<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 For fiscal year ended DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
________ to ________
Commission file number 1-13340
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 March 4, 1999:
Approximately $405 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.
51,134,162 shares of common stock as of March 4, 1999
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders to be
held on April 26, 1999 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 ... 18
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 19
Item 6 Selected Financial Data .............................. 20
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 21
Item 7A Quantitative and Qualitative Disclosures About
Market Risk ........................................ 29
Item 8 Financial Statements and Supplementary Data .......... 30
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 55
PART III
Item 10 Directors and Executive Officers of the Registrant ... 56
Item 11 Executive Compensation ............................... 56
Item 12 Security Ownership of Certain Beneficial Owners
and Management ..................................... 56
Item 13 Certain Relationships and Related Transactions ....... 56
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 57
<PAGE> 4
PART I
ITEM 1. BUSINESS
Mid Atlantic Medical Services, Inc. is a holding company for subsidiaries active
in managed health care and other life and health insurance related activities.
Mid-Atlantic Medical Services, Inc. and its subsidiaries (the "Company" or
"MAMSI") 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
Mid-Atlantic Medical Services, Inc. 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") (hereinafter M.D. IPA, OCI, OCCI and OCIPA will be
collectively referred to as the "HMOs" or "MAMSI HMOs") 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 and large 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 49 counties in West Virginia. For the Medicare Program,
OCI is licensed in Northern Virginia, Maryland, Delaware and the District of
Columbia. OCI withdrew from the Medicare risk program effective January 1, 1999.
<PAGE> 5
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 as well as Medicaid. OCCI's present service area includes
certain areas of North Carolina and South Carolina. OCCI has yet to market its
products in South Carolina as a provider network is still being developed.
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 eleven counties in south-central
Pennsylvania.
MAMSI Life, a life and health insurance company, is licensed in 31 states and
the District of Columbia and actively markets in the states in which the Company
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 and worker's compensation.
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.
The Company'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 coverage
to enrollees. Generally, enrollees arrange for coverage through their employer.
However, in certain circumstances, group enrollees can convert their coverage to
an individual contract upon separation from their employer. There is no
assurance that employers will renew their HMO agreements 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 in some of its service area. The
Company will no longer participate in the Medicare program effective January 1,
1999.
Under traditional HMO coverage, the enrollee selects a PCP from the HMO's
provider network. Most 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.
<PAGE> 6
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 (except North Carolina which is
offered through OCCI), a wholly owned subsidiary of MAMSI, also offer
point-of-service coverage (the "preferred plan"), which is marketed to appeal to
the following customers:
1. Individuals who will not consider a closed delivery system. These
individuals prefer the flexibility of the traditional indemnity plan but are
also seeking a lower-cost alternative such as an HMO.
2. Small to mid-sized employers who are looking to limit the number of health
care plan options. In this case, the HMO would seek to be offered as an
exclusive health care provider.
In the preferred plan, enrollees have the choice of seeking care from the PCP or
from any physician of their choice (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 requested charges or 100% of
a preestablished fee 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, 1998, MAMSI's Medicaid
service area includes certain areas of Virginia, fifteen counties in West
Virginia and twelve counties in North Carolina.
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.
Through December 31, 1998, OCI offered health coverage to Title XVIII Medicare
recipients. Under a contractual arrangement with the United States Health Care
Financing Administration ("HCFA"), OCI received a monthly premium based upon
age, sex, county of residence and enrollment status for which OCI provides
comprehensive medical coverage to those individuals. Effective January 1, 1999,
OCI will no longer participate in the Medicare program. This decision was
primarily motivated by insufficient reimbursement rates. The reimbursement OCI
was receiving was insufficient to fund the direct cost of care being provided by
OCI. It is anticipated that these changes will reduce MAMSI's membership by
approximately 7,000 members.
<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 increased to
approximately 731,000 at December 31, 1998 from 682,000 at December 31, 1997, an
increase of 7.2 percent.
The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 1998:
Employer Groups Served 25,000
Population of Aggregate HMO
Service Area 33,500,000
Service Area Penetration 28%
Primary Care Physicians 6,700
Specialist Physicians 15,400
Other Affiliated Health
Care Providers 8,600
Hospitals and Outpatient
Facilities 2,900
Pharmacies 11,400
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, 1998, 1997
and 1996, approximately 11% of premium revenue was derived from Federal
government agencies which is included in the Medicare and Risk segments, and
approximately 18%, 25% and 26%, respectively, was derived from state and local
government agencies located in the Company's service area which is included in
the Risk segment.
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. The Company compensates specialist providers and participating
non-physician providers using the Medicare Resource Based Relative Value Scale
methodology of provider reimbursement.
<PAGE> 8
The HMOs have contractual arrangements with a combined total of 2,900
facilities, consisting of 300 hospitals and 2,600 non-hospital facilities, as of
December 31, 1998. 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 subsidiary, HomeCall Pharmaceutical Services, Inc. provides home
infusion, delivery of drugs to physician offices and mail order prescription
services to its HMO and Indemnity 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's 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
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 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 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 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 with the physician and hospital
utilization department. The Utilization Management staff is working with a
physician during the course of treatment. If the physician needs to extend an
enrollee's stay beyond the expected length of stay, the physician provides
medical justification for the necessity of such proposed action in order to
obtain specific approval.
The HMOs have established a grievance procedure to respond to enrollee and
provider complaints. Persons covered by HMOs are given a right to seek a fast
and fair review of adverse utilization review decisions, first internally by a
medical director of the HMO and then by an independent review organization or by
a State regulator. Enrollees are encouraged to use this procedure. 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. In
May, 1998 NCQA completed its most recent accreditation review and in September,
1998 NCQA informed the Company that M.D. IPA and OCI received full accreditation
through May, 2000. 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, 1998 the Maryland Health Care Access and Cost Commission released the
results of Maryland's statewide HMO report card. MAMSI's Maryland HMOs exceeded
the state wide average in several key areas. 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 which resulted
in M.D. IPA be designated as a "Top Rated Plan".
The Company's home health care, home infusion, and home hospice subsidiaries
underwent voluntary reaccreditation review by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") in November, 1998. Full
accreditation status was awarded as a result of this process.
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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 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 29 HMOs or other prepaid alternative
health care delivery systems that have a presence in MAMSI's significant service
areas (Maryland, Virginia, Delaware, District of Columbia, North Carolina and
West Virginia). The following table sets forth MAMSI's best estimate of 1998
enrollment of HMOs operating in its significant HMO Service Areas.
<TABLE>
<CAPTION>
Approximate
Number
HMO Plan Type of Enrollees
- ------------- --------- ------------
<S> <C> <C>
AETNA/U.S. Healthcare***....................... IPA 822,000
Kaiser Permanente Health Plan ................. Group 675,000
Mid Atlantic Medical Services, Inc.* .......... IPA 562,000
FreeState Health Plan** ....................... IPA 407,000
United Healthcare ............................. IPA 325,000
Trigon ........................................ IPA 273,000
Health Source North Carolina................... IPA 244,000
Optima ........................................ IPA 222,000
Cigna Healthcare............................... IPA 216,000
Blue Cross/Blue Shield of North Carolina....... IPA 206,000
Partners Healthplan of North Carolina.......... IPA 185,000
Qualchoice of Virginia......................... IPA 107,000
</TABLE>
* - Includes individuals covered by the Company's HMOs only.
** - This company is owned by Blue Cross/Blue Shield of Maryland.
*** - Includes NYLCARE and Prudential membership.
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 383 full-time individuals who provide
marketing services for the Company's products as of December 31, 1998. 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 45 percent of total large group new members
and 98 percent of total small group new members in 1998.
<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. 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
either 90% of the approved per diem or fixed charge per procedure, or 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.
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; (ix) appeals and grievances.
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 HMOs generally fix the premiums charged to
employers for a 12 month period and revises the premium with each renewal. In
setting premiums, the HMOs forecast 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, HMO
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 Employee Health Benefit Program
("FEHBP"). The contract with OPM and applicable government regulations establish
premium rating requirements for the FEHBP. The premiums established under the
OPM contract are subject to periodic review and audit to determine if they were
established in compliance with the community rating and other requirements under
the program.
<PAGE> 12
In September, 1998, a pretax charge of approximately $16.5 million was
recognized in the Company's financial statements in anticipation of negotiations
relating to potential governmental claims for contracts with OPM related to an
audit conducted by the Office of Inspector General concerning the Company's
participation in FEHBP for the years 1992-1997 related to findings for years
1992-1994. In the normal course of business, OPM audits health plans with which
it contracts to, among other things, verify that the premiums calculated and
charged to OPM are established in compliance with the best price community
rating guidelines established by OPM. OPM typically audits plans once every five
or six years, and each audit covers the prior five or six year period. While the
government's initial on-site audits are usually followed by a post-audit
briefing as well as a preliminary audit report in which the government indicates
its preliminary results, final resolution and settlement of the audits can take
two to three years.
In addition to claims made by the OPM auditors as part of the normal audit
process, OPM may also refer their results to the United States Department of
Justice ("DOJ") for potential legal action under the False Claims Act. The DOJ
has the authority to file a claim under the False Claims Act if it believes that
the health plan knowingly overcharged the government or otherwise submitted
false documentation or certifications. In False Claims Act actions, the
government may impose trebled damages and a civil penalty of not less than
$5,000 nor more than $10,000 for each separate alleged false claim.
The Company intends to negotiate with OPM on all matters to attain a mutually
satisfactory result. There can be no assurance that these negotiations will be
concluded satisfactorily, that the audit will not be referred to the DOJ, or
that additional, possibly material, liability will be not be incurred. The
Company believes that any ultimate liability in excess of amounts accrued would
not materially affect the Company's consolidated financial position. However,
such liability could have a material affect on results of operations or cash
flows of a future period if resolved unfavorably.
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 31 states and the District of Columbia. 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 subsidiaries 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.
<PAGE> 13
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.
In 1997, the "Health Insurance Portability and Accountability Act of 1996,
Public Law 104- 191", commonly called ("HIPAA"), 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.
HIPAA 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. HIPAA 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 HIPAA 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 HIPAA 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 HMO's service area and the U.S.
Congress have considered legislation, (1) to amend civil tort law so as to
extend "enterprise liability" to HMOs, and/or (2) to amend regulatory
requirements to establish additional rules governing HMO internal and external
appeals and grievances. Neither the Congress nor any state legislature in the
HMO's service area has enacted laws, which would expand an HMO's liability in
tort action.
States in the HMOs service area have enacted laws regarding internal and
external appeals and grievances. Under these laws, persons covered by HMOs are
given a right to seek a fast and fair review of adverse utilization review
decisions, first internally by a medical director of the HMO and then by an
independent review organization or by a State regulator. Maryland, North
Carolina and Pennsylvania have enacted laws, which became effective January 1,
1999 or earlier in 1998, and which require HMOs to have an appeals and grievance
process meeting certain requirements and to submit adverse decisions to
independent outside review in certain circumstances. The District of Columbia is
expected to enact similar legislation, which would become effective on January
1, 2000.
<PAGE> 14
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 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.
PREFERRED PROVIDER ORGANIZATIONS
MAMSI offers PPO coverage through two subsidiaries: Alliance PPO, LLC
("Alliance") and Mid Atlantic Psychiatric Services, Inc. ("MAPSI").
PPOs allow enrollees to receive care from participating physicians at
contractually negotiated rates. A PPO is different from an HMO in that a PPO
does not assume any financial risk from medical utilization nor does it
typically process claims payments to providers. All medical charges are paid
directly by the payor, which can be a self-funded employer, a third party
administrator, 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 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 health and benefit 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, 1998, Alliance had contracts with approximately 31,700 employer
groups that had access to an entire PHP-MD 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, 1998,
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
may also purchase the MAPSI PPO if the Alliance PPO is purchased. A total of
approximately 1,060,000 lives were covered under one or both of these PPO
products as of December 31, 1998.
<PAGE> 15
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 HMOs preferred
plans, except OCCI, 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 31 states and the District of Columbia including Maryland, Virginia,
West Virginia, Delaware and North Carolina. MAMSI Life also became licensed in
Pennsylvania in 1995.
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. The Company achieved reaccreditation in November, 1998.
Also during 1994, the Company formed a home infusion services company, HomeCall
Pharmaceutical Services, Inc. ("HCPS"), which received its pharmacy license in
1994, its Federal license from the Drug Enforcement Agency in 1995, and JCAHO
accreditation in 1995 and 1998 for its infusion services.
HomeCall, FirstCall and HCPS provide services that are generally lower cost
alternatives to institutional treatment and care. The Company believes that it
can 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 13,500 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 and its Virginia hospice license on
June 26, 1998. Based in Columbia, Maryland, Hospice was organized to address the
needs of terminally ill patients and their families. The hospice program
provides services to individuals in the comfort of their homes. Hospice
underwent a voluntary accreditation review by JCAHO in November, 1998 and
received full accreditation.
<PAGE> 16
Hospice currently serves the Baltimore, Washington, D.C. and Northern Virginia
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.
A summary of MAMSI's membership enrollment in all product lines is as follows:
<TABLE>
<CAPTION>
MEMBERSHIP DATA AT DECEMBER 31
---------------------------------
PRODUCT LINE 1996 1997 1998
- ------------ ---------------------------------
(in thousands)
<S> <C> <C> <C>
Commercial HMO (1) 430.8 389.1 424.9
Hybrid HMO (2) 106.7 103.5 99.4
Medicaid 82.5 34.0 30.9
Medicare 14.4 11.2 7.0
Indemnity 99.2 132.7 157.5
ASO (3) 11.0 11.0 11.0
------- ------- -------
744.6 681.5 730.7
PPO (4) 935.0 1,006.0 1,060.0
------- ------- -------
Total Membership 1,679.6 1,687.5 1,790.7
======= ======= ========
</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 insurance 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.
<PAGE> 17
EMPLOYEES
As of December 31, 1998, the Company had a total of 2,674 employees, including
2,293 full-time and 381 part-time employees. MAMSI's home health care subsidiary
employed 607 of these employees (400 on a full-time basis and 207 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.
SEGMENT INFORMATION
Segment information is included in Item 8 "Financial Statements and
Supplementary Data" on pages 49 thru 50.
ITEM 2. PROPERTIES
The Company owns five office buildings. These buildings are located in Rockville
and Frederick, Maryland and total approximately 321,000 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 212,000 square feet of office
space and approximately 5,200 square feet of warehouse space in various
locations within its service areas to support sales and administrative
operations.
ITEM 3. LEGAL PROCEEDINGS
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 parties are in active arbitration proceedings at this time.
Management believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's financial statements.
On December 2, 1998, a minority of the MAMSI Board of Directors filed a lawsuit
in the Delaware Court of Chancery against George Jochum, CEO, President and
Chairman of the Board, and the Company. The suit concerns an evenly divided
Board of Directors' vote concerning Mr. Jochum's continued tenure. There was a
dispute as to whether the Board of Directors' vote operates to terminate Mr.
Jochum's employment. The suit sought removal of Mr. Jochum from his position
with the Company and expedited prosecution temporarily restraining Mr. Jochum
from conducting all but the most ministerial of actions and enjoining any change
in the composition of the Board of Directors and restitution from Mr. Jochum to
the Company for any damages. A trial date on the merit of the case was scheduled
for February 4, 1999. On January 8, 1999 the complaint was dismissed and Mr.
Jochum resigned as Chairman, CEO and President.
During the quarter ended March 31, 1998, the Company became involved in a
dispute with the Maryland Insurance Administration ("MIA") concerning the
construction and application of Section 15-1008 of the Maryland Insurance
Article. The law limits the time within which a carrier may retroactively
collect money owed by providers to the carrier by using the device of offsetting
future payments to providers with the amount owed by the provider to the
carrier. The law does not affect the right of carriers to otherwise recover
monies owed. The Company construed the law to be applicable to claims paid on or
after October 1, 1997. The MIA construed the law to apply to retroactive
adjustments made on or after October 1, 1997 and the MIA has ordered the Company
to abide by its construction of the law. The Company has not yet decided whether
to appeal. Management believes that the ultimate outcome
<PAGE> 18
of this matter will not have a material adverse effect on the Company's
financial statements as the MIA's current position affects the method of
collection of the claims reversals, rather than the Company's legal right to the
refunds.
On February 18, 1999, certain providers filed a class action lawsuit in the
Circuit Court for Anne Arundel County, Maryland concerning the construction and
application of Section 15-1008 of the Maryland Insurance Article. The complaint
requests an accounting of claims' payments, injunctive relief and punitive
damages. Management believes that the ultimate outcome of this matter will not
have a material adverse effect on the Company's financial statements as the
MIA's current position affects the method of collection of the claims reversals,
rather than the Company's legal right to the refunds.
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
effect 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
1998.
<PAGE> 19
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.
1998 1997
----------------- -----------------
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $13.88 $ 9.25 $15.25 $10.75
Second Quarter 13.88 11.50 15.56 10.25
Third Quarter 11.19 5.00 17.00 13.88
Fourth Quarter 10.69 4.44 16.75 10.81
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 March 4, 1999, there were approximately 775 stockholders of record of the
Company's common stock.
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(in thousands except share amounts, key ratios and operating data)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA
Revenue $1,187,901 $1,111,653 $1,133,742 $ 954,907 $ 749,898
Expense 1,175,665 1,090,213 1,138,677 858,567 663,343
Income (loss) before income taxes 12,236 21,440 (4,935) 96,340 86,555
Net income (loss) 9,045 14,489 (2,768) 61,124 54,530
Earnings (loss) per common share (1):
Basic $0.20 $0.31 ($0.06) $1.33 $1.21
Diluted $0.20 $0.31 ($0.06) $1.28 $1.15
Weighted Average Shares
Basic 45,407,006 46,273,484 45,978,864 46,127,112 45,030,113
Diluted 45,473,995 46,885,666 45,978,864 47,908,379 47,370,211
Dividends --- --- --- --- ---
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital $ 123,138 $ 128,065 $ 118,870 $ 153,668 $ 91,983
Total assets 362,775 345,959 334,719 354,182 268,522
Long-term debt 14 74 134 194 5,331
Stockholders' equity 191,218 208,307 184,400 217,216 141,326
Cash dividends per common share (2) --- --- --- --- ---
KEY RATIOS
Medical loss ratio 88.8% 89.4% 92.4% 81.9% 80.8%
Administrative expense ratio 11.3% 11.7% 10.7% 10.5% 9.4%
Net income margin 0.8% 1.3% (.2%) 6.4% 7.3%
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services (4) 265 297 331 313 312
HMO only (3) 191 192 203 222 238
Medicare (4) 2,425 2,566 2,698 2,531 ---
Medicaid (4) 375 552 454 405 466
Annualized hospital admissions per
1,000 enrollees (4) 72 78 77 80 76
HMO, hybrid, ASO and indemnity
health enrollees at year end 731,000 682,000 745,000 658,000 508,000
PPO enrollees at year end 1,060,000 1,006,000 935,000 825,000 698,000
Participating providers at year end 33,600 28,400 24,300 21,077 16,950
</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.
4. Days include acute and non-acute, skilled nursing, neonatal intensive care
and psychiatric inpatient care.
<PAGE> 21
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 budget related mandates that reduce premiums for
Medicaid 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.
6. The possibility that one of the Company's vendors will experience year 2000
problems that disrupt the Company's operating or administrative systems.
GENERAL
During the three year period ended December 31, 1998, the Company experienced
modest membership expansion. While membership in certain products continues to
grow, others have shown decreases when compared with 1997. 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 marketplace. During 1998, after consideration of
non-recurring adjustments, the Company's consolidated operating margin showed
increased profits over 1997. The Company achieved 1998'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 1999. 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
affected and irregular. However, over the longer business cycle, the Company
believes that its managed care control systems, underwriting procedures (when
allowed) and network of providers should result in continued profitability.
<PAGE> 22
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 put into effect, 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.
In 1997, the "Health Insurance Portability and Accountability Act of 1996,
Public Law 104- 191", commonly called ("HIPAA"), 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.
HIPAA 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. HIPAA 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 HIPAA 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 HIPAA 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 HMOs service area and the U.S.
Congress have considered legislation, (1) to amend civil tort law so as to
extend "enterprise liability" to HMOs, and/or (2) to amend regulatory
requirements to establish additional rules governing HMO internal and external
appeals and grievances. Neither the Congress nor any state legislature in the
HMOs service area has enacted laws, which would expand an HMO's liability in
tort action.
States in the HMOs service area have enacted laws regarding internal and
external appeals and grievances. Under these laws, persons covered by HMOs are
given a right to seek a fast and fair review of adverse utilization review
decisions, first internally by a medical director of the HMO and then by an
independent review organization or by a State regulator. Maryland, North
Carolina and Pennsylvania have enacted laws, which became effective January 1,
1999 or earlier in 1998, and which require HMOs to have an appeals and grievance
process meeting certain requirements and to submit adverse decisions to
independent outside review in certain circumstances. The District of Columbia is
expected to enact similar legislation, which would become effective on January
1, 2000.
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.
<PAGE> 23
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 YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated net income of the Company was $9,045,000 and $14,489,000 in 1998
and 1997, respectively. Diluted earnings per share was $.20 in 1998 as compared
to $.31 in 1997. This decrease in earnings is primarily attributable to a
$16,500,000 non-recurring item related to the results of an audit conducted in
connection with the Company's participation in the Federal Employee Health
Benefit Program. The audit covered the periods 1992 - 1997 with the audit
findings related to years 1992 - 1994. There were no findings for years 1995 -
1997.
The Company has priced its health products competitively in order to increase
its membership base and thereby enhance its strategic position in its market
place. The Company currently has one of the largest HMO and managed care
enrollments and also the largest network of contract providers of medical care
in its service area (which includes the entire states of Maryland and Delaware,
the District of Columbia, most counties and cities in Virginia and certain areas
of West Virginia, North Carolina and Pennsylvania.)
Revenue for the year ended December 31, 1998 increased approximately $76.2
million or 6.9 percent over the year ended December 31, 1997. Revenue for year
ended December 31, 1998 includes $5.7 million related to the sale of certain
Company owned real estate no longer required in its operations. Excluding these
sales, year-over-year revenue increased 6.4 percent. A 2 percent increase in net
average HMO and indemnity enrollment resulted in an increase of approximately
$21.2 million in health premium revenue while a 4.8 percent increase in average
monthly premium per enrollee, combined for all products, resulted in a $51.1
million increase in health premium revenue. The increase in HMO and indemnity
enrollment is principally due to increases in the Company's commercial
membership. Management believes that commercial health premiums should continue
to increase over the next twelve months as the Company continues to increase its
commercial membership and as new and renewing groups are charged higher premium
rates due to legislatively mandated benefit enhancements and general price
increases initiated by the Company. This is a forward-looking statement. See
"Forward-Looking Information" above for a description of the risk factors that
may effect health premiums per member.
The Company has implemented increased premium rates across essentially all of
its commercial products. As the Company's contracts are generally for a one year
period, increased pricing cannot be initiated until a contract reaches its
renewal date. Therefore, price increases cannot be made across the Company's
membership at the same time. Commercial premium rate increases are expected to
continue in 1999 in the range of 6% to 8%. Management believes that these rate
increases may have the effect of slowing the Company's future membership growth.
In addition, management reevaluated premium reimbursement rates with regard to
its Medicare and Medicaid programs. Specifically, effective January 1, 1998, the
Company withdrew from participation in certain areas of the Virginia Medicaid
program. On January 1, 1998, the Company also modified certain benefits for
enrollees in its Medicare program and began to charge additional premiums in
certain areas.
<PAGE> 24
In the third quarter of 1998, three HMOs with large Medicare membership in the
Mid-Atlantic area announced that effective January 1, 1999 they would not
continue their Medicare risk contract with the Health Care Financing
Administration ("HCFA"). In response to the Company's perception of increased
risk related to these HMOs' departure, the Company requested a change to its
already filed rates which were to be effective January 1, 1999. HCFA responded
that they would not allow the Company to change its filed rates. Based on HCFA's
response, the Company terminated its Medicare contract effective January 1,
1999. At December 31, 1998 the Company had approximately 7,000 Medicare Risk
members.
The Company's future membership growth depends on several factors such as
relative premium prices and product availability, future increases or decreases
in the Company's service area, increased competition in the Company's service
area and changes in state mandated enrollment in Medicaid HMO programs in which
the Company participates. Enrollment may also decrease if the Company determines
that premium reimbursement rates related to certain state Medicaid programs are
inadequate, which would cause the Company to voluntarily withdraw from
participation.
Fee and other income increased from $18.4 million in 1997 to $20.5 million in
1998, principally due to increased membership in the Company's PPO product.
Revenue from life and short-term disability products contributed $6.9 million in
revenue in 1998 as compared with $5.3 in 1997. The increase is mainly due to the
products' continued popularity with customers looking for one carrier to provide
all of their employee benefit needs.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries decreased and contributed approximately $20.0 million
in revenue in 1998 as compared with $21.0 million in 1997. This decrease is due
to an increasing volume of business conducted for MAMSI HMO and indemnity
members which is eliminated in consolidation.
In the third quarter of 1998, the National Committee for Quality Assurance
("NCQA") announced that OCI and M.D. IPA received three year, full
accreditation. Full accreditation is granted to those plans that have excellent
programs for continuous quality improvement and meet NCQA's rigorous standards.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased to 88.8 percent for 1998 compared to 89.4 percent for 1997. On
a per member, per month basis, medical expenses increased 4.0 percent. Included
in the year ended December 31, 1997 are the results of the Company's
identification of certain claims which were overpaid. These overpayments were
caused, in large part, by a combination of factors including the ever increasing
complexity of the claims paying process as well as providers enhancing their
ability to maximize charges. In connection with these overpayments, during 1997
the Company recorded, as a reduction of medical expenses, approximately $12
million relating to claims paid in 1996. The Company believes that it has taken
the appropriate action and implemented the appropriate controls to insure that
future claims are paid at the appropriate amount. These initiatives should help
to control the Company's medical loss ratio. The statements in this paragraph
and the preceding paragraphs regarding cost containment initiatives, total
medical costs and future increases in health premiums 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> 25
Administrative expenses as a percentage of revenue ("administrative expense
ratio") decreased to 11.3 percent for 1998 as compared to 11.7 in 1997. Adjusted
to exclude the effect of the $5.7 million gain on sale of real estate, the
administrative expense ratio was 11.4 percent for 1998. Management believes that
the administrative expense ratio will likely remain near the current level of
11.4 percent in 1999. Management's expectation concerning the administrative
expense ratio is a forward-looking statement. The administrative expense ratio
is affected by changes in health premiums and other revenues, development of the
Company's expansion areas and increased administrative activity related to
business volume.
M.D. IPA contracts with the Office of Personnel Management ("OPM") to provide or
arrange health services under the Federal Employee 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.
In September, 1998, a pretax charge of approximately $16.5 million was
recognized in the Company's financial statements in anticipation of negotiations
relating to potential governmental claims for contracts with OPM related to an
audit conducted by the Office of Inspector General concerning the Company's
participation in FEHBP for the years 1992-1997 related to findings for
1992-1994. In the normal course of business, OPM audits health plans with which
it contracts to verify, among other things, that the premiums calculated and
charged to OPM are established in compliance with the best price community
rating guidelines established by OPM. OPM typically audits plans once every five
or six years, and each audit covers the prior five or six year period. While the
government's initial on-site audits are usually followed by a post-audit
briefing as well as a preliminary audit report in which the government indicates
its preliminary results, final resolution and settlement of the audits can take
two to three years.
In addition to claims made by the OPM auditors as part of the normal audit
process, OPM may also refer their results to the United States Department of
Justice ("DOJ") for potential legal action under the False Claims Act. The DOJ
has the authority to file a claim under the False Claims Act if it believes that
the health plan knowingly overcharged the government or otherwise submitted
false documentation or certifications. In False Claims Act actions, the
government may impose trebled damages and a civil penalty of not less than
$5,000 nor more than $10,000 for each separate alleged false claim.
The Company intends to negotiate with OPM on all matters to attain a mutually
satisfactory result. There can be no assurance that these negotiations will be
concluded satisfactorily, that the audit will not be referred to the DOJ, or
that additional, possibly material, liability will be not be incurred. The
Company believes that any ultimate liability in excess of amounts accrued would
not materially affect the Company's consolidated financial position. However,
such liability could have a material effect on results of operations or cash
flows of a future period if resolved unfavorably.
Also reflected in the Company's 1998 results is a $4.8 million write down of
certain computer and computer related assets that the Company had identified as
being no longer of use and which were discarded or sold.
Investment income decreased $4.4 million due to a decrease in realized gains on
sales of marketable equity securities of $5.3 million offset by an increase in
interest income due to higher investable balances.
Income tax expense as a percent of pretax income decreased from 32.4 percent in
1997 to 26.1 percent in 1998, in large part due to the relative increase of tax
exempt interest income as a percent of pretax income.
<PAGE> 26
The net margin rate decreased from 1.3 percent in 1997 to .8 percent in 1998.
This decrease is primarily due to the non-recurring item related to the
Company's participation in the FEHBP.
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated net income (loss) of the Company was $14,489,000 and $(2,768,000)
in 1997 and 1996, respectively. Diluted 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.
The medical loss ratio decreased primarily due to increased efforts by the
Company to control medical costs.
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.
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 for 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.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased to 89.4 percent in 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
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 administrative expense ratio for 1997 increased to 11.7 percent from 10.7
percent in 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 in 1997.
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.
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.
<PAGE> 27
Accounts receivable decreased from $87.9 million at December 31, 1997 to $79.3
million at December 31, 1998. This decrease is primarily due to a reduction in
amounts due from the Federal government and a reduction in receivables from
customers offset somewhat by increased medical recoverables.
Prepaid expenses, advances and other current assets increased from $19.3 million
at December 31, 1997 to $27.0 million at December 31, 1998, principally due to
an increase in income taxes receivable and an increase in hospital working
capital advances.
Property and equipment decreased from $57.0 million at December 31, 1997 to
$45.0 million at December 31, 1998 due to the sale of two office buildings no
longer required in the Company's operations and the disposal of certain computer
equipment no longer needed.
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, 1998 reflects
an unrealized gain of $1.3 million, net of tax, on the Company's short-term
investments.
Medical claims payable increased from $98.3 million at December 31, 1997 to
$129.3 million at December 31, 1998 primarily due to increased membership and
increased medical expense per member.
Additional paid-in capital decreased from $162.9 million at December 31, 1997 to
$138.2 million at December 31, 1998, 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.
Treasury stock increased from $41.2 million at December 31, 1997 to $75.6
million at December 31, 1998 due to the purchase of approximately 5 million
additional shares by the Company.
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 the Company's 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 $29.0
million, which is used to provide short-term capital resources for routine cash
flow fluctuations. At December 31, 1998, approximately $1.9 million was drawn
against these facilities. In addition, the Company maintains a $12 million
letter of credit for the benefit of the North Carolina Insurance Department in
support of operations of MAMSI Life and Health Company and a $300,000 letter of
credit for the Company's home health subsidiary. While no amounts have been
drawn against these letters of credit, they are a reduction of the Company's
credit line availability.
<PAGE> 28
Following is a schedule of the short-term capital resources available to the
Company:
December 31
(in thousands) 1998 1997
--------------------
Cash and cash equivalents $ 9,787 $ 3,570
Short-term investments 174,325 152,080
Working capital advances to Maryland hospitals 12,261 9,186
-------- --------
Total available liquid assets 196,373 164,836
Credit line availability 14,855 21,526
-------- --------
Total short-term capital resources $211,228 186,362
======== ========
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. The Company sold an office building in April, 1998 at a
price of approximately $3 million. In July, 1998, the Company sold another of
its office buildings for approximately $9.4 million. The Company's purchase of
an approximately 208,000 square foot office building in Frederick, Maryland in
1997, and the resulting consolidation of its service departments in this new
facility, made the previously owned buildings unnecessary for the Company's
operations.
In 1997, the Company began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue ("Y2K"). 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. As a part
of the Company's initial assessment, 1,300 software programs were identified for
Y2K review. Of those 1,300, 182 programs were identified as needing modification
of which 145 were modified and 37 were determined to be obsolete. To date, the
Company has modified the majority of the programs with internal resources
diverted from other projects, none of which are critical to the Company's daily
operations. Testing and validation of the modified programs is complete. The
Company has incurred less than $500,000 to date and does not anticipate
significant additional costs to bring the Y2K compliance program to completion.
Approximately two-thirds of the Company's critical vendors have indicated Y2K
compliance and the Company anticipates completion of this evaluation in the
second quarter of 1999. The Company is actively pursuing the remainder for
confirmation of Y2K compliance. Based upon the work completed to date, the
Company does not anticipate any future material impact on its financial
statements. With regard to the Company's most reasonably likely worst case
scenario, the Company believes that such scenario involves the possibility that
a small number of reports will display incorrect data, a small number of
programs may give unusual data and a small number of vendors will not be Y2K
compliant. In terms of a contingency plan, the Company believes it has
sufficient internal resources to be able to correct such report errors and
address non-compliant vendors within a relatively short time frame. If internal
resources prove to be insufficient, the Company will engage outside resources.
The statements in this paragraph regarding future effects of the year 2000 issue
is a forward- looking statement. See "Forward-Looking Information" for a
description of risk factors.
<PAGE> 29
At its February, 1998 meeting, the Board of Directors authorized a $20 million
stock repurchase program which allowed the Company to purchase its stock on the
open market, through block trades, or in private transactions over the
succeeding 12 months. On August 3, 1998, the Executive Committee of the Board of
Directors (subsequently ratified by the Board of Directors) increased the
authorization to purchase up to $40 million of common stock prior to February
25, 1999. The program may be discontinued at any time. As of December 31, 1998,
the Company had repurchased 5,043,700 shares of its common stock for a total
cost of approximately $34.4 million under the stock repurchase program. On
February 25, 1999 the Board of Directors authorized a $20 million stock
repurchase program to extend through September 2, 1999.
MARKET RISK
The Company is exposed to market risk through its investment in fixed and
variable rate debt securities that are interest rate sensitive. The Company does
not use derivative financial instruments. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer, or type of instrument. A hypothetical
ten percent change in market interest rates over the next year would not
materially impact the Company's financial position or cash flow. The Company has
no significant market risk with regard to liabilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 305 of S-K is contained in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 1998 and 1997..... 31
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................... 32
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996........... 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................... 34
Notes to Consolidated Financial Statements....................... 35
Report of Ernst & Young LLP Independent Auditors................. 54
Selected Quarterly Financial Data for Fiscal Years 1998 and
1997 (Unaudited)............................................... 55
<PAGE> 31
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands except share amounts) 1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 9,787 $ 3,570
Short-term investments (Note 2) 174,325 152,080
Accounts receivable, net (Note 3) 79,258 87,855
Prepaid expenses, advances and other 26,955 19,294
Deferred income taxes (Note 7) 1,247 303
-------- --------
Total current assets 291,572 263,102
Property and equipment, net (Note 4) 44,961 56,964
Statutory deposits (Note 2) 14,906 14,854
Other assets 9,055 10,427
Deferred income taxes (Note 7) 2,281 612
-------- --------
Total assets $362,775 $345,959
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable (Note 5) $ 60 $ 60
Short-term borrowings (Note 5) 1,845 2,249
Accounts payable 19,071 16,878
Medical claims payable, net 129,265 98,328
Deferred premium revenue 17,167 15,722
Deferred income taxes (Note 7) 1,026 1,800
-------- --------
Total current liabilities 168,434 135,037
Notes payable (Note 5) 14 74
Deferred income taxes (Note 7) 3,109 2,541
-------- --------
Total liabilities 171,557 137,652
Stockholders' equity (Notes 10, 11 and 13)
Common stock, $0.01 par, 100,000,000 shares authorized,
56,772,502 issued and 49,634,162 outstanding at
December 31, 1998 and 54,677,862 outstanding at
December 31, 1997 567 567
Additional paid-in capital 138,247 162,892
Stock compensation trust (common stock held in trust) (68,926) (101,482)
Treasury stock, 7,138,340 shares at December 31, 1998;
2,094,640 shares at December 31, 1997 (75,623) (41,211)
Accumulated other comprehensive income (Note 16) 1,313 946
Retained earnings 195,640 186,595
-------- --------
Total stockholders' equity 191,218 208,307
-------- --------
Total liabilities and stockholders' equity $362,775 $345,959
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 32
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands except share amounts) 1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Revenue
Health premium $1,124,248 $1,051,923 $1,079,223
Fee and other 20,501 18,351 16,376
Life and short-term disability premium 6,876 5,313 3,240
Home health services 19,962 21,025 20,519
Investment 10,622 15,041 14,384
Gain on sale of real estate 5,692 0 0
---------- ---------- ----------
Total revenue 1,187,901 1,111,653 1,133,742
---------- ---------- ----------
Expense
Medical expense
Referral and ancillary care (Notes 8 and 9) 437,279 406,840 432,487
Hospitalization, net of coordination of benefits 342,852 323,435 349,445
Primary care (Notes 8 and 9) 81,166 83,183 100,692
Prescription drugs 136,767 127,187 115,544
Reinsurance premiums, net (Note 6) 192 (49) (600)
---------- ---------- ----------
998,256 940,596 997,568
---------- ---------- ----------
Life and short-term disability claims 3,760 2,811 2,314
---------- ---------- ----------
Home health patient services 17,755 16,808 17,141
---------- ---------- ----------
Administrative expense
Salaries and benefits 85,166 80,700 76,627
Promotion and advertising 3,939 3,543 4,182
Professional services 4,066 6,499 5,837
Facilities, maintenance and supplies 27,058 26,609 23,398
Other (including interest expense of $414, $540 and $691) 14,378 12,647 11,610
---------- ---------- ----------
134,607 129,998 121,654
---------- ---------- ----------
Loss on retirement of equipment 4,787 0 0
Federal Employee Health Benefit Program
Potential Settlement (Note 12) 16,500 0 0
---------- ---------- ----------
Total expense 1,175,665 1,090,213 1,138,677
---------- ---------- ----------
Income (loss) before income taxes 12,236 21,440 (4,935)
Income tax benefit (expense) (Note 7) (3,191) (6,951) 2,167
---------- ---------- ----------
Net income (loss) $ 9,045 $ 14,489 $ (2,768)
========== ========== ==========
Basic earnings (loss) per common share (Note 11) $ .20 $ .31 $ (.06)
========== ========== =========
Diluted earnings (loss) per common share (Note 11) $ .20 $ .31 $ (.06)
========== ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 33
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional Stock Other
Common Paid-In Compensation Treasury Comprehensive Retained
(in thousands except share amounts) Stock Capital Trust Stock Income Earnings Total
------ ---------- ------------ -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Comprehensive Income:
Net Loss (2,768) (2,768)
Other comprehensive income,
net of tax benefit of $830 (1,270) (1,270)
------ -------- --------- -------- -------- -------- --------
Total Comprehensive Income (4,038)
--------
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
Comprehensive Income:
Net Income 14,489 14,489
Other comprehensive income,
net of tax of $444 681 681
------ -------- --------- -------- -------- -------- --------
Total Comprehensive Income 15,170
--------
Balance, December 31, 1997 567 162,892 (101,482) (41,211) 946 186,595 208,307
Exercise of stock options for
935,425 shares released from the
Stock Compensation Trust (7,914) 13,330 5,416
Stock option tax benefit 2,495 2,495
Adjustment to market value for shares
held in Stock Compensation Trust (19,226) 19,226
Repurchase of 5,043,700 shares of
MAMSI common stock (34,412) (34,412)
Comprehensive Income:
Net Income 9,045 9,045
Other comprehensive income
net of tax of $239 367 367
------ -------- --------- -------- -------- -------- --------
Total Comprehensive Income 9,412
Balance, December 31, 1998 $ 567 $138,247 $ (68,926) $(75,623) $ 1,313 $195,640 $191,218
====== ======== ========= ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 34
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,045 $ 14,489 $ (2,768)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,796 10,179 7,874
Provision for bad debts 34 (187) 1,728
Provision for deferred income taxes (2,273) 7,260 2,261
Gain (loss) on sale and disposal of assets (833) 13
Decrease (increase) in accounts receivable 8,563 (10,626) (20,153)
Decrease (increase) in prepaid expenses, advances and other (7,661) 13,029 (23,349)
Increase (decrease) in accounts payable 2,193 (1,877) 3,680
Increase (decrease) in medical claims payable, net 30,937 (20,321) 10,159
Increase in deferred premium revenue 1,445 5,243 3,000
-------- -------- --------
Total adjustments 43,201 2,700 (14,787)
-------- -------- --------
Net cash provided by (used in) operating activities 52,246 17,189 (17,555)
-------- -------- --------
Cash flows (used in) provided by investing activities:
Purchases of short-term investments (329,400) (249,862) (338,943)
Sales and maturities of short-term investments 307,763 253,267 392,219
Purchases of property and equipment (9,008) (21,016) (13,469)
Purchases of statutory deposits (100) (8,761) (2,407)
Maturities of statutory deposits 10 1,824
Purchases of other assets (893) (406) (247)
Proceeds from sale of assets 12,574 131 435
-------- -------- --------
Net cash (used in) provided by investing activities (19,064) (26,637) 39,412
-------- -------- --------
Cash flows provided by (used in) financing activities:
Principal payments on notes payable (60) (60) (210)
Increase (decrease) in short-term borrowings (404) 276 322
Exercise of stock options 5,416 4,859 6,238
Stock option tax benefit 2,495 3,878 6,162
Purchase of treasury stock (34,412) (41,178)
-------- -------- --------
Net cash provided by (used in) financing activities (26,965) 8,953 (28,666)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,217 (495) (6,809)
Cash and cash equivalents at beginning of year 3,570 4,065 10,874
-------- -------- --------
Cash and cash equivalents at end of year $ 9,787 $ 3,570 $ 4,065
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 35
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, LLC ("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> 36
MAJOR CUSTOMERS
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, 1998, 1997
and 1996, approximately 11% of premium revenue was derived from federal
government agencies which is included in the Medicare and Risk segments, and
approximately 18%, 25% and 26%, respectively, was derived from state and local
government agencies which is included in the Risk segment.
CASH EQUIVALENTS
Floating rate municipal putable bonds, which possess an insignificant risk of
loss from changes in interest rates, are 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 in other comprehensive income, 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> 37
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 for 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.
<PAGE> 38
INCOME TAXES
The income tax provision includes Federal and state income taxes both currently
payable and deferred because of differences between financial reporting and tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
EARNINGS (LOSS) PER COMMON SHARE
In 1997, the Company 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.
<PAGE> 39
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("Statement No. 130"), which establishes standards for reporting and display of
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company adopted Statement No. 130 as
of December 31, 1997 and has presented comprehensive income for all periods
presented in the Consolidated Statements of Changes in Stockholders' Equity.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("Statement No. 131"), which changes the way
public companies report information about operating segments. Statement No. 131,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenue. The
Company adopted Statement No. 131 as of December 31, 1997.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"),
which establishes guidelines for the accounting for the costs of all computer
software developed or obtained for internal use. SOP 98-1 is effective for years
beginning after December 15, 1998. The Company anticipates adopting this
statement in the first quarter of 1999 and anticipates that the adoption of SOP
98-1 will not have a material impact on the Company's consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("Statement No. 133"). Statement No. 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999.
Statement No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company does not expect that
the adoption of Statement No. 133 will have a material impact on its
consolidated financial statements because the Company does not currently hold
any derivative instruments.
RECLASSIFICATIONS
Certain balances in the 1997 financial statements have been reclassified to
conform to 1998 presentation.
NOTE 2 - INVESTMENTS
Investments are classified into two categories (available-for-sale or
held-to-maturity) 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 other
comprehensive income. 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.
<PAGE> 40
The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
-----------------------------------------------------
1998
-----------------------------------------------------
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 $ 84,072 $ 1,996 $ - $ 86,068
Municipal bond funds 81,468 1 81,469
Accrued interest 1,210 1,210
-------- ------- ------- --------
Debt securities 166,750 1,997 - 168,747
Equity securities 5,403 181 6 5,578
-------- ------- ------- --------
Short-term investments $172,153 $ 2,178 $ 6 $174,325
======== ======= ======= ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 3,426 $ 157 $ - $ 3,583
Obligations of states and political subdivisions 10,626 270 10,896
Other investments 854 854
-------- ------- ------- --------
Statutory deposits $ 14,906 $ 427 $ - $ 15,333
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
1997
-----------------------------------------------------
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>
For the years ended December 31, 1998 and 1997, marketable equity
available-for-sale securities with a fair value at the date of sale of
$92,570,000 and $62,804,000, respectively, were sold. The gross realized gains
on such sales totaled $5,793,000 and $11,027,000, and the gross realized losses
totaled $3,001,000 and $2,935,000 for each of the
<PAGE> 41
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, 1998, 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.
<TABLE>
<CAPTION>
-------------------------
Estimated
Fair
(in thousands) Cost Value
-------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 89,634 $ 89,645
Due after one year through five years 39,444 40,370
Due after five years through ten years 23,356 24,003
Due after ten years 14,316 14,729
-------- --------
Debt securities 166,750 168,747
Equity securities 5,403 5,578
-------- --------
$172,153 $174,325
======== ========
HELD-TO-MATURITY
Due in one year or less $ 2,021 $ 2,029
Due after one year through five years 8,802 8,980
Due after five years through ten years 3,579 3,784
Due after ten years 504 540
-------- --------
$ 14,906 $ 15,333
======== ========
</TABLE>
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1998 1997
-------------------------
<S> <C> <C>
Premium and fee accounts $ 57,399 $ 68,643
Home health service accounts 5,909 5,466
Medical recoverables 16,204 11,726
Other 4,960 7,200
Less: allowance for doubtful accounts (5,214) (5,180)
-------- --------
$ 79,258 $ 87,855
======== ========
</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> 42
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
------------------------
(in thousands) 1998 1997
------------------------
<S> <C> <C>
Land, buildings and improvements $28,684 $31,355
Computer equipment and software 28,826 38,757
Office furniture and equipment 19,498 17,267
Leasehold improvements 861 688
------- -------
77,869 88,067
Less: accumulated depreciation and
amortization (32,908) (31,103)
------- -------
$44,961 $56,964
======= =======
</TABLE>
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
------------------------
(in thousands) 1998 1997
------------------------
<S> <C> <C>
Notes payable $ 74 $ 134
Current portion (60) (60)
------- -------
Noncurrent portion $ 14 $ 74
======= =======
</TABLE>
The noncurrent portion of notes at December 31, 1998 matures in the year 2000.
The Company has access to total line-of-credit and letter-of-credit facilities
of $29 million, which are subject to annual renewal. Borrowings bear interest at
a rate based on the Federal Funds rate plus .75% - 1.65% and are secured by
certain cash balances and short-term investments. At December 31, 1998,
approximately $1.85 million was outstanding on one of the lines-of-credit at an
interest rate of 6.45% and approximately $12.3 million was outstanding in
letters-of-credit.
Interest expense paid in cash during 1998, 1997 and 1996 was approximately
$188,000, $538,000 and $688,000, 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 is $200,000. Reinsurance
for life and accidental death claims generally covers all settlements in excess
of $50,000 per person subject to a $2,500,000 maximum recovery per person.
Reinsurance recoveries for the years ended December 31, 1998, 1997 and 1996 were
approximately $1,597,000, $2,045,000 and $2,288,000, respectively. In the
consolidated statements of operations, reinsurance premiums are shown net of the
related recoveries.
<PAGE> 43
NOTE 7 - INCOME TAXES
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) 1998 1997
--------------------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation $ 2,664 $ 3,422
Receivable valuation adjustments 4,460 3,314
Unrealized investment gains 859 618
------- -------
Total deferred tax liabilities 7,983 7,354
------- -------
Deferred tax assets:
Accrued medical expenses 3,429 3,259
Premium revenue adjustments 2,975 784
State net operating losses 2,449 256
Accrued pension expenses 1,263 915
Other (450) (224)
------- -------
Total deferred tax assets 9,666 4,990
Valuation allowance for deferred tax assets (2,290) (1,062)
------- -------
Net deferred tax assets 7,376 3,928
------- -------
$ (607) $(3,426)
======= =======
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 1,247 $ 303
Non-current assets - deferred income taxes 2,281 612
Current liabilities - deferred income taxes (1,026) (1,800)
Non-current liabilities - deferred
income taxes (3,109) (2,541)
------- -------
Net deferred tax liability $ (607) $(3,426)
======= =======
</TABLE>
<PAGE> 44
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) 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 4,105 $ (1,363) $ (4,239)
State 1,359 1,054 (189)
--------- --------- ---------
Total current 5,464 (309) (4,428)
--------- --------- ---------
Deferred:
Federal (1,250) 7,279 1,828
State (1,023) (19) 433
--------- --------- ---------
Total deferred (2,273) 7,260 2,261
--------- --------- ---------
$ 3,191 $ 6,951 $ (2,167)
========= ========= =========
</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) 1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Statutory rate (35%) $ 4,282 $ 7,504 (1,727)
Tax-exempt interest (1,369) (1,582) (1,912)
State income taxes, net of Federal benefit (580) 461 (254)
Increase in valuation allowance for
deferred tax assets 1,228 325 634
Other non-deductible items 526 575 785
Other, net (896) (332) 307
------- ------- -------
$ 3,191 $ 6,951 $(2,167)
======= ======= =======
</TABLE>
Total tax deposits made by the Company in 1998, 1997 and 1996 were approximately
$6,870,000, $2,461,000 and $10,320,000, 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 in 1996 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 1998 and 1997.
<PAGE> 45
NOTE 9 - RELATED PARTIES
For the years ended December 31, 1998, 1997 and 1996, certain members of the
Boards of Directors of MAMSI and subsidiary corporations who are also
participating physicians provided medical services to enrollees totaling
$4,430,000, $6,103,000 and $8,406,000, respectively, which represents
approximately 1% in 1998 and 1997, and 2% in 1996 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
pretax 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 1998, 1997 and 1996, the Company's contribution to the
401(k) plan aggregated $681,000, $577,000 and $540,000, respectively.
In accordance with a personal service contract negotiated by the Company, its
former 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 in 1996. 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. During 1998, certain one-time elections which reduced the fixed
benefit payable to $250,000 per year, were made under the agreement which caused
1998 pension expense to be reduced by approximately $880,000.
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 1995-1998 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 1998, 1997 and 1996, respectively: risk-free interest rates of
5.6%, 6.4%, and 6.3%; volatility factors of the expected market price of the
Company's common stock of .42, .42, and .47 and a weighted average life of the
options of 3 years. The Company anticipates that it will declare no dividends.
<PAGE> 46
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 affect 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):
1998 1997 1996
------ ------ -------
Pro forma net income (loss) $1,502 $9,007 $(8,409)
Pro forma basic earnings (loss) per share .03 .19 (.18)
Pro forma diluted earnings (loss) per share .03 .19 (.18)
In each year 1990 through 1996 and 1998, 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 17,000,000. 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 and the 1998 plan through 1998 are summarized as follows:
<PAGE> 47
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
1998 Exercise 1997 Exercise 1996 Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding, January 1 8,099,231 $ 17.76 8,864,021 $ 17.02 7,400,405 $ 14.94
Granted 6,304,558 $ 14.77 1,128,500 $ 12.79 3,122,371 $ 17.72
Exercised (935,425) $ 5.79 (1,061,325) $ 4.58 (1,120,475) $ 5.57
Forfeited (5,555,240) $ 20.34 (831,965) $ 19.92 (538,280) $ 20.67
--------- --------- ---------
Outstanding, December 31 7,913,124 $ 14.98 8,099,231 $ 17.76 8,864,021 $ 17.02
========= ========= =========
Available for grant, end of year 1,766,751 1,188,744 1,494,829
Exercisable, end of year 1,608,139 4,887,992 4,107,450
Option price range for exercised
shares $4.54-$12.63 $3.29-14.75 $2.58-22.38
Option price range at end of year $5.00-$27.13 $4.54-28.50 $3.29-28.50
Weighted average fair value of
options granted during year $4.49 $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 12/31/1998 Contractual Life Exercise Price 12/31/1998 Exercise Price
- ------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$5.00 - $10.00 236,337 4.7 $ 7.07 3,750 $ 9.56
$10.01 - $15.00 2,868,341 3.8 $12.70 990,000 $12.74
$15.01 - $20.00 4,609,546 2.4 $16.28 415,489 $18.31
$20.01 - $25.00 900 2.2 $23.75 900 $23.75
$25.01 - $27.13 198,000 0.3 $27.13 198,000 $27.13
--------- ------- ------ --------- ------
7,913,124 2.9 $14.98 1,608,139 $15.95
========= ======= ====== ========= ======
</TABLE>
On April 15, 1998, the Stock Option Committee of the Company's Board of
Directors authorized a voluntary exchange ("Exchange") of all existing stock
options with an exercise price of $16.00 or more per share. Each stock option
that was voluntarily tendered was replaced with a newly issued stock option
priced at $16.00 per share. As a condition of the Exchange, option holders
agreed to extend the vesting period for one year. In addition, the newly issued
stock options are exercisable for one additional year beyond the current
expiration date. Approximately 4.3 million options were exchanged for a like
number of newly issued options.
The Company has an incentive compensation plan whereby managers receive bonuses
based upon the annual operating results of the Company. During 1998, incentive
compensation expense was approximately $800,000 which was paid to employees
below the level of Vice President. No management bonus was earned in 1997 or
1996. 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> 48
NOTE 11 - COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 9,045,000 $14,489,000 $(2,768,000)
Denominator:
Denominator for basic earnings per share
- weighted average shares 45,407,006 46,273,484 45,978,864
Dilutive securities - employee stock options 66,989 612,182 0
Denominator for diluted earnings per share
- adjusted weighted average shares 45,473,995 46,885,666 45,978,864
</TABLE>
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.
On January 11, 1999 the SCT purchased an additional 1,500,000 shares of the
Company's common stock for approximately $18,000,000. The existing promissory
note has been modified to reflect this purchase.
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,
1998, 1997 and 1996, the SCT held 7,023,950, 7,959,375 and 9,020,700 shares of
common stock at a fair market value of approximately $68.9, $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 $3,502,000, $3,552,000
and $3,316,000 in 1998, 1997 and 1996, respectively.
<PAGE> 49
Future minimum lease commitments under non-cancelable operating leases are as
follows for the years ended December 31 (in thousands):
1999 $ 2,907
2000 1,505
2001 719
2002 397
2003 203
-------
$ 5,731
=======
During the quarter ended March 31, 1998, the Company became involved in a
dispute with the Maryland Insurance Administration ("MIA") concerning the
construction and application of Section 15-1008 of the Maryland Insurance
Article. The law limits the time within which a carrier may retroactively
collect money owed by providers to the carrier by using the device of offsetting
future payments to providers with the amount owed by the provider to the
carrier. The law does not affect the right of carriers to otherwise recover
monies owed. The Company construed the law to be applicable to claims paid on or
after October 1, 1997. The MIA construed the law to apply to retroactive
adjustments made on or after October 1, 1997 and the MIA has ordered the Company
to abide by its construction of the law. The Company has not yet decided whether
to appeal. Management believes that the ultimate outcome of this matter will not
have a material adverse effect on the Company's financial statements as the
MIA's current position affects the method of collection of the claims reversals,
rather than the Company's legal right to the refunds.
On February 18, 1999, certain providers filed a class action lawsuit in the
Circuit Court for Anne Arundel County, Maryland concerning the construction and
application of Section 15-1008 of the Maryland Insurance Article. The complaint
requests an accounting of claims' payments, injunctive relief and punitive
damages. Management believes that the ultimate outcome of this matter will not
have a material adverse effect on the Company's financial statements as the
MIA's current position affects the method of collection of the claims reversals,
rather than the Company's legal right to the refunds.
M.D. IPA contracts with the Office of Personnel Management ("OPM") to provide or
arrange health services under the Federal Employee 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.
In September, 1998, a pretax charge of approximately $16.5 million which
includes approximately $4.4 million of interest, was recognized in the Company's
financial statements in anticipation of negotiations relating to potential
governmental claims for contracts with OPM related to an audit conducted by the
Office of Inspector General concerning the Company's participation in FEHBP for
the years 1992-1997 related to findings for years 1992-1994. In the normal
course of business, OPM audits health plans with which it contracts to verify,
among other things, that the premiums calculated and charged to OPM are
established in compliance with the best price community rating guidelines
established by OPM. OPM typically audits plans once every five or six years, and
each audit covers the prior five or six year period. While the government's
initial on-site audits are usually followed by a post-audit briefing as well as
a preliminary audit report in which the government indicates its preliminary
results, final resolution and settlement of the audits can take two to three
years.
<PAGE> 50
In addition to claims made by the OPM auditors as part of the normal audit
process, OPM may also refer their results to the United States Department of
Justice ("DOJ") for potential legal action under the False Claims Act. The DOJ
has the authority to file a claim under the False Claims Act if it believes that
the health plan knowingly overcharged the government or otherwise submitted
false documentation or certifications. In False Claims Act actions, the
government may impose trebled damages and a civil penalty of not less than
$5,000 nor more than $10,000 for each separate alleged false claim.
The Company intends to negotiate with OPM on all matters to attain a mutually
satisfactory result. There can be no assurance that these negotiations will be
concluded satisfactorily, that the audit will not be referred to the DOJ, or
that additional, possibly material, liability will not be incurred. The Company
believes that any ultimate liability in excess of amounts accrued would not
materially affect the Company's consolidated financial position. However, such
liability could have a material effect on results of operations or cash flows of
a future period if resolved unfavorably.
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
effect 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:
1998 1997
-------------------------- --------------------------
Minimum Actual Minimum Actual
---------- ----------- ---------- -----------
M.D. IPA $3,000,000 $42,000,000 $3,000,000 $43,300,000
OCI 3,000,000 56,000,000 3,000,000 49,800,000
MLH 500,000 34,500,000 500,000 28,300,000
OCCI 2,500,000 2,900,000 2,500,000 1,800,000
OCIPA 1,500,000 2,400,000 1,500,000 2,700,000
M.D. IPA, OCI, OCCI, OCIPA and MAMSI Life were in compliance with state
depository rules at December 31, 1998 and 1997. 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. MAMSI Life was in compliance with
the applicable risk-based capital requirements for life and health insurance
companies at December 31, 1998 and 1997, and M.D. IPA, OCI, OCCI and OCIPA were
in compliance with the applicable newly enacted risk-based capital requirements
at December 31, 1998. 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
<PAGE> 51
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, 1998,
approximately 16% 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.
NOTE 15 - REPORTABLE SEGMENTS
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. The adoption of Statement 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information.
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE
SEGMENT DERIVES ITS REVENUES
The Company has three reportable segments: Commercial risk products, Medicare
products and Preferred Provider Organizations (PPO). Commercial risk products
include traditional HMO and point of service health care plans as well as hybrid
products. Traditional products provide for the provision of comprehensive
medical care to enrollees for a fixed, prepaid premium regardless of the amount
of care provided. Hybrid products offer the ability to tailor employee health
care offerings by varying benefit designs, funding methods and insurance risk.
These products combine the use of capitated physicians to serve as gatekeepers,
employer funding of specialist and institutional claims on an "as paid" basis
with MAMSI's underwriting of risk on a specific and/or aggregate stop loss
basis. The Medicare product is health coverage offered to Title XVIII Medicare
recipients. Under a contractual arrangement with the United States Health Care
Financing Administration ("HCFA"), the Company receives a monthly premium for
which the Company provides comprehensive medical coverage to those individuals.
Effective January 1, 1999, the Company will no longer participate in the
Medicare program. The PPO product provides a delivery network of physicians to
employers and insurance companies in association with various health plans. PPOs
allow enrollees to receive care from participating physicians at contractually
negotiated rates. A PPO does not assume any financial risk from medical
utilization nor does it typically process claims payments to providers.
MEASUREMENT OF SEGMENT PROFIT OR LOSS
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, not including gains and losses on the
Company's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Management does not allocate assets in the measurement of segment profit or
loss; therefore, jointly used assets are not allocated to the reportable
segments.
FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because of the
range of benefit plans offered for providing health care coverage to enrollees.
<PAGE> 52
<TABLE>
<CAPTION>
REPORTABLE SEGMENTS
-----------------------------------------------------------------
(in thousands) Risk Medicare PPO All Other Totals
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Revenue from external customers $1,040,701 $46,414 $20,501 $ 63,971 $1,171,587
Segment profit (loss) 13,251 (6,778) 10,748 519 17,740
-----------------------------------------------------------------
(in thousands) Risk Medicare PPO All Other Totals
-----------------------------------------------------------------
Year ended December 31, 1997:
Revenue from external customers $ 917,613 $53,665 $18,351 $106,983 $1,096,612
Segment profit (loss) 7,282 (14,799) 9,543 5,095 7,121
-----------------------------------------------------------------
(in thousands) Risk Medicare PPO All Other Totals
-----------------------------------------------------------------
Year ended December 31, 1996:
Revenue from external customers $ 878,060 $55,542 $16,376 $169,380 $1,119,358
Segment profit (loss) (743) (25,555) 9,171 (2,048) (19,175)
</TABLE>
The sources of revenue included in the All Other category are composed primarily
of Medicaid and miscellaneous. All revenue is generated within the United
States.
<TABLE>
<CAPTION>
--------------------------------------------
(in thousands) 1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Revenues
Total external revenues for reportable segments $1,107,616 $ 989,629 $ 949,978
Other revenues 63,971 106,983 169,380
Investment revenue not allocated 10,622 15,041 14,384
Gain on sale of real estate 5,692
---------- ---------- ----------
Total consolidated revenues $1,187,901 $1,111,653 $1,133,742
========== ========== ==========
Pretax Profit or Loss
Total profit or loss from reportable segments $ 17,221 $ 2,026 $ (17,127)
Other profit or loss 519 5,095 (2,048)
Net investment income not allocated 10,091 14,319 14,240
Gain on sale of real estate 5,692
Federal Employee Health Benefit Program
potential settlement (16,500)
Loss on retirement of equipment (4,787)
---------- ---------- ----------
Total consolidated pretax profit (loss) $ 12,236 $ 21,440 $ (4,935)
========== ========== ==========
</TABLE>
<PAGE> 53
NOTE 16 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or stockholders'
equity. Statement 130 requires unrealized gains and losses on the Company's
available-for-sale securities, which prior to the adoption were reported
separately in the stockholders' equity to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities net-of-tax were as follows:
<TABLE>
<CAPTION>
-----------------------------------------
(in thousands) 1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Unrealized holding gains arising during period $ 2,055 $ 5,573 $ 2,296
Less: Reclassification adjustment for
net gains included in net income 1,688 4,892 3,566
------- ------- -------
Net unrealized gain (loss) recognized in
other comprehensive income $ 367 $ 681 $(1,270)
======= ======= =======
</TABLE>
<PAGE> 54
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, 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 24, 1999
<PAGE> 55
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1998 AND 1997
<TABLE>
<CAPTION>
1998 1998 1998 1998 1997 1997 1997 1997
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 $289,502 $294,225 $299,546 $304,628 $283,165 $282,443 $269,875 $276,170
Expense 278,843 288,496 310,685 297,641 281,856 278,014 262,685 267,658
Income (loss) before income taxes 10,659 5,729 (11,139) 6,987 1,309 4,429 7,190 8,512
Net income (loss) 6,690 3,585 (6,743) 5,513 806 2,788 4,726 6,169
Basic earnings (loss) per share .14 .08 (.15) .13 .02 .06 .10 .13
Diluted earnings (loss) per share .14 .08 (.15) .13 .02 .06 .10 .13
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 56
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 26, 1999.
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 26, 1999.
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 26, 1999.
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 26, 1999.
<PAGE> 57
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, 1998 and 1997 ... 31
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 ............................. 32
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 ......... 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ............................. 34
Notes to Consolidated Financial Statements ..................... 35
Report of Ernst & Young LLP Independent Auditors ............... 54
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
1998, 1997 and 1996 ..................................... 58
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> 58
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, 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
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts - accounts receivable
$ 5,180 $ 143 $ (309)(1) $ 200 $ 5,214
======== ======== ======== ======== =======
Valuation allowance - deferred tax assets
$ 1,062 $ 1,228 $ $ $ 2,290
======== ======== ======== ======== =======
</TABLE>
(1) The changes to the allowance were charged to premium revenue.
<PAGE> 59
(a)(3)
EXHIBITS
See the Exhibit Index on pages 62-63 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.
<PAGE> 60
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/ Mark D. Groban, M.D. 3/29/99
--------------------------------------------------
Mark D. Groban, M.D. Date
Chairman of the Board 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 3/29/99
--------------------------------------------------
Thomas P. Barbera Date
Vice Chairman of the Board, President,Chief Executive Officer and
Director
By: /s/ Francis C. Bruno, M.D. 3/29/99
---------------------------------------------------
Francis C. Bruno, M.D. Date
Director
By: /s/ John H. Cook, III, M.D. 3/29/99
---------------------------------------------------
John H. Cook, III, M.D. Date
Director
By: /s/ Raymond H. Cypess, D.V.M., Ph.D. 3/29/99
---------------------------------------------------
Raymond H. Cypess, D.V.M., Ph.D. Date
Director
By: /s/ Stanley M. Dahlman, Ph.D. 3/29/99
--------------------------------------------------
Stanley M. Dahlman, Ph.D. Date
Director
By: /s/ Robert E. Foss 3/29/99
--------------------------------------------------
Robert E. Foss Date
Senior Executive Vice President and Chief Financial Officer and
Director
(Principal Financial Officer)
By: /s/ Mark D. Groban, M.D. 3/29/99
--------------------------------------------------
Mark D. Groban, M.D. Date
Chairman of the Board and Director
(Principal Executive Officer)
By: /s/ Christopher E. Mackail 3/29/99
--------------------------------------------------
Christopher E. Mackail Date
Senior Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ John P. Mamana, M.D. 3/29/99
--------------------------------------------------
John P. Mamana, M.D. Date
Director
<PAGE> 61
By: /s/ William M. Mayer, M.D. 3/29/99
--------------------------------------------------
William M. Mayer, M.D. Date
Director
By: /s/ Edward J. Muhl 3/29/99
--------------------------------------------------
Edward J. Muhl Date
Director
By: /s/ Gretchen P. Murdza 3/29/99
--------------------------------------------------
Gretchen P. Murdza Date
Chief Executive Officer of Homecare and Pharmacy
Subsidiaries and Director
By: /s/ James A. Wild 3/29/99
--------------------------------------------------
James A. Wild Date
Director
<PAGE> 62
(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, 1999............
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.....................................(11)
10.61 1993 Non-Qualified Stock Option Letter Sent to Key Employees.............(11)
10.62 1992 Amendment to Employment Agreement Between George T. Jochum and
the Company..............................................................(11)
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> 63
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..........................................................(11)
10.87 1998 Non-Qualified Stock Option Plan.....................................(11)
10.88 1998 Senior Management Bonus Plan........................................(11)
10.89 1998 Management Bonus Plan...............................................(11)
10.90 Amendment to 1994 Non-Qualified Stock Option Plan........................(11)
10.91 Amendment to 1995 Non-Qualified Stock Option Plan........................(11)
10.92 Amendment to 1996 Non-Qualified Stock Option Plan........................(11)
10.93 1999 Employment Agreement Between George T. Jochum and the Company.......(11)
10.94 Form of Agreement between MAMSI and Employees Granting Options
under the 1998 Non-Qualified Stock Option Plan...........................(12)
10.95 Form of Agreement between MAMSI and George T. Jochum Granting Options
under the 1998 Non-Qualified Stock Option Plan...........................(12)
10.96 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1998 Non-Qualified Stock Option Plan...................(12)
10.97 Memorandum to Employees and Form for Election Of Exchange
and Repricing of Stock Options...........................................(12)
10.98 Agreement of Purchase and Sale of Real Estate............................(13)
10.981 1999 Non-Qualified Stock Option Plan.....................................
10.982 1999 Senior Management Bonus Plan........................................
10.983 1999 Management Bonus Plan...............................................
10.984 Amended and Restated Stock Compensation Trust Agreement
dated January 11, 1999...................................................
10.985 Common Stock Purchase Agreement dated January 11, 1999...................
10.986 Allonge to Replacement Promissory Note dated January 11, 1999............
10.987 Employment Agreement between the Company and Mark D. Groban..............
10.988 Employment Agreement between the Company and Thomas P. Barbera...........
10.989 Employment Agreement between the Company and Robert E. Foss..............
10.990 Form of Executive Employment Agreement between the Company
and Executive Staff......................................................
10.991 Form of Agreement between MAMSI and Employees Granting Options
under the 1999 Non-Qualified Stock Option Plan...........................
10.992 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1999 Non-Qualified Stock Option Plan...................
21 Subsidiaries of the Company..............................................
23 Consent of Independent Auditors..........................................
27 Financial Data Schedule..................................................
</TABLE>
(1) Incorporated by reference to exhibits filed with the Company's Registration
Statement filed under the Securities Act of 1933 on Form S-4 (Registration No.
33-9803).
(2) Incorporated by reference to exhibits filed with the Company's 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 Quarterly
Report filed under the Securities Exchange Act on Form 10-Q for the Quarterly
Period Ended March 31, 1995.
(6) 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.
(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.
<PAGE> 64
(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.
(11) 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, 1997.
(12) 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 March 31, 1998.
(13) 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 September 30, 1998.
AMENDED AND RESTATED BY-LAWS
OF
MID ATLANTIC MEDICAL SERVICES, INC.
AS OF MARCH 9, 1999
OFFICES
SECTION 1.1 PRINCIPAL OFFICE. - The principal office of the corporation
shall be at 4 Taft Court, Rockville, Maryland 20850. The principal address of
the corporation in Delaware is 229 South State Street, Dover, Delaware 19901.
SECTION 1.2 OTHER OFFICES. - The corporation may have such other offices
and places of business within or without the State of Delaware as the Board of
Directors shall determine.
STOCKHOLDERS
SECTION 2.1 PLACE OF MEETINGS. - Meetings of the stockholders may be
held at such place or places within or without the State of Delaware as shall be
fixed by the Board of Directors and stated in the notice of the meeting.
SECTION 2.2 ANNUAL MEETING. - An annual meeting of stockholders for the
election of directors and the transaction of such other business as may properly
come before the meeting shall be held within five months after the close of the
fiscal year of the corporation.
SECTION 2.3 SPECIAL MEETINGS. - Special meetings of the stockholders
for any purpose(s) may be called by the Board of Directors or by the President
stating the purpose(s) of the meeting. No matters, except those set forth in the
notice of special meeting, may be considered at the special meeting.
SECTION 2.4 NOTICE OF MEETINGS. - Notice stating the time and place,
and in the case of a special meeting the purpose(s) thereof and by whom called,
shall be delivered to each stockholder entitled to vote, not less than
twenty-five (25) nor more than sixty (60) days prior to the meeting. If mailed,
notice shall be directed to each such stockholder at his address as it appears
on the records of the stockholders of the corporation, unless he shall have
previously filed with the Secretary of the corporation a written request that
notices intended for him be mailed to some other address, in which case it shall
be mailed to the address designated in the request. Notice of any meeting need
not be given to any person who may become a stockholder of record after the
mailing of such notice and prior to the meeting, or to any stockholder who
attends such meeting, in person or by proxy, for purposes other than solely to
object to the lack of proper notice, or to any stockholder who, in person or by
proxy, submits a signed waiver of notice either before or after such meeting.
Notice of any adjourned meeting of stockholders need not be given, unless
otherwise required by statute.
SECTION 2.5 QUORUM AND ACTION. - (a) At any duly held meeting of
stockholders, the presence in person or by proxy of stockholders entitled to
cast a majority of the votes thereat shall constitute a quorum, except as
otherwise provided by law or the Certificate of Incorporation.
(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
newly created directorship resulting from any increase in the authorized number
of directors by action of the stockholders may be filled by the affirmative vote
of three-quarters (3/4) of the votes cast at the meeting. Any vacancy in the
Board of Directors resulting from the resignation of a director or for any other
cause other than the removal of a director by the stockholders may be filled by
the affirmative vote of the plurality 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 majority of the shares present and
entitled to vote thereat, even though less than a quorum is so present. If a
meeting is adjourned to another time, not more than thirty days thereafter,
and/or to another place, and if an announcement of the adjourned time and/or
place is made at the meeting, it shall not be necessary to give notice of the
adjourned meeting unless the Board of Directors, after adjournment, fixes a new
record date for the adjourned meeting.
SECTION 2.8 ACTION BY WRITTEN CONSENT IN LIEU OF MEETING OF STOCKHOLDERS. -
See Section 6.6 of the By-Laws.
SECTION 2.9 NEW BUSINESS AND NOMINATIONS. - (a) Only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the Board of Directors, or (ii) by any stockholder of the
corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 2.9. For business to be properly
brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the corporation. To
be timely, a stockholder's notice must be delivered or mailed to and received at
the principal executive offices of the corporation not less than thirty (30)
days prior to the date of the annual meeting; provided, however, that, in the
event that less than forty (40) days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made.
A stockholder's notice to the Secretary shall set forth as to each
matter such stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of the corporation's capital
stock that are beneficially owned by such stockholder, and (iv) any material
interest of such stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be brought before or conducted at an annual meeting except in accordance
with the provisions of this Section 2.9(a). The officer of the corporation or
other person presiding over the annual meeting shall, if the facts so warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 2.9(a) and,
if he or she 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 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 fourteen (14) 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 By-Laws, said Chairman and/or President shall
automatically become a director of the corporation. The Chairman and/or
President shall remain a director only as long as he or she continues to be the
Chairman and/or President of the Corporation. As provided for in Section 4.1 of
the By-Laws, the Chairman and the President hold office at the pleasure of the
Board, and may be removed and/or replaced at any time, with or without cause.
(b) Upon the election qualification of the successor directors to the
first Board of Directors, the successor directors shall be elected by the
stockholders at the first stockholder meeting in members as equally as possible,
into three groups. Group A directors will have a term of office expiring after
one year and until the election and qualification of their successors chosen at
the next annual shareholders meeting ensuing; Group B directors shall have a
term of office expiring one year thereafter and until the election and
qualification of their successors; Group C directors shall have a term of office
expiring two years thereafter and until the election and qualification of their
successors.
(c) Each successor to a Group A, B, and C director shall hold office
until the third annual meeting of the stockholders next succeeding his election,
and until his successor is elected and qualified, or until his prior death,
resignation or removal; except however, if additional directorships are
established, the initial term for such directorships shall be for one or more
years not greater than three as determined by the Board of Directors in order to
ensure that approximately one-third (1/3) of all the directors are elected at
each annual meeting of the stockholders.
(d) Notwithstanding the above, an individual is not qualified to serve
as a director if the individual is concurrently also a director of M.D.
Individual Practice Association, Inc., and Physicians Health Plan of Maryland,
Inc.
SECTION 3.2 POWERS. - The management of all the business, property and
affairs of the corporation shall be vested in the Board of Directors. The Board
may exercise all of the powers of the corporation and do all lawful acts and
things (including the adoption of such rules and regulations for the conduct of
its meetings, the exercise of its powers, and the management of the corporation,
as it may deem proper), consistent with the Delaware General Corporation law,
the Articles of Incorporation, and these By-Laws, and not thereby conferred upon
or reserved to the stockholders.
SECTION 3.3 MEETINGS. - The annual meeting of the Board of Directors
may be held without notice within four (4) weeks after the annual meeting of
stockholders. Regular meetings and the time and place of regular meetings of the
Board may be established by the Board. If the Board of Directors fixes a regular
meeting at a time more than four (4) weeks after the annual meeting of the
stockholders, or changes the time or place of any regular meeting, notice of
such meeting, in accordance with the By-Law requirements for notice of special
meetings, shall be given to each director who was not present at the meeting at
which such action was taken. Special meetings of the Board may be called by the
Chairman of the Board (if any) or the President, and shall be called at the
written request of three of more directors. Five (5) days notice of special
meetings shall be given by mail, or two (2) days notice if given personally or
by telegraph or cable, to each director. Notice of special meetings need not
state the purpose(s) thereof. A majority of the Directors present at the time
and place of any regular or special meeting, although less than a quorum, may
adjourn the same from time to time without notice, until a quorum shall be
present. Notice of any special meeting shall not be required to be given to any
director who shall attend a meeting without protesting prior thereto or at its
commencement the lack of notice to him, or who submits a signed waiver of
notice, whether before or after the meeting. Notice of any adjourned meeting
shall be required to be given. Meetings of the Board may be held at any place
within or outside of the State of Delaware.
A director may attend a meeting of the Board of Directors, or any
committee thereof, either in person or by means of a telephone or similar
communications medium which allows all persons participating in the meeting to
hear and be heard by all others participating, and participation pursuant to
this subsection shall constitute presence in person at the meeting.
SECTION 3.4 QUORUM AND ACTION. - A majority of the directors then
serving (but in no event less than one-third of the total number of directors
which the corporation would then have if there were no vacancies) shall
constitute a quorum for the transaction of business. At any duly held meeting at
which a quorum is present, the affirmative vote of a majority of the directors
present shall be the act of the Board of Directors on any question, except where
the act of a greater number is required by these By-Laws, by the Certificate of
Incorporation, or by statute.
SECTION 3.5 ACTION BY WRITTEN CONSENT IN LIEU OF MEETINGS OF DIRECTORS. -
See Section 6.6 of these By-Laws.
SECTION 3.6 VACANCIES; REMOVAL. - (a) Any vacancy occurring in the
Board of Directors by reason of an increase in the number of directors
comprising the Board or for any other reason shall be filled by action of a
majority of the remaining directors, even if less than a quorum, or by the sole
remaining director. Vacancies shall be filled for the unexpired portion of the
term of the director whose vacancy is being filled.
(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 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 the Chairman.
The Chairman and Vice Chairman shall have and perform such other duties as from
time to time may be assigned to them by the Board of Directors or the Executive
Committee, if any.
SECTION 4.4 THE PRESIDENT. - The President shall, in the absence or
non-election of a Chairman of the Board, preside at all meetings of the
stockholders and directors. When the Board is not in session, he shall have
general management and control of the business and affairs of the corporation.
SECTION 4.5 THE VICE-PRESIDENT. - The Vice-President, if any, or if
there be more than one, the senior Vice-President as determined by the Board of
Directors, shall in the absence or disability of the President, exercise the
powers and perform the duties of the President, and each Vice-President shall
exercise such other powers and perform such other duties as shall be prescribed
by the Board.
SECTION 4.6 THE TREASURER. - The Treasurer shall have custody of all
funds, securities and evidences of indebtedness of the corporation; he shall
receive and give receipts and acquittances for monies paid in on account of the
corporation, and shall pay out of the funds on hand all bills, payrolls, and
other just debts of the corporation, of whatever nature, upon maturity; he shall
enter regularly in books to be kept by him for that purpose, full and accurate
accounts of all monies received and paid out by him on account of the
corporation, and he shall perform all other duties incident to the office of
Treasurer and as may be prescribed by the Board.
SECTION 4.7 THE SECRETARY. - The Secretary shall keep the minutes of
all proceedings of the Board of Directors and of the stockholders; he shall
attend to the giving and serving of all notices to the stockholders and
directors or other notice required by law, or by these By-Laws; shall affix the
seal of the corporation to deeds, contracts and other instruments in writing
requiring a seal, when duly signed or when so ordered by the Board of Directors;
shall have charge of the certificate books and stock books and such other books
and papers as the Board may direct, and shall perform all other duties incident
to the office of the Secretary.
SECTION 4.8 SALARIES. - The salaries of all officers shall be fixed by
the Board of Directors, and the Board has the authority by majority vote to
reimburse expenses and to establish reasonable compensation of all directors for
services to the corporation as directors, officers, or otherwise.
SECTION 4.9 SHARES OF OTHER CORPORATIONS. - Whenever the corporation is
the holder of shares of stock of any other corporation, any right or power of
the corporation as such stockholder (including the attendance, acting and voting
at stockholders' meetings and execution of waivers, consents, proxies or other
instruments) may be exercised on behalf of the corporation by the President or
such other person as the Board of Directors may authorize.
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 against loss or liability by reason of
the issuance of such new certificate.
SECTION 5.4 RECORD DATE. - (a) In order to make a determination of
stockholders for any proper purpose, the directors may close the stock transfer
books for a stated period not to exceed twenty (20) days; and if the purpose of
the closing is to determine stockholders entitled to notice of or to vote at a
meeting of the stockholders, the books shall be closed for at least ten (10)
days immediately preceding such meeting.
(b) In lieu of closing the books, the directors may fix in advance a
record date for determination of stockholders for any proper purpose, such date
shall not be more than sixty (60) days, and in case of a meeting of
stockholders, not less than twenty-five (25) days, prior to the date on which
the particular action, requiring such determination of stockholders, is to be
taken.
(c) In the absence of such closing or fixed record date, the date for
determination of stockholders entitled (1) to notice of or to vote at a meeting
of stockholders, or (2) to receive a dividend or any right shall be as provided
by Section 213 of the General Corporation Law or any successor provision.
MISCELLANEOUS
SECTION 6.1 DIVIDENDS. - The Board of Directors may declare dividends
from time to time on the outstanding shares of the corporation from the surplus
or net profits legally available therefor.
SECTION 6.2 SEAL. - The Board shall provide a suitable corporate seal
stating the corporate name, and state and year of incorporation, which shall be
in the charge of the Secretary and shall be used as authorized by these By-Laws.
SECTION 6.3 FISCAL YEAR. - The fiscal year of the corporation shall close
annually on December 31.
SECTION 6.4 CHECKS, NOTES, ETC. - (a) Checks, notes, drafts, bills of
exchange and orders for the payment of money shall be signed or endorsed in such
manner as shall be determined by the Board.
(b) The funds of the corporation shall be deposited in such bank or
trust company, and checks drawn against such funds shall be signed in such
manner as may be determined from time to time by the Board.
SECTION 6.5 NOTICE AND WAIVER OF NOTICE. - (a) Any notice of meetings
required to be given under these By-Laws to stockholders and/or directors may be
waived in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein.
(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 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.
MID ATLANTIC MEDICAL SERVICES, INC.
1999 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.
1999 Non-Qualified Stock Option Plan (hereinafter referred to as the "Plan") is
to advance the interests of the Company (as hereinafter defined) and its
Subsidiaries (as hereinafter defined) by encouraging and providing for the
acquisition of an equity interest in the Company by non-employee directors,
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, officers 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 3, 1999,
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 May
2, 2004, 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 1999 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.
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.
2.07 "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 Physicians Health Plan of Maryland, Inc., 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.
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. 1999
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 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 fourth sentence of Section 2.05(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.
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 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).
(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 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 to continue to accrue service with respect to the
right to exercise his or her Options.
Article VII. Non-Employee Director Options
7.01 Grant of Non-Employee Director Options; Exercise Price; Term. On
May 3, 1999, 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 3, 1999, 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 5,000 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 3,000 shares of Common Stock.
7.03 Exercisability. Each Non-Employee Director Option shall become
exercisable cumulatively in three equal installments on May 3, 2000, May 3, 2001
and May 3, 2002; 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 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 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. The
Committee shall determine the date on which Options may become exercisable
pursuant to this Section 8.05(d).
8.06 Surrender of Options. Any Option granted to a Participant under
the Plan may be surrendered to the Company for cancellation on such terms as the
Committee and holder approve.
8.07 No Right to Option; No Right to Employment. Except as provided in
Article VII, no director, employee or other person shall have any claim or right
to be granted an Option. Neither the Plan nor any action taken hereunder shall
be construed as giving any employee any right to be retained in the employ of
the Company or any of its Subsidiaries.
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.
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 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.
1999 SENIOR MANAGEMENT BONUS PLAN
(to be approved by the Compensation Committee)
Participants in the 1999 Senior Management Bonus Plan ("Bonus Plan") shall
include all full-time positions Level 17 and above (except for certain sales
personnel who receive override commissions), which includes those individuals
who could possibly be affected by Section 162(m) of the Internal Revenue Code,
including but not limited to the Chairman or CEO. This definition includes all
full-time employees who are Level 17 and above as of March 1, 1999 and all
full-time employees who are promoted to or hired at a Level 17 or above after
March 1, 1999. Bonuses will be solely predicated on the consolidated earnings
performance of Mid Atlantic Medical Services, Inc. (MAMSI).
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 $36,000,000 before income
taxes, expansion or acquisition costs, one time charges or credits not related
to current year operations, 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 $42,000,000 before income taxes, expansion or acquisition costs, one time
charges or credits not related to current year operations, and prior to the
physicians' return of withhold and payment of physicians' bonuses.
3. Pro-ration- In the event that the Company earns between $36,000,000 and
42,000,000 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, 1999. 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, 1999, the bonus will be calculated at the initial Level 17 or higher
salary.With respect to a participant who is demoted during 1999, 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 1999 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 or upon any other reasonable method
designed to fairly compensate and recruit a new employee, with the approval of
the Compensation Committee.
6. Termination- No bonus shall be paid to bonus participants who terminate
employment with the Company or are terminated by the Company prior to the year
end unless approved by the Compensation Committee. 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 following the completion
of the audit of the financial statement(s) for the Company for the year 1999.
8. Bonus Percentages- The distribution of the bonus payments to participants
shall be limited according to the following percentage ranges:
Chairman, CEO, President 12.5 - 45%
Senior Executive Vice President 10.5 -38%
Executive Staff (Levels 18 through 23,
excluding CEO, Chairman and Senior
Executive Vice President) 6.0 - 28%
Senior Staff (Level 17) 5.5 - 25%
For the purposes of administering this Bonus Plan, any offices held by a
participant in an interim capacity will be credited as permanent positions.
9. Relationship to Other Bonus Plan- This Bonus Plan is substantially similar to
the 1999 Management Bonus Plan for full-time non-sales employees Level 10 to
Level 16. The primary differences between the Bonus Plan and the 1999 Management
Bonus Plan are the percentage payments available to personnel and the personnel
covered.
10. Interpretation of the Bonus Plan by the Compensation Committee- If a
question as to the interpretation of the Bonus Plan arises, the Compensation
Committee may interpret the Bonus Plan. The decision of the Compensation
Committee is final.
11. Amendment- The Compensation Committee may not amend the Bonus Plan to
materially increase the amounts payable thereunder to participants.
1999 MANAGEMENT BONUS PLAN
Participants in the 1999 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).
Bonuses shall be paid according to the following guidelines:
1. Minimum Bonus- Minimum bonuses shall be paid if the MAMSI and its
consolidated subsidiaries (the "Company") achieve a profit of $36,000,000 before
income taxes, expansion or acquisition costs, one time charges or credits not
related to current year operations, and prior to any physicians'return of
withhold and payment of physicians' bonuses.
2. Maximum Bonus- Maximum bonuses shall be paid if the Company achieves a profit
of $42,000,000 before income taxes, expansion or acquisition costs, one time
charges or credits not related to current year operations, and prior to any
physician's return of withhold and payment of physicians' bonuses.
3. Pro-ration- In the event that the Company earns between $36,000,000 and
$42,000,000, 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 employees who
are 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 receive a pro-rata
bonus payment based upon the time the participant was in a full-time non-sales
Level 10 or higher position during 1999. If, however, 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
1999. If an employee is promoted to a Level 17 or higher, his or her bonus for
the portion of the year when he or she was promoted is governed by the 1999
Senior Management Bonus Plan.
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 or upon any other reasonable method designed to
fairly compensate and recruit a new employee, with the approval of the CFO, CEO
or Chairman.
6. Termination- No bonus shall be paid to bonus participants who terminate
employment with the Company 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 following the completion
of the audit of the financial statement(s) for the Company for the year 1999.
8. Bonus Percentages- The distribution of the bonus payments to participants
shall be limited according to the following percentage ranges:
Level 16 5.0 - 23%
Level 15 4.5 - 20%
Level 14 4.0 - 15%
Level 12 & 13 3.5 - 10%
Level 10 & 11 2.5 - 5%
9. Relationship to Other Bonus Plan- This Bonus Plan is substantially similar to
the 1999 Senior Management Bonus Plan for full-time employees Level 17 to Level
25. The primary differences between the Bonus Plan and the 1999 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.
AMENDED AND RESTATED MID ATLANTIC MEDICAL SERVICES, INC.
STOCK COMPENSATION TRUST AGREEMENT
THIS AMENDED AND RESTATED STOCK COMPENSATION TRUST AGREEMENT made and
entered into as of the 11th day of January, 1999, by and between MID ATLANTIC
MEDICAL SERVICES, INC., a corporation organized under the laws of the State of
Delaware (hereinafter referred to as the "Company") and THE BANK OF NEW YORK, a
New York banking corporation (hereinafter referred to as the "Trustee").
WHEREAS, the Company (as defined below) desires to establish a trust
(the "Trust") in accordance with the laws of the State of New York and for the
purposes stated in this Agreement;
WHEREAS, the Trustee desires to act as trustee of the Trust, and to
hold legal title to the assets of the Trusts, in trust, for the purposes
hereinafter stated and in accordance with the terms hereof;
WHEREAS, the Company or its subsidiaries have previously adopted the Plans
(as defined below);
WHEREAS, the Company desires to provide assurance of the availability
of the shares of its common stock necessary to satisfy certain of its
obligations or those of its subsidiaries under the Plans (as defined below);
WHEREAS, the Trustee has accepted such appointment as of August 26, 1996;
WHEREAS, the Company intends, that the assets of the Trust Fund shall
be and remain subject to the claims of the Company's creditors as herein
provided and that the Plans not be deemed funded by virtue of the existence of
this Trust; and
WHEREAS, the Trust is intended to be a "grantor trust" with the result
that the corpus and income of the Trust are treated as assets and income of the
Company pursuant to Sections 671 through 679 of the Code; and
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Stock Compensation Trust Agreement dated December 20, 1996,
effective as of August 26, 1996, between the Company and the Trustee is hereby
amended and restated in its entirety as follows:
1. DEFINITIONS; ESTABLISHMENT OF TRUST
1.1. Definitions.
Whenever used in this Trust Agreement, unless otherwise
provided or the context otherwise requires:
Authorized Officer. "Authorized Officer" means the Chairman,
President, any Vice President, the Secretary or the Treasurer of the Company or
any other person or persons as may be designated by the Company
.
Board of Directors. "Board of Directors" means the board of
directors of the Company.
Change of Control. "Change of Control" means any of the following
events: (a) an acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the combined
voting power of the then outstanding voting securities of the Company; provided,
however, that the following acquisitions shall not constitute a Change of
Control: (i) an acquisition by or directly from the Company, (ii) an acquisition
by any employee benefit plan or trust sponsored or maintained by the Company;
and (iii) any acquisition described in subclauses (A) or (B) of subsection (b)
below; or
(b) approval by the stockholders of the Company of (i) a
complete dissolution or liquidation of the Company, (ii) a sale or other
disposition of all or substantially all of the Company's assets or (iii) a
reorganization, merger, or consolidation ("Business Combination") unless either
(A) all or substantially all of the stockholders of the Company immediately
prior to the Business Combination own more than 50% of the voting securities of
the entity surviving the Business Combination, or the entity which directly or
indirectly controls such surviving entity, in substantially the same proportion
as they owned the voting securities of the Company immediately prior thereto, or
(B) the consideration (other than cash paid in lieu of fractional shares or
payment upon perfection of appraisal rights) issued to stockholders of the
Company in the Business Combination is solely common stock which is publicly
traded on an established securities exchange in the United States.
Code. "Code" means the Internal Revenue Code of 1986, as amended.
Committee. "Committee" means a committee of officers selected
by the Board of Directors, except as provided in Section 9.2, or by an
individual or individuals authorized by the Board of Directors to make such
selection which is charged with administration of the Trust.
Company. "Company" means Mid Atlantic Medical Services, Inc., a
Delaware corporation, or any successor thereto. References to the Company shall
include its subsidiaries where appropriate. Company Stock "Company Stock" means
shares of common stock, par value $0.01 per share, issued by the Company or any
successor securities.
Extraordinary Dividend. "Extraordinary Dividend" means any
dividend or other distribution of cash or other property (other than Company
Stock) made with respect to Company Stock, which the Board of Directors declares
generally to be other than an ordinary dividend.
Fair Market Value. "Fair Market Value" means as of any date
the closing price quotation, or, if none, the average of the bid and asked
prices, as reported with respect to the Company Stock on the most recently
available date, on any national exchange on which the Company Stock is then
listed, or if not so listed, on the NASDAQ National Market, or other
consolidated reporting system reporting trades of the Company Stock. If he
Company Stock is not so listed, "Fair Market Value" shall mean the average of
the bid and asked prices as quoted by all market makers in the Company Stock. In
the event that a market for the Company Stock does not exist, the Committee may
determine, in any case or cases, that "Fair Market Value" shall be determined on
the basis of the opinion of one or more independent and reputable appraisers
qualified to value companies in the Company's line of business.
Insolvency. "Insolvency" means (i) the inability of the
Company to pay its debts as they become due, or (ii) the Company being subject
to a pending proceeding as a debtor under the provisions of Title 11 of the
United States Code (Bankruptcy Code).
Loan. "Loan" means the loan and extension of credit to the
Trust evidenced by a promissory note (the "Original Promissory Note") dated as
of the Closing (as defined in the Amended and Restated Common Stock Purchase
Agreement dated December 20, 1996, effective as of August 26, 1996, between the
Trust and the Company (the "1996 Common Stock Purchase Agreement")) and,
following cancellation of such promissory note, by the replacement promissory
note dated as of the Rescission Closing (as defined in the 1996 Common Stock
Purchase Agreement), with which the Trustee purchased Company Stock, as amended
by an Allonge to the Original Promissory Note dated as of the Closing (as
defined in the Common Stock Purchase Agreement dated of even date herewith
between the Trust and the Company), with which the Trustee will purchase Company
Stock.
Option Grant. "Option Grant" means an option granted under
one of the Plans to a Plan Participant to acquire shares of Company Stock.
Plan Committee Certification. "Plan Committee Certifications"
means a certification to be provided to the Trustee by the Committee from time
to time which (i) sets forth the number of shares of Company Stock transferred
to a Plan Participant, and (ii) certifies that the determination of such number
is in accordance with the terms of each Plan.
Plans. "Plans" means the employee plans listed on
Schedule A hereto and any other employee benefit plan of the Company designated
as such by the Board of Directors.
Plan Participant. "Plan Participant" means an individual who
has an Option Grant under any of the Plans.
Reliable Source. "Reliable Source" means (i) a report filed
with the Securities and Exchange Commission, (ii) a public statement issued by
the Company, or a periodical of general circulation, including, but not limited
to, The New York Times or The Wall Street Journal, or (iii) a certificate of the
Company signed by the Chief Executive Officer or by the Chairman of the Board of
Directors.
Suspense Account. "Suspense Account" means the account in
which shares of Company Stock acquired with the Loan are held until they are
released pursuant to Section 3.1.
Trust. "Trust" means the trust established pursuant to this
Trust Agreement.
Trustee. "Trustee" means The Bank of New York or any
successor trustee.
Trust Year. "Trust Year" means the period beginning on the
date of the Closing (the "Closing Date") and ending on the next following
December 31st and on each December 31st thereafter.
1.2. Establishment of Trust.
Trust. This Agreement and the Trust shall be known as the Mid
Atlantic Medical Services, Inc. Stock Compensation Trust. The parties intend
that the Trust will be an independent legal entity with title to and power to
convey all of its assets. The parties hereto further intend that the Trust not
be subject to the Employee Retirement Income Security Act of 1974, as amended.
The Trust is not a part of any of the Plans and does not provide retirement or
other benefits to any Plan Participant. The assets of the Trust will be held,
invested and disposed of by the Trustee, in accordance with the terms of the
Trust. The Company covenants and agrees to at all times make available
sufficient shares of Company Stock for purposes of the Plans to the extent that
there are not sufficient shares in the Trust to meet the requirements of the
Plans; provided, however, that the Trustee shall not be responsible for
enforcing such obligation of the Company.
Trustee. The trustee named above, and its successor or
successors, is hereby designated as the trustee hereunder, to receive, hold,
invest, administer and distribute the Trust Fund in accordance with this
Agreement, the provisions of which shall govern the power, duties and
responsibilities of the Trustee.
Trust Fund. The assets held at any time and from time to time
under the Trust collectively are herein referred to as the "Trust Fund" and
shall consist of contributions received by the Trustee, proceeds of any loans,
investments and reinvestment thereof, the earnings and income thereon, less
disbursements therefrom. Except as herein otherwise provided, title to the
assets of the Trust Fund shall at all times be vested in the Trustee and
securities that are part of the Trust Fund shall be held in such manner that the
Trustee's name and the fiduciary capacity in which the securities are held are
fully disclosed, subject to the right of the Trustee to hold title in bearer
form or in the name of a nominee, and the interests of others in the Trust Fund
shall be only the right to have such assets received, held, invested,
administered and distributed in accordance with the provisions of the Trust.
Irrevocability. The Trust Fund shall be used for the exclusive
purpose of aiding the Company in delivering the benefits provided by the Plans
and defraying the expenses of the Trust in accordance with this Trust Agreement.
The Trustee, however, is under no obligation to enforce the requirements set
forth in the foregoing sentence. No part of the income or corpus of the Trust
Fund shall be recoverable by the Company except as provided in Sections 2.1, 2.2
and 7.2 and except as provided in Article II of the Common Stock Purchase
Agreement, with respect to the Rescission (as defined in such Agreement).
Trust Fund Subject to Claims. Notwithstanding any provision of
this Agreement to the contrary, the Trust Fund shall at all times remain subject
to the claims of the Company's general creditors under federal and state law as
set forth herein.
2. CONTRIBUTIONS AND DIVIDENDS
2.1. Contributions. For each Trust Year the Company shall
contribute to the Trust in cash such amount, which together with dividends, as
provided in Section 2.2, and any other earnings of the Trust Fund, shall enable
the Trustee to make all scheduled payments of principal and interest due under
the Loan on a timely basis. Unless otherwise expressly provided herein, the
Trustee shall apply all such contributions, dividends and earnings to the
payment of principal and interest due under the Loan. The Company may from time
to time, in its sole discretion, make additional contributions to the Trust for
the purpose of enabling the Trust to make prepayments of principal with respect
to the Loan (a "Prepayment Contribution"). The Trustee shall immediately use any
Prepayment Contribution to make a prepayment of principal with respect to the
Loan. All contributions made under the Trust shall be delivered to the Trustee.
The Trustee shall be accountable for all contributions received by it, but shall
have no duty to require any contributions to be made to it.
2.2. Dividends. Except as otherwise provided herein, dividends
paid in cash on Company Stock held by the Trust, including Company Stock held in
the Suspense Account, shall be applied to pay interest and repay scheduled
principal due under the Loan. In the event that cash dividends paid on Company
Stock held in the Trust, other than Extraordinary Dividends, exceed the amount
of scheduled principal and interest due in any Trust Year, such excess shall be
used to purchase additional shares of Company Stock and/or shall be distributed
to a broad cross-section of individuals employed by the Company, as determined
in good faith by the Committee. Dividends which are not in cash or in Company
Stock (including Extraordinary Dividends, or portions thereof) shall be reduced
to cash by the Trustee and reinvested in Company Stock as soon as practicable.
For purposes of this Agreement, Company Stock purchased with the proceeds of an
Extraordinary Dividend, any excess dividend or with the proceeds of a non-cash
dividend and any dividend paid in the form of Company Stock shall, for purposes
of this Agreement (including without limitation Section 3.1 hereof), be deemed
to have been acquired with the proceeds of the Loan. In the Trustee's
discretion, investments in Company Stock may be made through open-market
purchases, private transactions or (with the Company's consent) purchases from
the Company. In carrying out the duties as set forth in this Section, the
Trustee shall act solely pursuant to the directions of the Committee.
3. RELEASE AND ALLOCATION OF COMPANY STOCK
3.1. Release of Shares. Upon any payment (including a
prepayment) or forgiveness in any Trust Year of any principal on the Loan (a
"Principal Payment"), the following number of shares of Company Stock acquired
with the proceeds of the Loan shall be available for allocation ("Available
Shares") as provided in this Article 3: the number of shares so acquired and
held in the Suspense Account immediately before such payment or forgiveness,
multiplied by a fraction the numerator of which is the amount of the Principal
Payment and the denominator of which is the sum of such Principal Payment and
the remaining principal of the Loan outstanding after such Principal Payment.
3.2. Payment of Benefits. Available Shares shall be
distributed, as directed by the Committee, to the Plan Participants at such
times as may be required to provide shares in accordance with the Plans. Any
payments required by the Plan Participants shall be made in accordance with the
Plans.
4. TAX WITHHOLDING
4.1. Withholding of Taxes. The Trustee shall, as directed by
the Committee, withhold, require withholding, or otherwise satisfy any
withholding obligation, on any distribution which it is directed to make, such
amount as the Committee shall reasonably estimate to be necessary to comply with
applicable federal, state and local withholding requirements. Upon settlement of
such tax liability, the Trustee shall distribute the balance of such amount.
Prior to making any distribution hereunder, the Trustee may require such release
of documents from any taxing authority, or may require such indemnity, as the
Trustee shall reasonably deem necessary for its protection.
5. ADMINISTRATION OF TRUST FUND
5.1. Management and Control of Trust Fund. Subject to the
terms of this Agreement, the Trustee shall have exclusive authority and
responsibility to manage and control the assets of the Trust Fund; provided,
however, that the Trustee shall have no authority or responsibility to manage
and control shares of Company Stock returned to the Company in connection with
the Rescission from and after the date of the Rescission Closing (as such terms
are defined in the Amended and Restated Common Stock Purchase Agreement, dated
as of December 20, 1996, by and between the Company and the Trust).
5.2. Investment of Funds. Except as otherwise provided in
Section 2.2 and in this Section 5.2, the Trustee shall invest and reinvest the
Trust Fund exclusively in Company Stock, including any accretions thereto
resulting from the proceeds of a tender offer, recapitalization or similar
transaction which, if not in Company Stock, shall be reduced to cash as soon as
practicable. The Trustee may invest any portion of the Trust Fund temporarily
pending investment in Company Stock, distribution or payment of expenses in (i)
investments in United States Government obligations with maturities of less than
one year, (ii) interest-bearing accounts including but not limited to
certificates of deposit, time deposits, saving accounts and money market
accounts with maturities of less than one year in any bank, including the
Trustee's, with aggregate capital in excess of $1,000,000,000 and a Moody's
Investor Services rating of at least P1, or an equivalent rating from a
nationally recognized ratings agency, which accounts are insured by the Federal
Deposit Insurance Corporation or other similar federal agency, (iii) obligations
issued or guaranteed by any agency or instrumentality of the United States of
America with maturities of less than one year or (iv) short-term discount
obligations of the Federal National Mortgage Association.
5.3. Trustee's Administrative Powers. Except as otherwise
provided herein, and subject to the Trustee's duties hereunder, the Trustee
shall have the following powers and rights, in addition to those provided
elsewhere in this Agreement or by law:
(a) to retain any asset of the Trust Fund;
(b) subject to Section 5.4 and Article 3, to sell, transfer,
mortgage, pledge, lease or otherwise dispose of, or grant options with
respect to, any Trust Fund assets at public or private sale;
(c) upon direction from the Committee and with the Trustee's
consent, to borrow from any lender (including the Company pursuant to
the Loan), to acquire Company Stock as authorized by this Agreement, to
enter into lending agreements upon such terms (including reasonable
interest and security for the loan and rights to renegotiate and prepay
such loan) as may be determined by the Committee; provided, however,
that any collateral given by the Trustee for the Loan shall be limited
to cash and property contributed by the Company to the Trust and
dividends paid on Company Stock held in the Trust and shall not include
Company Stock acquired with the proceeds of the Loan;
(d) with the consent of the Committee, to settle, submit to
arbitration, compromise, contest, prosecute or abandon claims and
demands in favor of or against the Trust Fund initiated by a party
other than the Trustee;
(e) to vote or to give any consent with respect to any
securities, including any Company Stock, held by the Trust either in
person or by proxy for any purpose, provided that the Trustee shall
vote, tender or exchange all shares of Company Stock as provided in
Section 5.4;
(f) to exercise any of the powers and rights of an individual
owner with respect to any asset of the Trust Fund and to perform any
and all other acts that in its judgment are necessary or appropriate
for the proper administration of the Trust Fund, even though such
powers, rights and acts are not specifically enumerated in this
Agreement;
(g) to employ such accountants, actuaries, investment bankers,
appraisers, other advisors and agents as may be reasonably necessary in
collecting, managing, administering, investing, valuing, distributing
and protecting the Trust Fund or the assets thereof or any borrowings
of the Trustee made in accordance with Section 5.3(c); and to pay their
reasonable fees and out-of-pocket expenses, which shall be deemed to be
expenses of the Trust and for which the Trustee shall be reimbursed in
accordance with Section 4.1;
(h) to cause any asset of the Trust Fund to be issued, held or
registered in the Trustee's name or in the name of its nominee, or in
such form that title will pass by delivery, provided that the records
of the Trustee shall indicate the true ownership of such asset;
(i) to utilize another entity as custodian to hold, but not
invest or otherwise manage or control, some or all of the assets of the
Trust Fund; and
(j) to consult with legal counsel (who may also be counsel for
the Trustee generally) with respect to any of its duties or obligations
hereunder; and to pay the reasonable fees and out-of-pocket expenses of
such counsel, which shall be deemed to be expenses of the Trust and for
which the Trustee shall be reimbursed in accordance with Section 4.1.
Notwithstanding the foregoing, neither the Trust nor the Trustee shall
have any power to, and shall not, engage in any trade or business. Any
loan obtained by the Trustee pursuant to Section 5.3(c) shall be in its
capacity as Trustee and not in its individual corporate capacity.
5.4. Voting and Tendering of Company Stock.
(a) Voting of Company Stock. The Trustee shall follow the
directions of each Plan Participant, as to the manner in which shares of Company
Stock held by the Trust are to be voted on each matter brought before an annual
or special stockholders' meeting of the Company or the manner in which any
consent is to be executed, in each case as provided below. Before each such
meeting of stockholders, the Trustee shall cause to be furnished to each Plan
Participant, a copy of the proxy solicitation material received by the Trustee,
together with a form requesting confidential instructions as to how to vote the
shares of Company Stock held by the Trustee. Upon timely receipt of directions
from the Plan Participants, the Trustee shall on each such matter vote the
number of shares (including fractional shares) of Company Stock held by the
Trust as follows:
The Company Stock shall be voted by the Trustee with each Plan
Participant directing a number of shares of Company Stock (the "Participant
Directed Amount") equal to the quotient of (x) the total number of shares of
Company Stock held by the Trust and (y) the number of Plan Participants on the
relevant date. Any Participant Shares for which the Trustee does not receive a
signed voting-direction instrument shall be voted for, against or to abstain in
the same proportions as those shares of Company Stock for which the Trustee did
receive instructions.
Similar provisions shall apply in the case of any action by
shareholder consent without a meeting.
(b) Tender or Exchange of Company Stock. The Trustee shall use
its best efforts timely to distribute or cause to be distributed to each Plan
Participant any written materials distributed to stockholders of the Company
generally in connection with any tender offer or exchange offer, together with a
form requesting confidential instructions as to whether or not to tender or
exchange shares of Company Stock held in the Trust. Upon timely receipt of
instructions from a Plan Participant, the Trustee shall tender such
Participant's Participant Directed Amount if such Plan Participant has directed
the Trustee to tender.
(c) The Company shall maintain appropriate procedures to
ensure that all instructions by Participants in the Plans are collected,
tabulated, and transmitted to the Trustee without being divulged or released to
any person affiliated with the Company or its affiliates. All actions taken by
Plan Participants shall be held confidential by the Trustee and shall not be
divulged or released to any person, other than (i) agents of the Trustee who are
not affiliated with the Company or its affiliates or (ii) by virtue of the
execution by the Trustee of any proxy, consent or letter of transmittal for the
shares of Company Stock held in the Trust.
6. CONCERNING THE TRUSTEE
6.1. Notices to the Trustee. The Trustee may rely on the authenticity,
truth and accuracy of, and will be fully protected in acting upon:
(a) any notice, direction, certification, approval or other
writing of the Company, if evidenced by an instrument signed in the name of the
Company by an Authorized Officer; and
(b) any copy of a resolution of the Board of Directors of the
Company, if certified by the Secretary or an Assistant Secretary of the Company
under its corporate seal; or
(c) any notice, direction, certification, approval or other
writing, oral or other transmitted form of instruction received by the Trustee
and believed by it to be genuine and to be sent by or on behalf of the
Committee.
6.2. Expenses of the Trust Fund. The Trustee is authorized to pay out
of the Trust Fund: (a) all brokerage fees and transfer tax expenses and other
expenses incurred in connection with the sale or purchase of investments; (b)
all real and personal property taxes, income taxes and other taxes of any kind
at any time levied or assessed under any present or future law upon, or with
respect to, the Trust Fund or any property included in the Trust Fund; (c) the
Trustee's compensation and expenses as provided in Section 6.3 hereof; and (d)
all other expenses of administering the Trust, including, without limitation,
the expenses incurred by the Trustee pursuant to Section 6.11 of this Agreement,
if any, unless promptly paid to the Trustee by the Company.
6.3. Compensation of the Trustee. The Company will pay to the Trustee
such compensation for its services as set forth on Exhibit A as from time to
time amended by the Company and the Trustee and will reimburse the Trustee for
all expenses (including reasonable attorney's fees) incurred by the Trustee in
the administration of the Trust. If not promptly paid on request, the Trustee
may charge such fees and expenses to and pay the same from the Trust Fund. The
compensation and expenses of the Trustee shall constitute a lien on the Trust
Fund.
6.4. Protection of the Trustee. The Company shall pay and shall
protect, indemnify and save harmless the Trustee and its officers, employees and
agents from and against any and all losses, liabilities (including liabilities
for penalties), actions, suits, judgments, demands, damages, costs and expenses
(including, without limitation, attorneys' fees and expenses) of any nature
arising from or relating to any action or any failure to act by the Trustee, its
officers, employees and agents or the transactions contemplated by this Trust
Agreement, including, but not limited to, any claim with respect to the
Rescission (as such term is defined in the Common Stock Purchase Agreement), any
claim by a shareholder of the Company of any kind or nature, any claim made by a
Plan Participant or his or her beneficiary with respect to payments made or to
be made by the Trustee and any claim made by the Company or its successor,
whether pursuant to a sale of assets, merger, consolidation, liquidation or
otherwise, that this Trust Agreement is invalid or ultra vires, except to the
extent that any such loss, liability, action, suit, judgment, demand, damage,
cost or expense has been determined by a final judgment of a court of competent
jurisdiction to be solely the result of the gross negligence or willful
misconduct of the Trustee, its officers, employees or agents. To the extent that
the Company has not fulfilled its obligations under the foregoing provisions of
this Section, the Trustee shall be reimbursed out of the assets of the Trust
Fund or may set up reasonable reserves for the payment of such obligations. The
Trustee assumes no obligation or responsibility with respect to any action
required by this Trust Agreement on the part of the Company or the Committee.
With respect to all action or inaction taken or not taken by the Trustee prior
to the Rescission Closing, the rights of the Trustee shall be determined in
accordance with the terms and provisions of the 1996 Common Stock Purchase
Agreement.
6.5. Duties of the Trustee. The Trustee will be under no duties
whatsoever, except such duties as are specifically set forth as such in this
Trust Agreement, and no implied covenant or obligation will be read into this
Trust Agreement against the Trustee. The Trustee will not be liable for any
action or failure to act except if such action or failure to act constitutes
gross negligence or willful misconduct. The Trustee will not be compelled to
take any action toward the execution or enforcement of the Trust or to prosecute
or defend any suit in respect thereof, unless indemnified to its satisfaction
against loss, cost, liability and expense; and the Trustee will be under no
liability or obligation to anyone with respect to any failure on the part of the
Company, the Committee or a Plan Participant. Nothing in this Trust Agreement
shall be construed as requiring the Trustee to make any payment in excess of the
amounts held in the Trust Fund at the time of such payment or otherwise to risk
its own funds. The Trustee has no duty to maintain records with respect to
Option Grants or with respect to the shares in the Suspense Account.
6.6. Settlement of Accounts of the Trustee. The Trustee shall keep or
cause to be kept accurate and detailed accounts of all investments, receipts,
disbursements and other transactions hereunder. Such accounts shall be open to
inspection and audit at all reasonable times during normal business hours by any
person designated by the Company or the Committee. At least annually after the
end of each Plan Year, the Trustee shall file with the Company and the Committee
a written account, listing the investments of the Trust Fund and any uninvested
cash balance thereof, and setting forth all receipts, disbursements, payments,
and other transactions respecting the Trust Fund not included in any such
previous account. Any account, when approved by the Company and the Committee,
will be binding and conclusive on the Company, the Committee and all Plan
Participants, and the Trustee will thereby be released and discharged from any
liability or accountability to the Company, the Committee and all Plan
Participants with respect to all matters set forth therein. Omission by the
Company or the Committee to object in writing to any specific items in any such
account within sixty (60) days after its delivery will constitute approval of
the account by the Company and the Committee. No other accounts or reports shall
be required to be given to the Company, the Committee or a Plan Participant
except as stated herein or except as otherwise agreed to in writing by the
Trustee. The Trustee shall not be required to file, and no Plan Participant or
beneficiary shall have right to compel, an accounting, judicial or otherwise, by
the Trustee.
6.7. Right to Judicial Settlement. Nothing contained in this Trust
Agreement shall be construed as depriving the Trustee of the right to have a
judicial settlement of its accounts, and upon any proceeding for a judicial
settlement of the Trustee's accounts or for instructions the only necessary
parties thereto in addition to the Trustee shall be the Company and the
Committee.
6.8. Resignation or Removal of the Trustee. The Trustee may at any time
resign and may at any time be removed by the Company upon thirty (30) days'
notice in writing.
6.9. Appointment of Successor Trustee. In the event of the resignation
or removal of the Trustee, or in any other event in which the Trustee ceases to
act, a successor trustee may be appointed by the Company by instrument in
writing delivered to and accepted by the successor trustee. Notice of such
appointment and approval, if applicable, will be given by the Company to the
retiring trustee, and the successor trustee will deliver to the retiring trustee
an instrument in writing accepting such appointment. Notwithstanding the
foregoing, if no appointment and approval, if applicable, of a successor trustee
is made by the Company within a reasonable time after such a resignation,
removal or other event, any court of competent jurisdiction may appoint a
successor trustee after such notice, if any, solely to the Company and the
retiring trustee, as such court may deem suitable and proper.
In the event of such resignation, removal or other event, the retiring
trustee or its successors and assigns shall file with the Company a final
account to which the provisions of Section 6.6 hereof relating to annual
accounts shall apply.
In the event of the appointment of a successor trustee, such successor
trustee will succeed to all the right, title and estate of, and will be, the
Trustee; and the retiring trustee will after the settlement of its final account
and the receipt of any compensation or expenses due it, deliver the Trust Fund
to the successor trustee together with all such instruments of transfer,
conveyance, assignment and further assurance as the successor trustee may
reasonably require. The retiring trustee will retain a lien upon the Trust Fund
to secure all amounts due the retiring trustee pursuant to the provisions of
this Trust Agreement.
6.10. Merger or Consolidation of the Trustee. Any corporation
continuing as the result of any merger or resulting from any consolidation to
which merger or consolidation the Trustee is a party, or any corporation to
which substantially all the business and assets of the Trustee may be
transferred, will be deemed automatically to be continuing as the Trustee.
6.11. Declaratory Judgment. Effective on and after December 20, 1996,
the Trustee may, prior to taking any action pursuant to this Agreement with
respect to which the Trustee determines in good faith that the legality or
permissibility of such action under this Agreement or otherwise is questionable,
seek a declaratory judgment from a court of competent jurisdiction as to such
legality or permissibility.
7. ENFORCEMENT; INSOLVENCY OF THE COMPANY
7.1. Enforcement of Trust Agreement and Legal Proceedings. The Company
shall have the right to enforce any provision of this Trust Agreement. In any
action or proceeding affecting the Trust, the only necessary parties shall be
the Company, the Trustee and the Committee and, except as otherwise required by
applicable law, no other person shall be entitled to any notice or service of
process. Any judgment entered in such an action or proceeding shall, to the
maximum extent permitted by applicable law, be binding and conclusive on all
persons having or claiming to have any interest in the Trust.
7.2. Insolvency of the Company.
(a) If at any time (i) the Company or a person claiming to be
a creditor of the Company alleges in writing to the Trustee that the Company has
become Insolvent, (ii) the Trustee is served with any order, process or paper
from which it appears that an allegation to the effect that the Company is
Insolvent has been made in a judicial proceeding or (iii) the Trustee has actual
knowledge of a current report or statement from a nationally recognized credit
reporting agency or from a Reliable Source to the effect that the Company is
Insolvent, the Trustee shall discontinue allocations under Section 3 under this
Trust Agreement, shall hold the Trust Fund for the benefit of the Company's
creditors, and shall resume allocations under Section 3 under this Trust
Agreement, only upon receipt of an order of a court of competent jurisdiction
requiring such payment or if the Trustee has actual knowledge of a current
report or statement from a nationally recognized credit reporting agency or
other Reliable Source (other than a Reliable Source described in clause (iii) of
the definition thereof) to the effect that the Company is not Insolvent;
provided, however, that in the event that allocations under Section 3 were
discontinued by reason of a court order or injunction, the Trustee shall resume
allocations only upon receipt of an order of a court of competent jurisdiction
requiring such allocation. The Company and its Chief Executive Officer shall be
obligated to give the Trustee prompt written notice in the event that the
Company becomes Insolvent. The Trustee shall not be liable to anyone in the
event benefit payments are discontinued pursuant to this Section 7.2. For
purposes of this Section 7.2, the term Company shall include any and all of the
Company's subsidiaries. The Company hereby specifically represents and warrants
to the Trustee that, as of the date hereof, neither the Company nor any
subsidiary of the Company with one or more employees benefiting under the Plans
is Insolvent.
8. AMENDMENT, REVOCATION AND TERMINATION
8.1. Amendments. Except as otherwise provided herein, the
Company may amend the Trust at any time and from time to time in any manner
which it deems desirable, provided that no amendment which would adversely
affect the rights, duties, interests, fees or obligations of the Trustee shall
be made without the Trustee's written consent, which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, the Company shall retain
the power under all circumstances to amend the Trust to correct any errors or
clarify any ambiguities or similar issues of interpretation in this Agreement.
8.2. Termination. Subject to the terms of this Section 8.2,
the Trust shall terminate on the later of (i) the date all Available Shares are
distributed and (ii) the date on which the Loan is paid in full (the
"Termination Date"). The Company may terminate the Trust at any time prior to
the Termination Date. The Trust shall also terminate automatically upon the
Company giving the Trustee written notice of a Change of Control (The Trustee
shall have no duty to authenticate the occurrence of a Change of Control).
Immediately upon a termination of the Trust, the Company shall be deemed to have
forgiven all amounts then outstanding under the Loan. As soon as practicable
after receiving notice from the Company of a Change of Control or upon any other
termination of the Trust, the Trustee shall sell all of the Company Stock and
other non-cash assets (if any) then held in the Trust Fund as directed by the
Committee in good faith taking into account the interests of a broad
cross-section of individuals employed by the Company. The proceeds of such sale
shall first be returned to the Company up to an amount equal to the principal
amount, plus any accrued interest, of the Loan that was forgiven upon such
termination. Any funds remaining in the Trust after such payment to the Company
(the "Excess Funds") shall be allocated and distributed with reasonable
promptness to Plan Participants among a broad cross-section of the Company's
employees as determined by the Committee.
8.3. Form of Amendment or Termination. Any amendment or
termination of the Trust shall be evidenced by an instrument in writing signed
by an Authorized Officer of the Company, certifying that said amendment or
termination has been authorized and directed by the Company or the Board of
Directors, as applicable, and, in the case of any amendment, shall be consented
to by signature of an authorized officer of the Trustee, if required by Section
8.1.
9. MISCELLANEOUS PROVISIONS
9.1. Successors. This Trust Agreement shall be binding upon and
inure to the benefit of the Company and the Trustee and their respective
successors and assigns.
9.2. Committee Action. Any action required or permitted to be taken by
the Committee may be taken on behalf of the Committee by any individual so
authorized. The Company (or the Committee after a Change of Control) shall
furnish to the Trustee the name and specimen signature of each member of the
Committee upon whose statement of a decision or direction the Trustee is
authorized to rely. Until notified of a change in the identity of such person or
persons, the Trustee shall act upon the assumption that there has been no
change. After the Company has given the Trustee notice that a Change of Control
has occurred, the Board of Directors shall no longer have the authority to
remove or appoint members of the Committee and the members of the Committee in
place immediately preceding such a Change of Control shall continue as such
members and shall appoint new members to replace any members who resign or
otherwise cease to be members after the Change of Control.
9.3. Nonalienation. Except insofar as applicable law may otherwise
require, (a) no amount payable to or in respect of any Plan Participant at any
time under the Trust shall be subject in any manner to alienation by
anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge
or encumbrance of any kind, and any attempt to so alienate, sell, transfer,
assign, pledge, attach, charge or otherwise encumber any such amount, whether
presently or thereafter payable, shall be void; and (b) the Trust Fund shall in
no manner be liable for or subject to the debts or liabilities of any Plan
Participant.
9.4. Communications.
(a) Communications to the Company shall be addressed to the
Company at 4 Taft Court, Rockville, MD 20850 Attn: Sharon Pavlos, provided,
however, that upon the Company's written request, such communications shall be
sent to such other address as the Company may specify.
(b) Communications to the Trustee shall be addressed to it at
One Wall Street, New York, New York 10286, Attn: Division Head, Master
Trust/Custody Division; provided, however, that upon the Trustee's written
request, such communications shall be sent to such other address as the Trustee
may specify.
(c) No communication shall be binding on the Trustee until it
is received by officer the Trustee having primary responsibility for this Trust,
and no communication shall be binding on the Company until it is received by the
Company.
9.5. Headings. Titles to the Sections of this Trust Agreement
are included for convenience only and shall not control the meaning or
interpretation of any provision of this Trust Agreement.
9.6. Third Parties. A third party dealing with the Trustee shall not be
required to make inquiry as to the authority of the Trustee to take any action
nor be under any obligation to follow the proper application by the Trustee of
the proceeds of sale of any property sold by the Trustee or to inquire into the
validity or propriety of any act of the Trustee.
9.7. Governing Law. This Trust Agreement and the Trust established
hereunder shall be governed by and construed, enforced, and administered in
accordance with the internal laws of the State of New York without regard to
principles of conflicts of laws and the Trustee shall be liable to account only
in the courts of that state.
9.8. Counterparts. This Trust Agreement may be executed in any
number of counterparts, each of which shall be deemed to be the original
although the others shall not be produced.
IN WITNESS WHEREOF, this Trust Agreement has been duly executed by the
parties hereto as of the day and year first above written.
Attest MID ATLANTIC MEDICAL SERVICES, INC.
/s/ Alisa Chestler By: /s/ Sharon C. Pavlos
Title: Senior Vice President,
General Counsel
Attest THE BANK OF NEW YORK, as TRUSTEE
/s/ Paulette S. Bazil By: /s/ Richard J. Barry
Title: Vice President
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement"), made
this 11th day of January, 1999 between Mid Atlantic Medical Services, Inc., a
Delaware corporation (the "Seller") and The Bank of New York, not in its
individual or corporate capacity, but solely in its capacity as trustee (the
"Trustee") of the Stock Compensation Trust (the "Trust") (the Trust is
hereinafter sometimes referred to as the "Purchaser") under a trust agreement
between the Seller and the Trustee dated August 26, 1996, as most recently
amended and restated as of January 11, 1999 (the "Trust Agreement").
W I T N E S S E T H:
WHEREAS, as contemplated by the Trust Agreement, the Purchaser
is to purchase from the Seller, and the Seller is to sell to the Purchaser,
shares of the Seller's common stock, $0.01 par value (the "Common Stock"), all
as more specifically provided herein;
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and subject to and on the terms and conditions
herein set forth, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 Purchase and Sale. Subject to the terms and conditions set
forth herein, the Seller will sell to the Purchaser, and the Purchaser will
purchase from the Seller, at the Closing (as hereinafter defined), one million
five hundred thousand (1,500,000) shares of Common Stock at $12 per share which
is the Fair Market Value (as defined in the Trust) of the Common Stock on the
last full trading day prior to the Closing. The shares of Common Stock to be
purchased by the Purchaser and sold by the Seller at the Closing are referred to
in this Agreement as the "Common Shares." In consideration for the Common
Shares, the Purchaser will deliver to the Seller cash in the amount of $15,000,
representing the par value of the Common Stock, and an allonge to the
Replacement Promissory Note dated December 20, 1996 previously delivered by the
Purchaser to the Seller in the principal amount of $118,076,287.20 (the "Note")
in the form of Exhibit A attached hereto.
1.2 Closing. The closing of the sale and purchase of the
Common Shares hereunder (the "Closing"), will be held at the offices of the
Seller on January 11, 1999 or at such other time, date and place as agreed to by
the parties.
1.3 Delivery and Payment. At the Closing, the Seller will
deliver to the Purchaser a certificate representing the Common Shares, which
certificate shall be registered in the name of the Trustee, or the name of its
nominee, against payment by the Purchaser to the Seller of the aggregate
purchase price therefor. Notwithstanding the foregoing, the Seller may
accomplish the transfer of shares to the Trustee by book entry, in which event a
cross receipt shall be executed by the parties. The Seller will pay all stamp
and other transfer taxes, if any, which may be payable in respect of the sale
and delivery of the Common Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller represents and warrants to the Purchaser as
follows:
2.1 Corporate Existence and Authority. The Seller (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware; (ii) has all requisite corporate power to execute,
deliver and perform this Agreement; and (iii) has taken all necessary
corporation action to authorize the execution, delivery and performance of this
Agreement.
2.2 No Conflict. The execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated hereby will not,
conflict with or constitute a default under (i) the Seller's certificate of
incorporation or by-laws, (ii) any agreement, indenture or other instrument to
which the Seller is a party or by which the Seller or its assets may be bound or
(iii) any law, regulation, order, arbitration, award, judgment or decree
applicable to the Seller.
2.3 Validity. This Agreement has been duly executed and
delivered by the Seller and is a valid and binding agreement of the Seller
enforceable against the Seller in accordance with its terms, except as the
enforceability thereof may be limited by any applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other laws affecting the
enforcement of creditors' rights generally, and by general principles of equity.
2.4 The Common Shares. The Common Shares have been duly
authorized and are (or when issued as contemplated hereby will be) validly
issued and constitute fully-paid and non-assessable shares of Common Stock,
$0.01 par value, of the Seller. No stockholder of the Seller has any preemptive
or other subscription right to acquire any shares of Common Stock. The Seller
will convey to the Purchaser, on the date of Closing, good and valid title to
the Common Shares free and clear of any liens, claims, security interests and
encumbrances.
2.5 Litigation. There are no actions, suits, proceedings or
arbitrations or investigations pending, or to the Seller's best knowledge,
threatened in any court or before any governmental agency or instrumentality or
arbitration panel or otherwise against or by the Seller which seek to or could
restrain, prohibit, rescind or declare unlawful, or result in substantial
damages in respect of this Agreement or the performance hereof by the Seller
(including, without limitation, the delivery of the Common Shares).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Seller as
follows:
3.1 Authority; Validity. The Purchaser has full power and
authority to execute and deliver this Agreement and the Note as Trustee and to
consummate the transactions contemplated hereby. The Note has been duly executed
by the Trustee on behalf of the Trust and, upon the execution and delivery by
the Trustee on behalf of the Trust, the Note will be a valid and binding
agreement of the Purchaser enforceable in accordance with its terms, except as
the enforceability thereof may be limited by any applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other laws
affecting the enforcement of creditors' rights generally, and by general
principles of equity.
ARTICLE IV
RESTRICTIONS ON DISPOSITION OF THE COMMON SHARES
4.1 Restricted Securities. The Purchaser acknowledges that the
Purchaser is acquiring the Common Shares pursuant to a transaction exempt from
registration under the 1933 Act. The Purchaser represents, warrants and agrees
that all Common Shares acquired by the Purchaser pursuant to this Agreement are
being acquired for investment without any intention of making a distribution
thereof, or of making any sale or other disposition thereof which would be in
violation of the 1933 Act or any applicable state securities law, and that the
Purchaser will not dispose of any of the Common Shares except that the Trustee
will, from time to time, convey a portion of the Common Shares to the
participants in the Plans (as that term is defined in the Trust Agreement) to
satisfy the obligations of the Seller thereunder, and except upon termination of
the Trust to the extent that the Trust then holds any Common Shares, all in
compliance with all provisions of applicable federal and state law regulating
the issuance, sale and distribution of securities.
4.2 Legend. Until such time as the Common Shares are
registered pursuant to the provisions of the 1933 Act, any certificate or
certificates representing the Common Shares delivered pursuant to Section 1.3,
will bear a legend in substantially the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be sold, transferred or otherwise disposed of unless
they have first been registered under such Act or unless an
exemption from registration is available."
The Seller may place stop transfer orders against the registration or transfer
of any shares evidenced by such a certificate or certificates until such time as
the requirements of the foregoing are satisfied.
ARTICLE V
CONDITIONS TO CLOSING
5.1 Conditions to Obligations of the Purchaser. The obligation
of the Purchaser to purchase the Common Shares is subject to the satisfaction of
the following conditions on the date of Closing:
(a) The representations and warranties of the Seller
set forth in Article II hereof shall be true and correct; and
if the Closing shall occur on a date other than the date of
this Agreement, the Purchaser shall have been furnished with a
certificate, dated the date of Closing, to such effect, signed
by an authorized officer of the Seller; and
(b) All permits, approvals, authorizations and
consents of third parties necessary for the consummation of
the transactions herein shall have been obtained, and no order
of any court or administrative agency shall be in effect which
restrains or prohibits the transactions contemplated by this
Agreement, and no suit, action or other proceeding by any
governmental body or other person shall have been instituted
which questions the validity or legality of the transactions
contemplated by this Agreement.
5.2 Conditions to Obligations of the Seller. The obligation of
the Seller to issue, sell and deliver the Common Shares to the Purchaser is
subject to the satisfaction of the following conditions on the date of Closing:
(a) The representations and warranties of the
Purchaser set forth in Article III hereof shall be true and
correct; and if the Closing shall occur on a date other than
the date of this Agreement, the Seller shall have been
furnished with a certificate dated the date of Closing, to
such effect, signed by an authorized office of the Trustee;
and
(b) No order of any court or administrative agency
shall be in effect which restrains or prohibits the
transactions contemplated by this Agreement, and no suit,
action or other proceeding by any governmental body or other
person shall have been instituted which questions the validity
or legality of the transactions contemplated by this
Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 Expenses. The Seller shall pay all of its expenses, and it
shall pay the Purchaser's expenses, in connection with the authorization,
preparation, execution and performance of this Agreement, including without
limitation the reasonable fees and expenses of the Trustee, its agents,
representatives, counsel, financial advisors and consultants.
6.2 Survival of Seller's Representations and Warranties. All
representations and warranties made by the Seller to the Purchaser in this
Agreement shall survive the Closing.
6.3 Notices. All notices, requests or other communications
required or permitted to be delivered hereunder shall be in writing, delivered
by registered or certified mail, return receipt requested, as follows:
(a) To the Seller:
Sharon Pavlos, Senior Vice
President and General Counsel
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, MD 20850
(b) To the Purchaser:
Richard J. Barry
The Bank of New York
One Wall Street
New York, NY 10286
Any party hereto may from time to time, by written notice given as aforesaid,
designate any other address to which notices, requests or other communications
addressed to it shall be sent.
6.4 Specific Performance. The parties hereto acknowledge that
damages would be an inadequate remedy for any breach of the provisions of this
Agreement and agree that the obligations of the parties hereunder shall be
specifically enforceable, and neither party will take any action to impede the
other from seeking to enforce such rights of specific performance.
6.5 Successors and Assigns; Integration; Assignability. This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the parties hereto, and their respective legal representatives, successors
and assigns. This Agreement (a) constitutes, together with the Note, the Trust
Agreement, and any other written agreements between the Purchaser and the Seller
executed and delivered on the date hereof, the entire agreement between the
parties hereto and supersedes all other prior agreements and understandings,
both written and oral, among the parties, with respect to the subject matter
hereof; (b) shall not confer upon any person other than the parties hereto any
rights or remedies hereunder; and (c) shall not be assignable by operation of
law or otherwise, except that the Trustee may assign all its rights hereunder to
any corporation or other institution exercising trust powers in connection with
any such institution assuming the duties of a trustee under the Trust.
6.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the state of New York.
6.7 Further Assurances. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
6.8 Amendment and Waiver. No amendment or waiver of any
provision of this Agreement or consent to departure therefrom shall be effective
unless in writing and signed by the Purchaser and the Seller.
6.9 Counterparts. This Agreement may be executed in any number
of counterparts with the same effect as if the signatures thereto were upon one
instrument.
6.10 Certain Limitations. The execution and delivery of this
Agreement and the performance by the Trustee of this Agreement and under the
terms of the Trust have been or will be, effected by the Trustee in its capacity
as Trustee. Nothing in this Agreement shall be interpreted to increase, decrease
or modify in any manner any liability of the Trustee to the Seller or to any
trustee, representative or other claimant by right of the Seller resulting from
the Trustee's performance of its duties under the constituent instruments of the
Trust, and no personal liability shall be asserted or enforceable against said
entity by reason of any of the covenants, statements or representations
contained in this Agreement.
6.11 Incorporation. The terms and conditions of the Trust
Agreement relating to the nature of the responsibilities of the Trustee and the
indemnification of the Trustee by the Seller are incorporated herein by
reference and made applicable to this Agreement.
IN WITNESS WHEREOF, the undersigned have duly executed this
Agreement on the date and year first above written.
Mid Atlantic Medical Services, Inc.
By: /s/ Sharon C. Pavlos
Title: Senior Vice President,
General Counsel
The Bank of New York in its capacity as trustee
of the Mid Atlantic Medical Services, Inc. Stock
Compensation Trust
By: /s/ Richard J. Barry
Title: Vice President
EXHIBIT A
Allonge
<PAGE>
ALLONGE TO REPLACEMENT PROMISSORY NOTE
This Allonge made this 11th day of January, 1999, to the Replacement
Promissory Note dated December 20, 1996 made by The Bank of New York, not in its
individual or corporate capacity, but solely in its capacity as Trustee of the
Mid Atlantic Medical Services, Inc. Stock Compensation Trust ("Borrower") in
favor of Mid Atlantic Medical Services, Inc. ("Lender").
WHEREAS, Borrower executed and delivered to Lender a Replacement
Promissory Note dated December 20, 1996 in the original principal amount of
$129,902,500 (the "Original Note").
WHEREAS, $100,091,287.20 of the principal amount of the Original Note
remains unpaid as of the date hereof.
WHEREAS, in order to finance the Borrower's purchase of 1,500,000
shares of the Lender's common stock pursuant to the terms of Common Stock
Purchase Agreement of even date herewith between the Borrower and Lender,
Borrower and Lender wish to increase the principal amount of the Original Note
due and owing from $100,091,287.20 to $118,076,287.20 while leaving all other
terms of the Original Note unamended.
NOW, THEREFORE, for good and valuable consideration and intending to be
legally bound hereby, the parties hereto agree as follows:
(1) The Original Note is hereby amended by deleting all
references to "$129,902,500" and by inserting in lieu thereof
"$118,076,287.20."
(2) The last sentence of the second paragraph of the Original
Note is hereby amended by deleting the date "December 20, 1996" and by
inserting in lieu thereof January 11, 1999."
(3) Schedule A attached to the Original Note is hereby amended
and restated in its entirety in the form attached hereto as Exhibit 1.
(4) Schedule B attached to the Original Note is hereby amended
and restated in its entirety in the form attached hereto as Exhibit 2.
(5) Except as expressly amended hereby, the Original Note
shall remain unamended and in full force and effect.
IN WITNESS WHEREOF, this Allonge to Replacement Promissory is made
effective as of the 11th day of January, 1999.
Attest: THE BANK OF NEW YORK, not in its individual
corporate capacity, but solely in its capacity as
Trustee of the Mid Atlantic Medical Services, Inc.
Stock Compensation Trust
/s/ Paulette S. Bazil By: /s/ Richard J. Barry
Title: Vice President
Attest: MID ATLANTIC MEDICAL SERVICES, INC.
/s/ Alisa Chestler By: /s/ Sharon C. Pavlos
Title: Senior Vice President,
General Counsel
<PAGE>
EXHIBIT 1
Trust Year Amount
1999 9,000,000.00
2000 9,000,000.00
2001 9,000,000.00
2002 9,000,000.00
2003 9,000,000.00
2004 9,000,000.00
2005 9,000,000.00
2006 9,000,000.00
2007 9,000,000.00
2008 9,000,000.00
2009 9,000,000.00
2010 9,000,000.00
2011 10,076,287.20
<PAGE>
Exhibit 2
Interest
Pay Date Year Amount
1/5 1999 2,017,812
4/15 2,361,526
7/15 2,317,526
10/15 2,271,526
1/5 2000 2,227,526
4/15 2,181,526
7/15 2,137,526
10/15 2,091,526
1/5 2001 2,047,526
4/15 2,001,526
7/15 1,957,526
10/15 1,911,526
1/5 2002 1,867,526
4/15 1,821,526
7/15 1,777,526
10/15 1,731,526
1/5 2003 1,687,526
4/15 1,641,526
7/15 1,597,526
10/15 1,551,526
1/5 2004 1,507,526
4/15 1,461,526
7/15 1,417,526
10/15 1,371,526
1/5 2005 1,327,526
4/15 1,281,526
7/15 1,237,526
10/15 1,191,526
1/5 2006 1,147,526
4/15 1,101,526
7/15 1,057,526
10/15 1,011,526
1/5 2007 967,526
4/15 921,526
7/15 877,526
10/15 831,526
1/5 2008 787,526
4/15 741,526
7/15 697,526
10/15 651,526
1/5 2009 607,526
4/15 561,526
7/15 517,526
10/15 471,526
1/5 2010 427,526
4/15 381,526
7/15 337,526
10/15 291,526
1/5 2011 247,526
4/15 201,526
7/15 152,637
8/26 46,251
65,035,474
EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered as of this 8th day of
January, 1999 ("Effective Date"), by and between Mid Atlantic Medical Services,
Inc., a Delaware corporation with its principal executive offices at 4 Taft
Court, Rockville, Maryland 20850 ("Company"), and Mark D. Groban, "Executive");
WHEREAS, the Company wishes to assure itself of the services of Executive
for the period provided in this Agreement, and Executive is willing to serve in
the employ of the Company on a full-time basis for said period;
WHEREAS, the Company and Executive desire to set forth the amounts payable
and benefits to be provided by the Company to Executive in the event of a
termination of Executive's employment with the Company under the circumstances
set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto hereby agree as follows:
1. Employment. The Company agrees to continue Executive in its employ, and
Executive agrees to remain in the full time employ of the Company, for the
period stated in Section 3 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Company employs Executive, and
Executive agrees to serve, as interim Chairman of the Board of the Company on
the conditions hereinafter set forth. Executive agrees to perform such services
consistent with his position as shall from time to time be assigned to him by
the Company's Board of Directors ("Board"), or another executive designated by
the Board. Such duties may include the appointment of Executive as an officer
and/or director of any present or future subsidiary or affiliate of the Company
without any additional remuneration under this Agreement. Executive shall devote
all of his business time, attention, skill, and efforts to the faithful
performance of the duties hereunder.
3. Term. The period of Executive's employment under this Agreement with the
Company (i) shall commence as of the Effective Date and remain in effect for one
year after the date of the approval by the Board of Directors of a permanent
Chairman of the Board and a permanent Chief Executive Officer and President,
whichever date is later. In the event Executive is approved as the permanent
Chairman of the Board, the parties agree to terminate this agreement and enter
into a new employment agreement.
4. Compensation and Reimbursement of Expenses. For all services rendered by
Executive in any capacity during employment under this Agreement (including,
without limitation, services as an executive, officer, or director of the
Company, or any subsidiary or affiliate of the Company, or as a member of any
committee of the Board of Directors of the Company or any subsidiary or
affiliate of the Company), the Company shall pay Executive as compensation (A)
an annual salary ("Base Salary"); (B) such bonus for such period, if any, as may
be awarded to Executive from time to time pursuant to any Bonus Plan adopted by
the Company for its senior management or otherwise awarded by the Board or by a
committee designated by the Board; and (C) stock options at the discretion of
the Board or the appropriate Committee of the Board. By action of the Board on
February 25, 1999, the Company will grant Executive 85,000 shares of MAMSI stock
options as of that date. Such options will vest on the date of the February 2000
Board meeting on the following prorata basis over a period to be determined by
the percentage increase of 1999 earnings per share over 1998 earnings per share
as adjusted for one time items and as determined by the Board at its February
2000 meeting at which 1999 audited earnings are announced:
1999 EPS % Increase Vesting Dates of Vesting
up to 0-16% 5 years 1/5 in 2/2000; 1/5 in
$0.51 2/2001; 1/5 in 2/2002;
1/5 in 2/2003;
1/5 in 2/2004
$0.54 23% 4 years 1/4 in 2/2000; 1/4 in
2001; 1/4 in 2/2002;
1/4 in 2/2003
$0.57 30% 3 years 1/3 in 2/2000; 1/3 in
2/2001; 1/3 in 2002
$0.60 36% 2 years 1/2 in 2/2000; 1/2 in
2/2001
0.63 43% 1 year All in 2/2000
or greater
For the purposes of the above calculation, the 1998 earnings per share is
established at $.44 per share. Base Salary shall be not less than the rate at
which Executive is compensated on the Effective Date which is $475,000. The
Company shall also reimburse Executive, in accordance with such policies and
procedures as the Board may establish from time to time, for all reasonable
travel and other expenses incurred by Executive in the performance of his
obligations under this Agreement. Executive shall also be entitled to
participate in any benefit plans established by the Company for which Company
executives are or shall become eligible.
5. Termination of Employment. Executive's employment under this Agreement
may be terminated by the Company or Executive as follows:
(a) Disability.
(i) If Executive fails to perform his duties under this
Agreement on account of Disability (as hereinafter defined), the
Company may give notice to Executive to terminate this Agreement on a
date not less than thirty (30) days thereafter ("Notice Period") and,
if Executive has not resumed full performance of his duties under this
Agreement within such Notice Period, then Executive's employment under
this Agreement will terminate on the date provided in the notice
("Disability Termination Date").
(ii) During any period of Disability, the Company shall
maintain and pay for health and other insurance benefits for Executive
at least equal to those he had at the commencement of such Disability.
(iii) As used in this Agreement, the term "Disability" shall
mean the inability of Executive to perform his duties under this
Agreement by reason of his medical disability, as determined by an
independent physician selected with the approval of the Board and
Executive.
(b) Death. If Executive dies while employed under this Agreement, his
employment under this Agreement will terminate as of the date of his death
("Date of Death"). Within thirty (30) days after the Date of Death, the
Company shall pay to Executive's legal representative Executive's Base
Salary as then in effect that has accrued to the last day of the month in
which the Date of Death occurs. If the Executive dies while receiving
payments pursuant to Section 5(c) below, said payment shall continue for
the period remaining and shall be paid to the estate of the Executive.
(c) Certain Other Events of Termination. In the event that (i) the
Company terminates Executive's employment for any reason (other than
because of death, Disability, or "just cause" (as hereinafter defined),
(ii) Executive terminates his employment with the Company because of the
Company's material breach of this Agreement, (iii) Executive terminates his
employment with the Company because the Company requires Executive to be
based anywhere other than Executive's current location or within
seventy-five (75) miles round trip of the Company's principal executive
offices (except for required travel on the Company's business), or (iv)
Executive terminates his employment with the Company because of a
substantial reassignment of duties and responsibilities not related to a
change in control as defined herein, then the Company shall pay Executive
an amount equal to 12 months Base Salary paid in equal bi-weekly payments
over a period of one year commencing on the Executive Termination Date and
in accordance with the regular payroll practices of the Company. The
Company shall also pay Executive any pro-rata bonus that the Executive
would have been entitled to had he been employed until the end of the year.
In addition, all stock options which Executive has been granted shall
immediately vest and become exercisable under the terms of the applicable
plan. For the purposes of the time period available for exercising such
stock options, Executive shall be considered an employee of the Company
unless terminated pursuant to subsection (e) below. Payment made pursuant
to this paragraph shall be the exclusive remedy provided to Executive and
Executive shall not be entitled to any other severance benefit that the
Company may provide or adopt unless approved by the Board of the Directors
of the Company.
(d) Retirement. Executive shall be entitled to terminate his
employment with the Company on, or at any date after, a date on which he is
at least sixty-five (65) years old. Any date on which Executive elects to
retire shall be referred to as the "Retirement Termination Date." The
Company shall pay to Executive his Base Salary as then in effect that has
accrued to the last day of the month in which the Retirement Termination
Date occurs.
(e) Termination by the Company for Just Cause.
(i) The Company may terminate Executive's employment for "just
cause" at any time by giving written notice thereof to Executive.
(Except as provided below, the date of such notice is the "Just Cause
Termination Date" unless otherwise provided in the notice). Within
thirty (30) days after the Just Cause Termination Date, the Company
shall pay to Executive his Base Salary as then in effect that has
accrued to the Just Cause Termination Date. For the purposes of this
subparagraph, "just cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, breach of
fiduciary duty, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic
violations or similar offenses), or material breach of any provision
of this Agreement. Unless otherwise determined by the Board, Executive
shall have no right to receive compensation or other benefits under
this Agreement after a termination for just cause.
(ii) Notwithstanding the foregoing, Executive shall not be deemed
to have been terminated for just cause pursuant to this Section 5(e)
unless and until he shall have received a copy of a resolution duly
adopted by the affirmative vote of a majority of the Board, at a
meeting held for that purpose, declaring that in the good faith opinion
of the Board one or more of the conditions set forth in clause (i) of
this Section 5(e) has occurred and specifying the particulars thereof.
(f) Termination by Executive Without Cause. Executive may terminate
this Agreement without cause upon the provision of two weeks' prior
written notice to the Company. Upon such a termination, the following
payments will be made by the Company to the Executive:
1. If Executive elects such a termination between the
Effective Date of this Agreement and the first date of
work of either the permanent Chairman of the Board, the
permanent Chief Executive or the permanent President, the
Executive would receive no benefits under this Agreement.
2. If the Executive elects such a termination after the
first date of work of either the permanent Chairman,
permanent Chief Executive Officer or the permanent
President, the Executive would receive the same payment
as a termination pursuant to Section 5(c) above.
6. Change in Control. Notwithstanding any other provision to the contrary,
the following provisions will govern in the event of a change in control as
defined herein.
a. A change in control shall be deemed to have occurred if, at any
time, (I) substantially all the assets of the Company shall 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% or more of the combined voting power of the then-existing
outstanding securities of the Company; and (ii) the Executive is reassigned
without his concurrence to another position in the Company within 6 months
of such sale, merger or other event. No change in control shall be deemed
to have occurred if the reassignment is on a temporary basis and is
attributable to the Executive's illness or other physical, mental or
emotional disability or incapacity.
b. In the event of a change in control as defined in Section 6(a)
above, Executive shall be entitled to the compensation as set forth in
Section 5(c) above except for the provision regarding stock options which
will be compensated in accordance with subsection 6(c) below.
c. In the event of a change in control as defined in subsection 6(a),
all stock options to which Executive has been granted shall immediately
vest and become exercisable. Such acceleration of the vesting of stock
options shall be in addition to, and shall have no affect on, any payments
accrued pursuant to subsection 6(b).
d. The value of all payments, benefits and other consideration
received pursuant to subsections 6(b) and 6(c) 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 the Agreement pursuant to Section
6, and to negotiate modifications, if mutually acceptable, in situations
where the results to the Executive and to the Company are not compatible.
7. Selection of Permanent Chairman of the Board. If the Board of Directors
elects a permanent Chairman of the Board other than Executive during the term of
this Agreement, Executive will become a Senior Executive Vice President of the
Company.
8. Confidential Information. Executive shall fully comply with and abide
by the provisions of the Company's Employee Manual and other announced policies
in effect from time to time, including those provisions relating to the
protection of the Company's confidential information. The Company and Executive
agree that the foregoing provision shall survive the termination of this
Agreement for any reason whatsoever.
9. Indemnification. Employee shall be entitled to indemnification to the
full extent allowed by the Company's Certificate of Incorporation and Bylaws for
third party claims and to advances for expenses in defending against such
claims.
10. General Provisions.
(a) Entire Agreement. This Agreement contains the entire understanding
between the parties hereto and supersedes any prior employment agreement between
the Company and Executive.
(b) No Duty to Mitigate. Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall any amounts received from other employment or
otherwise by Executive offset in any manner the obligations of the Company
hereunder.
(c) Nonassignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof is assignable by
Executive, his beneficiaries, or legal representatives without the Company's
prior written consent; provided, however, that nothing in this Section 11(d)
shall preclude (i) Executive from designating a beneficiary to receive any
benefit payable hereunder upon his death, or (ii) the executors, administrators,
or other legal representatives of Executive or his estate from assigning any
rights hereunder to the person or persons entitled thereto.
(d) Notices. All notices and other communications required or permitted
to be given under this Agreement shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by certified mail, return
receipt requested, first-class postage prepaid, to the parties to this Agreement
at the following addresses:
(i) if to the Company at:
4 Taft Court
Mid Atlantic Medical Service, Inc.
Rockville, MD 20850
and
(ii) if to Executive at the address set forth on the signature
page. or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and communications
shall be deemed to have been received on the earlier of the date of receipt or
the third business day after the date of mailing thereof.
(e) Binding Effect; Benefits. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. Nothing in this Agreement, express or implied,
is intended or shall be construed to give any person, other than the parties to
this Agreement or their respective successors or permitted assigns, any legal or
equitable right, remedy, or claim under or in respect of any agreement or any
provision contained herein.
(f) Waiver. 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.
(g) Amendment. This Agreement may be terminated, amended, modified, or
supplemented only by a written instrument executed by Executive and the Company.
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, regardless of the law that
might be applied under principles of conflict of laws.
(i) Severability. If, for any reason, any provision of this Agreement
is held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provision not held so invalid, and the rest of such
provision, together with all other provisions of this Agreement, shall to the
full extent consistent with law continue in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its officers thereunto duly
authorized, and Executive has signed this Agreement, all as of the Effective
Date.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
By:/s/Thomas P. Barbera
(Corporate Seal) Name:Thomas P. Barbera
Title:President and CEO
WITNESS EXECUTIVE:
/s/ Mark Groban
Address: 4 Taft Ct.
Rockville, MD 20850
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered as of this 8th day of January, 1999
("Effective Date"), by and between Mid Atlantic Medical Services, Inc., a
Delaware corporation with its principal executive offices at 4 Taft Court,
Rockville, Maryland 20850 ("Company"), and Thomas P. Barbera, "Executive") and
supercedes and replaces the employment agreement between the parties dated
December 4, 1998;
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement, and Executive is willing to
serve in the employ of the Company on a full-time basis for said period;
WHEREAS, the Company and Executive desire to set forth the amounts
payable and benefits to be provided by the Company to Executive in the event of
a termination of Executive's employment with the Company under the circumstances
set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto hereby agree as follows:
1. Employment. The Company agrees to continue Executive in its employ, and
Executive agrees to remain in the full time employ of the Company, for the
period stated in Section 3 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Company employs Executive, and
Executive agrees to serve, as interim President and Chief Executive Officer of
the Company on the conditions hereinafter set forth. Executive agrees to perform
such services consistent with his position as shall from time to time be
assigned to him by the Company's Board of Directors ("Board"), or another
executive designated by the Board. Such duties may include the appointment of
Executive as an officer and/or director of any present or future subsidiary or
affiliate of the Company without any additional remuneration under this
Agreement. Executive shall devote all of his business time, attention, skill,
and efforts to the faithful performance of the duties hereunder.
3. Term. The period of Executive's employment under this Agreement with
the Company (i) shall commence as of the Effective Date and remain in effect for
one year after the date of the approval by the Board of Directors of a permanent
Chairman of the Board and a permanent Chief Executive Officer and President,
whichever date is later. In the event Executive is approved as the permanent
President and Chief Executive Officer, the parties agree to terminate this
agreement and enter into a new employment agreement.
4. Compensation and Reimbursement of Expenses. For all services
rendered by Executive in any capacity during employment under this Agreement
(including, without limitation, services as an executive, officer, or director
of the Company, or any subsidiary or affiliate of the Company, or as a member of
any committee of the Board of Directors of the Company or any subsidiary or
affiliate of the Company), the Company shall pay Executive as compensation (A)
an annual salary ("Base Salary"); (B) such bonus for such period, if any, as may
be awarded to Executive from time to time pursuant to any Bonus Plan adopted by
the Company for its senior management or otherwise awarded by the Board or by a
committee designated by the Board; and (C) stock options at the discretion of
the Board or the appropriate Committee of the Board. By action of the Board on
February 25, 1999, the Company will grant Executive 85,000 shares of MAMSI stock
options as of that date. Such options will vest on the date of the February 2000
Board meeting on the following prorata basis over a period to be determined by
the percentage increase of 1999 earnings per share over 1998 earnings per share
as adjusted for one time items and as determined by the Board at its February
2000 meeting at which 1999 audited earnings are announced:
1999 EPS % Increase Vesting Dates of Vesting
up to 0-16% 5 years 1/5 in 2/2000; 1/5 in
$0.51 2/2001; 1/5 in 2/2002;
1/5 in 2/2003;
1/5 in 2/2004
$0.54 23% 4 years 1/4 in 2/2000; 1/4 in
2001; 1/4 in 2/2002;
1/4 in 2/2003
$0.57 30% 3 years 1/3 in 2/2000; 1/3 in
2/2001; 1/3 in 2002
$0.60 36% 2 years 1/2 in 2/2000; 1/2 in
2/2001
0.63 43% 1 year All in 2/2000
or more
For the purposes of the above calculation, the 1998 earnings per share is
established at $.44 per share. Base Salary shall be not less than the rate at
which Executive is compensated on the Effective Date which is $475,000. The
Company shall also reimburse Executive, in accordance with such policies and
procedures as the Board may establish from time to time, for all reasonable
travel and other expenses incurred by Executive in the performance of his
obligations under this Agreement. Executive shall also be entitled to
participate in any benefit plans established by the Company for which Company
executives are or shall become eligible.
5. Termination of Employment. Executive's employment under this
Agreement may be terminated by the Company or Executive as follows:
(a) Disability. (i) If Executive fails to perform his duties
under this Agreement on account of Disability (as hereinafter defined),
the Company may give notice to Executive to terminate this Agreement on
a date not less than thirty (30) days thereafter ("Notice Period") and,
if Executive has not resumed full performance of his duties under this
Agreement within such Notice Period, then Executive's employment under
this Agreement will terminate on the date provided in the notice
("Disability Termination Date").
(ii) During any period of Disability, the Company shall
maintain and pay for health and other insurance benefits for Executive
at least equal to those he had at the commencement of such Disability.
(iii) As used in this Agreement, the term "Disability" shall
mean the inability of Executive to perform his duties under this
Agreement by reason of his medical disability, as determined by an
independent physician selected with the approval of the Board and
Executive.
(b) Death. If Executive dies while employed under this Agreement, his
employment under this Agreement will terminate as of the date of his death
("Date of Death"). Within thirty (30) days after the Date of Death, the
Company shall pay to Executive's legal representative Executive's Base
Salary as then in effect that has accrued to the last day of the month in
which the Date of Death occurs. If the Executive dies while receiving
payments pursuant to Section 5(c) below, said payment shall continue for
the period remaining and shall be paid to the estate of the Executive.
(c) Certain Other Events of Termination. In the event that (i) the
Company terminates Executive's employment for any reason (other than
because of death, Disability, or "just cause" (as hereinafter defined),
(ii) Executive terminates his or her employment with the Company because of
the Company's material breach of this Agreement, (iii) Executive terminates
his employment with the Company because the Company requires Executive to
be based anywhere other than Executive's current location or within
seventy-five (75) miles round trip of the Company's principal executive
offices (except for required travel on the Company's business), or (iv)
Executive terminates his employment with the Company because of a
substantial reassignment of duties and responsibilities, then the Company
shall pay Executive an amount equal to 12 months Base Salary paid in equal
bi-weekly payments over a period of one year commencing on the Executive
Termination Date and in accordance with the regular payroll practices of
the Company. The Company shall also pay Executive any pro-rata bonus that
the Executive would have been entitled to had he been employed until the
end of the year. Such bonus payment shall occur when bonuses are normally
paid by the Company. In addition, all stock options which Executive has
been granted shall immediately vest and become exercisable under the terms
of the applicable plan. For the purposes of the time period available for
exercising such stock options, Executive shall be considered an employee of
the Company unless terminated pursuant to subsection (e) below. Payment
made pursuant to this paragraph shall be the exclusive remedy provided to
Executive and Executive shall not be entitled to any other severance
benefit that the Company may provide or adopt unless approved by the Board
of the Directors of the Company.
(d) Retirement. Executive shall be entitled to terminate his
employment with the Company on, or at any date after, a date on which he is
at least sixty-five (65) years old. Any date on which Executive elects to
retire shall be referred to as the "Retirement Termination Date." The
Company shall pay to Executive his Base Salary as then in effect that has
accrued to the last day of the month in which the Retirement Termination
Date occurs.
(e) Termination by the Company for Just Cause.
(i) The Company may terminate Executive's employment for "just
cause" at any time by giving written notice thereof to Executive.
(Except as provided below, the date of such notice is the "Just Cause
Termination Date" unless otherwise provided in the notice). Within
thirty (30) days after the Just Cause Termination Date, the Company
shall pay to Executive his Base Salary as then in effect that has
accrued to the Just Cause Termination Date. For the purposes of this
subparagraph, "just cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, breach of
fiduciary duty, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations
or similar offenses), or material breach of any provision of this
Agreement. Unless otherwise determined by the Board, Executive shall
have no right to receive compensation or other benefits under this
Agreement after a termination for just cause.
(ii) Notwithstanding the foregoing, Executive shall not be deemed
to have been terminated for just cause pursuant to this Section 5(e)
unless and until he shall have received a copy of a resolution duly
adopted by the affirmative vote of a majority of the Board, at a
meeting held for that purpose, declaring that in the good faith opinion
of the Board one or more of the conditions set forth in clause (i) of
this Section 5(e) has occurred and specifying the particulars thereof.
(f) Termination by Executive Without Cause. Executive may terminate
this Agreement without cause upon the provision of two weeks' prior
written notice to the Company. Upon such a termination, the following
payments will be made by the Company to the Executive:
1. If Executive elects such a termination between the
Effective Date of this Agreement and the first date of work
of either the permanent Chairman of the Board, the permanent
Chief Executive or the permanent President, the Executive
would receive no benefits under this Agreement.
2. If the Executive elects such a termination after the
first date of work of either the permanent Chairman,
permanent Chief Executive Officer or the permanent
President, the Executive would receive the same payment as a
termination pursuant to Section 5(c) above.
6. Change in Control. Notwithstanding any other provision to the contrary, the
following provisions will govern in the event of a change in control as defined
herein.
a. A change in control shall be deemed to have occurred if, at
any time, (I) substantially all the assets of the Company shall 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% or more of
the combined voting power of the then-existing outstanding securities
of the Company; and (ii) the Executive is reassigned without his
concurrence to another position in the Company within 6 months of such
sale, merger or other event. No change in control shall be deemed to
have occurred if the reassignment is on a temporary basis and is
attributable to the Executive's illness or other physical, mental or
emotional disability or incapacity.
b. In the event of a change in control as defined in Section 6(a)
above, Executive shall be entitled to the compensation as set forth in
Section 5(c) above except for the provision regarding stock options
which will be compensated in accordance with subsection 6(c) below.
c. In the event of a change in control as defined in subsection
6(a), all stock options to which Executive has been granted shall
immediately vest and become exercisable. Such acceleration of the
vesting of stock options shall be in addition to, and shall have no
affect on, any payments accrued pursuant to subsection 6(b).
d. The value of all payments, benefits and other consideration
received pursuant to subsections 6(b) and 6(c) 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 the
Agreement pursuant to Section 6, and to negotiate modifications, if
mutually acceptable, in situations where the results to the Executive
and to the Company are not compatible.
7. Selection of Permanent Chief Executive Officer or President. If the
Board of Directors elects a permanent Chief Executive Officer or President other
than Executive during the term of this Agreement, Executive will become a Senior
Executive Vice President of the Company.
8. Confidential Information. Executive shall fully comply with and abide by
the provisions of the Company's Employee Manual and other announced policies in
effect from time to time, including those provisions relating to the protection
of the Company's confidential information. The Company and Executive agree that
the foregoing provision shall survive the termination of this Agreement for any
reason whatsoever.
9. Indemnification. Employee shall be entitled to indemnification to the
full extent allowed by the Company's Certificate of Incorporation and Bylaws for
third party claims and to advances for expenses in defending against such
claims.
10. General Provisions.
(a) Entire Agreement. This Agreement contains the entire understanding
between the parties hereto and supersedes any prior employment agreement between
the Company and Executive.
(b) No Duty to Mitigate. Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, nor shall any amounts received from other employment or otherwise
by Executive offset in any manner the obligations of the Company hereunder.
(c) Nonassignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof is assignable by
Executive, his beneficiaries, or legal representatives without the Company's
prior written consent; provided, however, that nothing in this Section 11(d)
shall preclude (i) Executive from designating a beneficiary to receive any
benefit payable hereunder upon his death, or (ii) the executors, administrators,
or other legal representatives of Executive or his estate from assigning any
rights hereunder to the person or persons entitled thereto.
(d) Notices. All notices and other communications required or permitted to
be given under this Agreement shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by certified mail, return
receipt requested, first-class postage prepaid, to the parties to this Agreement
at the following addresses:
(i) if to the Company at:
Mid Atlantic MedicalService, Inc.
4 Taft Court Rockville, MD 20850
and
(ii) if to Executive at the address set forth on the
signature page.
or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and communications
shall be deemed to have been received on the earlier of the date of receipt or
the third business day after the date of mailing thereof.
(e) Binding Effect; Benefits. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. Nothing in this Agreement, express or implied,
is intended or shall be construed to give any person, other than the parties to
this Agreement or their respective successors or permitted assigns, any legal or
equitable right, remedy, or claim under or in respect of any agreement or any
provision contained herein.
(f) Waiver. 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.
(g) Amendment. This Agreement may be terminated, amended, modified, or
supplemented only by a written instrument executed by Executive and the Company.
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, regardless of the law that
might be applied under principles of conflict of laws.
(i) Severability. If, for any reason, any provision of this Agreement is
held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provision not held so invalid, and the rest of such
provision, together with all other provisions of this Agreement, shall to the
full extent consistent with law continue in full force and effect.+
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and its seal to be affixed hereunto by its officers thereunto duly authorized,
and Executive has signed this Agreement, all as of the Effective Date.
Date.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
By:/s/Sharon C. Pavlos
(Corporate Seal) Name:Sharon C. Pavlos
Title:Exec VP and General Counsel
WITNESS EXECUTIVE:
Teresa Penland /s/ Thomas P. Barbera
Address: 4 Taft Ct.
Rockville, MD 20850
EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered as of this 8th day of
January, 1999 ("Effective Date"), by and between Mid Atlantic Medical Services,
Inc., a Delaware corporation with its principal executive offices at 4 Taft
Court, Rockville, Maryland 20850 ("Company"), and Robert E. Foss ("Executive");
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement, and Executive is willing to
serve in the employ of the Company on a full-time basis for said period;
WHEREAS, the Company and Executive desire to set forth the amounts
payable and benefits to be provided by the Company to Executive in the event of
a termination of Executive's employment with the Company under the circumstances
set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
1. Employment. The Company agrees to continue Executive in its employ,
and Executive agrees to remain in the full time employ of the Company, for
the period stated in Section 3 hereof and upon the other terms and
conditions herein provided.
2. Position and Responsibilities. The Company employs Executive, and
Executive agrees to serve, as Senior Executive Vice President of the
Company on the conditions hereinafter set forth. Executive agrees to
perform such services consistent with his position as shall from time to
time be assigned to him by the Company's Chief Executive Officer, the
Company's Board of Directors ("Board"), or another executive designated by
the Board. Such duties may include the appointment of Executive as an
officer and/or director of any present or future subsidiary or affiliate of
the Company without any additional remuneration under this Agreement.
Executive shall devote all of his business time, attention, skill, and
efforts to the faithful performance of the duties hereunder.
3. Term. The period of Executive's employment under this Agreement
with the Company (i) shall commence as of the Effective Date and remain in
effect for three (3) years after the date of the approval by the Board of
Directors of a permanent Chairman of the Board and a permanent Chief
Executive Officer and President, whichever date is later. Notwithstanding
the above, in no event will this Agreement continue beyond January 1, 2003
unless the term is extended by consent of the parties.
4. Compensation and Reimbursement of Expenses. For all services
rendered by Executive in any capacity during employment under this
Agreement (including, without limitation, services as an executive,
officer, or director of the Company, or any subsidiary or affiliate of the
Company, or as a member of any committee of the Board of Directors of the
Company or any subsidiary or affiliate of the Company), the Company shall
pay Executive as compensation (A) an annual salary ("Base Salary") and (B)
such bonus for such period, if any, as may be awarded to Executive from
time to time pursuant to any Bonus Plan adopted by the Company for its
senior management or otherwise awarded by the Board or by a committee
designated by the Board. Base Salary for the first year of this Agreement
shall be not less than the rate at which Executive is compensated on the
Effective Date which is $400,000. Thereafter, Base Salary shall be adjusted
annually. For 2000 and each year thereafter, the Executive Base Salary will
increase or decrease by an amount equal to 50% of the percentage change in
the Company's consolidated net income as determined by the Company, and
audited by the Company's independent certified public accountant but any
annual increase may not be greater than 20 percent and any annual decrease
may not be greater than 10 percent. This increase or decrease would first
apply to the year 2000 and would take effect retroactively to January 1 of
the then current year. Items of a non-recurring nature may be excluded in
the calculations as mutually agreed to by the Company and the Executive. By
action of the Board on February 25, 1999, the Company will grant Executive
75,000 shares of MAMSI stock options as of that date. Such options will
vest on the date of the February 2000 Board meeting on the following
prorata basis over a period to be determined by the percentage increase of
1999 earnings per share over 1998 earnings per share as adjusted for one
time items and as determined by the Board at its February 2000 meeting at
which 1999 audited earnings are announced:
1999 EPS % Increase Vesting Dates of Vesting
up to 0-16% 5 years 1/5 in 2/2000; 1/5 in
$0.51 2/2001; 1/5 in 2/2002;
1/5 in 2/2003;
1/5 in 2/2004
$0.54 23% 4 years 1/4 in 2/2000; 1/4 in
2001; 1/4 in 2/2002;
1/4 in 2/2003
$0.57 30% 3 years 1/3 in 2/2000; 1/3 in
2/2001; 1/3 in 2002
$0.60 36% 2 years 1/2 in 2/2000; 1/2 in
2/2001
0.63 43% 1 year All in 2/2000
or more
For the purposes of the above calculation, the 1998 earnings per
share is established at $.44 per share. The Company shall also reimburse
Executive, in accordance with such policies and procedures as the Board may
establish from time to time, for all reasonable travel and other expenses
incurred by Executive in the performance of his obligations under this
Agreement. Executive shall also be entitled to participate in any benefit plans
established by the Company for which Company executives are or shall become
eligible.
5. Termination of Employment. Executive's employment under this
Agreement may be terminated by the Company or Executive as follows:
(a) Disability. (i) If Executive fails to perform his duties
under this Agreement on account of Disability (as hereinafter
defined), the Company may give notice to Executive to terminate this
Agreement on a date not less than thirty (30) days thereafter ("Notice
Period") and, if Executive has not resumed full performance of his
duties under this Agreement within such Notice Period, then
Executive's employment under this Agreement will terminate on the date
provided in the notice ("Disability Termination Date").
(ii) During any period of Disability, the Company shall
maintain and pay for health and other insurance benefits for Executive
at least equal to those he had at the commencement of such Disability.
(iii) As used in this Agreement, the term "Disability" shall
mean the inability of Executive to perform his duties under this
Agreement by reason of his medical disability, as determined by an
independent physician selected with the approval of the Board and
Executive.
(b) Death. If Executive dies while employed under this Agreement,
his employment under this Agreement will terminate as of the date of
his death ("Date of Death"). Within thirty (30) days after the Date of
Death, the Company shall pay to Executive's legal representative
Executive's Base Salary as then in effect that has accrued to the last
day of the month in which the Date of Death occurs. If the Executive
dies while receiving payments pursuant to Section 5(c) below, said
payment shall continue for the period remaining and shall be paid to
the estate of the Executive.
(c) Certain Other Events of Termination. In the event that (i)
the Company terminates Executive's employment for any reason (other
than because of death, Disability, or "just cause" (as hereinafter
defined), (ii) Executive terminates his employment with the Company
because of the Company's material breach of this Agreement (iii)
Executive terminates his employment with the Company because the
Company requires Executive to be based anywhere other than Executive's
current location or within seventy-five (75) miles round trip of the
Company's principal executive offices (except for required travel on
the Company's business), or (iv) Executive terminates his employment
with the Company because of a substantial reassignment of duties and
responsibilities unrelated to a change in control as defined below,
then the Company shall pay Executive an amount equal to 12 months Base
Salary, as adjusted pursuant to Section 4, paid in equal bi-weekly
payments over a period of one year commencing on the Executive
Termination Date and in accordance with the regular payroll practices
of the Company. The Company shall also pay Executive any pro-rata
bonus that the Executive would have been entitled to had he been
employed until the end of the year. Such bonus payment shall occur
when bonuses are normally paid by the Company. In addition, all stock
options which Executive has been granted shall immediately vest and
become exercisable under the terms of the applicable plan. For the
purposes of the time period available for exercising such stock
options, Executive shall be considered an employee of the Company
unless terminated pursuant to subsection (e) below. Payment made
pursuant to this paragraph shall be the exclusive remedy provided to
Executive and Executive shall not be entitled to any other severance
benefit that the Company may provide or adopt unless approved by the
Board of Directors of the Company.
(d) Retirement. Executive shall be entitled to terminate his
employment with the Company on, or at any date after, a date on which
he is at least sixty-five (65) years old. Any date on which Executive
elects to retire shall be referred to as the "Retirement Termination
Date." The Company shall pay to Executive his Base Salary as then in
effect that has accrued to the last day of the month in which the
Retirement Termination Date occurs.
(e) Termination by the Company for Just Cause.
(i) The Company may terminate Executive's employment for
"just cause" at any time by giving written notice thereof to
Executive. (Except as provided below, the date of such notice is
the "Just Cause Termination Date" unless otherwise provided in
the notice). Within thirty (30) days after the Just Cause
Termination Date, the Company shall pay to Executive his Base
Salary as then in effect that has accrued to the Just Cause
Termination Date. For the purposes of this subparagraph, "just
cause" shall mean termination because of Executive's personal
dishonesty, willful misconduct, breach of fiduciary duty,
intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or
similar offenses), or material breach of any provision of this
Agreement. Unless otherwise determined by the Board, Executive
shall have no right to receive compensation or other benefits
under this Agreement after a termination for just cause.
(ii) Notwithstanding the foregoing, Executive shall not be
deemed to have been terminated for just cause pursuant to this
Section 6(e) unless and until he shall have received a copy of a
resolution duly adopted by the affirmative vote of a majority of
the Board, at a meeting held for that purpose, declaring that in
the good faith opinion of the Board one or more of the conditions
set forth in clause (i) of this Section 6(e) has occurred and
specifying the particulars thereof.
f. Termination by Executive Without Cause. Executive may terminate
this Agreement without cause upon the provision of two weeks' prior written
notice to the Company. Upon such a termination, the following payments will
be made by the Company to the Executive:
1. If Executive elects such a termination between the
Effective Date of this Agreement and the first date of work of
either the permanent Chairman of the Board, the permanent Chief
Executive or the permanent President, the Executive would receive
no benefits under this Agreement.
2. If the Executive elects such a termination after the
first date of work of either the permanent Chairman, permanent
Chief Executive Officer or the permanent President, the Executive
would receive the same payment as a termination pursuant to
Section 5(c) above.
6. Change in Control. Notwithstanding any other provision to the contrary,
the following provisions will govern in the event of a change in control as
defined herein.
a. A change in control shall be deemed to have occurred if, at any
time, (I) substantially all the assets of the Company shall 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% or more of the combined voting power of the then-existing
outstanding securities of the Company; and (ii) the Executive is reassigned
without his concurrence to another position in the Company within 6 months
of such sale, merger or other event. No change in control shall be deemed
to have occurred if the reassignment is on a temporary basis and is
attributable to the Executive's illness or other physical, mental or
emotional disability or incapacity.
b. In the event of a change in control as defined in Section 6(a)
above, Executive shall be entitled to a lump sum payment which shall be
equal to two times the Executive's base salary and two times the amount
equal to the maximum bonus the Executive could have earned under the
applicable bonus plan for the year in which such change in control occurs
in lieu of payment under the bonus plan. Upon payment of the lump sum
provided under this subsection, 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 2002,
the Executive shall receive compensation under Section 5(c) above as full
compensation.
c. In the event of a change in control as defined in subsection 6(a),
all stock options to which Executive has been granted shall immediately
vest and become exercisable. Such acceleration of the vesting of stock
options shall be in addition to, and shall have no affect on, any payments
accrued pursuant to subsection 6(b).
d. The value of all payments, benefits and other consideration
received pursuant to subsections 6(b) and 6(c) 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 the Agreement pursuant to Section
6, and to negotiate modifications, if mutually acceptable, in situations
where the results to the Executive and to the Company are not compatible.
7. Confidential Information. Executive shall fully comply with and abide
by the provisions of the Company's Employee Manual and other announced policies
in effect from time to time, including those provisions relating to the
protection of the Company's confidential information. The Company and Executive
agree that the foregoing provision shall survive the termination of this
Agreement for any reason whatsoever.
8. Indemnification. Employee shall be entitled to indemnification to the
full extent allowed by the Company's Certificate of Incorporation and Bylaws for
third party claims and to advances for expenses in defending against such
claims.
9. General Provisions.
(a) Entire Agreement. This Agreement contains the entire understanding
between the parties hereto and supersedes any prior employment agreement between
the Company and Executive.
(b) No Duty to Mitigate. Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall any amounts received from other employment or
otherwise by Executive offset in any manner the obligations of the Company
hereunder.
(c) Nonassignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof is assignable by
Executive, his beneficiaries, or legal representatives without the Company's
prior written consent; provided, however, that nothing in this Section 11(d)
shall preclude (i) Executive from designating a beneficiary to receive any
benefit payable hereunder upon his death, or (ii) the executors, administrators,
or other legal representatives of Executive or his estate from assigning any
rights hereunder to the person or persons entitled thereto.
(d) Notices. All notices and other communications required or permitted
to be given under this Agreement shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by certified mail, return
receipt requested, first-class postage prepaid, to the parties to this Agreement
at the following addresses:
(i) if to the Company at:
Mid Atlantic Medical Service, Inc.
4 Taft Court
Rockville, MD 20850
and
(ii) if to Executive at the address set forth on the signature
page. or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and communications
shall be deemed to have been received on the earlier of the date of receipt or
the third business day after the date of mailing thereof.
(e) Binding Effect; Benefits. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. Nothing in this Agreement, express or implied,
is intended or shall be construed to give any person, other than the parties to
this Agreement or their respective successors or permitted assigns, any legal or
equitable right, remedy, or claim under or in respect of any agreement or any
provision contained herein.
(f) Waiver. 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.
(g) Amendment. This Agreement may be terminated, amended, modified, or
supplemented only by a written instrument executed by Executive and the Company.
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, regardless of the law that
might be applied under principles of conflict of laws.
(i) Severability. If, for any reason, any provision of this Agreement
is held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provision not held so invalid, and the rest of such
provision, together with all other provisions of this Agreement, shall to the
full extent consistent with law continue in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its officers thereunto duly
authorized, and Executive has signed this Agreement, all as of the Effective
Date.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
By:/s/Thomas P. Barbera
(Corporate Seal) Name:Thomas P. Barbera
Title:President and CEO
WITNESS EXECUTIVE:
/s/Mark D. Groban /s/ Robert E. Foss
Address: 4 Taft Ct.
Rockville, MD 20850
FORM OF EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered as of this ___ day of _______, 1998
("Effective Date"), by and between Mid Atlantic Medical Services, Inc., a
Delaware corporation with its principal executive offices at 4 Taft Court,
Rockville, Maryland 20850 ("Company"), and ______________, an individual
residing at ______________________________________ ("Executive");
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement, and Executive is willing to
serve in the employ of the Company on a full-time basis for said period;
WHEREAS, the Company and Executive desire to set forth the amounts
payable and benefits to be provided by the Company to Executive in the event of
a termination of Executive's employment with the Company under the circumstances
set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
1. Employment. The Company agrees to continue Executive in its employ, and
Executive agrees to remain in the full time employ of the Company, for the
period stated in Section 3 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Company employs Executive, and
Executive agrees to serve, as a Senior Vice President of the Company on the
conditions hereinafter set forth. Executive agrees to perform such services
consistent with his or her position as shall from time to time be assigned to
him by the Company's Chief Executive Officer, the Company's Board of Directors
("Board"), or another executive designated by the Board. Such duties may include
the appointment of Executive as an officer and/or director of any present or
future subsidiary or affiliate of the Company without any additional
remuneration under this Agreement. Executive shall devote all of his or her
business time, attention, skill, and efforts to the faithful performance of the
duties hereunder.
3. Term. The period of Executive's employment under this Agreement with the
Company (i) shall commence for an initial period as of the Effective Date and
remain in effect for one year.
4. Compensation and Reimbursement of Expenses. For all services rendered by
Executive in any capacity during employment under this Agreement (including,
without limitation, services as an executive, officer, or director of the
Company, or any subsidiary or affiliate of the Company, or as a member of any
committee of the Board of Directors of the Company or any subsidiary or
affiliate of the Company), the Company shall pay Executive as compensation (A)
an annual salary ("Base Salary") and (B) such bonus for such period, if any, as
may be awarded to Executive from time to time pursuant to any Bonus Plan adopted
by the Company for its senior management or otherwise awarded by the Board or by
a committee designated by the Board. Unless and until adjusted in accordance
with regular Company compensation policies, Base Salary shall be not less the
rate at which Executive is compensated on the Effective Date. The Company shall
also reimburse Executive, in accordance with such policies and procedures as the
Board may establish from time to time, for all reasonable travel and other
expenses incurred by Executive in the performance of her or her obligations
under this Agreement. Executive shall also be entitled to participate in any
benefit plans established by the Company for which Company executives are or
shall become eligible.
5. Termination of Employment. Executive's employment under this Agreement
may be terminated by the Company or Executive as follows:
(a) Disability.
(i) If Executive fails to perform his or her duties under this
Agreement on account of Disability (as hereinafter defined), the
Company may give notice to Executive to terminate this Agreement on a
date not less than thirty (30) days thereafter ("Notice Period") and,
if Executive has not resumed full performance of his or her duties
under this Agreement within such Notice Period, then Executive's
employment under this Agreement will terminate on the date provided in
the notice ("Disability Termination Date").
(ii) During any period of Disability, the Company shall
maintain and pay for health and other insurance benefits for Executive
at least equal to those he had at the commencement of such Disability.
(iii) As used in this Agreement, the term "Disability" shall
mean the complete inability of Executive to perform his or her duties
under this Agreement by reason of his or her total and permanent
disability, as determined by an independent physician selected with the
approval of the Board and Executive.
(b) Death. If Executive dies while employed under this Agreement, his
or her employment under this Agreement will terminate as of the date of his
or her death ("Date of Death"). Within thirty (30) days after the Date of
Death, the Company shall pay to Executive's legal representative
Executive's Base Salary as then in effect that has accrued to the last day
of the month in which the Date of Death occurs. If the Executive dies while
receiving payments pursuant to Section 5(c) below, said payment shall
continue for the period remaining and shall be paid to the estate of the
Executive.
(c) Certain Other Events of Termination. In the event that (i) the
Company terminates Executive's employment for any reason (other than
because of death, Disability, or "just cause" (as hereinafter defined),
(ii) Executive terminates his or her employment with the Company because of
the Company's material breach of this Agreement, (iii) Executive terminates
his or her employment with the Company because Executive's Base Salary, is
reduced by an amount greater than 25% over the initial term of the contract
from the amount on the Effective Date, (iv) Executive terminates his or her
employment with the Company because the Company requires Executive to be
based anywhere other than Executive's current location or within
seventy-five (75) miles of the Company's principal executive offices
(except for required travel on the Company's business), or (v) Executive
terminates his or her employment with the Company because of a substantial
reassignment of duties and responsibilities, then the Company shall pay
Executive an amount equal to 12 months Base Salary paid in equal bi-weekly
payments over a period of one year commencing on the Executive Termination
Date and in accordance with the regular payroll practices of the Company.
Payment made pursuant to this paragraph shall be the exclusive remedy
provided to Executive and Executive shall not be entitled to any other
severance benefit that the Company may provide or adopt.
(d) Retirement. Executive shall be entitled to terminate his or her
employment with the Company on, or at any date after, a date on which he is
at least sixty-five (65) years old. Any date on which Executive elects to
retire shall be referred to as the "Retirement Termination Date." The
Company shall pay to Executive his or her Base Salary as then in effect
that has accrued to the last day of the month in which the Retirement
Termination Date occurs.
(e) Termination by the Company for Just Cause.
(i) The Company may terminate Executive's employment for
"just cause" at any time by giving written notice thereof to
Executive. (Except as provided below, the date of such notice is
the "Just Cause Termination Date" unless otherwise provided in
the notice). Within thirty (30) days after the Just Cause
Termination Date, the Company shall pay to Executive his or her
Base Salary as then in effect that has accrued to the Just Cause
Termination Date. For the purposes of this subparagraph, "just
cause" shall mean termination because of Executive's personal
dishonesty, willful misconduct, breach of fiduciary duty,
intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or
similar offenses), or material breach of any provision of this
Agreement. Unless otherwise determined by the Board, Executive
shall have no right to receive compensation or other benefits
under this Agreement after a termination for just cause.
(ii) Notwithstanding the foregoing, Executive shall not be
deemed to have been terminated for just cause pursuant to this
Section 6(e) unless and until he shall have received a copy of a
resolution duly adopted by the affirmative vote of a majority of
the Board, at a meeting held for that purpose, declaring that in
the good faith opinion of the Board one or more of the conditions
set forth in clause (i) of this Section 6(e) has occurred and
specifying the particulars thereof
6. Confidential Information. Executive shall fully comply with and abide by
the provisions of the Company's Employee Manual and other announced policies in
effect from time to time, including those provisions relating to the protection
of the Company's confidential information. The Company and Executive agree that
the foregoing provision shall survive the termination of this Agreement for any
reason whatsoever.
7. Covenant Not To Compete. Executive covenants and agrees that, in
consideration of the amounts to be paid Executive hereunder and other good and
valuable consideration, for a period of one (1) year beyond the Executive
Termination Date, Executive shall not be employed as an executive officer of,
control, manage, or otherwise participate in the management of the business of a
"significant competitor" of the Company. The term "significant competitor" shall
mean any company or division of a company that, on Effective Date, directly or
indirectly, is materially (10% or more of its revenues) engaged in the operation
or management of a health maintenance organization or any other similar
provider, payer or insurer for medical services. The Company and Executive agree
that the terms and conditions of this Section 7 shall survive the termination of
this Agreement following the Termination Date.
8. Indemnification. Employee shall be entitled to indemnification to the
full extent allowed by the Company's Certificate of Incorporation and Bylaws for
third party claims and to advances for expenses in defending against such
claims.
9. General Provisions.
(a) Entire Agreement. This Agreement contains the entire understanding
between the parties hereto and supersedes any prior employment agreement between
the Company and Executive.
(b) No Duty to Mitigate. Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall any amounts received from other employment or
otherwise by Executive offset in any manner the obligations of the Company
hereunder.
(c) Nonassignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof is assignable by
Executive, his or her beneficiaries, or legal representatives without the
Company's prior written consent; provided, however, that nothing in this Section
11(d) shall preclude (i) Executive from designating a beneficiary to receive any
benefit payable hereunder upon his or her death, or (ii) the executors,
administrators, or other legal representatives of Executive or his or her estate
from assigning any rights hereunder to the person or persons entitled thereto.
(d) Notices. All notices and other communications required or permitted
to be given under this Agreement shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by certified mail, return
receipt requested, first-class postage prepaid, to the parties to this Agreement
at the following addresses:
(i) if to the Company at:
Mid Atlantic Medical Service, Inc.
4 Taft Court
Rockville, MD 20850
and
(ii) if to Executive at the address set forth on the signature
page. or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and communications
shall be deemed to have been received on the earlier of the date of receipt or
the third business day after the date of mailing thereof.
(e) Binding Effect; Benefits. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. Nothing in this Agreement, express or implied,
is intended or shall be construed to give any person, other than the parties to
this Agreement or their respective successors or permitted assigns, any legal or
equitable right, remedy, or claim under or in respect of any agreement or any
provision contained herein.
(f) Waiver. 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.
(g) Amendment. This Agreement may be terminated, amended, modified, or
supplemented only by a written instrument executed by Executive and the Company.
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, regardless of the law that
might be applied under principles of conflict of laws.
(i) Severability. If, for any reason, any provision of this Agreement
is held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provision not held so invalid, and the rest of such
provision, together with all other provisions of this Agreement, shall to the
full extent consistent with law continue in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its officers thereunto duly
authorized, and Executive has signed this Agreement, all as of the Effective
Date.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
By:
(Corporate Seal) Name:
Title:
WITNESS EXECUTIVE:
Address: __________________________
MID ATLANTIC MEDICAL SERVICES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT FOR EMPLOYEES
AGREEMENT ("Agreement") dated the date indicated on the attached Face
Sheet, by and between Mid Atlantic Medical Services, Inc., a Delaware
corporation ("Corporation"), and the person indicated on the attached Face
Sheet, an employee of the Corporation and/or one of its subsidiaries
("Optionee").
WHEREAS, the Corporation desires to have Optionee continue in its
employ and to provide Optionee with an incentive by sharing in the success of
the Corporation;
WHEREAS, in order to provide such an incentive to its officers and key
employees, the Corporation has adopted the Mid Atlantic Medical Services,
Inc. 1999 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the Corporation desires to grant to Optionee under the Plan
options not intended to qualify as "incentive stock options" within the meaning
of Section 422 or any successor provision of the Internal Revenue Code of 1986,
as amended ("Code"); and
WHEREAS, unless otherwise provided herein, capitalized terms used in
this Agreement shall have the meaning given them in the Plan.
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the parties
hereto agree as follows:
1. Number of Shares and Price. The Corporation hereby grants to the
Optionee an option ("Option") to purchase the number of shares of Common Stock
set forth on the attached Face Sheet of this Agreement. The exercise price per
share of Common Stock of the Option shall be as is set forth on the attached
Face Sheet of this Agreement, such price being the Fair Market Value per share
of Common Stock on the Date of Grant of the Option. The Option is not intended
to qualify as an "incentive stock option" under Section 422 of the Code.
2. Term and Exercise. The Option shall expire five (5) years from the
date hereof, subject to earlier termination as set forth in Section 3. Subject
to the provisions of Section 3, the Option shall become exercisable in
installments as set forth on the attached Face Sheet of this Agreement.
3. Exercise of Option Upon Termination of Employment.
a) Termination of Vested Option Upon Termination of Employment.
(i) Termination. Upon the Optionee's Termination of
Employment, other than by reason of death or Disability, the
Optionee may, within three months from the date of such
Termination of Employment, exercise all or any part of the
Option to the extent it was exercisable at the date of
Termination of Employment. In no event may the Option be
exercised later than the expiration date described in Section
2.
(ii) Disability. Upon the Optionee's Disability Date,
the Optionee may, within one year after such Disability Date,
exercise all or a part of the Option, whether or not it was
exercisable on such Disability Date, but only to the extent
not previously exercised. In no event, however, may the Option
be exercised later than the expiration date described in
Section 2.
(iii) Death. In the event of the death of the
Optionee while employed by the Corporation or a Subsidiary,
the right of the Optionee's Beneficiary to exercise the Option
in full (whether or not all or any part of the Option was
exercisable as of the date of death, but only to the extent
not previously exercised) shall expire upon the expiration of
one year from the date of the Optionee's death or, if earlier,
on the date of expiration of the Option determined pursuant to
Section 2.
(b) Termination of Unvested Option Upon Termination of Employment.
Except as provided in Sections 3(a)(ii) and 3(a)(iii), to the extent all or
any part of the Option was not exercisable as of the date of Termination of
Employment, the unexercisable portion of the Option shall expire at the
date of such Termination of Employment.
(c) Change of Control. Notwithstanding anything to the contrary in
Section 2 or this Section 3, in the event one of the events specified in
Section 8.05(d)(i), (ii), (iii) or (iv) of the Plan occurs, the provisions
of such Section 8.05(d) shall determine when the Option becomes
exercisable, when it may be exercised and when it expires.
4. Exercise Procedures. The Option shall be exercisable by written notice
to the Corporation, which must be received by the Secretary of the Corporation
not later than 5:00 P.M. local time at the principal executive office of the
Corporation on the expiration date of the Option. Such written notice shall set
forth (a) the number of shares of Common Stock being purchased, (b) the total
exercise price for the shares of Common Stock being purchased, (c) the exact
name as it should appear on the stock certificate(s) to be issued for the shares
of Common Stock being purchased, and (d) the address to which the stock
certificate(s) should be sent. The exercise price of shares of Common Stock
purchased upon exercise of the Option shall be paid in full (a) in cash, (b) by
delivery to the Corporation of shares of Common Stock (which shares of Common
Stock must have been held for at least six months), (c) in any combination of
cash and shares of Common Stock, or (d) by delivery of such other consideration
as the Committee deems appropriate and in compliance with applicable law
(including payment in accordance with a cashless exercise program approved by
the Committee). In the event that any shares of Common Stock shall be
transferred to the Corporation to satisfy all or any part of the exercise price,
the part of the exercise price deemed to have been satisfied by such transfer of
shares of Common Stock shall be equal to the product derived by multiplying the
Fair Market Value as of the date of exercise times the number of shares of
Common Stock transferred to the Corporation. Any shares of Common Stock tendered
in payment shall be duly endorsed in blank or accompanied by stock powers duly
endorsed in blank. The Optionee may not transfer to the Corporation in
satisfaction of the exercise price any fraction of a share of Common Stock, and
any portion of the exercise price that would represent less than a full share of
Common Stock must be paid in cash by the Optionee. Subject to Section 8 hereof,
certificates for the purchased shares of Common Stock will be issued and
delivered to the Optionee as soon as practicable after the receipt of such
payment of the exercise price; provided, however, that delivery of any such
shares of Common Stock shall be deemed effected for all purposes when a stock
transfer agent of the Corporation shall have deposited such certificates in the
United States mail, addressed to Optionee, at the address set forth on the Face
Sheet of this Agreement or to such other address as Optionee may from time to
time designate in a written notice to the Corporation. The Optionee shall not be
deemed for any purpose to be a shareholder of the Corporation in respect of any
shares of Common Stock as to which the Option shall not have been exercised, as
herein provided, until such shares of Common Stock have been issued to Optionee
by the Corporation hereunder.
5. Plan Provisions Control Option Terms; Modifications. The Option is
granted pursuant and subject to the terms and conditions of the Plan, the
provisions of which are incorporated herein by reference. In the event any
provision of this Agreement shall conflict with any of the terms in the Plan as
constituted on the Date of Grant, the terms of the Plan as constituted on the
Date of Grant shall control. Except as provided in Section 8.05 of the Plan, the
Option shall not be modified after the Date of Grant except by express written
agreement between the Corporation and the Optionee; provided, however, that any
such modification (a) shall not be inconsistent with the terms of the Plan, and
(b) shall be approved by the Committee.
6. Limitations on Transfer. The Option may not be assigned or
transferred other than by will, by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code, Title I
of ERISA or the rules thereunder.
7. Taxes. The Corporation shall be entitled to withhold (or secure
payment from the Optionee in lieu of withholding) the amount of any withholding
or other tax required by law to be withheld or paid by the Corporation with
respect to any shares of Common Stock issuable under this Agreement, and the
Corporation may defer issuance of shares of Common Stock upon the exercise of
the Option unless the Corporation is indemnified to its satisfaction against any
liability for any such tax. The amount of such withholding or tax payment shall
be determined by the Committee or its delegate and shall be payable by the
Optionee at such time as the Committee determines. The Optionee may satisfy his
or her tax withholding obligation by (a) having cash withheld from the
Optionee's salary or other compensation payable by the Corporation or a
Subsidiary, (b) the payment of cash to the Corporation, (c) the payment in
shares of Common Stock already owned by the Optionee valued at Fair Market
Value, and/or (d) the withholding from the Option, at the appropriate time, of a
number of shares of Common Stock sufficient, based upon the Fair Market Value of
such shares of Common Stock, to satisfy such tax withholding requirements. The
Committee shall be authorized, in its sole and absolute discretion, to establish
such rules and procedures relating to any such withholding methods as it deems
necessary or appropriate, including, without limitation, rules and procedures
relating to elections to have shares of Common Stock withheld upon exercise of
the Option to meet such withholding obligations.
8. No Exercise in Violation of Law. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she will not
exercise the Option granted hereby, and that the Corporation will not be
obligated to issue any shares of Common Stock to the Optionee hereunder, if the
exercise thereof or the issuance of such shares of Common Stock shall constitute
a violation by the Optionee or the Corporation of any provision of any law or
regulation of any governmental authority. Any determination in this connection
by the Committee shall be final, binding and conclusive.
9. Securities Law Compliance. The Optionee agrees, for the Optionee and
his or her Beneficiaries, with respect to all shares of Common Stock acquired
pursuant to the terms and conditions of the Plan and the Option (or any other
shares of Common Stock issued pursuant to a stock dividend or stock split
thereon or any securities issued in lieu thereof or in substitution or exchange
therefor), that the Optionee and his or her Beneficiaries will not sell or
otherwise dispose of these shares except pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Act"), or except in
a transaction that, in the opinion of counsel for the Corporation, is exempt
from registration under the Act. Further, the Corporation shall not be required
to sell or issue any shares under the Option if, in the opinion of the
Corporation, (a) the issuance of such shares would constitute a violation by the
Optionee or the Corporation of any applicable law or regulation of any
government authority or (b) the consent or approval of any governmental body is
necessary or desirable as condition of, or in connection with, the issuance of
such shares.
10. Adjustments. The existence of the Option shall not affect in any
way the right or power of the Corporation or its directors or shareholders to
make or authorize any or all adjustments, recapitalizations, reorganizations, or
other changes in the Corporation's capital structure or its business, or any
merger or consolidation of the Corporation, or any issuance of bonds,
debentures, preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
11. Dispute Resolution. As a condition of granting the Option, the
Optionee agrees, for the Optionee and his or her Beneficiaries, that any dispute
or disagreement that may arise under or as a result of or pursuant to the Plan
and the Option shall be determined by the Committee in its sole and absolute
discretion, and any interpretation by the Committee of the terms of the Plan and
Option shall be final, binding and conclusive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
__________________________ By:
Thomas P. Barbera, Interim
President and Chief Executive Officer
By:
Member of the Stock Option Committee
WITNESS: OPTIONEE
__________________________
(Signature)
<PAGE>
FACE SHEET
Notice Addresses:
Optionee:
------------------------
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: ___________
Total Options Granted: ___________
Exercise Price Per Share of Common Stock: $__________
Vesting Schedule:
Number of Shares
Date (Non-Cumulative)
06/01/2000 ___
06/01/2001 ___
06/01/2002 ___
Expiration Date:
Optioned shares must be purchased within five (5) years from the date of
grant, which is _________. That is, all options must be exercised by __________.
MID ATLANTIC MEDICAL SERVICES, INC.
STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS
AGREEMENT ("Agreement") dated this 3rd day of May, 1999 by and between
Mid Atlantic Medical Services, Inc., a Delaware corporation ("Corporation"), and
the person indicated on the attached Face Sheet, a non-employee director of the
Corporation and/or Physicians Health Plan of Maryland, Inc. ("Optionee").
WHEREAS, the Corporation desires to have Optionee continue to serve on
its Board of Directors and to provide Optionee with an incentive by sharing in
the success of the Corporation;
WHEREAS, in order to provide such an incentive to its key employees and
non-employee directors, the Corporation has adopted the Mid Atlantic Medical
Services, Inc. 1999 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the option granted hereby is not intended to qualify as an
"incentive stock option" within the meaning of Section 422 or any successor
provision of the Internal Revenue Code of 1986, as amended; and
WHEREAS, unless otherwise provided herein, capitalized terms used in
this Agreement shall have the meaning given them in the Plan;
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the parties
hereto agree as follows:
1. Number of Shares and Price. The Corporation hereby grants to the
Optionee an option ("Option") to purchase the number of shares of Common Stock
set forth on the attached Face Sheet of this Agreement. The exercise price per
share of Common Stock of the Option shall be as is set forth on the attached
Face Sheet of this Agreement, such price being the Fair Market Value per share
of Common Stock on the Date of Grant of the Option. The Option is not intended
to qualify as an "incentive stock option" under Section 422 of the Code.
2. Term and Exercise. The Option shall expire five (5) years from the
date hereof. The Option shall become exercisable in installments as set forth on
the attached Face Sheet of this Agreement; provided, however, that, if the
Optionee is removed for Cause, the Option shall cease to continue to become
exercisable on or after the date of such removal. If the Optionee's service with
the Corporation terminates for any reason or if the Optionee ceases to be a
Non-Employee Director, the Option shall continue to become exercisable in
accordance with the preceding sentence and may be exercised until the Option
expires in accordance with the first sentence of this Section 2. Accordingly, if
the Optionee is removed for Cause, he or she may continue to exercise the Option
until the Option expires in accordance with the first sentence of this Section
2, but only to the extent that (a) the Option became exercisable prior to the
date of such removal and (b) it was not previously exercised.
Notwithstanding anything to the contrary in this Section 2, in the
event one of the events specified in Section 8.05(d)(i), (ii), (iii) or (iv) of
the Plan occurs, the provisions of such Section 8.05(d) shall determine when the
Option becomes exercisable, when it may be exercised and when it expires.
3. Exercise Procedures. The Option shall be exercisable by written
notice to the Corporation, which must be received by the Secretary of the
Corporation not later than 5:00 P.M. local time at the principal executive
office of the Corporation on the expiration date of the Option. Such written
notice shall set forth (a) the number of shares of Common Stock being purchased,
(b) the total exercise price for the shares of Common Stock being purchased, (c)
the exact name as it should appear on the stock certificate(s) to be issued for
the shares of Common Stock being purchased, and (d) the address to which the
stock certificate(s) should be sent. The exercise price of shares of Common
Stock purchased upon exercise of the Option shall be paid in full (a) in cash,
(b) by delivery to the Corporation of shares of Common Stock (which shares of
Common Stock must have been held for at least six months), (c) in any
combination of cash and shares of Common Stock, or (d) by delivery of such other
consideration as the Committee deems appropriate and in compliance with
applicable law (including payment in accordance with a cashless exercise program
approved by the Committee). In the event that any shares of Common Stock shall
be transferred to the Corporation to satisfy all or any part of the exercise
price, the part of the exercise price deemed to have been satisfied by such
transfer of shares of Common Stock shall be equal to the product derived by
multiplying the Fair Market Value as of the date of exercise times the number of
shares of Common Stock transferred to the Corporation. Any shares of Common
Stock tendered in payment shall be duly endorsed in blank or accompanied by
stock powers duly endorsed in blank. The Optionee may not transfer to the
Corporation in satisfaction of the exercise price any fraction of a share of
Common Stock, and any portion of the exercise price that would represent less
than a full share of Common Stock must be paid in cash by the Optionee. Subject
to Section 7 hereof, certificates for the purchased shares of Common Stock will
be issued and delivered to the Optionee as soon as practicable after the receipt
of such payment of the exercise price; provided, however, that delivery of any
such shares of Common Stock shall be deemed effected for all purposes when a
stock transfer agent of the Corporation shall have deposited such certificates
in the United States mail, addressed to Optionee, at the address set forth on
the last page of this Agreement or to such other address as Optionee may from
time to time designate in a written notice to the Corporation. The Optionee
shall not be deemed for any purpose to be a shareholder of the Corporation in
respect of any shares of Common Stock as to which the Option shall not have been
exercised, as herein provided, until such shares of Common Stock have been
issued to Optionee by the Corporation hereunder.
4. Plan Provisions Control Option Terms; Modifications. The Option is
granted pursuant and subject to the terms and conditions of the Plan, the
provisions of which are incorporated herein by reference. In the event any
provision of this Agreement shall conflict with any of the terms in the Plan as
constituted on the Date of Grant, the terms of the Plan as constituted on the
Date of Grant shall control. Except as provided in Section 8.05 of the Plan, the
Option shall not be modified after the Date of Grant except by express written
agreement between the Corporation and the Optionee; provided, however, that any
such modification (a) shall not be inconsistent with the terms of the Plan, and
(b) shall be approved by the Committee.
5. Limitations on Transfer. The Option may not be assigned or
transferred other than by will, by the laws of descent and distribution, or
pursuant to a qualified domestic relations order as defined by the Code, Title I
of ERISA or the rules thereunder.
6. Taxes. The Corporation shall be entitled to withhold (or secure
payment from the Optionee in lieu of withholding) the amount of any withholding
or other tax required by law to be withheld or paid by the Corporation with
respect to any shares of Common Stock issuable under this Agreement, and the
Corporation may defer issuance of shares of Common Stock upon the exercise of
the Option unless the Corporation is indemnified to its satisfaction against any
liability for any such tax. The amount of such withholding or tax payment shall
be determined by the Committee or its delegate and shall be payable by the
Optionee at such time as the Committee determines. The Optionee may satisfy his
or her tax withholding obligation by (a) having cash withheld from the
Optionee's salary or other compensation payable by the Corporation or a
Subsidiary, (b) the payment of cash to the Corporation, (c) the payment in
shares of Common Stock already owned by the Optionee valued at Fair Market
Value, and/or (d) the withholding from the Option, at the appropriate time, of a
number of shares of Common Stock sufficient, based upon the Fair Market Value of
such shares of Common Stock, to satisfy such tax withholding requirements. The
Committee shall be authorized, in its sole and absolute discretion, to establish
such rules and procedures relating to any such withholding methods as it deems
necessary or appropriate, including, without limitation, rules and procedures
relating to elections to have shares of Common Stock withheld upon exercise of
the Option to meet such withholding obligations.
7. No Exercise in Violation of Law. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she will not
exercise the Option granted hereby, and that the Corporation will not be
obligated to issue any shares of Common Stock to the Optionee hereunder, if the
exercise thereof or the issuance of such shares of Common Stock shall constitute
a violation by the Optionee or the Corporation of any provision of any law or
regulation of any governmental authority. Any determination in this connection
by the Committee shall be final, binding and conclusive.
8. Securities Law Compliance. The Optionee agrees, for the Optionee and
his or her Beneficiaries, with respect to all shares of Common Stock acquired
pursuant to the terms and conditions of the Plan and the Option (or any other
shares of Common Stock issued pursuant to a stock dividend or stock split
thereon or any securities issued in lieu thereof or in substitution or exchange
therefor), that the Optionee and his or her Beneficiaries will not sell or
otherwise dispose of these shares except pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Act"), or except in
a transaction that, in the opinion of counsel for the Corporation, is exempt
from registration under the Act. Further, the Corporation shall not be required
to sell or issue any shares under the Option if, in the opinion of the
Corporation, (a) the issuance of such shares would constitute a violation by the
Optionee or the Corporation of any applicable law or regulation of any
government authority or (b) the consent or approval of any governmental body is
necessary or desirable as condition of, or in connection with, the issuance of
such shares.
9. Adjustments. The existence of the Option shall not affect in any way
the right or power of the Corporation or its directors or shareholders to make
or authorize any or all adjustments, recapitalizations, reorganizations, or
other changes in the Corporation's capital structure or its business, or any
merger or consolidation of the Corporation, or any issuance of bonds,
debentures, preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
10. Dispute Resolution. As a condition of granting the Option, the
Optionee agrees, for the Optionee and his or her Beneficiaries, that any dispute
or disagreement that may arise under or as a result of or pursuant to the Plan
and the Option shall be determined by the Committee in its sole and absolute
discretion, and any interpretation by the Committee of the terms of the Plan and
Option shall be final, binding and conclusive.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
__________________________ By:
Thomas P. Barbera, Interim
President and Chief Executive Officer
By:
Member of the Stock Option Committee
WITNESS: OPTIONEE
__________________________
<PAGE>
FACE SHEET
Notice Addresses:
Optionee:
-----------------------
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: _________________
Total Options Granted: _________________
Exercise Price per share of Common Stock: $________________
Vesting Schedule:
Number of Shares
Date (Non-Cumulative)
05/03/2000 ___
05/03/2001 ___
05/03/2002 ___
Expiration Date:
Optioned shares must be purchased within five years from the date of
grant, which is May 3, 1999. That is, all options must be exercised by May 3,
2004.
SUBSIDIARIES OF THE COMPANY
AS OF DECEMBER 31, 1998
1. MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI"): MAMSI, a Delaware
corporation, is the holding company for the subsidiaries listed below.
2. ALLIANCE PPO, LLC ("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 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, Registration Statement Number 33-02531 on Form S-8 dated April 16,
1996, Registration Statement Number 33-50275 on Form S-8 dated April 16,
1998, and in Registration Statement Number 33-XXXXX on Form S-8 dated March
26, 1999 of our report dated February 24, 1999, 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, 1998.
/s/ Ernst & Young LLP
Washington, D.C. ---------------------
March 23, 1999 Ernst & Young LLP
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