided, however, that the
Committee may, in its sole and absolute discretion, make provision in
an Option Agreement for such amendments that, in its sole and absolute
discretion, it deems appropriate.
(b) Termination. The Board shall have the right and the power
to terminate the Plan at any time. No Option shall be granted under the
Plan after the termination of the Plan, but the termination of the Plan
shall not have any other effect and any
<PAGE> 14
Option outstanding at the time of the termination of the Plan may be
amended and exercised and may vest after termination of the Plan at any
time prior to the expiration date of such Option to the same extent
such Option could have been amended or would have been exercisable or
vest had the Plan not terminated.
8.17 Costs and Expenses. All costs and expenses incurred in
administering the Plan shall be borne by the Company.
8.18 Unfunded Plan. The Plan shall be unfunded. The Company shall not
be required to establish any special or separate fund or make any other
segregation of assets to assure the payment of any award under the Plan.
1998 SENIOR MANAGEMENT BONUS PLAN
Participants in the 1998 Senior Management Bonus Plan ("Bonus Plan") shall
include all full-time non-sales positions Level 17 and above, which includes
those individuals who could possibly be affected by Section 162(m) of the
Internal Revenue Code, including but not limited to the CEO. This definition
includes all full-time non-sales employees who are Level 17 and above as of
March 1, 1998 and all full-time non-sales employees who are promoted to or hired
at a Level 17 or above after March 1, 1998. Bonuses will be solely predicated on
the consolidated earnings performance of Mid Atlantic Medical Services, Inc.
(MAMSI) and will be accrued on at least a quarterly basis as documented by the
year end audited financial statements.
Bonuses shall be paid according to the following guidelines:
1. Minimum Bonus- Minimum bonuses shall be paid if MAMSI and its
consolidated subsidiaries (the "Company") achieve a profit of $33.750
million before income taxes, expansion or acquisition costs, and prior
to the physicians' return of withhold and payment of physicians'
bonuses.
2. Maximum Bonus- Maximum bonuses shall be paid if the Company achieves a
profit of $52.50 million before income taxes, expansion or acquisition
costs, and prior to the physicians' return of withhold and payment of
physicians' bonuses.
3. Pro-ration- In the event that the Company earns between $33.750 million
and $52.50 million, bonus payments will be pro-rated accordingly.
4. Bonus Base- In general, bonus payments will be calculated based on the
salary level on March 1, 1998. With respect to new participants who
are hired or initially promoted to a full-time non-sales position Level
17 or higher after March 1, 1998, the bonus will be calculated at the
initial Level 17 or higher salary. With respect to new participants
who are hired or initially promoted to a full-time non-sales position
Level 17 or higher after March 1, 1998, the bonus will be calculated
at the initial Level 17 or higher salary.With respect to a participant
who is demoted during 1998, the amount will be calculated on a pro-rata
basis based on the portion of the year that the employee was employed
in a full-time non-sales position Level 17 or higher.
5. New Employees- New full-time employees or those who are promoted to a
full-time non-sales position Level 17 or higher during 1998 are
eligible to participate in the Bonus Plan. The bonus payment will be
pro-rated accordingly for the portion of the year that the employee was
employed in a full-time non-sales position Level 17 or higher.
<PAGE>
6. Termination- No bonus shall be paid to bonus participants who terminate
or are terminated by the Company prior to the year end. In the event of
retirement or death, the employee or his\her beneficiary will receive a
pro-rated portion of the bonus.
7. Time of Payment- Bonus payments shall be distributed immediately
following the receipt of the audited financial statement(s) for the
Company for the year 1998.
8. Bonus Percentages- The distribution of the bonus payments to
participants shall be limited according to the following percentage
ranges:
CEO 12.5 - 50%
Executive Staff (Level 18 & above, excluding CEO) 6.0 - 35%
Senior Staff (Level 17) 5.5 - 30%
9. Relationship to Other Bonus Plan- This Bonus Plan is substantially
similar to the 1998 Management Bonus Plan for full-time non-sales
employees Level 10 to Level 16. The primary differences between the
Bonus Plan and the 1998 Management Bonus Plan are the percentage
payments available to personnel and the personnel covered.
10. Interpretation of the Bonus Plan by the Board of Directors- If a
question as to the the interpretation of the Bonus Plan arises, the
Board of Directors may interpret the Bonus Plan. The decision of the
Board is final.
11. Amendment- The Board of Directors may not amend the Bonus Plan to
materially increase the amounts payable thereunder to participants.
1998 MANAGEMENT BONUS PLAN
Participants in the 1998 Management Bonus Plan shall include all full-time
non-sales positions from Level 10 up to Level 16. Bonuses will be solely
predicated on the consolidated earnings performance of Mid Atlantic Medical
Services, Inc. (MAMSI) and will be accrued on at least a quarterly basis as
documented by the year end audited financial statements.
Bonuses shall be paid according to the following guidelines:
1. Minimum Bonus- Minimum bonuses shall be paid if MAMSI and its
consolidated subsidiaries (the "Company") achieve a profit of $33.750
million before income taxes, expansion or acquisition costs, and prior
to the physicians' return of withhold and payment of physicians'
bonuses.
2. Maximum Bonus- Maximum bonuses shall be paid if the Company achieves a
profit of $52.50 million before income taxes, expansion or acquisition
costs, and prior to the physicians' return of withhold and payment of
physicians' bonuses.
3. Pro-ration- In the event that the Company earns between $33.750 million
and $52.50 million, bonus payments will be pro-rated accordingly.
4. Bonus Base- In general, bonus payments will be calculated on cash
payments made during the year for base salary, which would take into
account salary increases due to promotion or merit increases (other
than those to Level 17 or higher). Pro-rated calculations will be made
at each salary level for the portion of the year that the new level is
in effect. If a participant is demoted to under a Level 10 position,
and remains in an under Level 10 position until December 31, 1998, the
employee will received a pro-rata bonus payment based upon the time
the participant was in a full-time non-sales Level 10 or higher
position during 1998. Similarly, the employee is promoted or
re-promoted to a Level 10 or higher, the employee is eligible to
participate in the Bonus Plan on a pro-rata basis for all the time
periods during which the participant was in a full-time non-sales
Level 10 or higher position during 1998.
5. New Employees- New full-time non-sales employees are eligible to
participate in the Bonus Plan. The bonus payment will be pro-rated
accordingly for the portion of the year that the employee was employed
at a full-time non-sales Level 10 or higher position.
6. Termination- No bonus shall be paid to bonus participants who
terminate or are terminated by the Company prior to year end. In the
event of retirement or death, the employee or his/her beneficiary will
receive a pro-rated portion of the bonus.
<PAGE>
7. Time of Payment- Bonus payments shall be distributed immediately
following the receipt of the audited financial statement(s) for the
Company for the year 1998.
8. Bonus Percentages- The distribution of the bonus payments to
participants shall be limited according to the following percentage
ranges:
Level 16 5.0 - 28%
Level 15 4.5 - 21%
Level 14 4.0 - 16%
Level 12 & 13 3.5 - 12%
Level 10 & 11 2.5 - 7%
9. Relationship to Other Bonus Plan- This Bonus Plan is substantially
similar to the 1998 Senior Management Bonus Plan for full-time
non-sales employees Level 17 to Level 20, including the CEO. The
primary differences between the Bonus Plan and the 1998 Senior
Management Bonus Plan are the percentage payments available to
personnel and the personnel covered.
10. Interpretation of the Bonus Plan by the Board of Directors- If a
question as to the the interpretation of the Bonus Plan arises, the
Board of Directors may interpret the Bonus Plan. The decision of the
Board is final.
11. Amendment- The Board of Directors may amend the Bonus Plan to
materially/increase the amounts payable thereunder to participants or
for any other reason.
Amendment of 1994 Non-Qualified Stock Option Plan
FURTHER RESOLVED, that Section 4 of the Mid Atlantic Medical Services,
Inc. 1994 Non-Qualified Stock Option Plan ("1994 Plan") be, and it hereby is,
amended to read in its entirety as follows:
4. COMMITTEE. The "Committee" means a committee of the
Board of Directors of MAMSI ("Board") as may be appointed, from time to
time, by the Board.
a. The Board may appoint more than one Committee to administer
the Plan. If it appoints more than one Committee, one Committee (the
"Stock Option Committee") shall have the authority to grant Options to
a key employee who is either, at the date of grant of the Option, a
"covered employee" as defined in Section 162(m) of the Internal Revenue
Code of 1986, as amended ("Code"), and the regulations thereunder
(collectively, "Section 162(m)") or who is subject to Section 16 of the
Securities Exchange Act of 1934, as amended ("Exchange Act"); however,
such Committee shall also have the authority to grant Options to other
key employees. The Stock Option Committee shall be composed of at least
two directors of MAMSI, each of whom is a "non-employee director" as
defined in Rule 16b-3 as promulgated by the Securities and Exchange
Commission under Section 16 of the Exchange Act (together with any
successor rule, "Rule 16b-3") and an "outside director" within the
meaning of Section 162(m). If, however, at least two of MAMSI's
directors are not both "non-employee directors" and "outside
directors," the Board may grant Options to a key employee who is either
a "covered employee" or subject to Section 16 of the Exchange Act, in
which case the Board may also administer the Plan and the term
"Committee" as used herein shall also include the Board. The other
Committee (the "Select Committee") shall be composed of at least one
director of MAMSI, who may be an officer of the Company. The Select
Committee shall have authority to grant Options to a key employee who
is not, at the date of grant of the Option, either a "covered employee"
as defined in Section 162(m) or subject to Section 16 of the Exchange
Act.
b. The Board may, from time to time, appoint members of each
Committee in substitution for those members who were previously
appointed and may fill vacancies, however caused, in the Committee.
<PAGE>
c. The Stock Option Committee and the Select Committee shall
each have the power and authority to administer the Plan in accordance
with Section 3 with respect to particular classes of key employees (as
specified in Section 4(a)) and, when used herein, the term "Committee"
shall mean either the Stock Option Committee or the Select Committee if
the Board appoints more than one Committee to administer the Plan. If,
however, there is a conflict between the determinations made by the
Stock Option Committee and the Select Committee, the determinations
made by the Stock Option Committee shall control.
d. Except when the "Committee" is the "Board" in the
circumstance described in Section 4(a), all determinations of the
Committee shall be made by a majority vote of its members. A majority
of a Committee's members shall constitute a quorum. Any decision or
determination reduced to writing and signed by all of the members shall
be fully as effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee shall also have express
authorization to hold Committee meetings by conference telephone, or
similar communication equipment by means of which all persons
participating in the meeting can hear each other.
and it was
FURTHER RESOLVED, that Section 9 of the 1994 Plan be, and it hereby is,
amended to read in its entirety as follows:
9. AMENDMENT AND TERMINATION.
a. Amendment. The Board shall have complete power and
authority to amend the Plan at any time it is deemed necessary or
appropriate; provided, however, that the Board shall not, without the
affirmative approval of a simple majority of the holders of Common
Stock, represented, by person or by proxy, and entitled to vote at an
annual or special meeting of the holders of Common Stock, make any
amendment that requires stockholder approval under applicable law or
rule, unless the Board determines that compliance with such law or rule
is no longer desired with respect to the Plan as a whole or the
provision to be amended. No termination or amendment of the Plan may,
without the consent of the person to whom any Option shall theretofore
have been granted under the Plan, adversely affect the right of such
individual under such Option; provided, however, that the Committee
may, in its sole and absolute discretion, make provision in an Option
Agreement for such amendments that, in its sole and absolute
discretion, it deems appropriate.
<PAGE>
b. Termination. The Board shall have the right and the power
to terminate the Plan at any time. No Option shall be granted under the
Plan after the termination of the Plan, but the termination of the Plan
shall not have any other effect and any Option outstanding at the time
of the termination of the Plan may be amended and exercised and may
vest after termination of the Plan at any time prior to the expiration
date of such Option to the same extent such Option could have been
amended or would have been exercisable or vest had the Plan not
terminated.
and it was
FURTHER RESOLVED, that Section 11(k) be, and it hereby is, added to the
1994 Plan in the following form:
k. Compliance with Rule 16b-3 and Section 162(m). It is
intended that the Plan be applied and administered in compliance with
Rule 16b-3 and with Section 162(m). If any provision of the Plan would
be in violation of Section 162(m) if applied as written, such provision
shall not have effect as written and shall be given effect so as to
comply with Section 162(m) as determined by the Committee in its sole
and absolute discretion. The Board is authorized to amend the Plan and
the Committee is authorized to make any such modifications to Option
Agreements to comply with Rule 16b-3 and Section 162(m), as they may be
amended from time to time, and to make any other such amendments or
modifications deemed necessary or appropriate to better accomplish the
purposes of the Plan in light of any amendments made to Rule 16b-3 and
Section 162(m). Notwithstanding the foregoing, the Board may amend the
Plan so that it (or certain of its provisions) no longer comply with
either or both of Rule 16b-3 or Section 162(m) if the Board
specifically determines that such compliance is no longer desired and
the Committee may grant Options that do not comply with Rule 16b-3
and/or Section 162(m) if the Committee determines, in its sole and
absolute discretion, that it is in the interest of the Company to do
so.
and it was
Committees
- ----------
FURTHER RESOLVED, that the Corporation establish two committees of the
Board to administer the Plan, the 1996 Plan, the 1995 Plan and the 1994 Plan
(collectively, the "Option Plans"), which committees shall have the authority to
grant options under the Option Plans and otherwise administer the Option Plans
as more fully provided in such Option Plans, (1) the first committee, which
shall be known as the "Stock Option Committee," shall have authority to grant
options to a participant who is either, at the date of grant of the Option, a
"covered employee" as defined in Section 162(m) of the Internal Revenue Code of
1986, as amended, and the regulations thereunder (collectively, "Section
162(m)") or who
<PAGE>
is subject to Section 16 of the Securities Exchange Act of 1934, as amended
("Section 16"), as well as to other participants in the Option Plans, and (2)
the second committee, which shall be known as the "Select Committee," shall have
the authority to grant options to a participant who is not, at the date of grant
of the option, either a "covered employee" as defined in Section 162(m) or
subject to Section 16; and it was
FURTHER RESOLVED, that the Stock Option Committee shall be composed of
three directors and that directors James A. Wild, Walter Girardin and Creighton
R. Schneck shall serve as members of the Stock Option Committee, with Mr. Wild
serving as Chairman, each to serve until his successor is elected and qualified
or until he is removed or replaced; and it was
FURTHER RESOLVED, that director George T. Jochum shall serve as the
sole member of the Select Committee, to serve until his successor is elected and
qualified or until he is removed or replaced; and it was.
Amendment of 1995 Non-Qualified Stock Option Plan
FURTHER RESOLVED, that Section 4 of the Mid Atlantic Medical Services,
Inc. 1995 Non-Qualified Stock Option Plan ("1995 Plan") be, and it hereby is,
amended to read in its entirety as follows:
4. COMMITTEE. The "Committee" means a committee of the
Board of Directors of MAMSI ("Board") as may be appointed, from time to
time, by the Board.
a. The Board may appoint more than one Committee to administer
the Plan. If it appoints more than one Committee, one Committee (the
"Stock Option Committee") shall have the authority to grant Options to
a key employee who is either, at the date of grant of the Option, a
"covered employee" as defined in Section 162(m) of the Internal Revenue
Code of 1986, as amended ("Code"), and the regulations thereunder
(collectively, "Section 162(m)") or who is subject to Section 16 of the
Securities Exchange Act of 1934, as amended ("Exchange Act"); however,
such Committee shall also have the authority to grant Options to other
key employees. The Stock Option Committee shall be composed of at least
two directors of MAMSI, each of whom is a "non-employee director" as
defined in Rule 16b-3 as promulgated by the Securities and Exchange
Commission under Section 16 of the Exchange Act (together with any
successor rule, "Rule 16b-3") and an "outside director" within the
meaning of Section 162(m). If, however, at least two of MAMSI's
directors are not both "non-employee directors" and "outside
directors," the Board may grant Options to a key employee who is either
a "covered employee" or subject to Section 16 of the Exchange Act, in
which case the Board may also administer the Plan and the term
"Committee" as used herein shall also include the Board. The other
Committee (the "Select Committee") shall be composed of at least one
director of MAMSI, who may be an officer of the Company. The Select
Committee shall have authority to grant Options to a key employee who
is not, at the date of grant of the Option, either a "covered employee"
as defined in Section 162(m) or subject to Section 16 of the Exchange
Act.
b. The Board may, from time to time, appoint members of each
Committee in substitution for those members who were previously
appointed and may fill vacancies, however caused, in the Committee.
<PAGE>
c. The Stock Option Committee and the Select Committee shall
each have the power and authority to administer the Plan in accordance
with Section 3 with respect to particular classes of key employees (as
specified in Section 4(a)) and, when used herein, the term "Committee"
shall mean either the Stock Option Committee or the Select Committee if
the Board appoints more than one Committee to administer the Plan. If,
however, there is a conflict between the determinations made by the
Stock Option Committee and the Select Committee, the determinations
made by the Stock Option Committee shall control.
d. Except when the "Committee" is the "Board" in the
circumstance described in Section 4(a), all determinations of the
Committee shall be made by a majority vote of its members. A majority
of a Committee's members shall constitute a quorum. Any decision or
determination reduced to writing and signed by all of the members shall
be fully as effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee shall also have express
authorization to hold Committee meetings by conference telephone, or
similar communication equipment by means of which all persons
participating in the meeting can hear each other.
and it was
FURTHER RESOLVED, that Section 9 of the 1995 Plan be, and it hereby is,
amended to read in its entirety as follows:
9. AMENDMENT AND TERMINATION.
a. Amendment. The Board shall have complete power and
authority to amend the Plan at any time it is deemed necessary or
appropriate; provided, however, that the Board shall not, without the
affirmative approval of a simple majority of the holders of Common
Stock, represented, by person or by proxy, and entitled to vote at an
annual or special meeting of the holders of Common Stock, make any
amendment that requires stockholder approval under applicable law or
rule, unless the Board determines that compliance with such law or rule
is no longer desired with respect to the Plan as a whole or the
provision to be amended. No termination or amendment of the Plan may,
without the consent of the person to whom any Option shall theretofore
have been granted under the Plan, adversely affect the right of such
individual under such Option; provided, however, that the Committee
may, in its sole and absolute discretion, make provision in an Option
Agreement for such amendments that, in its sole and absolute
discretion, it deems appropriate.
<PAGE>
b. Termination. The Board shall have the right and the power
to terminate the Plan at any time. No Option shall be granted under the
Plan after the termination of the Plan, but the termination of the Plan
shall not have any other effect and any Option outstanding at the time
of the termination of the Plan may be amended and exercised and may
vest after termination of the Plan at any time prior to the expiration
date of such Option to the same extent such Option could have been
amended or would have been exercisable or vest had the Plan not
terminated.
and it was
FURTHER RESOLVED, that Section 11(k) be, and it hereby is, added to the
1995 Plan in the following form:
k. Compliance with Rule 16b-3 and Section 162(m). It is
intended that the Plan be applied and administered in compliance with
Rule 16b-3 and with Section 162(m). If any provision of the Plan would
be in violation of Section 162(m) if applied as written, such provision
shall not have effect as written and shall be given effect so as to
comply with Section 162(m) as determined by the Committee in its sole
and absolute discretion. The Board is authorized to amend the Plan and
the Committee is authorized to make any such modifications to Option
Agreements to comply with Rule 16b-3 and Section 162(m), as they may be
amended from time to time, and to make any other such amendments or
modifications deemed necessary or appropriate to better accomplish the
purposes of the Plan in light of any amendments made to Rule 16b-3 and
Section 162(m). Notwithstanding the foregoing, the Board may amend the
Plan so that it (or certain of its provisions) no longer comply with
either or both of Rule 16b-3 or Section 162(m) if the Board
specifically determines that such compliance is no longer desired and
the Committee may grant Options that do not comply with Rule 16b-3
and/or Section 162(m) if the Committee determines, in its sole and
absolute discretion, that it is in the interest of the Company to do
so.
Amendment of 1996 Non-Qualified Stock Option Plan
After a motion was made and seconded, and with a majority of the Board voting,
it was
FURTHER RESOLVED, that Section 2.05 of the Mid Atlantic Medical
Services, Inc. 1996 Non-Qualified Stock Option Plan (1996 Plan) be, and it
hereby is, amended to read in its entirety as follows:
2.05 Committee means a committee of the Board as may be appointed, from
time to time, by the Board.
(a) The Board may appoint more than one Committee to
administer the Plan. If it appoints more than one Committee, one Committee
(the Stock Option Committee) shall have the authority to grant Options to a
Participant who is either, at the Date of Grant of the Option, a covered
employee as defined in Section 162(m) or who is subject to Section 16 of
the Exchange Act; however, such Committee shall also have the authority to
grant Options to other Participants. The Stock Option Committee shall be
composed of at least two directors of the Company, each of whom is a
"non-employee director" as defined in Rule 16b-3 and an "outside director"
within the meaning of Section 162(m). If, however, at least two of the
Company's directors are not both non-employee directors and outside
directors, the Board may grant Options to a Participant who is either a
covered employee or subject to Section 16 of the Exchange Act, in which
case the Board may also administer the Plan and the term Committee as used
herein shall also include the Board. The other Committee (the Select
Committee) shall be composed of at least one director, who may be an
officer of the Company. The Select Committee shall have authority to grant
Options to a Participant who is not, at the Date of Grant of the Option,
either a covered employee as defined in Section 162(m) or subject to
Section 16 of the Exchange Act.
(b) The Board may, from time to time, appoint members of each
Committee in substitution for those members who were previously appointed
and may fill vacancies, however caused, in the Committee.
(c) The Stock Option Committee and the Select Committee shall
each have the power and authority to administer the Plan in accordance with
Article III with respect to particular classes of Participants (as
specified in Section 2.05(a)) and, when used herein, the term Committee
shall mean either the Stock Option Committee or the Select Committee if the
Board appoints more than one Committee to administer the Plan. If, however,
there is a conflict between the determinations made by the Stock Option
Committee and the Select Committee, the determinations made by the Stock
Option Committee shall control.
and it was
<PAGE>
FURTHER RESOLVED, that Section 2.08 of the 1996 Plan be, and it hereby
is, amended to read in its entirety as follows:
2.08 Date of Grant means the date designated by the Committee as the
date as of which it grants an Option, which shall not be earlier than the
date on which the Committee approves the granting of such Option.
and it was
FURTHER RESOLVED, that Sections 2.24 and 2.25 be, and they hereby are,
added to the 1996 Plan in the following form:
2.24 Rule 16b-3 means Rule 16b-3 promulgated by the SEC under Section
16 of the Exchange Act and any successor rule.
2.25 Section 162(m) means Section 162(m) of the Code and the
regulations thereunder.
and it was
FURTHER RESOLVED, that Section 3.02 of the 1996 Plan be, and it hereby
is, amended to read in its entirety as follows:
3.02 Actions of the Committee. Except when the Committee is the Board
in the circumstance described in the last sentence of Section 2.05, all
determinations of the Committee shall be made by a majority vote of its
members. A majority of a Committee member shall constitute a quorum. Any
decision or determination reduced to writing and signed by all of the
members shall be fully as effective as if it had been made by a majority
vote at a meeting duly called and held. The Committee shall also have
express authorization to hold Committee meetings by conference telephone,
or similar communication equipment by means of which all persons
participating in the meeting can hear each other.
and it was
FURTHER RESOLVED, that Section 8.11 of the 1996 Plan be, and it hereby is,
amended to read in its entirety as follows:
8.11 Compliance with Rule 16b-3 and Section 162(m). It is intended that
the Plan be applied and administered in compliance with Rule 16b-3 and with
Section 162(m). If any provision of the Plan would be in violation of
Section 162(m) if applied as written, such provision shall not have effect
as written and shall be given effect so as to comply with Section 162(m) as
determined by the Committee in its sole and absolute discretion. The Board
is authorized to amend the Plan and the Committee is authorized to make any
such modifications to Option Agreements to
<PAGE>
comply with Rule 16b-3 and Section 162(m), as they may be amended from time
to time, and to make any other such amendments or modifications deemed
necessary or appropriate to better accomplish the purposes of the Plan in
light of any amendments made to Rule 16b-3 and Section 162(m).
Notwithstanding the foregoing, the Board may amend the Plan so that it (or
certain of its provisions) no longer comply with either or both of Rule
16b-3 or Section 162(m) if the Board specifically determines that such
compliance is no longer desired and the Committee may grant Options that do
not comply with Rule 16b-3 and/or Section 162(m) if the Committee
determines, in its sole and absolute discretion, that it is in the interest
of the Company to do so.
and it was
FURTHER RESOLVED, that Section 8.16 of the 1996 Plan be, and it hereby
is, amended to read in its entirety as follows:
8.16 Amendment and Termination.
(a) Amendment. The Board shall have complete power and
authority to amend the Plan at any time it is deemed necessary or
appropriate; provided, however, that the Board shall not, without the
affirmative approval of a simple majority of the holders of Common Stock,
represented, by person or by proxy, and entitled to vote at an annual or
special meeting of the holders of Common Stock, make any amendment that
requires stockholder approval under applicable law or rule, unless the
Board determines that compliance with such law or rule is no longer desired
with respect to the Plan as a whole or the provision to be amended. No
termination or amendment of the Plan may, without the consent of the
Participant to whom any Option shall theretofore have been granted under
the Plan, adversely affect the right of such individual under such Option;
provided, however, that the Committee may, in its sole and absolute
discretion, make provision in an Option Agreement for such amendments that,
in its sole and absolute discretion, it deems appropriate.
(b) Termination. The Board shall have the right and the power
to terminate the Plan at any time. No Option shall be granted under the
Plan after the termination of the Plan, but the termination of the Plan
shall not have any other effect and any Option outstanding at the time of
the termination of the Plan may be amended and exercised and may vest after
termination of the Plan at any time prior to the expiration date of such
Option to the same extent such Option could have been amended or would have
been exercisable or vest had the Plan not terminated.
EMPLOYMENT AGREEMENT
This Employment Agreement between Mid Atlantic Medical Services, Inc.
(Company), a corporation organized and existing under the laws of the State of
Delaware and having its principal office and place of business in the City of
Rockville, Maryland, as the employer, and George T. Jochum (Executive), as the
employee.
W I T N E S S E T H
WHEREAS, the Company desires to employ the Executive as its chairman,
president, and chief executive officer and whereas the Executive desires to be
employed in such capacity.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and the Executive agree as follows:
1. Term of Employment
The Company shall employ the Executive to perform the services
described below, for the period beginning January 1, 1999 and ending December
31, 2001. At the conclusion of the term of this Agreement, the Executive will be
paid any accrued bonus.
2. Duties
The Executive will serve as chairman, president, and chief
executive officer of the Company (subject to the provisions of the Company
by-laws). Executive also agrees to serve, for any period for which he is
elected, as director, or an officer of the Company, any affiliated or subsidiary
companies and Executive shall not be entitled to any additional compensation for
such service. All services shall be performed in consultation with and under the
supervision of the Board of Directors of the Company. Executive shall (a) keep
the Board of Directors of the Company fully informed of the Company operations,
and (b) promptly submit to such Board of Directors any reasonable written
reports it may require. Executive shall have those duties and responsibilities
customarily associated with the positions of chairman, president, and chief
executive officer of comparable companies, and such other responsibilities as
may be assigned to Executive by the Board of Directors from time to time.
Executive shall resign from all offices and directorship of the Company and of
its subsidiaries upon the termination of this contract.
3. Compensation
3.1 Base Salary. As compensation in full for all services to be
rendered by Executive under this Agreement, the Company shall pay to Executive
an annual base salary of $1,350,000.00 in approximately equal installments on
the regular pay dates of the Company. The base salary will not be adjusted
during the term of the Agreement.
3.2 Incentive Compensation. In addition to the base salary described in
subsection 3.1,Executive shall be entitled to participate in the Company
Management Bonus Program as in effect from time to time, and any subsequent
incentive program adopted by the Company Board for the Company Senior Staff. The
extent of Executive participation in the Management Bonus Program shall be
calculated in a similar manner to the bonus paid to other senior staff, but that
the minimum bonus amount will equal 25 percent of that year's base salary and
the maximum amount will equal 50 percent of base salary.
3.3 Participation in Benefit Plans. During the term of this Agreement,
Executive shall be entitled to receive such fringe benefits as shall be made
generally available to employees of the Company or to executive officers of the
Company.
3.4 Tax Indemnity Payments. Any Income Tax Indemnity Payment
required to be paid pursuant to this Agreement shall be determined by assuming
that the tax due upon any amount is computed by applying to such
<PAGE>
amount the highest marginal federal, state, and local income tax rates then in
effect for an individual with the Executive filing status, as if such amount
were Executive=s only item of taxable income and Executive was entitled to claim
no credits with respect thereto, but such Tax Indemnity Payment shall be the net
of the maximum reduction in federal income taxes that could be obtained by
Executive from reduction of the state and local income taxes applicable with
respect to such amount. Upon request, the Executive shall provide to the Company
one copy of all individual federal, state, and local income tax returns filed
for the year preceding that for which the Income Tax Indemnity Payment is due.
Any Income Tax Indemnity Payment made pursuant to subsection 3.8 hereof shall be
paid on or before the April 15 following the year to which such Payment related.
3.5 Life Insurance. In addition to any life insurance which may be
included as a fringe benefit made generally available to employees of the
Company, the Company agrees to obtain, pay all premiums for, and maintain during
the term of this Agreement, a whole life insurance policy on the life of and
payable to a beneficiary named by the Executive in the amount of $200,000.00,
provided, however, that the Company shall have no obligation to provide such
insurance if the Executive is not insurable at ordinary market rates and without
material cost or other adjustments.
3.6 Stock Options.
Should the Executive continue to perform at current levels, and should
the Company and its subsidiaries continue to develop their financial strength,
it would be the present intention of the Company to grant, through action by the
Company=s Stock Option Committee, with an exercise price equal to the fair
market value on the date of grant, to the Executive options to acquire 200,000
shares of Company stock as a one time signing bonus. It is anticipated that
50,000 options would be granted from the 1995 Non-Qualified Stock Option Plan,
upon Board approval, which is anticipated to occur at the November 1997 Meeting,
and that 150,000 shares would be granted from the 1998 Non-Qualified Stock
Option Plan in April 1998. Notwithstanding the above, it is anticipated that the
Stock Option Committee would grant an additional 200,000 shares in April 1998 as
the Executive annual stock option grant.
Assuming continued performance, Executive will be granted an additional
200,000 shares with an exercise price equal to the fair market value on the date
of grant each April that contract continues prior to its termination or
expiration. Such grants will start in April, 1999.
All option grants issued pursuant to this Agreement will vest on grant.
In all other respects option grants will be similar to those available to other
employees of the Company.
3.7 Expenses. During the term of this Agreement, the Company shall
reimburse Executive for all reasonable items of travel and related lodging,
entertainment, business promotion, community activities, and miscellaneous
expenses incurred that are related to the Company or any subsidiary company
business and executive employment by the Company or any subsidiary company, with
reimbursement to be made to the Executive upon submission to the Company of a
signed statement itemizing the expenses so incurred in accordance with policies
adopted by the Company for reimbursement of their executives.
3.8 Business Automobile. The Company shall provide through purchase or
lease for Executive use an automobile appropriate for Executive position in the
Company. Upon the presentation of receipts or other documentation, the Company
shall on a regular basis reimburse the Executive for normal up-keep, insurance,
fuel, and related expenses associated with the use of such automobile for the
business purposes of the Company or any subsidiary company. To the extent that
the Company expenditures for such automobile are determined by the Company to
result in taxable income to Executive, the Company will also pay to Executive,
as an Income Tax Indemnity Payment, to be computed and paid as described in
subsection 3.4 hereof, an amount of cash equal to the sum of all federal, state,
and local income taxes upon (a) such taxable income, and (b) such Income Tax
Indemnity Payment. The Executive may elect to receive a new automobile on an
annual basis.
<PAGE>
3.9 Retirement. The Executive shall be entitled to supplemental
retirement benefit which will provide an annual benefit of $450,000.00 per year
for 15 years. However, the Company shall not be obligated to pay any
supplemental retirement benefit under this subsection 3.9 if the Executive is
terminated for cause by the Company.
Payment, if any, of the supplemental retirement benefit will
be made in the form of an annuity for a fixed term of years payable to the
Executive, or his estate, heirs, or assignees as determined by the Executive.
Should Executive die prior to retirement, but during the term of this Agreement,
payments will be made as designated by the Executive, or in the absence of any
such designation, to the Executive=s estate. The parties may enter in to a
separate agreement to make more particular the terms and conditions of this
supplemental retirement benefit including but not limited to the use of a Rabbi
Trust. If a Rabbi Trust is to be used, the Executive must elect its use no later
than January 1, 1999.
3.10 Health Insurance. Either the Executive or the spouse of the
Executive at the time of retirement or death of the Executive will be eligible
for health coverage from the company or its successor during the term of their
respective lives. Such health coverage to be paid for by Executive or the spouse
of the Executive.
3.11 Split Dollar. Executive, at Executive=s option, has a one time
election to reduce the supplemental retirement payment provided under Section
3.9. Such election must be made by January 1, 1999. If Executive makes such an
election prior to January 1, 1999, Company shall fund an amount equal to the
actual equivalent of the retirement benefit in the form of premium advances on a
split dollar life policy on the life of the Executive, or on the joint lives of
the Executive and his spouse. Under the terms of the split dollar coverage,
Company will be repaid, either by loan on the policy or from policy proceeds,
for all premiums advanced by the Company.
4. Acceptance.
The Executive accepts the aforementioned employment at the
compensation and upon the terms specified herein. During the term of this
Agreement, the Executive agrees to serve the Company and its subsidiaries
faithfully and to the best of his ability and to devote his full time,
attention, and efforts to the business of the Company and its subsidiaries and
shall not during the term of this Agreement engage in any other business
activity that would interfere with his employment or be in any manner
competitive with the Company or any of its subsidiaries.
Contract will not be effective until approved by Board of
Directors which is expected to occur in November 1997. Notwithstanding the
above, the parties acknowledge that the contract will be submitted to
shareholders vote at the April 1998 Shareholders Meeting. Such approval is
expected to occur at the 1998 Annual Shareholders meeting. In the event that the
shareholders do not approve the contract, the parties agree to renegotiate this
Agreement with the intention of reaching and receiving shareholder approval..
5. Vacation and Sick Leave.
The Executive shall be entitled to four weeks paid annual
vacation and paid sick leave in accordance with the policies of the Company.
Vacation days shall be taken at such time or times as the Company and Executive
may agree.
The Company shall provide paid sick leave in accordance with
existing benefit policies; however, in the event of the Executive physical,
mental, or emotional disability or incapacity, the Company shall provide to the
Executive any financial remuneration difference between that amount allowed
under existing benefit policy and the base salary in effect at the time of
Executive disability or incapacity for a period of up to 90 days. Thereafter,
for an additional period of up to 90 days, the Company shall provide to the
Executive any financial remuneration difference between that amount allowed
under then existing benefit policy and 60 percent of the Executive base salary
in effect at the time of such disability. However, such salary benefits shall be
cumulative and may be used only for a maximum of 180 days as herein provided.
Thereafter, the Executive shall be entitled to receive such
<PAGE>
benefits as shall be made generally available to any employee of the Company or
executive employee of Company.
6. Death or Incapacity.
In the event of the death of the Executive during the term
hereof, this Agreement shall terminate and the Company shall not be subject to
any further obligation to such deceased Executive hereunder, or his estate
except for any accrued unpaid salary, reimbursements, and other compensation,
including without limitation any vested benefits under the Company employee
benefit programs and any incentive payment which may be due pursuant to
subsections 3.2 and 3.9 hereof.
If, on account of physical, mental, or emotional disability or
incapacity, the Executive shall fail or be unable to substantially perform the
duties contemplated by this Agreement for a total of 90 days or more within any
12 consecutive calendar months, the Company may, upon 30 days written notice to
the Executive, reassign the Executive in accordance with Section 10.
7. Covenant Not to Compete.
In carrying out his duties under this Agreement, the Executive
may have access to confidential information and trade secrets related to
business activities of the Company and its subsidiaries including, without
limitation, financial projections and models, cost and sales data, marketing
plans and programs, and methods of operation. In order to protect the
confidentiality of information acquired by the Executive heretofore or in the
future in the course of his employment, the Executive hereby agrees that, during
the term of this Agreement and for a period of one year after any termination
hereof, he will not, in any area of service by the Company or in any area in
which the Executive knows the Company, or any direct or indirect subsidiary or
affiliate (including but not limited to the Company, or any subsidiary or
affiliate thereof) intends to extend its service, unless acting as an officer or
employee of the Company, or with the prior written consent of the Board of
Directors or the Company, directly or indirectly manage, operate, control, or
own a 5 percent or more interest in or serve as an officer, director, employee,
or partner of, any managed health care business entity that directly or
indirectly competes with the Company as it then conducts its business. The term
Amanaged health care business entity@ refers to any business entity which,
directly or indirectly, provides or arranges for the provision of comprehensive
medical care, including physician and hospital care, to participants or
enrollees for a fixed, prepaid premium or fee which is not adjusted in
accordance with the amount of care actually provided. This covenant by Executive
shall be construed as an agreement independent of any other provision of this
Agreement; and the existence of any claim or cause of action of the Executive
against the Company or any of its subsidiaries whether or not predicated on this
Agreement, shall not constitute a defense to the enforceability by the Company
or any of its subsidiaries of this Section 7. Any violation of this Section
would constitute a basis for termination with cause by the Company.
In consideration of the Executive=s covenant under this
Section 7.1 not to compete for a period of one year after termination of this
Agreement, as set forth above, the Company shall retain the Executive as a
Consultant for a period beginning at the conclusion of the term of this
Agreement and not to exceed one year. The Executive shall be paid an amount
equal to the Executive pre-termination base salary in consideration of this
covenant. The Company shall enforce this Section 7.1 through all available legal
means.
8. Termination.
Either of the employers or the Executive may terminate this
Agreement in the event of a material breach thereof by the Executive or either
of the employers, respectively, and the Executive may also be terminated for
cause by either employer; provided, however, that termination of this Agreement
by the Company for either material breach or cause shall not affect any
obligation arising under this Agreement. Termination by any party shall be by
notice in writing specifying such material breach or cause and shall be
effective on the date of such notice, without prejudice to the rights of the
party to whom such notice is given to contest such termination by appropriate
judicial means.
<PAGE>
For purposes of termination of this Agreement by the Company,
the following events shall be considered cause under the preceding subsection
8.1 for which Executive may be terminated:
(a) failure or refusal by Executive to perform his duties in
accordance with this Agreement, including without limitation the
duty to keep the Board of Directors of the Company adequately
informed and to submit to it such written reports as it may
reasonably require;
(b) any material act of self-dealing between the Executive and the
Company=s business that is not disclosed in full to, and approved
by, the Board of Directors of the Company;
(c) misrepresentation of the performance and affairs of the Company
and other matters affecting the Company;
(d) deliberate falsification by the Executive of any records or
reports; (e) fraud on the part of the Executive;
(f) theft, embezzlement, or misappropriation by the Executive of any
funds of the Company, or conviction of the Executive for any
felony;
(g) execution by the Executive or any document transferring or
creating any material lien or encumbrance on any property of the
Company without authorization of its Board of Directors.
(h) such other act as should cause material harm to the business or
property of the Company unless action was taken in good faith such
as with a reasonable belief that such act was in the best interest
of the Company.
All references to the Company in this Section 8 shall be deemed to include any
parent, subsidiaries, and affiliates of the Company.
At the meeting of the Board of Directors of the Company,
occurring during the fourth quarter of each year at what has been referred to as
the Planning Session the Board shall, in the absence of the Executive, discuss
the Executive performance, and take an affirmative vote to retain the Executive.
Should the Executive fail to receive the affirmative vote of more than half of
the Directors present and voting, the Executive duties under this Agreement
shall terminate, and the Executive shall be entitled to compensation in an
amount equal to that determined under Section 10 of this Agreement, however the
Executive stock option vesting will not accelerate as described in Section 10.3
in such a situation.
Executive should have the right to terminate the contract by
providing to the Board of Directors notice of such termination 6 months in
advance of such termination or such other period of time as may be agreed to by
the parties. Termination pursuant to this Section 8.4 is not considered a change
in contract and no payments will be made under Section 10 after such notice is
provided by Executive.
9. Reassignment.
The Company may with cause reassign the Executive from the
position of chairman, president, and chief executive officer to another position
in the Company. Upon reassignment, Executive shall be entitled to continue to
receive his salary and any current bonus accrued, but no incentive compensation
unless such position to which Executive is assigned is otherwise covered by the
Company Management Bonus Program or any subsequent incentive program adopted by
the Company. Should such reassignment be unacceptable to the Executive,
Executive may elect to treat such reassignment as a change in control under the
provision of Section 10.
10. Change in Control.
For purposes of this Agreement, a Achange in control@ shall be
deemed to have occurred if, at any time (a) substantially all the assets of the
Company have been sold or transferred by sale, merger, or otherwise, or if any
person (as such term is used in Sections 13(d) or 14(d) of the Exchange Act) is
or becomes the beneficial owner, directly or indirectly, of securities of the
Company representing 50 percent or more of the combines voting power of the then
issued and outstanding securities of the Company; and (b) the Executive is
reassigned pursuant to subsection 9.1 within six months of such sale, merger, or
other event; provided, however, that no Achange in control
<PAGE>
shall be deemed to have occurred unless such reassignment is coupled with a
significant diminution of the duties, compensation and/or privileges previously
attaching to the Executive position as president, chairman, and chief executive
officer of the Company. No change in control shall be deemed to have occurred if
the reassignment under subsection 9.1 is on a temporary basis and is
attributable to the Executive illness or other physical, mental, or emotional
disability or incapacity.
In the event of a change in control as defined in subsection
10.1 Executive shall be entitled to a lump sum payment which shall be equal to
two times the Executive base salary for the year in which such change in control
occurs. Upon payment of the lump sum provided under this subsection 10.2, the
obligations of the Company to employ Executive under this Agreement shall cease.
However, if the event which triggers the application of this provision occurs in
calendar year 2001, the Executive shall receive, under this Section 10.2 no more
than the number of months remaining under the terms of the Agreement multiplied
by an amount equal to two months base salary. Notwithstanding the above, the
Company shall continue to be responsible for the payment of life insurance under
Section 3.5 and payment of the Company retirement obligations under Section 3.9.
In the event of a change in control as defined in subsection
10.1, all stock options to which Executive is entitled shall immediately vest
and become exercisable. Such acceleration of the vesting of stock options shall
be in addition to, and shall have no effect on, any payments pursuant to
subsection.
The value of all payments, benefits, and other consideration
received pursuant to subsections 10.2 and 10.3 and contingent upon a change in
control, and any additional payments in the nature of compensation described by
Section 280G(b)(2) of the Internal Revenue Code, shall not exceed an amount
which is equal to three times the average taxable compensation from the Company
for the base period as that term is defined in Section 280G(d)(2) of the
Internal Revenue Code. The parties agree to review the impact of the termination
of this Agreement pursuant to Section 10, and to negotiate modifications, if
mutually acceptable in situations where the results to the Executive and to the
Company are not compatible.
11. Notices.
All notices pursuant to this Agreement shall be in writing and
shall be effective when delivered to the recipient or sent to the recipient by
certified mail, return receipt requested, addressed as follows:
(a) If to the Company, to:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, MD 20850
ATTN: Secretary
(b) If to the Executive, address to:
Mr. George T. Jochum
7810 Warfield Road
Gaithersburg, MD 20882
or to such other persons or addresses as may be specified in writing by the
appropriate party.
12. Interpretation.
This Agreement shall be interpreted, performed, and enforced
in accordance with the laws (other than those relating to conflicts of law) of
the State of Delaware.
Should the parties be unable to agree upon the interpretation
of the Agreement, the matter will be referred to arbitration, under the rules of
the American Arbitration Association.
<PAGE>
13. Successors and Assigns.
This Agreement shall be binding upon the parties hereto, their
respective heirs, legal representatives, successors, and assigns, but this
Agreement may not be assigned by any party without the express written consent
of the other party hereto, and any assignment without such consent shall be void
and of no effect.
14. Entire Understanding: Amendments and Waiver.
This Agreement constitutes the entire understanding between
the parties concerning the subject matter hereof. No party shall be bound in any
manner related to employment by any warranties, representations, or guarantees,
except as specifically set forth in this Agreement.
No provision of this Agreement may be amended, waived,
discharged, or terminated except by an instrument in writing and executed by
each party. Any waiver of enforcement of any provision of this Agreement shall
not operate or be construed as a continuing waiver or a waiver of any other
provisions unless expressly stated in such instrument.
15. Impact of Previous Contract.
This Agreement shall become operational on January 1, 1999.
However, each party waives all rights and responsibilities under this Employment
Agreement, and this Employment Agreement will be without force and effect if the
Employment Agreement executed by the parties on December 18, 1990 is terminated
for any reason prior to December 31, 1998.
Salary to be paid to the Executive for the calendar year 1998
will be set at $1,350,000.00.
The vote of confidence which would occur in January 1998
under the terms of the 1990 agreement will occur at the November 1997 Board
Meeting.
Signed and delivered this 21st day of November, 1997, in
Rockville, Maryland, by Mid Atlantic Medical Services, Inc., and George T.
Jochum.
/s/ George T. Jochum
_______________________________________For: Mid Atlantic Medical Services, Inc.
George T. Jochum
BY: /s/ Joseph L. Guarriello
_____________________________________
Joseph L. Guarriello
Executive Vice-President
and General Counsel
SUBSIDIARIES OF THE COMPANY
AS OF DECEMBER 31, 1997
1. MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI"): MAMSI, a Delaware
corporation, is the holding company for the subsidiaries listed below.
2. ALLIANCE PPO, INC. ("Alliance"): Owned 100 percent by MAMSI (1).
Alliance, a Maryland corporation, provides a delivery network of physicians
(called a preferred provider organization or "PPO") to employers and insurance
companies in association with various health plans.
3. MAMSI INSURANCE AGENCY OF THE CAROLINAS, INC. ("MIACI"): Owned 100
percent by Alliance (2). MIACI, a North Carolina Corporation, contracts with
marketing representatives to sell MAMSI products in North Carolina and South
Carolina.
4. MAMSI LIFE AND HEALTH INSURANCE COMPANY ("MAMSI Life"): Owned 100 percent by
MAMSI(1). MAMSI Life, a Maryland corporation, develops and markets indemnity
health products in addition to life, accidental death and disability insurance.
5. MD-INDIVIDUAL PRACTICE ASSOCIATION, INC. (M.D. IPA"): Owned 77 percent by
PHYSICIANS HEALTH PLAN OF MARYLAND, INC. (11) and 23 percent by MAMSI (1). M.D.
IPA, a Maryland corporation, is a health maintenance organization ("HMO")
providing health care coverage for its members.
6. MD-IPA SURGICENTER, INC. ("Surgicenter"): Owned 100 percent by M.D. IPA
(5). Surgicenter, a Maryland corporation, is a general partner in a
partnership that in turn is the general partner in a limited partnership that
operates a surgery center.
7. MID ATLANTIC PSYCHIATRIC SERVICES, INC. ("MAPSI"): Owned 100 percent by
MAMSI (1). MAPSI, a Maryland corporation, provides psychiatric services to
third party payors or self-insured employer groups.
8. NATIONAL MANAGED CARE, INC. ("NMCI"): owned 78 percent by MAMSI (1). NMCI, a
Delaware corporation, markets health care services with individual practice
association ("IPA") model HMOs throughout the U.S.
9. OPTIMUM CHOICE, INC. ("OCI"): Owned 100 percent by MAMSI (1). OCI, a
Maryland corporation, is an HMO providing health care coverage for its
members.
10. OPTIMUM CHOICE OF THE CAROLINAS, INC. ("OCCI"): Owned 100 percent by MAMSI
(1). OCCI, a North Carolina corporation, is an HMO providing health care
coverage to members who are in North Carolina and South Carolina.
11. PHYSICIANS HEALTH PLAN OF MARYLAND, INC. ("PHP-MD"): Owned 100 percent by
MAMSI (1). PHP-MD, a Maryland corporation, is an IPA that provides health care
services to certain of MAMSI's HMOs.
12. HOMECALL, INC. ("HomeCall"): Owned 100 percent by MAMSI (1). HomeCall, a
Maryland corporation, provides in-home medical care including skilled nursing
and therapy to MAMSI'S HMO members and other payors.
13. HOMECALL PHARMACEUTICAL SERVICES, INC. ("HPS"): Owned 100 percent by
MAMSI (1). HPS, a Maryland corporation, providing infusion services to
MAMSI's HMO members and other payors.
14. FIRSTCALL, INC. ("FirstCall"): Owned 100 percent by HomeCall (12) and a
Maryland corporation.
15. HOMECALL HOSPICE SERVICES, INC. ("Hospice"): Owned 100 percent by MAMSI
(1). Hospice, a Maryland corporation, that provides services to the
terminally ill.
16. OPTIMUM CHOICE, INC. OF PENNSYLVANIA ("OCIPA"): Owned 100 percent by
MAMSI (1). OCIPA, a Pennsylvania corporation, is an HMO providing health care
coverage to members in Pennsylvania.
17. MAMSI INSURANCE RESOURCES, INC. ("MIRI"): Owned 100 percent by Alliance
(2). MIRI, a Maryland corporation, provides marketing personnel.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Number
33-34868 on Form S-8 dated May 11, 1990, in Registration Statement Number
33-40975 on Form S-8 dated May 31, 1991, in Registration Statement Number
33-47593 on Form S-8 dated May 1, 1992, in Registration Statement Number
33-61896 on Form S-8 dated April 29, 1993, in Registration Statement Number
33-78258 on Form S-8 dated April 28, 1994, in Registration Statement Number
33-91294 on Form S-8 dated April 17, 1995, and in Registration Statement Number
33-02531 on Form S-8 dated April 16, 1996, of our report dated February 25,
1998, with respect to the consolidated financial statements and schedule of Mid
Atlantic Medical Services, Inc. and subsidiaries included in the Annual Report
on Form 10-K for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Washington, D.C. ---------------------
March 27, 1998 Ernst & Young LLP
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