<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 June 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
------------------------------
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 49,954,762 shares of common stock, par value $.01, outstanding as of June
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)
June 30, 1999 December 31, 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,107 $ 9,787
Short-term investments 177,885 174,325
Accounts receivable, net of allowance of $5,153 and $5,214 84,493 79,258
Prepaid expenses, advances and other 29,566 26,955
Deferred income taxes 1,969 1,247
----------- -----------
Total current assets 310,020 291,572
Property and equipment, net of accumulated
depreciation of $37,743 and $32,908 43,363 44,961
Statutory deposits 14,915 14,906
Other assets 8,766 9,055
Deferred income taxes 4,190 2,281
---------- -----------
Total assets $ 381,254 $ 362,775
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 59 $ 60
Short-term borrowings 3,834 1,845
Accounts payable 19,305 19,071
Medical claims payable 144,970 129,265
Deferred premium revenue 18,287 17,167
Deferred income taxes 1,935 1,026
----------- -----------
Total current liabilities 188,390 168,434
Notes payable - 14
Deferred income taxes 3,686 3,109
----------- -----------
Total liabilities 192,076 171,557
----------- -----------
Stockholders' equity
Common stock, $.01 par, 100,000,000 shares authorized; 58,272,502 issued and
49,954,762 outstanding at June 30, 1999; 56,772,502 issued and
49,634,162 outstanding at December 31, 1998 582 567
Additional paid-in capital 153,578 138,247
Stock compensation trust (common stock held in trust) (84,066) (68,926)
Treasury stock, 8,317,740 shares at June 30, 1999; 7,138,340 shares at
December 31, 1998 (86,938) (75,623)
Accumulated other comprehensive income (Note 2) 5 1,313
Retained earnings 206,017 195,640
----------- -----------
Total stockholders' equity 189,178 191,218
----------- -----------
Total liabilities and stockholders' equity $ 381,254 $ 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
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 307,880 $ 278,029
Fee and other 5,375 6,099
Life and short-term disability premium 2,005 1,695
Home health services 5,839 5,410
Investment 2,431 2,992
----------- -----------
Total revenue 323,530 294,225
----------- -----------
Expense
Medical 274,096 249,805
Life and short-term disability claims 1,028 819
Home health patient services 4,900 4,136
Administrative (including interest expense of $80 and $127) 36,536 33,736
----------- -----------
Total expense 316,560 288,496
----------- -----------
Income before income taxes 6,970 5,729
Provision for income taxes (2,464) (2,144)
----------- -----------
Net income $ 4,506 $ 3,585
=========== ===========
Basic earnings per common share (Note 2) $ .11 $ .08
=========== ===========
Diluted earnings per common share (Note 2) $ .11 $ .08
=========== ===========
</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>
Six Months Ended
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 606,541 $ 552,095
Fee and other 10,839 11,194
Life and short-term disability premium 3,954 3,300
Home health services 10,748 10,435
Investment 4,646 6,703
----------- -----------
Total revenue 636,728 583,727
----------- -----------
Expense
Medical 536,585 490,847
Life and short-term disability claims 1,915 1,812
Home health patient services 8,853 8,321
Administrative (including interest expense of $166 and $265) 73,334 66,359
----------- -----------
Total expense 620,687 567,339
----------- -----------
Income before income taxes 16,041 16,388
Income tax expense (5,664) (6,113)
----------- -----------
Net income $ 10,377 $ 10,275
=========== ===========
Basic earnings per common share (Note 2) $ .25 $ .22
=========== ===========
Diluted earnings per common share (Note 2) $ .25 $ .22
=========== ===========
</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>
Six Months
Ending
June 30, 1999
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 10,377
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 5,370
Provision for bad debts (60)
Provision for deferred income taxes (289)
Loss on sale of disposal of assets 8
Increase in accounts receivable (5,175)
Increase in prepaid expenses, advances, and other (2,611)
Increase in accounts payable 234
Increase in medical claims payable 15,705
Increase in deferred premium revenue 1,120
-----------
Total adjustments 14,302
-----------
Net cash provided by operating activities 24,679
Cash flows used in investing activities:
Purchases of short-term investments (171,099)
Sales of short-term investments 165,342
Purchases of property and equipment (3,375)
Purchases of other assets (483)
Proceeds from sale of assets 392
-----------
Net cash used in investing activities (9,223)
Cash flows used in financing activities:
Principal payments on notes payable (30)
Increase in short-term borrowings 2,004
Exercise of stock options 188
Stock option tax benefit 17
Purchase of treasury stock (11,315)
-----------
Net cash used in financing activities (9,136)
-----------
Net increase in cash and cash equivalents 6,320
Cash and cash equivalents at beginning of period 9,787
-----------
Cash and cash equivalents at end of period $ 16,107
===========
</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>
Six Months
Ending
June 30, 1998
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 10,275
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 5,783
Provision for bad debts (551)
Provision for deferred income taxes 558
Gain on sale and disposal of fixed assets (689)
Increase in accounts receivable (3,842)
Increase in prepaid expenses, advances, and other (3,792)
Decrease in accounts payable (247)
Increase in medical claims payable 17,539
Increase in deferred premium revenue 2,906
-----------
Total adjustments 17,665
-----------
Net cash provided by operating activities 27,940
Cash flows used in investing activities:
Purchases of short-term investments (174,013)
Sales of short-term investments 155,057
Purchases of property and equipment (5,898)
Purchases of statutory deposits (100)
Purchases of other assets (714)
Proceeds from sale of assets 3,316
-----------
Net cash used in investing activities (22,352)
Cash flows used in financing activities:
Principal payments on notes payable (30)
Increase in short-term borrowings 244
Exercise of stock options 5,382
Stock option tax benefit 2,473
Purchase of treasury stock (8,413)
-----------
Net cash used in financing activities (344)
-----------
Net increase in cash and cash equivalents 5,244
Cash and cash equivalents at beginning of period 3,570
-----------
Cash and cash equivalents at end of period $ 8,814
===========
</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 June 30, 1999, the
consolidated statements of operations for the three and six months ended June
30, 1999 and 1998, and the consolidated statements of cash flows for the six
months ended June 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 six month periods ended June 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 Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 4,506 $ 3,585 $ 10,377 $ 10,275
Denominator:
Denominator for basic earnings per share
- weighted average shares 41,871,216 47,202,991 42,178,123 46,987,462
Dilutive securities - employee stock options 62,595 43,088 61,126 124,973
Denominator for diluted earnings per share
- adjusted weighted average shares 41,933,811 47,246,079 42,239,249 47,112,435
</TABLE>
<PAGE> 8
Options to purchase approximately 7.7 million shares of common stock at various
prices were outstanding at June 30, 1999, but were not included in the
computation of diluted earnings per share because the effect would be
antidilutive.
During the first six months of 1999 and 1998, total comprehensive income
amounted to $9,069,000 and $11,826,000, 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. 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 Six Months Ending
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
In 000's ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Commercial risk $ 295,214 $ 256,962 $ 583,105 $ 508,324
Preferred Provider Organizations 5,375 6,099 10,839 11,194
Medicare - 11,867 - 25,934
All other 20,510 16,305 38,138 31,572
----------- ----------- ----------- -----------
$ 321,099 $ 291,233 $ 632,082 577,024
=========== =========== =========== ===========
Income before taxes:
Commercial risk $ 2,346 $ 85 $ 6,512 $ 6,290
Preferred Provider Organizations 2,795 3,171 5,636 5,820
Medicare - (1,499) - (3,575)
All other (482) 1,130 (522) 1,486
----------- ----------- ----------- -----------
$ 4,659 $ 2,887 $ 11,626 $ 10,021
=========== =========== =========== ===========
</TABLE>
Reconciliations of segment data to the Company's consolidated data is as
follows:
<TABLE>
<CAPTION>
Three Months Ending Six Months Ending
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
In 000's ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total profit from reportable segments $ 5,141 $ 1,757 $ 12,148 $ 8,535
Other (loss) profit (482) 1,130 (522) 1,486
Unallocated amounts:
Investment income 2,311 2,842 4,415 6,367
----------- ----------- ----------- -----------
Income before taxes $ 6,970 $ 5,729 $ 16,041 $ 16,388
=========== =========== =========== ===========
</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 state or federal budget related mandates that reduce
premiums for Medicaid recipients.
4. The potential for increased medical expenses due to: - Increased utilization
by the Company's membership. - Inflation in provider and pharmaceutical costs. -
Federal or state mandates that increase benefits or limit the Company's
oversight ability.
5. The possibility that the Company is not able to 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 JUNE 30, 1999 COMPARED WITH THE THREE MONTHS ENDED
JUNE 30, 1998
Consolidated net income of the Company was $4,506,000 and $3,585,000 for the
second quarters of 1999 and 1998, respectively. Diluted earnings per share was
$.11 in the second quarter of 1999 as compared to $.08 in the second quarter of
1998. This increase in earnings is primarily attributable to an increase in
premiums per member and a reduction in the medical loss ratio offset somewhat by
a decrease in investment income and an increase in administrative expense. 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 June 30, 1999 increased approximately $29.3
million or 10.0 percent over the three months ended June 30, 1998. A 7.2 percent
increase in net average HMO and indemnity enrollment resulted in an increase of
approximately $19.9 million in health premium revenue while a 3.3 percent
increase in average monthly premium per enrollee, combined for all products,
resulted in a $9.9 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 is a forward-looking statement. See "Forward
Looking Information" above for a description of the risk factors that may effect
health premiums per member.
<PAGE> 11
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.
The Company's future membership growth depends on several factors such as
relative premium prices and product availability, future increases or decreases
in the Company's service area, increased competition in the Company's service
area and changes in state mandated enrollment in Medicaid HMO programs in which
the Company participates. Enrollment may also decrease if the Company determines
that premium reimbursement rates related to certain state Medicaid programs are
inadequate, which would cause the Company to voluntarily withdraw from
participation.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries contributed approximately $5.8 million in revenue in
the second quarter of 1999 as compared with $5.4 million in the second quarter
of 1998. Revenue from life and short-term disability products contributed $2.0
million in revenue in the second quarter of 1999 as compared to $1.7 million for
the same period in 1998.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased to 89.0 percent for the second quarter of 1999 as compared to
89.8 percent for the comparable period of 1998. On a per member per month basis,
medical expenses increased 2.4 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 should help to control the
Company's medical loss ratio. The statements in this paragraph and the preceding
paragraphs regarding future utilization rates, cost containment initiatives,
total medical costs and future increases in health premiums per member are
forward-looking statements. See "Forward-Looking Information" above for a
description of risk factors that may affect medical expenses per member and the
medical loss ratio.
Administrative expenses as a percentage of revenue ("administrative expense
ratio") decreased to 11.3 percent for the second quarter of 1999 as compared to
11.5 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 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.
Investment income decreased $.6 million primarily due to the decrease in
realized gains on sales of marketable equity securities.
<PAGE> 12
The net margin rate increased from 1.2 percent in the second quarter of 1998 to
1.4 percent in the current quarter. This increase is consistent with the factors
previously described.
THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1998
The Company's consolidated net income for the six months ended June 30, 1999
increased to $10,337,000 from $10,275,000 for the six months ended June 30,
1998. Earnings per share on net income increased from $.22 in the first six
months of 1998 to $.25 for the same period in 1999. The increase in earnings is
primarily attributable to increased premiums per member and reduction in the
medical loss ratio offset somewhat by a decrease in investment income and an
increase in administrative expense.
Revenue for the six months ended June 30, 1999 increased approximately $53.0
million or 9.1 percent over the six months ended June 30, 1998. A 2.5 percent
increase in average premiums per HMO and indemnity enrollee increased health
premium revenue by approximately $14.6 million and a 7.2 percent increase in net
average HMO and indemnity enrollment resulted in an increase of approximately
$39.8 million in health premium revenue. Revenue from life and short-term
disability products contributed $3.9 million in revenue for the first six months
of 1999 as compared to $3.3 million for the same period in 1998.
The medical loss ratio decreased to 88.5 percent for the six months ended June
30, 1999 as compared to 88.9 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 six months of 1999 was
essentially stable increasing to 11.5 percent as compared to 11.4 percent for
the same period in 1998.
The net margin rate decreased from 1.8 percent for the first six months of 1998
to 1.6 percent for the comparable period of 1999. This modest decrease is due
primarily to increased administrative expense coupled with less investment
income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive and the majority of the
Company's expenses are payments to health care providers, which generally vary
in direct proportion to the health premium revenues received by the Company.
Although medical utilization rates vary by season, the payments for such
expenses lag behind cash inflow from premiums because of the lag in provider
billing procedures. In the past, the Company's cash requirements have been met
principally from operating cash flow and it is anticipated that this source,
coupled with the Company's operating line-of-credit, will continue to be
sufficient in the future.
The Company's cash and short-term investments increased from $184.1 million at
December 31, 1998 to $193.9 million at June 30, 1999, primarily due to the
timing of medical expense payments which traditionally lag behind increased
premiums per member. Accounts receivable increased from $79.3 million at
December 31, 1998 to $84.5 million at June 30, 1999, principally due to
increased membership.
Medical claims payable increased from $129.3 million at December 31, 1998 to
$145.0 million at June 30, 1999, primarily due to increased membership and an
increase in medical expenses per member.
Additional paid-in capital increased from $138.2 million to $153.6 million at
June 30, 1999 due principally to an additional 1.5 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 $86.9
million at June 30, 1999 due to the purchase of 1,179,400 additional shares by
the Company at a total cost of $11,315,000.
<PAGE> 13
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 June 30, 1999, approximately $3.8 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>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 16,107 $ 9,787
Short-term investments 177,885 174,325
Working capital advances to Maryland hospitals 14,565 12,261
----------- -----------
Total available liquid assets 208,557 196,373
Credit line availability 13,050 14,855
----------- -----------
Total short-term capital resources $ 221,607 $ 211,228
=========== ===========
</TABLE>
The Company believes that cash generated from operations along with its current
liquidity and borrowing capabilities are adequate for both current and planned
expanded operations.
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. In terms of a contingency plan, the Company believes it has
sufficient internal resources to be able to correct such report errors and
address non-compliant vendors within a relatively short time frame. If internal
resources prove to be insufficient, the Company will engage outside resources.
The statements in this paragraph regarding future effects of the year 2000 issue
is a forward-looking statement. See "Forward-Looking Information" for a
description of risk factors.
On February 25, 1999, the Board of Directors authorized a $20 million stock
repurchase program to extend through September 2, 1999. On August 11, 1999, the
Board of Directors extended the current purchase authorization through September
30, 1999. As of June 30, 1999, the Company had repurchased 1,179,400 shares of
its common stock for a total cost of approximately $11.3 million under the stock
repurchase program.
<PAGE> 14
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 June 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, Maryland concerning the construction and
application of Section 15-1008 of the Maryland Insurance Article. The complaint
requests an accounting of claims' payments, injunctive relief and punitive
damages. Management believes that the ultimate outcome of this matter will not
have a material adverse effect on the Company's financial statements as the
MIA's current position affects the method of collection of the claims reversals,
rather than the Company's legal right to the refunds.
The Company is involved in other various legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes that any
ultimate liability that could arise from these other actions will not materially
effect the Company's consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 June 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: August 13, 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
- ------- ----------------------- -------------------
3.3 Amended and Restated By-Laws of
MAMSI as of May 12, 1999. . . . . . . . . . . . . .
10.993 Employment Agreement between the Company
and Mark D. Groban. . . . . . . . . . . . . . . . .
10.994 Employment Agreement between the Company
and Thomas P. Barbera. . . . . . . . . . . . . . . .
AMENDED AND RESTATED BY-LAWS
OF
MID ATLANTIC MEDICAL SERVICES, INC.
AS OF MAY 12, 1999
OFFICES
SECTION 1.1 PRINCIPAL OFFICE. - The principal office of the corporation
shall be at 4 Taft Court, Rockville, Maryland 20850. The principal address of
the corporation in Delaware is 229 South State Street, Dover, Delaware 19901.
SECTION 1.2 OTHER OFFICES. - The corporation may have such other offices
and places of business within or without the State of Delaware as the Board of
Directors shall determine.
STOCKHOLDERS
SECTION 2.1 PLACE OF MEETINGS. - Meetings of the stockholders may be
held at such place or places within or without the State of Delaware as shall be
fixed by the Board of Directors and stated in the notice of the meeting.
SECTION 2.2 ANNUAL MEETING. - An annual meeting of stockholders for the
election of directors and the transaction of such other business as may properly
come before the meeting shall be held within eight months after the close of the
fiscal year of the corporation.
SECTION 2.3 SPECIAL MEETINGS. - Special meetings of the stockholders
for any purpose(s) may only be called by the Board of Directors, Chairman of the
Board of Directors ("Chairman") or President. Any notice of a special meeting
shall state the specific purpose(s) of the meeting. No matters, except those set
forth in the notice of special meeting, may be considered or acted upon at the
special meeting.
SECTION 2.4 NOTICE OF MEETINGS. - Notice stating the time and place,
and in the case of a special meeting the purpose(s) thereof and by whom called,
shall be delivered to each stockholder entitled to vote, not less than ten (10)
nor more than sixty (60) days prior to the meeting. If mailed, notice shall be
directed to each such stockholder at his address as it appears on the records of
the stockholders of the corporation, unless he shall have previously filed with
the Secretary of the corporation a written request that notices intended for him
be mailed to some other address, in which case it shall be mailed to the address
designated in the request. Notice of any meeting need not be given to any person
who may become a stockholder of record after the mailing of such notice and
prior to the meeting, or to any stockholder who attends such meeting, in person
or by proxy, for purposes other than solely to object to the lack of proper
notice, or to any stockholder who, in person or by proxy, submits a signed
waiver of notice either before or after such meeting. Notice of any adjourned
meeting of stockholders need not be given, unless otherwise required by statute.
SECTION 2.5 QUORUM AND ACTION. - (a) At any duly held meeting of
stockholders, the presence in person or by proxy of stockholders entitled to
cast a majority of the votes thereat shall constitute a quorum, except as
otherwise provided by law or the Certificate of Incorporation.
(b) A majority of the votes cast at a duly held meeting of stockholders
at which a quorum is present (stockholders represented by proxy shall be deemed
present) shall be sufficient to take or authorize action upon any matter which
may properly come before the meeting, unless a greater vote, or voting by
classes, is required by law or by the Certificate of Incorporation or by these
By-Laws on any question, and except that, in elections of directors, those
receiving the greatest number of votes shall be deemed elected even though not
receiving a majority.
Notwithstanding the above, at all meetings of the stockholders, any
newly created directorship resulting from any increase in the authorized number
of directors by action of the stockholders may be filled by the affirmative vote
of three-quarters (3/4) of the votes cast at the meeting. Any vacancy in the
Board of Directors resulting from the resignation of a director or for any other
cause other than the removal of a director by action of the stockholders may be
filled by the affirmative vote of the plurality of the votes cast at the
meeting.
SECTION 2.6 VOTING. - At each meeting of the stockholders, every holder
of stock then entitled to vote may vote in person or by proxy and, except as may
be otherwise provided by the Certificate of Incorporation, shall have one vote
for each share of stock registered in his name. No proxy shall be valid after
eleven (11) months from the date of its execution, unless a longer period is
provided for in the proxy. Proxies shall be exhibited to the Secretary at the
meeting and filed with the records of the corporation.
SECTION 2.7 ADJOURNED MEETINGS. - Any duly called meeting of
stockholders may, by announcement thereat, be adjourned to a designated time and
place by the vote of the holders of a majority of the shares present and
entitled to vote thereat, even though less than a quorum is so present. If a
meeting is adjourned to another time, not more than thirty days thereafter,
and/or to another place, and if an announcement of the adjourned time and/or
place is made at the meeting, it shall not be necessary to give notice of the
adjourned meeting unless the Board of Directors, after adjournment, fixes a new
record date for the adjourned meeting.
SECTION 2.8 ACTION BY WRITTEN CONSENT IN LIEU OF MEETING OF STOCKHOLDERS. -
See Section 6.6 of the By-Laws.
SECTION 2.9 NEW BUSINESS AND NOMINATIONS. - (a) Only such business
shall be conducted at an annual meeting of the corporation's stockholders as
shall have been brought before the meeting (i) by or at the direction of the
Board of Directors, or (ii) by any stockholder of the corporation who is
entitled to vote with respect thereto and who meets the requirements of
Regulation 14A of the Securities Exchange Act of 1934, as amended ("Exchange
Act"). For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a stockholder's notice must be
personally delivered or mailed to and received at the principal executive
offices of the corporation not less than one hundred and twenty days in advance
of the first anniversary of the date the corporation's proxy statement was
released to stockholders in connection with the previous year's annual meeting;
provided, however, that, if the date of the annual meeting changes by more than
thirty (30) days from the date of the previous year's meeting, to be timely, a
stockholder's notice must be personally delivered or mailed to and received at
the principal executive offices of the corporation in the manner required by
Regulation 14A promulgated under the Exchange Act.
A stockholder's notice to the Secretary shall set forth as to each
matter such stockholder proposes to bring before the annual meeting (i) the name
and address of the stockholder who intends to make the proposal and the text of
the proposal to be introduced; (ii) the class and number of shares of the
corporation's stock held of record or owned beneficially by such stockholder as
well as the other information with respect to the ownership of the corporation's
stock required by Regulation 14A promulgated under the Exchange Act as of the
record date for the meeting (if such date shall have been made publicly
available) and as of the date of such notice; (iii) a representation that the
stockholder intends to appear in person or by proxy at the meeting to introduce
the proposal specified in the notice; (iv) such other information as may be
required by Regulation 14A promulgated under the Exchange Act; and (v) if the
proposal relates to the nomination of a director, the information required by
Section 2.9(c).
Notwithstanding anything in these Bylaws to the contrary, no business
shall be brought before or conducted at an annual meeting except in accordance
with the provisions of this Section 2.9(a). The officer of the corporation or
other person presiding over the annual meeting shall, if the facts so warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 2.9(a) and,
if he or she should so determine, he or she shall so declare to the meeting and
any such business so determined to be not properly brought before the meeting
shall not be transacted. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of stockholders of reports of
officers, directors, and committees, but, in connection with such reports, no
new business shall be acted upon at such annual meeting unless stated and filed
as herein provided.
(b) At any special meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors, Chairman or President.
(c) Such stockholder's notice shall set forth as to each person whom
such stockholder proposes to nominate for election or re-election as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A promulgated under the Exchange Act
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected).
DIRECTORS
SECTION 3.1 NUMBER AND QUALIFICATION. (a) The Board of Directors shall
be comprised of no more than fourteen (14) and no less than five (5) directors,
each of whom shall serve a three-year staggered term and until his or her
successor is elected and qualified.
(b) At the conclusion of the terms of the first Board of Directors, the
successor directors shall be elected in numbers as equally as possible, into
three groups. Group A directors will have a term of office expiring after one
year and until the election and qualification of their successors chosen at the
next annual shareholders meeting ensuing; Group B directors shall have a term of
office expiring one year after the expiration of the term of the Group A
directors and until the election and qualification of their successors; Group C
directors shall have a term of office expiring two years after the expiration of
the term of the Group A directors and until the election and qualification of
their successors.
(c) Each successor to a Group A, B, and C director shall hold office
until the third annual meeting of the stockholders next succeeding his election,
and until his successor is elected and qualified, or until his prior death,
resignation or removal; except however, if additional directorships are
established, the initial term for such directorships shall be for one or more
years not greater than three as determined by the Board of Directors in order to
ensure that approximately one-third (1/3) of all the directors are elected at
each annual meeting of the stockholders.
SECTION 3.2 POWERS. - The management of all the business, property and
affairs of the corporation shall be vested in the Board of Directors. The Board
may exercise all of the powers of the corporation and do all lawful acts and
things (including the adoption of such rules and regulations for the conduct of
its meetings, the exercise of its powers, and the management of the corporation,
as it may deem proper), consistent with the Delaware General Corporation law,
the Certificate of Incorporation, and these By-Laws, and not thereby conferred
upon or reserved to the stockholders.
SECTION 3.3 MEETINGS. - The annual meeting of the Board of Directors
may be held without notice within four (4) weeks after the annual meeting of
stockholders. Regular meetings and the time and place of regular meetings of the
Board may be established by the Board. If the Board of Directors fixes the
annual meeting at a time more than four (4) weeks after the annual meeting of
the stockholders, or changes the time or place of any regular meeting, notice of
such meeting, in accordance with the By-Law requirements for notice of special
meetings, shall be given to each director who was not present at the meeting at
which such action was taken. Special meetings of the Board may be called by the
Chairman (if any) or the President, and shall be called at the written request
of three of more directors. Five (5) days notice of special meetings shall be
given by mail, or two (2) days notice if given personally or by electronic mail,
facsimile, telegraph or cable, to each director. Notice of a special meeting
shall set forth matters anticipated to be discussed, but such meeting may
consider and act upon other matters upon the affirmative vote of three-fourths
(3/4) of the members of the Board of Directors then serving. A majority of the
Directors present at the time and place of any annual, regular or special
meeting, although less than a quorum, may adjourn the same from time to time
without notice, until a quorum shall be present. Notice of any special meeting
shall not be required to be given to any director who shall attend a meeting
without protesting prior thereto or at its commencement the lack of notice to
him, or who submits a signed waiver of notice, whether before or after the
meeting. Meetings of the Board may be held at any place within or outside of the
State of Delaware.
A director may attend a meeting of the Board of Directors, or any
committee thereof, either in person or by means of a telephone or similar
communications medium which allows all persons participating in the meeting to
hear and be heard by all others participating, and participation pursuant to
this subsection shall constitute presence in person at the meeting.
SECTION 3.4 QUORUM AND ACTION. - A majority of the directors then
serving (but in no event less than one-third of the total number of directors
which the corporation would then have if there were no vacancies or unfilled
newly created directorships) shall constitute a quorum for the transaction of
business. At any duly held meeting at which a quorum is present, the affirmative
vote of a majority of the directors present shall be the act of the Board of
Directors on any question, except where the act of a greater number is required
by these By-Laws, by the Certificate of Incorporation, or by statute.
SECTION 3.5 ACTION BY WRITTEN CONSENT IN LIEU OF MEETINGS OF DIRECTORS. -
See Section 6.6 of these By-Laws.
SECTION 3.6 NEWLY CREATED DIRECTORSHIPS AND VACANCIES; REMOVAL. - (a)
Any newly created directorship resulting from any increase in the authorized
number of directors or any vacancy occurring in the Board of Directors for any
reason may be filled by action of a majority of the remaining directors, even if
less than a quorum, or by the sole remaining director. A director elected to a
newly created directorship shall serve for a term set by the Board of Directors
in accordance with Section 3.1(c) in order to ensure that approximately
one-third (1/3) of all the directors are elected at each annual meeting of the
stockholders. Vacancies shall be filled for the unexpired portion of the term of
the director whose vacancy is being filled.
(b) Except where the Certificate of Incorporation provides otherwise,
contains provisions authorizing cumulative voting or the election of one or more
directors by class or their election by holders of bonds, or requires all action
by stockholders to be by a greater vote, any one or more of the directors may be
removed, (1) either for or without cause, at any time, by the holders of
two-thirds (2/3) of the shares then entitled to vote at an election of directors
(a) at any regular meeting or (b) at any special meeting of the stockholders the
notice of which announces that a purpose of such meeting is to seek removal, or
(2) for cause, by the affirmative vote of all members of the Board of Directors
at any regular or special meeting of the Board. Three (3) unexcused absences
within one (1) calendar year from Board of Directors meetings and/or meetings of
committees on which such director sits shall constitute cause for, but shall not
require, removal. The Chairman, if a Chairman be elected, shall determine
whether an absence is "excused" for purposes of this paragraph, but this
decision may be overruled by an affirmative vote of a majority of the directors
at any duly held meeting at which a quorum is present. If no Chairman is then
serving, the Board members at any duly held meeting at which a quorum is present
shall determine whether an absence is excused by an affirmative vote of a
majority of the directors present at the meeting.
SECTION 3.7 COMMITTEES. - The Board of Directors, by resolution adopted
by a majority of the total number of directors which the Corporation would have
if there were no vacancies or unfilled newly created directorships, may
designate from its members an Executive Committee, and such other committees as
it shall choose to create, consisting of one or more directors, with such powers
and authority (to the extent permitted by law) as may be provided in said
resolution. Non-directors may serve on a committee in an ex officio capacity,
but a committee may act only by the affirmative vote of a majority of the
members of the committee who are also members of the Board of Directors.
SECTION 3.8 REMUNERATION. - (a) Unless otherwise expressly provided by
resolution adopted by the Board of Directors, none of the directors shall, as
such, receive any stated remuneration for these services but the Board of
Directors may at any time and from time to time by resolution provide that a
specified sum shall be paid to a director of the corporation, either as his/her
annual remuneration as such director or member of any committee of the Board of
Directors or as remuneration for such director's attendance at each meeting of
the Board of Directors or any such committee. The Board of Directors may also
likewise provide that the corporation shall reimburse each director for any
expenses paid by him/her on account of such attendance at any meeting. Nothing
in this section shall be construed to preclude any director from serving the
corporation in any other capacity and receiving remuneration therefor.
(b) Notwithstanding the above, if any director is also a director of
another corporation either directly or indirectly owned, controlled by and/or
under common control of the corporation, such director shall receive
remuneration as a director from only one corporation. The director shall be
remunerated by the corporation for which he or she would receive the greater
remuneration.
OFFICERS
SECTION 4.1 OFFICERS. - The executive officers of the corporation shall
be a Chairman and a President (each, an "Executive Officer"). In addition, the
Board may elect a Chairman and a Vice Chairman of the Board of Directors ("Vice
Chairman") from its members, and one or more Vice Presidents, Secretaries,
Assistant Secretaries, Treasurers, Assistant Treasurers or other officers as it
shall deem necessary. Certain Vice Presidents may be classified as Executive
Officers, with any such Vice Presidents so classified designated as Senior
Executive Vice Presidents or Executive Vice Presidents. Except for the Chairman
and Vice Chairman, an officer need not be a member of the Board of Directors.
The Board of Directors may grant to any officer of the corporation such
powers and duties as it shall deem necessary. Any two or more offices may be
held by one person. All vacancies occurring among any of the officers shall be
filled by the Board for the unexpired portion of such officer's term and may be
filled at a meeting of the Board other than its annual meeting. Any officer may
be removed and/or replaced at any time, with or without cause, by the
affirmative vote of a majority (unless the Certificate of Incorporation requires
a larger vote) of the directors present at a regular meeting of directors or at
a special meeting of directors called for that purpose. The Board may by
resolution authorize the Chairman or President to appoint and remove officers
who are not designated as Executive Officers.
SECTION 4.2 THE CHAIRMAN AND VICE CHAIRMAN. - The Chairman, if one be
elected, shall preside at all meetings of the Board of Directors and of the
stockholders. The Vice Chairman, if one be elected, shall preside at all
meetings of the Board of Directors and of the stockholders in the absence of the
Chairman. The Chairman and Vice Chairman shall have and perform such other
duties as from time to time may be assigned to them by the Board of Directors or
the Executive Committee, if any. The Chairman may be employed and classified as
an Executive Officer and such person may continue as an Executive Officer
irrespective of the continuation of his term as a member of the Board of
Directors.
SECTION 4.3 THE PRESIDENT. - The Chairman and President shall, when the
Board of Directors is not in session, have general management and control of the
business and affairs of the corporation, except as such authority may be limited
by the Board of Directors or otherwise delegated to another Executive Officer.
SECTION 4.4 THE VICE-PRESIDENT. - The Board of Directors may classify
any Vice President as a Senior Executive Vice President, an Executive Vice
President, a Senior Vice President or a Vice President. In the absence or
disability of the President, the Board of Directors may select a Senior
Executive Vice President, an Executive Vice President, a Senior Vice President
or a Vice President to exercise the powers and perform the duties of the
President. Each Senior Executive Vice President, Executive Vice President,
Senior Vice President or Vice President shall exercise such other powers and
perform such other duties as shall be prescribed by the Board.
SECTION 4.5 THE TREASURER. - The Treasurer shall have custody of all
funds, securities and evidence of indebtedness of the corporation; he shall
receive and give receipts and acquittances for monies paid in on account of the
corporation, and shall pay out of the funds on hand all bills, payrolls, and
other just debts of the corporation, of whatever nature, upon maturity; he shall
enter regularly in books to be kept by him for that purpose, full and accurate
accounts of all monies received and paid out by him on account of the
corporation, and he shall perform all other duties incident to the office of
Treasurer and as may be prescribed by the Board.
SECTION 4.6 THE SECRETARY. - The Secretary shall keep the minutes of
all proceedings of the Board of Directors and of the stockholders; he shall
attend to the giving and serving of all notices to the stockholders and
directors or other notices required by law, or by these By-Laws; shall affix the
seal of the corporation to deeds, contracts and other instruments in writing
requiring a seal, when duly signed or when so ordered by the Board of Directors;
shall have charge of the certificate books and stock books and such other books
and papers as the Board may direct, and shall perform all other duties incident
to the office of the Secretary.
SECTION 4.7 SALARIES. - The salaries of all Executive Officers and
other officers shall be fixed by the Board of Directors, and the Board has the
authority to reimburse expenses and to establish reasonable compensation of all
directors for services to the corporation as directors, officers, or otherwise.
SECTION 4.8 SHARES OF OTHER CORPORATIONS. - Whenever the corporation is
the holder of shares of stock of any other corporation, any right or power of
the corporation as such stockholder (including the attendance, acting and voting
at stockholders' meetings and execution of waivers, consents, proxies or other
instruments) may be exercised on behalf of the corporation by the Chairman, the
President or such other person as the Board of Directors may authorize.
CAPITAL STOCK
SECTION 5.1 FORM AND EXECUTION OF CERTIFICATES. - The shares of the
corporation shall be represented by certificates which shall be in the form
required by the laws of Delaware and as shall be adopted by the Board of
Directors. They shall be numbered and registered in the order issued; shall be
signed by the Chairman, the Vice Chairman, the President or a Vice President and
by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and shall be sealed with the corporate seal or a facsimile thereof.
When such a certificate is counter-signed by a transfer agent or registered by a
registrar, the signatures of any such officers may be facsimile.
SECTION 5.2 TRANSFER. - Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfer of
shares shall be made upon the books of the corporation by the registered holder
in person or by attorney, duly authorized, but only upon surrender of the
certificate or certificates for such shares properly assigned for transfer.
SECTION 5.3 LOST OR DESTROYED CERTIFICATES. - The holder of any
certificate representing shares of stock of the corporation may notify the
corporation of any loss, theft or destruction thereof, and the Board of
Directors may thereupon, in its discretion, cause a new certificate for the same
number of shares to be issued to such holder upon satisfactory proof of such
loss, theft or destruction, and the deposit of indemnity by way of bond or
otherwise, in such form and amount and with such surety or sureties as the Board
may require, to indemnify the corporation against loss or liability by reason of
the issuance of such new certificate.
SECTION 5.4 RECORD DATE. - (a) In order to make a determination of
stockholders for any proper purpose, the directors may close the stock transfer
books for a stated period not to exceed twenty (20) days; and if the purpose of
the closing is to determine stockholders entitled to notice of or to vote at a
meeting of the stockholders, the books shall be closed for at least ten (10)
days immediately preceding such meeting.
(b) In lieu of closing the books, the directors may fix in advance a
record date for determination of stockholders for any proper purpose, such date
shall not be more than sixty (60) days, and in case of a meeting of
stockholders, not less than twenty-five (25) days, prior to the date on which
the particular action, requiring such determination of stockholders, is to be
taken.
(c) In the absence of such closing or fixed record date, the date for
determination of stockholders entitled (1) to notice of or to vote at a meeting
of stockholders, or (2) to receive a dividend or any right shall be as provided
by Section 213 of the General Corporation Law or any successor provision.
MISCELLANEOUS
SECTION 6.1 DIVIDENDS. - The Board of Directors may declare dividends
from time to time on the outstanding shares of the corporation from the surplus
or net profits legally available therefor.
SECTION 6.2 SEAL. - The Board shall provide a suitable corporate seal
stating the corporate name, and state and year of incorporation, which shall be
in the charge of the Secretary and shall be used as authorized by these By-Laws.
SECTION 6.3 FISCAL YEAR. - The fiscal year of the corporation shall close
annually on December 31.
SECTION 6.4 CHECKS, NOTES, ETC. - (a) Checks, notes, drafts, bills of
exchange and orders for the payment of money shall be signed or endorsed in such
manner as shall be determined by the Board.
(b) The funds of the corporation shall be deposited in such bank or
trust company, and checks drawn against such funds shall be signed in such
manner, as may be determined from time to time by the Board.
SECTION 6.5 NOTICE AND WAIVER OF NOTICE. - (a) Any notice of meetings
required to be given under these By-Laws to stockholders and/or directors may be
waived in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein.
(b) All notices required by these By-Laws shall be printed or written,
and shall be delivered either personally, by electronic mail, facsimile,
telegraph or cable, or by mail, and, if mailed, shall be deemed to be delivered
when deposited in the United States mail, postage prepaid, addressed to the
stockholder or director at his address as it appears on the records of the
corporation.
SECTION 6.6 ACTION BY WRITTEN CONSENT IN LIEU OF MEETINGS. - Any action
required or permitted to be taken at a meeting of the stockholders or of the
Board of Directors or of any committee thereof may be taken without a meeting if
a consent in writing setting forth the action so taken shall be signed by all of
the stockholders entitled to notice of or to vote with respect to the subject
matter thereof, or by all of the members of the Board or of such committee, as
the case may be, and such consent shall have the same force and effect as an
action taken at a meeting duly called and held.
AMENDMENTS
SECTION 7.1 AMENDMENTS. - These By-Laws may be altered, amended or
repealed:
(a) at any duly held stockholders' meeting by vote of the owners of a
majority (unless the Certificate of Incorporation requires a larger vote) of the
outstanding stock having voting power, present in person or by proxy, provided
notice of the amendment is included in the notice or waiver of notice of such
meeting, and
(b) except as provided below, at any regular or special meeting of the
Board of Directors by a majority (unless the Certificate of Incorporation
requires a larger vote) of the total number of directors that the Corporation
would have if there were no vacancies or unfilled newly created directorships,
but any By-Laws so made by the Board may be altered or repealed by the
stockholders. The Board of Directors shall have no power to change the quorum
for meetings of stockholders or of the Board of Directors, or to change any
provisions of the By-Laws with respect to the removal of directors or the
filling of vacancies in the Board resulting from the removal by the
stockholders.
INDEMNITY
SECTION 8.1 INDEMNITY. - The corporation shall indemnify its officers,
directors, employees and agents to the full extent permitted by Section 145, or
any successor provision, of the General Corporation Law, and such rights of
indemnification shall be in addition to any rights to which any such director,
officer, employee or agent may otherwise be entitled under the Certificate of
Incorporation, any agreement or vote of the stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has agreed to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered as of this 21st day of April, 1999
("Effective Date"), by and between Mid Atlantic Medical Services, Inc., a
Delaware corporation with its principal executive offices at 4 Taft Court,
Rockville, Maryland 20850 ("Company"), and Mark D. Groban, M.D. ("Executive")
and supercedes and replaces the employment agreements between the parties dated
December 4, 1998 and January 8, 1999;
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement, and Executive is willing to
serve in the employ of the Company on a full-time basis for said period;
WHEREAS, the Company and Executive desire to set forth the amounts
payable and benefits to be provided by the Company to Executive while in the
employment of the Company and in the event of a termination of Executive's
employment with the Company under the circumstances set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
1. Employment. The Company agrees to continue Executive in its employ,
and Executive agrees to remain in the full time employ of the Company, for the
period stated in Section 3 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Company employs Executive, and
Executive agrees to serve, as Chairman of the Board of Directors of the Company
on the conditions hereinafter set forth. Executive agrees to perform such
services consistent with his position as shall from time to time be assigned to
him by the Company's Board of Directors ("Board"), or another executive
designated by the Board. Such duties may include, in addition to his duties as
Chairman of the Board, the appointment of Executive as an officer and/or
director of any present or future subsidiary or affiliate of the Company without
any additional remuneration under this Agreement. Executive shall devote all of
his business time, attention, skill, and efforts to the faithful performance of
the duties hereunder. Executive acknowledges that his employment will be at the
pleasure of the Board.
3. Term. The period of Executive's employment under this Agreement with
the Company shall commence as of the Effective Date and remain in effect for
three years unless terminated earlier as provided herein.
4. Compensation and Reimbursement of Expenses. For all services
rendered by Executive as Chairman of the Board in addition to any other capacity
during employment under this Agreement (including, without limitation, services
as an executive, officer, or director of the Company, or any subsidiary or
affiliate of the Company, or as a member of any committee of the Board of
Directors of the Company or any subsidiary or affiliate of the Company), the
Company shall pay Executive as compensation (A) an annual salary ("Base
Salary"); (B) such bonus for such period, if any, as may be awarded to Executive
from time to time pursuant to any Bonus Plan adopted by the Company for its
senior management or otherwise awarded by the Board or by a committee designated
by the Board; and (C) stock options at the discretion of the Board or the
appropriate Committee of the Board.
Stock Options. By action of the Board on February 25, 1999, the Company
granted Executive 85,000 options to purchase MAMSI common stock at an exercise
price of $ 8.25 under the terms of the 1995 Non-Qualified Stock Option Plan.
Such options will vest on the date of the February 2000 Board meeting on the
following prorata basis over a period to be determined by the percentage
increase of 1999 earnings per share over 1998 earnings per share as adjusted for
one time items and as determined by the Board at its February 2000 meeting at
which 1999 audited earnings are announced:
1999 EPS % Increase Vesting Dates of Vesting
up to
$0.51 0-16% 5 years 1/5 in 2/2000; 1/5 in 2/2001
; 1/5 in 2/2002;1/5 in 2/2003;
1/5 in 2/2004
$0.54 23% 4 years 1/4 in 2/2000; 1/4 in 2001;
1/4 in 2/2002;1/4 in 2/2003
$0.57 30% 3 years 1/3 in 2/2000; 1/3 in 2/2001
1/3 in 2002
$0.60 36% 2 years 1/2 in 2/2000; 1/2 in 2/2001
$0.63 43% 1 year All in 2/2000
or greater
For the purposes of the above calculation, the 1998 earnings per share is
established at $.44 per share.
On January 1, 2000 and January 1, 2001, the Company will grant Executive
options to purchase no less than 150,000 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.
Base Salary. Base Salary shall be not less than the rate at which
Executive is compensated on the Effective Date which is $525,000. Thereafter,
Base Salary shall be adjusted annually. For 2000 and each year thereafter, the
Executive Base Salary will increase or decrease by an amount equal to 50% of the
percentage change in the Company's consolidated net income as determined by the
Company, and audited by the Company's independent certified public accountant
but any annual increase may not be greater than 25 percent and any annual
decrease may not be greater than 12.5 percent. This increase or decrease would
first apply to the year 2000 and would take effect retroactively to January 1 of
the then current year. Items of a non-recurring nature may be excluded in the
calculations as mutually agreed to by the Company and the Executive.
The Company shall also reimburse Executive, in accordance with such
policies and procedures as the Board may establish from time to time, for all
reasonable travel and other expenses incurred by Executive in the performance of
his obligations under this Agreement. Executive shall also be entitled to
participate in any benefit plans established by the Company for which Company
executives are or shall become eligible.
5. Termination of Employment. Executive's employment under this
Agreement may be terminated by the Company or Executive as follows:
(a) Disability. (i) If Executive fails to perform his duties under this
Agreement on account of Disability (as hereinafter defined), the
Company may give notice to Executive to terminate this Agreement on a
date not less than ninety (90) days thereafter ("Notice Period") and,
if Executive has not resumed full performance of his duties under this
Agreement within such Notice Period, then Executive's employment under
this Agreement will terminate on the date provided in the notice
("Disability Termination Date").
(ii) During any period of Disability, the Company shall
maintain and pay for health and other insurance benefits for Executive
at least equal to those he had at the commencement of such Disability.
(iii) As used in this Agreement, the term "Disability" shall
mean the inability of Executive to perform his duties under this
Agreement by reason of his medical disability, as determined by an
independent physician selected with the approval of the Board and
Executive.
(b) Death. If Executive dies while employed under this Agreement, his
employment under this Agreement will terminate as of the date of his
death ("Date of Death"). Within thirty (30) days after the Date of
Death, the Company shall pay to Executive's legal representative
Executive's Base Salary as then in effect that has accrued to the last
day of the month in which the Date of Death occurs. If the Executive
dies while receiving payments pursuant to Section 5(c) below, said
payment shall continue for the period remaining and shall be paid to
the estate of the Executive.
(c)Certain Other Events of Termination. In the event that (i) the Company
terminates Executive's employment for any reason (other than because of
death, Disability, or "just cause" (as hereinafter defined) including
failure of the Executive to be re-elected as a member of the Board by the
Company's shareholders, (ii) Executive terminates his or her employment
with the Company because of the Company's material breach of this
Agreement, (iii) Executive terminates his employment with the Company
because the Company requires Executive to be based anywhere other than
Executive's current location or within seventy-five (75) miles round trip
of the Company's principal executive offices (except for required travel on
the Company's business), or (iv) Executive terminates his employment with
the Company because of a substantial reassignment of duties and
responsibilities, then the Company shall pay Executive an amount equal to
24 months Base Salary paid in equal bi-weekly payments over a period of two
years commencing on the Executive Termination Date and in accordance with
the regular payroll practices of the Company. The Company shall also pay
Executive any pro-rata bonus that the Executive would have been entitled to
had he been employed until the end of the year. Such bonus payment shall
occur when bonuses are normally paid by the Company. In addition, all stock
options which Executive has been granted shall immediately vest and become
exercisable under the terms of the applicable plan. For the purposes of the
time period available for exercising such stock options, Executive shall be
considered an employee of the Company unless terminated pursuant to
subsection (e) below. Payment made pursuant to this paragraph shall be the
exclusive remedy provided to Executive and Executive shall not be entitled
to any other severance benefit that the Company may provide or adopt unless
approved by the Board of the Directors of the Company.
(d) Retirement. Subject to the vesting schedule set forth below,
retirement benefits shall be payable to Executive 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 that time employed by the Company, and elects to
begin receiving retirement benefits. This date shall be referred to as
the "Retirement Termination Date". 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.
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 Base Salary and
bonus compensation for the years beginning on or after January 1, 1999
times the number of years of service with the Company 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. This retirement benefit 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 a lump sum with the initial payment made to the Executive on
the Retirement Termination Date and annually thereafter on each
anniversary of 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 survivor benefit upon the Retirement
Termination Date. If Executive dies prior to retirement, the
Executive's spouse shall be entitled to a lump sum benefit of the
actuarial equivalent of the retirement benefit earned to the date of
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.
(e) Termination by the Company for Just Cause.
(i) The Company may terminate Executive's employment for "just
cause" at any time by giving written notice thereof to Executive.
(Except as provided below, the date of such notice is the "Just Cause
Termination Date" unless otherwise provided in the notice). Within
thirty (30) days after the Just Cause Termination Date, the Company
shall pay to Executive his Base Salary as then in effect that has
accrued to the Just Cause Termination Date. For the purposes of this
subparagraph, "just cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, breach of
fiduciary duty, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations
or similar offenses), or material breach of any provision of this
Agreement. Unless otherwise determined by the Board, Executive shall
have no right to receive compensation or other benefits under this
Agreement after a termination for just cause.
(ii) Notwithstanding the foregoing, Executive shall not be deemed
to have been terminated for just cause pursuant to this Section 5(e)
unless and until he shall have received a copy of a resolution duly
adopted by the affirmative vote of a majority of the Board, at a
meeting held for that purpose, declaring that in the good faith opinion
of the Board one or more of the conditions set forth in clause (i) of
this Section 5(e) has occurred and specifying the particulars thereof.
(f) Termination by Executive Without Cause. Executive may terminate
this Agreement without cause upon the provision of eight (8) weeks'
prior written notice to the Company. Upon such a termination, the
Executive shall receive the compensation set forth in Section 7 below.
No other payment shall be made to Executive under this Agreement other
than the retirement benefit in accordance with Section 5(d) of this
Agreement which has vested prior to the Executive's termination date
and any other non-reimbursed business expenses.
6. Change in Control. Notwithstanding any other provision to the contrary,
the following provisions will govern in the event of a change in control as
defined herein.
a. A change in control shall be deemed to have occurred if, at
any time, (I) substantially all the assets of the Company
shall have been sold or transferred by sale, merger or
otherwise, or if any "person" (as such term is used in
Sections 13(d) or 14(d) of the Exchange Act) is or becomes
the beneficial owner, directly or indirectly, of securities
of the Company representing 50% or more of the combined
voting power of the then-existing outstanding securities of
the Company.
b. In the event of a change in control as defined in Section
6(a) above, Executive shall be entitled to a lump sum payment
which shall be equal to two times the Executive's Base Salary
and two times the amount equal to the maximum bonus the
Executive could have earned under the applicable bonus plan
for the year in which such change in control occurs in lieu
of payment under the bonus plan. Upon payment of the lump sum
provided under this subsection, the obligations of the
Company to employ Executive under this Agreement shall cease.
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.
7. Covenant Not to Compete. Executive covenants and agrees that, in
consideration of the amounts to be paid Executive hereunder and other good and
valuable consideration, for a period of one (1) year beyond the 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 7 shall survive the termination of
this Agreement following the Termination Date.
In consideration of the Executive's covenant not to compete under this Section
7, the Executive shall be paid an amount equal to one year of the Executive's
pre-termination Base Salary.
8. Business Automobile. The Company shall pay to Executive a car
allowance of $450 monthly.
9. 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.
10. Confidential Information. Executive shall fully comply with and abide
by the provisions of the Company's Employee Manual and other announced policies
in effect from time to time, including those provisions relating to the
protection of the Company's confidential information. The Company and Executive
agree that the foregoing provision shall survive the termination of this
Agreement for any reason whatsoever.
11. Indemnification. Employee shall be entitled to indemnification to the
full extent allowed by the Company's Certificate of Incorporation and Bylaws for
third party claims and to advances for expenses in defending against such
claims.
12. General Provisions.
(a) Entire Agreement. This Agreement contains the entire understanding
between the parties hereto and supersedes any prior employment agreement between
the Company and Executive.
(b) No Duty to Mitigate. Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall any amounts received from other employment or
otherwise by Executive offset in any manner the obligations of the Company
hereunder.
(c) Nonassignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof is assignable by
Executive, his beneficiaries, or legal representatives without the Company's
prior written consent; provided, however, that nothing in this Section 11(d)
shall preclude (i) Executive from designating a beneficiary to receive any
benefit payable hereunder upon his death, or (ii) the executors, administrators,
or other legal representatives of Executive or his estate from assigning any
rights hereunder to the person or persons entitled thereto.
(d) Notices. All notices and other communications required or permitted
to be given under this Agreement shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by certified mail, return
receipt requested, first-class postage prepaid, to the parties to this Agreement
at the following addresses:
(i) if to the Company at:
Mid Atlantic Medical Service, Inc.
4 Taft Court
Rockville, MD 02850
and
(ii) if to Executive at the address set
forth on the signature page.
or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and communications
shall be deemed to have been received on the earlier of the date of receipt or
the third business day after the date of mailing thereof.
(e) Binding Effect; Benefits. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. Nothing in this Agreement, express or implied,
is intended or shall be construed to give any person, other than the parties to
this Agreement or their respective successors or permitted assigns, any legal or
equitable right, remedy, or claim under or in respect of any agreement or any
provision contained herein.
(f) Waiver. No provision of this Agreement may be amended, waived,
discharged, or terminated except by an instrument in writing and executed by
each party. Any waiver of enforcement of any provision of this Agreement shall
not operate or be construed as a continuing waiver or a waiver of any other
provisions unless expressly stated in such instrument.
(g) Amendment. This Agreement may be terminated, amended, modified, or
supplemented only by a written instrument executed by Executive and the Company.
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, regardless of the law that
might be applied under principles of conflict of laws.
(i) Severability. If, for any reason, any provision of this Agreement
is held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provision not held so invalid, and the rest of such
provision, together with all other provisions of this Agreement, shall to the
full extent consistent with law continue in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its officers thereunto duly
authorized, and Executive has signed this Agreement, all as of the Effective
Date.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
By:/s/Thomas P. Barbera
(Corporate Seal) Name:Thomas P. Barbera
Title:President and CEO
WITNESS EXECUTIVE:/s/Mark D. Groban MD
/s/Nancy M. Jones
Address: 4 Taft Ct
Rockville MD 20850
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered as of this 21st day of April, 1999
("Effective Date"), by and between Mid Atlantic Medical Services, Inc., a
Delaware corporation with its principal executive offices at 4 Taft Court,
Rockville, Maryland 20850 ("Company"), and Thomas P. Barbera ("Executive") and
supercedes and replaces the employment agreements between the parties dated
December 4, 1998 and January 8, 1999;
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement, and Executive is willing to
serve in the employ of the Company on a full-time basis for said period;
WHEREAS, the Company and Executive desire to set forth the amounts
payable and benefits to be provided by the Company to Executive while in the
employment of the Company and in the event of a termination of Executive's
employment with the Company under the circumstances set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
1. Employment. The Company agrees to continue Executive in its employ,
and Executive agrees to remain in the full time employ of the Company, for the
period stated in Section 3 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Company employs Executive, and
Executive agrees to serve, as President and Chief Executive Officer of the
Company on the conditions hereinafter set forth. Executive agrees to perform
such services consistent with his position as shall from time to time be
assigned to him by the Company's Board of Directors ("Board"), or another
executive designated by the Board. Such duties may include, in addition to his
duties as President and Chief Executive Officer, the appointment of Executive as
an officer and/or director of any present or future subsidiary or affiliate of
the Company without any additional remuneration under this Agreement. Executive
shall devote all of his business time, attention, skill, and efforts to the
faithful performance of the duties hereunder. Executive acknowledges that his
employment will be at the pleasure of the Board.
3. Term. The period of Executive's employment under this Agreement with
the Company shall commence as of the Effective Date and remain in effect for
three years unless terminated earlier as provided herein.
4. Compensation and Reimbursement of Expenses. For all services
rendered by Executive as President and Chief Executive Officer in addition to
any other capacity during employment under this Agreement (including, without
limitation, services as an executive, officer, or director of the Company, or
any subsidiary or affiliate of the Company, or as a member of any committee of
the Board of Directors of the Company or any subsidiary or affiliate of the
Company), the Company shall pay Executive as compensation (A) an annual salary
("Base Salary"); (B) such bonus for such period, if any, as may be awarded to
Executive from time to time pursuant to any Bonus Plan adopted by the Company
for its senior management or otherwise awarded by the Board or by a committee
designated by the Board; and (C) stock options at the discretion of the Board or
the appropriate Committee of the Board.
Stock Options. By action of the Board on February 25, 1999, the Company
granted Executive 85,000 options to purchase MAMSI common stock at an exercise
price of $ $8.25 under the terms of the 1995 Non-Qualified Stock Option Plan.
Such options will vest on the date of the February 2000 Board meeting on the
following prorata basis over a period to be determined by the percentage
increase of 1999 earnings per share over 1998 earnings per share as adjusted for
one time items and as determined by the Board at its February 2000 meeting at
which 1999 audited earnings are announced:
1999 EPS % Increase Vesting Dates of Vesting
up to
$0.51 0-16% 5 years 1/5 in 2/2000; 1/5 in 2/2001
; 1/5 in 2/2002;1/5 in 2/2003;
1/5 in 2/2004
$0.54 23% 4 years 1/4 in 2/2000; 1/4 in 2001;
1/4 in 2/2002;1/4 in 2/2003
$0.57 30% 3 years 1/3 in 2/2000; 1/3 in 2/2001
1/3 in 2002
$0.60 36% 2 years 1/2 in 2/2000; 1/2 in 2/2001
$0.63 43% 1 year All in 2/2000
or greater
For the purposes of the above calculation, the 1998 earnings per share is
established at $.44 per share.
On January 1, 2000 and January 1, 2001, the Company will grant Executive
options to purchase no less than 150,000 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.
Base Salary. Base Salary shall be not less than the rate at which
Executive is compensated on the Effective Date which is $525,000. Thereafter,
Base Salary shall be adjusted annually. For 2000 and each year thereafter, the
Executive Base Salary will increase or decrease by an amount equal to 50% of the
percentage change in the Company's consolidated net income as determined by the
Company, and audited by the Company's independent certified public accountant
but any annual increase may not be greater than 25 percent and any annual
decrease may not be greater than 12.5 percent. This increase or decrease would
first apply to the year 2000 and would take effect retroactively to January 1 of
the then current year. Items of a non-recurring nature may be excluded in the
calculations as mutually agreed to by the Company and the Executive.
The Company shall also reimburse Executive, in accordance with such
policies and procedures as the Board may establish from time to time, for all
reasonable travel and other expenses incurred by Executive in the performance of
his obligations under this Agreement. Executive shall also be entitled to
participate in any benefit plans established by the Company for which Company
executives are or shall become eligible.
5. Termination of Employment. Executive's employment under this Agreement may
be terminated by the Company or Executive as follows:
(a) Disability. (i) If Executive fails to perform his duties under this
Agreement on account of Disability (as hereinafter defined), the
Company may give notice to Executive to terminate this Agreement on a
date not less than ninety (90) days thereafter ("Notice Period") and,
if Executive has not resumed full performance of his duties under this
Agreement within such Notice Period, then Executive's employment under
this Agreement will terminate on the date provided in the notice
("Disability Termination Date").
(ii) During any period of Disability, the Company shall
maintain and pay for health and other insurance benefits for Executive
at least equal to those he had at the commencement of such Disability.
(iii) As used in this Agreement, the term "Disability" shall
mean the inability of Executive to perform his duties under this
Agreement by reason of his medical disability, as determined by an
independent physician selected with the approval of the Board and
Executive.
(b) Death. If Executive dies while employed under this Agreement, his
employment under this Agreement will terminate as of the date of his
death ("Date of Death"). Within thirty (30) days after the Date of
Death, the Company shall pay to Executive's legal representative
Executive's Base Salary as then in effect that has accrued to the last
day of the month in which the Date of Death occurs. If the Executive
dies while receiving payments pursuant to Section 5(c) below, said
payment shall continue for the period remaining and shall be paid to
the estate of the Executive.
(c) Certain Other Events of Termination. In the event that (i) the
Company terminates Executive's employment for any reason (other than
because of death, Disability, or "just cause" (as hereinafter defined)
(ii) Executive terminates his or her employment with the Company
because of the Company's material breach of this Agreement, (iii)
Executive terminates his employment with the Company because the
Company requires Executive to be based anywhere other than Executive's
current location or within seventy-five (75) miles round trip of the
Company's principal executive offices (except for required travel on
the Company's business), or (iv) Executive terminates his employment
with the Company because of a substantial reassignment of duties and
responsibilities, then the Company shall pay Executive an amount equal
to 24 months Base Salary paid in equal bi-weekly payments over a
period of two years commencing on the Executive Termination Date and
in accordance with the regular payroll practices of the Company. The
Company shall also pay Executive any pro-rata bonus that the Executive
would have been entitled to had he been employed until the end of the
year. Such bonus payment shall occur when bonuses are normally paid by
the Company. In addition, all stock options which Executive has been
granted shall immediately vest and become exercisable under the terms
of the applicable plan. For the purposes of the time period available
for exercising such stock options, Executive shall be considered an
employee of the Company unless terminated pursuant to subsection (e)
below. Payment made pursuant to this paragraph shall be the exclusive
remedy provided to Executive and Executive shall not be entitled to
any other severance benefit that the Company may provide or adopt
unless approved by the Board of the Directors of the Company.
(d) Retirement. Subject to the vesting schedule set forth below,
retirement benefits shall be payable to Executive 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 that time employed by the Company, and elects to
begin receiving retirement benefits. This date shall be referred to as
the "Retirement Termination Date". 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.
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 Base Salary and
bonus compensation for the years beginning on or after January 1, 1999
times the number of years of service with the Company 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. This retirement benefit 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 a lump sum with the initial payment made to the Executive on
the Retirement Termination Date and annually thereafter on each
anniversary of 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 survivor benefit upon the Retirement
Termination Date. If Executive dies prior to retirement, the
Executive's spouse shall be entitled to a lump sum benefit of the
actuarial equivalent of the retirement benefit earned to the date of
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.
(e) Termination by the Company for Just Cause.
(i) The Company may terminate Executive's employment for "just
cause" at any time by giving written notice thereof to Executive.
(Except as provided below, the date of such notice is the "Just Cause
Termination Date" unless otherwise provided in the notice). Within
thirty (30) days after the Just Cause Termination Date, the Company
shall pay to Executive his Base Salary as then in effect that has
accrued to the Just Cause Termination Date. For the purposes of this
subparagraph, "just cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, breach of
fiduciary duty, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations
or similar offenses), or material breach of any provision of this
Agreement. Unless otherwise determined by the Board, Executive shall
have no right to receive compensation or other benefits under this
Agreement after a termination for just cause.
(ii) Notwithstanding the foregoing, Executive shall not be deemed
to have been terminated for just cause pursuant to this Section 5(e)
unless and until he shall have received a copy of a resolution duly
adopted by the affirmative vote of a majority of the Board, at a
meeting held for that purpose, declaring that in the good faith opinion
of the Board one or more of the conditions set forth in clause (i) of
this Section 5(e) has occurred and specifying the particulars thereof.
(f) Termination by Executive Without Cause. Executive may terminate
this Agreement without cause upon the provision of eight (8) weeks'
prior written notice to the Company. Upon such a termination, the
Executive shall receive the compensation set forth in Section 7 below.
No other payment shall be made to Executive under this Agreement other
than the retirement benefit in accordance with Section 5(d) of this
Agreement which has vested prior to the Executive's termination date
and any other non-reimbursed business expenses.
6. Change in Control. Notwithstanding any other provision to the contrary,
the following provisions will govern in the event of a change in control as
defined herein.
a. A change in control shall be deemed to have occurred if, at
any time, (I) substantially all the assets of the Company
shall have been sold or transferred by sale, merger or
otherwise, or if any "person" (as such term is used in
Sections 13(d) or 14(d) of the Exchange Act) is or becomes
the beneficial owner, directly or indirectly, of securities
of the Company representing 50% or more of the combined
voting power of the then-existing outstanding securities of
the Company.
b. In the event of a change in control as defined in Section
6(a) above, Executive shall be entitled to a lump sum payment
which shall be equal to two times the Executive's Base Salary
and two times the amount equal to the maximum bonus the
Executive could have earned under the applicable bonus plan
for the year in which such change in control occurs in lieu
of payment under the bonus plan. Upon payment of the lump sum
provided under this subsection, the obligations of the
Company to employ Executive under this Agreement shall cease.
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.
7. Covenant Not to Compete. Executive covenants and agrees that, in
consideration of the amounts to be paid Executive hereunder and other good and
valuable consideration, for a period of one (1) year beyond the 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 7 shall survive the termination of
this Agreement following the Termination Date.
In consideration of the Executive's covenant not to compete under this Section
7, the Executive shall be paid an amount equal to one year of the Executive's
pre-termination Base Salary.
8. Business Automobile. The Company shall pay to Executive a car
allowance of $450 monthly.
9. 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.
10. Confidential Information. Executive shall fully comply with and abide
by the provisions of the Company's Employee Manual and other announced policies
in effect from time to time, including those provisions relating to the
protection of the Company's confidential information. The Company and Executive
agree that the foregoing provision shall survive the termination of this
Agreement for any reason whatsoever.
11. Indemnification. Employee shall be entitled to indemnification to the
full extent allowed by the Company's Certificate of Incorporation and Bylaws for
third party claims and to advances for expenses in defending against such
claims.
12. General Provisions.
(a) Entire Agreement. This Agreement contains the entire understanding
between the parties hereto and supersedes any prior employment agreement between
the Company and Executive.
(b) No Duty to Mitigate. Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall any amounts received from other employment or
otherwise by Executive offset in any manner the obligations of the Company
hereunder.
(c) Nonassignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof is assignable by
Executive, his beneficiaries, or legal representatives without the Company's
prior written consent; provided, however, that nothing in this Section 11(d)
shall preclude (i) Executive from designating a beneficiary to receive any
benefit payable hereunder upon his death, or (ii) the executors, administrators,
or other legal representatives of Executive or his estate from assigning any
rights hereunder to the person or persons entitled thereto.
(d) Notices. All notices and other communications required or permitted
to be given under this Agreement shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by certified mail, return
receipt requested, first-class postage prepaid, to the parties to this Agreement
at the following addresses:
(i) if to the Company at:
Mid Atlantic Medical Service, Inc.
4 Taft Court
Rockville, MD 02850
and
(ii) if to Executive at the
address set forth on the signature
page.
or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and communications
shall be deemed to have been received on the earlier of the date of receipt or
the third business day after the date of mailing thereof.
(e) Binding Effect; Benefits. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. Nothing in this Agreement, express or implied,
is intended or shall be construed to give any person, other than the parties to
this Agreement or their respective successors or permitted assigns, any legal or
equitable right, remedy, or claim under or in respect of any agreement or any
provision contained herein.
(f) Waiver. No provision of this Agreement may be amended, waived,
discharged, or terminated except by an instrument in writing and executed by
each party. Any waiver of enforcement of any provision of this Agreement shall
not operate or be construed as a continuing waiver or a waiver of any other
provisions unless expressly stated in such instrument.
(g) Amendment. This Agreement may be terminated, amended, modified, or
supplemented only by a written instrument executed by Executive and the Company.
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, regardless of the law that
might be applied under principles of conflict of laws.
(i) Severability. If, for any reason, any provision of this Agreement
is held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provision not held so invalid, and the rest of such
provision, together with all other provisions of this Agreement, shall to the
full extent consistent with law continue in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its officers thereunto duly
authorized, and Executive has signed this Agreement, all as of the Effective
Date.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
By:
(Corporate Seal) Name: /s/Mark D. Groban
Title: Chairman of the Board
WITNESS EXECUTIVE: /s/Thomas P Barbera
Address: 4 Taft Ct.
/s/Nancy M. Jones Rockville, MD 20850
- -------------------------
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