<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999, or
[ ] Transition report pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-13340
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MID ATLANTIC MEDICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
52-1481661
(IRS Employer Identification Number)
4 TAFT COURT, ROCKVILLE, MARYLAND
(Address of principal executive offices)
20850
(Zip code)
(301) 294-5140
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's classes of common stock
was 49,886,422 shares of common stock, par value $.01, outstanding as of
September 30, 1999.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Note 1)
(in thousands except share amounts)
<TABLE>
<CAPTION>
(Unaudited) (Note)
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,171 $ 9,787
Short-term investments 190,074 174,325
Accounts receivable, net of allowance of $5,057 and $5,214 81,849 79,258
Prepaid expenses, advances and other 27,206 26,955
Deferred income taxes 1,747 1,247
----------- -----------
Total current assets 311,047 291,572
Property and equipment, net of accumulated
depreciation of $39,865 and $32,908 42,678 44,961
Statutory deposits 14,874 14,906
Other assets 8,227 9,055
Deferred income taxes 2,290 2,281
---------- -----------
Total assets $ 379,116 $ 362,775
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 29 $ 60
Short-term borrowings 3,507 1,845
Accounts payable 21,891 19,071
Medical claims payable 151,320 129,265
Deferred premium revenue 17,268 17,167
Deferred income taxes 465 1,026
----------- -----------
Total current liabilities 194,480 168,434
Notes payable - 14
Deferred income taxes 2,918 3,109
----------- -----------
Total liabilities 197,398 171,557
----------- -----------
Stockholders' equity
Common stock, $.01 par, 100,000,000 shares authorized; 59,772,502 issued and
49,886,422 outstanding at September 30, 1999; 56,772,502 issued and
49,634,162 outstanding at December 31, 1998 597 567
Additional paid-in capital 158,868 138,247
Stock compensation trust (common stock held in trust) (89,484) (68,926)
Treasury stock, 9,886,080 shares at September 30, 1999; 7,138,340 shares
at December 31, 1998 (100,982) (75,623)
Accumulated other comprehensive income (Note 2) (418) 1,313
Retained earnings 213,137 195,640
----------- -----------
Total stockholders' equity 181,718 191,218
----------- -----------
Total liabilities and stockholders' equity $ 379,116 $ 362,775
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1998 has been extracted from the
audited financial statements at that date.
See accompanying notes to these financial statements.
<PAGE> 3
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending
September 30, September 30,
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 318,794 $ 281,777
Fee and other 5,224 5,006
Life and short-term disability premium 2,089 1,751
Home health services 6,531 5,171
Investment 2,612 944
Gain on sale of real estate - 4,897
----------- -----------
Total revenue 335,250 299,546
----------- -----------
Expense
Medical 281,050 250,997
Life and short-term disability claims 934 930
Home health patient services 5,264 4,397
Administrative (including interest expense of $211 and $96) 37,441 33,257
Loss on retirement of computer equipment - 4,604
Federal Employees' Health Benefits Program
potential settlement (Note 3) - 16,500
----------- -----------
Total expense 324,689 310,685
----------- -----------
Income (loss) before income taxes 10,561 (11,139)
Income tax (expense) benefit (3,441) 4,396
----------- -----------
Net income (loss) $ 7,120 $ (6,743)
=========== ===========
Basic earnings (loss) per common share (Note 2) $ .17 $ (.15)
=========== ===========
Diluted earnings (loss) per common share (Note 2) $ .17 $ (.15)
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 4
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 925,335 $ 833,872
Fee and other 16,063 15,405
Life and short-term disability premium 6,043 5,051
Home health services 17,279 15,606
Investment 7,258 7,647
Gain on sale of real estate - 5,692
----------- -----------
Total revenue 971,978 883,273
----------- -----------
Expense
Medical 817,635 741,844
Life and short-term disability claims 2,849 2,742
Home health patient services 14,117 12,718
Administrative (including interest expense of $377 and $361) 110,775 99,616
Loss on retirement of computer equipment - 4,604
Federal Employees' Health Benefits Program
potential settlement (Note 3) - 16,500
----------- -----------
Total expense 945,376 878,024
----------- -----------
Income before income taxes 26,602 5,249
Income tax expense (9,105) (1,717)
----------- -----------
Net income $ 17,497 $ 3,532
=========== ===========
Basic earnings per common share (Note 2) $ .42 $ .08
=========== ===========
Diluted earnings per common share (Note 2) $ .42 $ .08
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 5
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ending
September 30, 1999
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 17,497
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 7,759
Provision for bad debts (102)
Provision for deferred income taxes (128)
Loss on sale of disposal of assets 8
Increase in accounts receivable (2,489)
Increase in prepaid expenses, advances, and other (251)
Increase in accounts payable 2,820
Increase in medical claims payable 22,055
Increase in deferred premium revenue 101
-----------
Total adjustments 29,773
-----------
Net cash provided by operating activities 47,270
Cash flows used in investing activities:
Purchases of short-term investments (265,361)
Sales of short-term investments 246,715
Purchases of property and equipment (4,815)
Purchases of other assets (167)
Proceeds from sale of assets 391
-----------
Net cash used in investing activities (23,237)
Cash flows used in financing activities:
Principal payments on notes payable (45)
Increase in short-term borrowings 1,662
Exercise of stock options 75
Stock option tax benefit 18
Purchase of treasury stock (25,359)
-----------
Net cash used in financing activities (23,649)
-----------
Net increase in cash and cash equivalents 384
Cash and cash equivalents at beginning of period 9,787
-----------
Cash and cash equivalents at end of period $ 10,171
===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 6
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ending
September 30, 1998
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 3,532
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 8,604
Provision for bad debts 65
Provision for deferred income taxes (759)
Gain on sale and disposal of fixed assets (982)
Decrease in accounts receivable 6,248
Increase in prepaid expenses, advances, and other (10,251)
Increase in accounts payable 1,011
Increase in medical claims payable 16,909
Increase in deferred premium revenue 3,853
-----------
Total adjustments 24,698
-----------
Net cash provided by operating activities 28,230
Cash flows used in investing activities:
Purchases of short-term investments (262,172)
Sales of short-term investments 256,528
Purchases of property and equipment (6,842)
Purchases of statutory deposits (100)
Reduction in other assets (778)
Proceeds from sale of assets 12,333
-----------
Net cash used in investing activities (1,031)
Cash flows used in financing activities:
Principal payments on notes payable (45)
Increase in short-term borrowings 195
Exercise of stock options 5,417
Stock option tax benefit 2,475
Purchase of treasury stock (34,412)
-----------
Net cash used in financing activities (26,370)
-----------
Net increase in cash and cash equivalents 829
Cash and cash equivalents at beginning of period 3,570
-----------
Cash and cash equivalents at end of period $ 4,399
===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 7
MID ATLANTIC MEDICAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
INTRODUCTION
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose
subsidiaries are active in managed health care and other life and health
insurance related activities. MAMSI's principal markets currently include
Maryland, Virginia, the District of Columbia, Delaware, West Virginia, North
Carolina and Pennsylvania. MAMSI and its subsidiaries (collectively referred to
as the "Company") have developed a broad range of managed health care and
related ancillary products and deliver these services through health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), a life and
health insurance company, home health care and home infusion services companies,
a hospice company, a mail-order pharmacy, and part ownership in an outpatient
surgery center.
MAMSI delivers managed health care services principally through HMOs. The HMOs,
MD-Individual Practice Association, Inc. ("M.D. IPA"), Optimum Choice, Inc.
("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc.
of Pennsylvania ("OCIPA") arrange for health care services to be provided to an
enrolled population for a predetermined, prepaid fee, regardless of the extent
or nature of services provided to the enrollees. The HMOs offer a full
complement of health benefits, including physician, hospital and prescription
drug services.
Other MAMSI subsidiaries include Alliance PPO, LLC, which provides a delivery
network of physicians to employers and insurance companies in association with
various health plans, and Mid Atlantic Psychiatric Services, Inc., which
provides psychiatric services to third party payors or self-insured employer
groups. MAMSI Life and Health Insurance Company develops and markets indemnity
health products and group life, accidental death and short-term disability
insurance. HomeCall, Inc., FirstCall, Inc., and HomeCall Pharmaceutical
Services, Inc. provide in-home medical care (including skilled nursing, infusion
and therapy) and mail-order pharmacy services to MAMSI's HMO members and other
payors. HomeCall Hospice Services, Inc. provides services to terminally ill
patients and their families.
NOTE 1 - FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of September 30, 1999, the
consolidated statements of operations for the three and nine months ended
September 30, 1999 and 1998, and the consolidated statements of cash flows for
the nine months ended September 30, 1999 and 1998 have been prepared by MAMSI
without audit. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
December 31, 1998 audited consolidated financial statements. The results of
operations for the three and nine month periods ended September 30, 1999 are not
necessarily indicative of the operating results for the full year.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 7,120 $ (6,743) $ 17,497 $ 3,532
Denominator:
Denominator for basic earnings per share
- weighted average shares 40,896,492 45,042,891 41,750,913 46,339,272
Dilutive securities - employee stock options 31,894 - 51,382 83,315
Denominator for diluted earnings per share
- adjusted weighted average shares 40,928,386 45,042,891 41,802,295 46,422,587
</TABLE>
<PAGE> 8
Options to purchase approximately 9.0 million shares of common stock at various
prices were outstanding at September 30, 1999, but were not included in the
computation of diluted earnings per share because the effect would be
antidilutive.
During the first nine months of 1999 and 1998, total comprehensive income
amounted to $15,766,000 and $984,000, respectively.
The Company maintains a stock compensation trust ("SCT") to fund its obligations
arising from its various stock option plans. Shares held by the SCT are excluded
from the denominator used in calculating basic and diluted earnings per common
share.
NOTE 3 - FEDERAL EMPLOYEES' HEALTH BENEFIT PROGRAM POTENTIAL SETTLEMENT
During 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 The United States Office of Personnel
Management ("OPM"), based upon an audit conducted by the Office of Inspector
General concerning the Company's participation in the Federal Employee Health
Benefit Program ("FEHBP") for the years 1992- 1997, related to findings for
years 1992-1994. The report had no findings for the years 1995-1997. 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.
In the first quarter of 1999 the Company received OPM's final audit report. Its
findings are consistent with the preliminary report which was the basis for
recording the $16.5 million pretax charge in 1998. In the second quarter of
1999, the Company formally responded to OPM's final audit report accepting a
portion of the findings while contesting other of the report's findings. The
Company intends to negotiate on the remaining contested matters with OPM 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.
NOTE 4 - REPORTABLE SEGMENTS
The Company's principal business is providing health insurance products. The
Company has two reportable segments: commercial risk products and preferred
provider organizations. The Company evaluates performance and allocates
resources based on profit or loss from operations before income taxes, not
including gains or losses on the Company's investment portfolio. Management does
not allocate assets in the measurement of segment profit or loss. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies described in the Company's Form 10-K.
Effective January 1, 1999, the Company ended its participation in the Medicare
Program.
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ending Nine Months Ending
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
In 000's ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Commercial risk $ 304,096 $ 262,303 $ 887,201 $ 770,627
Preferred Provider Organizations 5,224 10,355 16,063 15,405
Medicare - 5,006 - 36,289
All other 23,318 16,041 61,456 47,613
----------- ----------- ----------- -----------
$ 332,638 $ 293,705 $ 964,720 869,934
=========== =========== =========== ===========
Income before taxes:
Commercial risk $ 5,696 $ 2,791 $ 12,208 $ 9,081
Preferred Provider Organizations 2,716 2,603 8,352 7,628
Medicare - (1,740) - (5,315)
All other (334) 517 (856) 2,003
----------- ----------- ----------- -----------
$ 8,078 $ 4,171 $ 19,704 $ 13,397
=========== =========== =========== ===========
</TABLE>
Reconciliations of segment data to the Company's consolidated data is as
follows:
<TABLE>
<CAPTION>
Three Months Ending Nine Months Ending
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
In 000's ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total profit from reportable segments $ 8,412 $ 3,654 $ 20,560 $ 11,394
Other (loss) profit (334) 517 (856) 2,003
Unallocated amounts:
Investment income 2,483 897 6,898 7,264
Gain on sale of real estate - 4,897 - 5,692
Federal Employee Health Benefits
Program potential settlement - (16,500) - (16,500)
Loss on retirement of equipment - (4,604) - (4,604)
----------- ----------- ----------- -----------
Income before taxes $ 10,561 $ (11,139) $ 26,602 $ 5,249
=========== =========== =========== ===========
</TABLE>
<PAGE> 10
MID ATLANTIC MEDICAL SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
All forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations is based on
management's current knowledge of factors affecting MAMSI's business. MAMSI's
actual results may differ materially if these assumptions prove invalid.
Significant risk factors, while not all-inclusive, are:
1. The possibility of increasing price competition in the Company's market
place.
2. The possibility that the Company is not able to increase its market share at
the anticipated premium rates.
3. The possibility of increased litigation, legislation or regulation (such as
the numerous class action lawsuits that have been recently filed against managed
care companies and the pending initiatives to increase health care regulation)
that might increase regulatory oversight which, in turn, would have the
potential for increased costs.
4. The potential for increased medical expenses due to: - Increased utilization
by the Company's membership. - Inflation in provider and pharmaceutical costs. -
Federal or state mandates that increase benefits or limit the Company's
oversight ability.
5. The possibility that the Company is not able to negotiate new or renewal
contracts with appropriate providers.
6. The possibility that one of the Company's vendors will experience year 2000
problems that disrupt the Company's operating or administrative systems.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1998
Consolidated net income of the Company was $7,120,000 for the third quarter of
1999 as compared with a consolidated net loss of $6,743,000 for the third
quarter of 1998. Diluted earnings(loss) per share was $.17 in the third quarter
of 1999 as compared to $(.15) in the third quarter of 1998. The increase in
earnings is attributable to an increase in premiums per member, a reduction in
the medical loss ratio, an increase in investment income offset somewhat by an
increase in administrative expense. In addition, the third quarter of 1998
included a non-recurring item related to the results of an audit conducted in
connection with the Company's participation in the FEHBP. The medical loss ratio
decreased principally due to an increase in premiums per member and continuing
efforts by the Company to control medical costs through utilization review,
enhanced claim adjudication, and increased claims audit and claims reversal
activity. The Company has priced its health products competitively in order to
increase its membership base and thereby enhance its strategic position in its
market place. The Company currently has one of the largest HMO and managed care
enrollments and also the largest network of contract providers of medical care
in its service area (which includes the entire states of Maryland and Delaware,
the District of Columbia, most counties and cities in Virginia and certain areas
of West Virginia, North Carolina and Pennsylvania.)
Revenue for the three months ended September 30, 1999 increased approximately
$35.7 million or 11.9 percent over the three months ended September 30, 1998. A
8.2 percent increase in net average HMO and indemnity enrollment resulted in an
increase of approximately $23.2 million in health premium revenue while a 4.5
percent increase in average monthly premium per enrollee, combined for all
products, resulted in a $13.8 million increase in health premium revenue. The
increase in enrollment is principally due to the Company's commercial
membership. Management believes that commercial health premiums should continue
to increase over the remainder of the year 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
<PAGE> 11
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, in most circumstances, 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 be in the range of 5% to 7% for the remainder of 1999.
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 participation in the Medicare program.
Specifically, effective January 1, 1999, the Company withdrew from participation
in the Medicare program. Effective November 1, 1999 the Company has ended its
participation in the North Carolina and West Virginia Medicaid Programs. In
addition, the Company its considering ending its participation in the Virginia
Medicaid Program by notifying Virginia on April 30, 2000 of termination which
would then be effective on June 30, 2000. The Company took these actions due to
continuing sustained losses in these programs.
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 and increased competition in the Company's service
area.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries contributed approximately $6.5 million in revenue in
the third quarter of 1999 as compared with $5.2 million in the third quarter of
1998. Revenue from life and short-term disability products contributed $2.1
million in revenue in the third quarter of 1999 as compared to $1.8 million for
the same period in 1998.
Investment income increased $1.7 million primarily due to the decrease in
realized losses on sales of marketable equity securities.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased to 88.2 percent for the third quarter of 1999 as compared to
89.1 percent for the comparable period of 1998. On a per member per month basis,
medical expenses increased 3.5 percent. The decrease in the medical loss ratio
is due to a combination of factors including continuing efforts by the Company
to implement product specific cost containment controls, expanded activity in
specialized subrogation areas and claims review for dual health coverage, the
Company's withdrawal from the Medicare program effective January 1, 1999, and
also increased premiums per member. These initiatives are ongoing and should
help to control the Company's medical loss ratio. The statements in this
paragraph and the preceding paragraphs regarding future utilization rates, cost
containment initiatives, total medical costs and future increases in health
premiums per member are forward-looking statements. See "Forward- Looking
Information" above for a description of risk factors that may affect medical
expenses per member and the medical loss ratio.
Administrative expenses as a percentage of revenue ("administrative expense
ratio") stayed relatively stable at 11.2 percent for the third quarter of 1999
as compared to 11.1 percent for the same period in 1998. Management believes
that the administrative expense ratio will increase slightly over the remainder
of the year as additional personnel with specialized medical and other expertise
are hired. 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.
Included in the Company's third quarter 1998 results is a $16,500,000 accrual
related to an audit conducted by the Office of Inspector General concerning the
Company's participation in the FEHBP for the years 1992- 1997. The report's
preliminary findings indicate that in the years 1992- 1994 the FEHBP was charged
rates that exceeded the then market price. In the first quarter of 1999 the
Company received OPM's final audit report. Its findings are consistent with the
preliminary report which was the basis for recording the $16.5 million pretax
charge in 1998. In the second quarter of 1999, the Company formally responded to
OPM's final
<PAGE> 12
audit report accepting a portion of the findings while contesting other of the
report's findings. The Company intends to negotiate on the remaining contested
matters with OPM 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 report had no findings for the years 1995-1997.
The net margin rate increased from a negative (2.3) percent in the third quarter
of 1998 to 2.1 percent in the current quarter. This increase is consistent with
the factors previously described.
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1998
The Company's consolidated net income for the nine months ended September 30,
1999 increased to $17,497,000 from $3,532,000 for the nine months ended
September 30, 1998. Earnings per share on net income increased from $.08 in the
first nine months of 1998 to $.42 for the same period in 1999. The increase in
earnings is attributable to an increase in premiums per member, a reduction in
the medical loss ratio, offset somewhat by a slight decrease in investment
income and an increase in administrative expense. In addition, the 1998 results
include a non-recurring item related to the results of an audit conducted in
connection with the Company's participation in the FEHBP. The audit covered the
periods 1992- 1997 with the audit findings related to years 1992-1994. There
were no findings for the years 1995-1997.
Revenue for the nine months ended September 30, 1999 increased approximately
$88.7 million or 10.0 percent over the nine months ended September 30, 1998. A
3.2 percent increase in average premiums per HMO and indemnity enrollee
increased health premium revenue by approximately $28.5 million and a 7.6
percent increase in net average HMO and indemnity enrollment resulted in an
increase of approximately $63.0 million in health premium revenue. Revenue from
life and short-term disability products contributed $6.0 million in revenue for
the first nine months of 1999 as compared to $5.1 million for the same period in
1998.
The Company's home health operations contributed $17.3 million for the first
nine months of 1999 as compared with $15.6 million for the first nine months of
1998.
Investment income was $7.3 million and $7.6 million for the first nine months of
1999 and 1998, respectively.
The medical loss ratio decreased to 88.4 percent for the nine months ended
September 30, 1999 as compared to 89.0 percent for the comparable period in
1998. The reasons for this decrease are consistent with the items discussed in
the quarterly analysis.
The administrative expense ratio for the first nine months of 1999 essentially
stable increasing to 11.4 percent as compared to 11.3 percent for the same
period in 1998.
Included in the Company's year-to-date 1998 results is a $16,500,000 accrual
related to an audit conducted by the Office of Inspector General concerning the
Company's participation in FEHBP for the years 1992 - 1997. The report's
preliminary findings indicate that in the years 1992 - 1994 the FEHBP was
charged rates that exceeded the then market price. The report had no findings
for the years 1995-1997. In the first quarter of 1999 the Company received OPM's
final audit report. Its findings are consistent with the preliminary report
which was the basis for recording the $16.5 million pretax charge in 1998. In
the second quarter of 1999, the Company formally responded to OPM's final audit
report accepting a portion of the findings while contesting other of the
report's findings. The Company intends to negotiate on the remaining contested
matters with OPM 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
<PAGE> 13
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 net margin rate increased from .4 percent for the first nine months of 1998
to 1.8 percent for the comparable period of 1999. This increase is consistent
with the factors previously described.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive and the majority of the
Company's expenses are payments to health care providers, which generally vary
in direct proportion to the health premium revenues received by the Company.
Although medical utilization rates vary by season, the payments for such
expenses lag behind cash inflow from premiums because of the lag in provider
billing procedures. In the past, the Company's cash requirements have been met
principally from operating cash flow and it is anticipated that this source,
coupled with the Company's operating line-of-credit, will continue to be
sufficient in the future.
The Company's cash and short-term investments increased from $184.1 million at
December 31, 1998 to $200.2 million at September 30, 1999, primarily due to the
timing of medical expense payments which traditionally lag behind increased
premiums per member and net income offset by the effect of treasury stock
purchases. Accounts receivable increased from $79.3 million at December 31, 1998
to $81.8 million at September 30, 1999, principally due to the timing of
customer payments and increases in membership.
Net property and equipment decreased from $45.0 million at December 31, 1998 to
$42.7 million at September 30, 1999 primarily due to assets becoming fully
depreciated.
Medical claims payable increased from $129.3 million at December 31, 1998 to
$151.3 million at September 30, 1999, primarily due to increased membership and
an increase in medical expenses per member.
Additional paid-in capital increased from $138.2 million at December 31, 1998 to
$158.9 million at September 30, 1999 due principally to an additional 3.0
million shares of the Company's stock being placed into the stock compensation
trust. This also accounts for the change in the stock compensation trust
balance.
Treasury stock increased from $75.6 million at December 31, 1998 to $101.0
million at September 30, 1999 due to the purchase of 2,747,740 additional shares
by the Company at a total cost of $25,359,000.
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 September 30, 1999, approximately $2.9 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 Insurance Company, and a $150,000
letter of credit for the Company's home health subsidiary. While no amounts have
been drawn against these letters of credit, they reduce the Company's credit
line availability.
Following is a schedule of the short-term capital resources available to the
Company (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 10,171 $ 9,787
Short-term investments 190,074 174,325
Working capital advances to Maryland hospitals 14,799 12,261
----------- -----------
Total available liquid assets 215,044 196,373
Credit line availability 13,950 14,855
----------- -----------
Total short-term capital resources $ 228,994 $ 211,228
=========== ===========
</TABLE>
<PAGE> 14
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.
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. All of the Company's critical vendors have indicated Y2K compliance
or that they will be Y2K compliant prior to December 31, 1999. 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. The Company has developed a contingency plan which identifies
back-up vendors or back-up procedures to be used in the event of a Y2K incident.
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.
At its October Board meeting, the Board of Directors authorized a $20 million
stock repurchase program to begin November 15, 1999 and extend through June 30,
2000. As of September 30, 1999, the Company had repurchased 2,747,740 shares of
its common stock for a total cost of approximately $25.4 million under its then
current stock repurchase program.
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 invests 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. The Company has no
significant market risk with regard to liabilities. There are no material
changes in market risk exposure at September 30, 1999 when compared with
December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is contained in Item 2 "Management's
Discussion and Analysis of Financial Condition and Results
of Operations".
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. 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.
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 ("Court"), 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. On August 13, 1999 the Court dismissed the class
action lawsuit. The plaintiffs filed a similar class action lawsuit which was
dismissed by the Court on October 1, 1999.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 20, 1999 the Company's Stock Compensation Trust ("the Trust")
purchased from the Company 1,500,000 shares of Mid Atlantic Medical Services,
Inc. Common Stock at a price of $9.1875 for $15,000 in cash and $13,781,250 in
the form of a note payable to the Company. The sale was exempt under Section
4(2) of the Securities Act of 1933. The Trust is used to meet grant obligations
of the Company's stock option plans, and the shares issuable upon exercise of
these options are registered under the 1933 Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit index on page 17 of the Form 10-Q.
(b) There were no reports filed on Form 8-K during the
quarter ended September 30, 1999.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by undersigned
thereto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC.
--------------------------------------------
(Registrant)
Date: November 12, 1999 /s/ Robert E. Foss
-------------------------------------
Robert E. Foss
Senior Executive Vice President and
Chief Financial Officer (duly authorized officer
and principal financial officer)
<PAGE> 17
6(a) List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit In Sequential
Number Description of Document Numbering System
- ------- ----------------------- -------------------
10.995 First Amendment to Employment Agreement between
the Company and Mark D. Groban. . . . . . . . . . . . . . .
10.996 First Amendment to Employment Agreement between
the Company and Thomas P. Barbera. . . . . . . . . . . . . .
10.997 First Amendment to Employment Agreement between
the Company and Robert E. Foss. . . . . . . . . . . . . . .
10.998 Amended and Restated Stock Compensation Trust
Agreement dated August 20, 1999. . . . . . . . . . . . . . .
10.999 Common Stock Purchase Agreement dated August 20, 1999. . . .
10.21 Allonge to Replacement Promissory Note
dated August 20, 1999. . . . . . . . . . . . . . . . . . . .
27 Financial Data Schedule for the Nine
Months Ended September 30, 1999. . . . . . . . . . . . . . .
First Amendment to
Employment Agreement Between
Mid Atlantic Medical Services, Inc. and
Mark D. Groban, M.D.
This amendment shall be the first Amendment to the Employment Agreement
("Agreement') between Mid Atlantic Medical Services, Inc. ("Company") and Mark
D. Groban, M.D. ("Executive") which was entered into as of April 21, 1999.
WHEREAS, the Agreement provided for retirement benefits to be paid to Executive
under certain conditions; and
WHEREAS, the Company believes it is in the best interests of the Company to
provide an additional early retirement benefit to Executive, to allow for a
named beneficiary designation in the survivor benefit, and to clarify certain
other terms;
NOW THEREFORE, the parties agree to amend the Agreement as follows:
1. Delete Section 5(d) in its entirety and replace it with the following new
Section 5(d):
"(d) Retirement. Subject to the vesting schedule set forth below,
retirement benefits shall be payable to Executive beginning on the day
Executive attains age sixty-two (62), (1) if he is at that time still
employed by the Company, and he elects to retire from employment with the
Company, or (2) he is not at the time employed by the Company, and elects
to begin receiving retirement benefits. Notwithstanding the above
provision, the Executive and the Company may agree that the Executive may
continue to be employed by the Company and not to retire at age 62. In
addition, the Executive may elect an early retirement and may elect to
receive payment of the retirement benefit at anytime after attaining age 55
but before age 62 by providing written notice to the Company. Such early
retirement benefit will be actuarially adjusted solely for actual
retirement age and will be subject to the vesting schedule provided below.
The date on which the Executive retires shall be referred to as the
"Retirement Termination Date".
If Executive retires on or after reaching age 62, Executive will be
entitled to receive from the Company a retirement benefit which will
provide an annual lifetime benefit in an amount equal to three percent of
the total average annual Base Salary and bonus compensation for the years
beginning on or after January 1, 1999 times the total number of months of
service with the Company, including all months prior to January 1, 1999,
divided by 12 to a limit of 60% of Executive's total compensation defined
as the total amount of annual salary and maximum annual bonus that
Executive could have earned in the calendar year of Executive's termination
of employment with the Company. If Executive elects early retirement and
retires after reaching age 55 but before age 62, the annual payment shall
be adjusted so that the total amount of retirement benefits to be paid do
not exceed the actuarial equivalent of the amount which would then have
been payable in retirement benefits had Executive reached and retired at
age 62. For the purposes of determining actuarial equivalency, the
retirement benefit will be reduced by .25% per month for each month that
the actual retirement age is below age 62.
Retirement benefits will vest 50% if Executive is employed by the Company
on January 1, 2000 and the remaining 50% if the Executive is employed on
January 1, 2001 and 100% immediately upon a change in control, death or
disability. Such retirement benefit shall be paid in single annual payments
for the life of the Executive with the initial payment made to the
Executive on the Retirement Termination Date. The Company shall not be
obligated to pay any retirement benefit under this subsection if the
Executive is terminated for cause by the Company.
Executive may elect a beneficiary to receive a survivor benefit upon the
Retirement Termination Date. If Executive dies prior to retirement without
naming a beneficiary, then Executive's surviving spouse shall be deemed to
be his named beneficiary or if Executive has no surviving spouse, to his
issue per stirpes. If Executive dies prior to retirement, the Executive's
named beneficiary shall be entitled to elect a lump sum benefit, payable
immediately or in annual payments over the beneficiary's lifetime, of the
actuarial equivalent of the retirement benefit earned to the date of death.
For this purpose, the Company will use the lower of the U.S. Government
T-Bill Rate or 5% and a mortality table in general use at the time of the
Executive's death.
If Executive is employed by the Company on 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 and any non-reimbursed business expenses."
2. This Amendment shall be effective as of August 11, 1999.
3. All other terms and conditions of the Agreement shall remain unchanged and in
full force.
Signed and delivered ____16th_____ day of September, 1999 in the Company's
offices at 4 Taft Court, Rockville, Maryland.
By: Mid Atlantic Medical Services, Inc. By: Mark D. Groban
__Thomas P.Barbera____________ ___Mark D. Groban________
Name Name
__President And CEO___________ _Chairman_______________
Title Title
First Amendment to
Employment Agreement Between
Mid Atlantic Medical Services, Inc. and
Thomas P. Barbera
This amendment shall be the first Amendment to the Employment Agreement
("Agreement') between Mid Atlantic Medical Services, Inc. ("Company") and Thomas
P. Barbera ("Executive") which was entered into as of April 21, 1999.
WHEREAS, the Agreement provided for retirement benefits to be paid to Executive
under certain conditions; and
WHEREAS, the Company believes it is in the best interests of the Company to
provide an additional early retirement benefit to Executive, to allow for a
named beneficiary designation in the survivor benefit, and to clarify certain
other terms;
NOW THEREFORE, the parties agree to amend the Agreement as follows:
1. Delete Section 5(d) in its entirety and replace it with the following new
Section 5(d):
"(d) Retirement. Subject to the vesting schedule set forth below,
retirement benefits shall be payable to Executive beginning on the day
Executive attains age sixty-two (62), (1) if he is at that time still
employed by the Company, and he elects to retire from employment with the
Company, or (2) he is not at the time employed by the Company, and elects
to begin receiving retirement benefits. Notwithstanding the above
provision, the Executive and the Company may agree that the Executive may
continue to be employed by the Company and not to retire at age 62. In
addition, the Executive may elect an early retirement and may elect to
receive payment of the retirement benefit at anytime after attaining age 55
but before age 62 by providing written notice to the Company. Such early
retirement benefit will be actuarially adjusted solely for actual
retirement age and will be subject to the vesting schedule provided below.
The date on which the Executive retires shall be referred to as the
"Retirement Termination Date".
If Executive retires on or after reaching age 62, Executive will be
entitled to receive from the Company a retirement benefit which will
provide an annual lifetime benefit in an amount equal to three percent of
the total average annual Base Salary and bonus compensation for the years
beginning on or after January 1, 1999 times the total number of months of
service with the Company, including all months prior to January 1, 1999,
divided by 12 to a limit of 60% of Executive's total compensation defined
as the total amount of annual salary and maximum annual bonus that
Executive could have earned in the calendar year of Executive's termination
of employment with the Company. If Executive elects early retirement and
retires after reaching age 55 but before age 62, the annual payment shall
be adjusted so that the total amount of retirement benefits to be paid do
not exceed the actuarial equivalent of the amount which would then have
been payable in retirement benefits had Executive reached and retired at
age 62. For the purposes of determining actuarial equivalency, the
retirement benefit will be reduced by .25% per month for each month that
the actual retirement age is below age 62.
Retirement benefits will vest 50% if Executive is employed by the Company
on January 1, 2000 and the remaining 50% if the Executive is employed on
January 1, 2001 and 100% immediately upon a change in control, death or
disability. Such retirement benefit shall be paid in single annual payments
for the life of the Executive with the initial payment made to the
Executive on the Retirement Termination Date. The Company shall not be
obligated to pay any retirement benefit under this subsection if the
Executive is terminated for cause by the Company.
Executive may elect a beneficiary to receive a survivor benefit upon the
Retirement Termination Date. If Executive dies prior to retirement without
naming a beneficiary, then Executive's surviving spouse shall be deemed to
be his named beneficiary or if Executive has no surviving spouse, to his
issue per stirpes. If Executive dies prior to retirement, the Executive's
named beneficiary shall be entitled to elect a lump sum benefit, payable
immediately or in annual payments over the beneficiary's lifetime, of the
actuarial equivalent of the retirement benefit earned to the date of death.
For this purpose, the Company will use the lower of the U.S. Government
T-Bill Rate or 5% and a mortality table in general use at the time of the
Executive's death.
If Executive is employed by the Company on 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 and any non-reimbursed business expenses."
2. This Amendment shall be effective as of August 11, 1999.
3. All other terms and conditions of the Agreement shall remain unchanged and in
full force.
Signed and delivered ___16th_______ day of September, 1999 in the Company's
offices at 4 Taft Court, Rockville, Maryland.
By: Mid Atlantic Medical Services, Inc. By: Thomas P. Barbera
____Mark D. Groban__________ ______Thomas P. Barbera___
Name Name
____Chairman________________ _____President and CEO____
Title Title
First Amendment to
Employment Agreement Between
Mid Atlantic Medical Services, Inc. and
Robert E. Foss
This amendment shall be the First Amendment to the Employment Agreement
("Agreement") between Mid Atlantic Medical Services, Inc. ("Company") and Robert
E. Foss which was entered into as of January 8, 1999.
WHEREAS, the Agreement provided for a limited retirement benefit to be paid to
Mr. Foss in addition to other benefits; and
WHEREAS, the Company believes it is in the best interests of the Company to
provide additional retirement benefits to Mr. Foss as well as adjust certain
other benefits;
NOW THEREFORE, the parties agree to amend the Agreement as follows:
1. Stock Options: Add the following to Paragraph 4:
"On both January 1, 2000 and January 1, 2001, the Company will grant
Executive options to purchase no less than 130,000 shares of MAMSI common
stock at the stock price on the date of grant. Such options will vest 50%
on the date of grant and 50% based on performance to be determined by the
Stock Option Committee and the Board at the first Board meeting in 2000 and
2001 respectively."
2. Termination for Disability: Replace "thirty (30)" in Paragraph 5 (a)(i) with
"ninety (90)".
3. Termination Under Change in Control: Delete Paragraph 6 and replace with the
following:
"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 (ii)
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.
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, the
obligations of the Company to employ Executive under this Agreement
shall cease.
c. In the event of a change in control as defined in Section 6(a) above,
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. In the event of a change in control as defined in Section 6(a) above,
the Company shall also pay to Executive an amount equal to the sum of
(x) excise taxes imposed on the Executive under Section 4999 of the
Internal Revenue Code and (y) income taxes due from the Executive with
respect to the payment of the amount in subsection (x) above as well as
the payment for income taxes under this subsection 6(d).
e. In the event of a change in control as defined in Section 6(a) above,
or any successor changes in control thereafter, the payment of all
retirement benefits as defined in Section 5(d) of this Agreement shall
become the obligation and responsibility of the successor company or
"person" noted in Section 6(a) above."
4. Retirement: Delete Paragraph 5(d) and replace it with the following:
"(d) Retirement. Subject to the vesting schedule set forth below,
retirement benefits shall be payable to Executive beginning on the day
Executive attains age sixty-two (62), (1) if he is at that time still
employed by the Company, and he elects to retire from employment with the
Company, or (2) he is not at the time employed by the Company, and elects
to begin receiving retirement benefits. Notwithstanding the above
provision, the Executive and the Company may agree that the Executive may
continue to be employed by the Company and not to retire at age 62. In
addition, the Executive may elect an early retirement and may elect to
receive payment of the retirement benefit at anytime after attaining age 55
but before age 62 by providing written notice to the Company. Such early
retirement benefit will be actuarially adjusted solely for actual
retirement age and will be subject to the vesting schedule provided below.
The date on which the Executive retires shall be referred to as the
"Retirement Termination Date".
If Executive retires on or after reaching age 62, Executive will be
entitled to receive from the Company a retirement benefit which will
provide an annual lifetime benefit in an amount equal to three percent of
the total average annual Base Salary and bonus compensation for the years
beginning on or after January 1, 1999 times the total number of months of
service with the Company, including all months prior to January 1, 1999,
divided by 12 to a limit of 60% of Executive's total compensation defined
as the total amount of annual salary and maximum annual bonus that
Executive could have earned in the calendar year of Executive's termination
of employment with the Company. If Executive elects early retirement and
retires after reaching age 55 but before age 62, the annual payment shall
be adjusted so that the total amount of retirement benefits to be paid do
not exceed the actuarial equivalent of the amount which would then have
been payable in retirement benefits had Executive reached and retired at
age 62. For the purposes of determining actuarial equivalency, the
retirement benefit will be reduced by .25% per month for each month that
the actual retirement age is below age 62.
Retirement benefits will vest 50% if Executive is employed by the Company
on January 1, 2000 and the remaining 50% if the Executive is employed on
January 1, 2001 and 100% immediately upon a change in control, death or
disability. Such retirement benefit shall be paid in single annual payments
for the life of the Executive with the initial payment made to the
Executive on the Retirement Termination Date. The Company shall not be
obligated to pay any retirement benefit under this subsection if the
Executive is terminated for cause by the Company.
Executive may elect a beneficiary to receive a survivor benefit upon the
Retirement Termination Date. If Executive dies prior to retirement without
naming a beneficiary, then Executive's surviving spouse shall be deemed to
be his named beneficiary or if Executive has no surviving spouse, to his
issue per stirpes. If Executive dies prior to retirement, the Executive's
named beneficiary shall be entitled to elect a lump sum benefit, payable
immediately or in annual payments over the beneficiary's lifetime, of the
actuarial equivalent of the retirement benefit earned to the date of death.
For this purpose, the Company will use the lower of the U.S. Government
T-Bill Rate or 5% and a mortality table in general use at the time of the
Executive's death.
If Executive is employed by the Company on 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 and any non-reimbursed business expenses."
5. Business Automobile: Add the following new paragraph:
"10. Business Automobile. The Company shall pay to Executive a car
allowance of $450 monthly."
6. Health Insurance: Add the following new paragraph:
"11. Health Insurance. Both the Executive and the spouse of the Executive
at the time of retirement or spouse upon death of the Executive will be
eligible for health coverage from the Company or its successor during the
term of their respective lives. Such health coverage to be paid for by
Executive or the spouse of the Executive with the normal Company
contribution for active employees in effect during the period of coverage."
7. Covenant Not to Compete: Add the following new paragraph:
"12. 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 Without
Cause 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 12 shall survive the termination of this
Agreement following the Termination Date."
8. All other terms and conditions of the Agreement remain unchanged and in full
force and effect.
9. This Amendment shall be effective as of August 11, 1999.
Signed and delivered this ____ day of September, 1999 in the Company's offices
at 4 Taft Court, Rockville, Maryland.
By: Mid Atlantic Medical Services, Inc. By: Robert E. Foss
Thomas P. Barbera Robert E. Foss
- ------------------------------- ----------------------------
Name Name
President and CEO Senior EVP and CFO
- ------------------------------- ----------------------------
Title Title
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 20th day of August, 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 and as
previously amended and restated as of January 11, 1999 is hereby further 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 the
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 dated as of January 11, 1999 (as defined in the Common Stock
Purchase Agreement dated of even date therewith between the Trust and the
Company), as further amended by an Allonge dated as of the Closing (as defined
in the Common Stock Purchase Agreement 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/ Sharon C. Pavlos
____________________________ By:___________________________________
Executive Vice President
Title:__________________________________
Attest THE BANK OF NEW YORK, as TRUSTEE
/s/Paulette S. Bazil /s/ Richard Barry
____________________________ By:___________________________________
Richard J. Barry Vice President
Title:__________________________________
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement"), made
this 20th day of August, 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 August 20, 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 $9.1875 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, as amended by Allonge dated
January 11, 1999, previously delivered by the Purchaser to the Seller in the
principal amount of $127,284,696.75 (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 August 20, 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, Executive 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.
/s/ Sharon C. Pavlos
By:__________________________________
Executive Vice President
Title:_________________________________
The Bank of New York in its capacity as trustee of
the Mid Atlantic Medical Services, Inc. Stock Compensation
Trust
/s/ Richard Barry
By__________________________________
Richard J. Barry Vice President
Title:________________________________
<PAGE>
EXHIBIT A
Allonge
ALLONGE TO REPLACEMENT PROMISSORY NOTE
This Allonge made this 20th day of August, 1999, to the Replacement
Promissory Note dated December 20, 1996, as amended by Allonge dated January 11,
1999, 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, the Original Note was amended by an Allonge on January 11,
1999.
WHEREAS, under the terms of the Allonge, the principal amount of the
Original Note due and owing as of January 11, 1999 was increased to
$118,076,287.20.
WHEREAS, $113,518,446.75 of the principal amount of the Original Note,
as amended by the Allonge (the "Amended 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 Amended Note
due and owing from $113,518,446.75 to $127,284,696.75 while leaving all other
terms of the Amended Note unamended.
NOW, THEREFORE, for good and valuable consideration and intending to be
legally bound hereby, the parties hereto agree as follows:
(1) The Amended Note is hereby amended by deleting all
references to "$118,076,287.20" and by inserting in lieu thereof
"$127,284,696.75."
(2) The last sentence of the second paragraph of the Amended
Note is hereby amended by deleting the date "January 11, 1999" and by
inserting in lieu thereof August 20, 1999."
(3) Schedule A attached to the Amended Note is hereby amended
and restated in its entirety in the form attached hereto as Exhibit 1.
(4) Schedule B attached to the Amended Note is hereby amended
and restated in its entirety in the form attached hereto as Exhibit 2.
(5) Except as expressly amended hereby, the Amended Note shall
remain unamended and in full force and effect.
IN WITNESS WHEREOF, this Allonge to Replacement Promissory is made
effective as of the 20th day of August, 1999.
Attest: 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
/s/Paulette S. Bazil /s/ Richard Barry
____________________________ By:_______________________________________
Richard J. Barry Vice President
Title:_____________________________________
MID ATLANTIC MEDICAL SERVICES, INC.
/s/ Sharon C. Pavlos
______________________________ By:_______________________________________
Title:__Executive Vice President____________
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<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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0
0
<COMMON> 597
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<TOTAL-LIABILITY-AND-EQUITY> 379,116
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