UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For fiscal year ended DECEMBER 31, 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
Mid Atlantic Medical Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1481661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 Taft Court, Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
(301) 294-5140
(Registrant's telephone number, including area code) Securities registered
pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- ---------------------
Common Stock, $0.01 par value The New York Stock
per share. Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ ]
Aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity as of March 3,
2000: Approximately $365 million.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
48,700,222 shares of common stock as of March 3, 2000
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders to be
held on May 1, 2000 is incorporated by reference into Part III of this Form
10-K.
2
<PAGE>
FORM 10-K
INDEX
ITEM NO. DISCLOSURE REQUIRED PAGE
PART I
Item 1 Business .............................................. 4
Item 2 Properties ............................................ 15
Item 3 Legal Proceedings ..................................... 15
Item 4 Submission of Matters to a Vote of Security Holders ... 16
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 17
Item 6 Selected Financial Data .............................. 18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 19
Item 7A Quantitative and Qualitative Disclosures About
Market Risk ........................................ 25
Item 8 Financial Statements and Supplementary Data .......... 26
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 48
PART III
Item 10 Directors and Executive Officers of the Registrant ... 49
Item 11 Executive Compensation ............................... 49
Item 12 Security Ownership of Certain Beneficial Owners
and Management ..................................... 49
Item 13 Certain Relationships and Related Transactions ....... 49
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 50
3
<PAGE>
PART I
ITEM 1. BUSINESS
Mid Atlantic Medical Services, Inc. is a holding company for subsidiaries active
in managed health care and other life and health insurance related activities.
Mid Atlantic Medical Services, Inc. and its subsidiaries (the "Company" or
"MAMSI") offer a broad range of managed health care coverage and related
ancillary insurance and other products and deliver these services through health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
and a life and health insurance company. MAMSI owns a home health care company,
a pharmaceutical services company and a hospice company. The Company also has a
partnership interest in an outpatient surgery center.
GENERAL DEVELOPMENT OF BUSINESS
Mid Atlantic Medical Services, Inc. was incorporated in Delaware in 1986 to
serve as a holding company for MD - Individual Practice Association, Inc. ("M.D.
IPA") and Physicians Health Plan of Maryland, Inc. ("PHP-MD"). MAMSI made an
exchange offer for all of the issued and outstanding shares of common stock of
M.D. IPA and PHP-MD in 1987.
M.D. IPA, a Federally qualified HMO, was organized as a non-stock corporation in
1979. M.D. IPA operated as a non-profit organization until 1985 when it amended
its articles of incorporation and was reorganized into a stock corporation.
PHP-MD, an individual practice association ("IPA"), was organized as a non-stock
corporation in 1979 to provide physician and other medical services to M.D. IPA
enrollees. PHP-MD operated as a non-stock organization until it amended its
articles of incorporation and was reorganized into a stock corporation in 1984.
MANAGED HEALTH ORGANIZATIONS
MAMSI's primary business is insuring health care coverage through its HMOs and
its life and health insurance company. During 1999, MAMSI offered HMO coverage
through four licensed HMO subsidiaries - M.D. IPA, Optimum Choice, Inc.(R)
("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc.
of Pennsylvania ("OCIPA") (hereinafter M.D. IPA, OCI, OCCI and OCIPA will be
collectively referred to as the "HMOs" or "MAMSI HMOs"). MAMSI offers life and
health insurance through MAMSI Life and Health Insurance Company ("MLH").
M.D. IPA became a licensed HMO in Maryland in 1981 and in Virginia in 1985. M.D.
IPA's present service area (which includes all geographic areas in which the HMO
received regulatory approval to cover health care services) includes the entire
state of Maryland, the District of Columbia and most counties and cities in
Virginia including the Northern Virginia, Richmond/Tidewater and Roanoke areas
("HMO Service Area"). In addition to serving governmental entities such as the
U.S. Office of Personnel Management under the Federal Employees Health Benefits
Program, M.D. IPA generally provides coverage to the larger commercial group
market.
OCI, a non-Federally qualified HMO, became a licensed HMO in Maryland in 1988,
in Virginia in 1990, in Delaware in 1993 and in West Virginia in 1994. OCI
generally operates within the small and large business market, which is
comprised of both small and large group employers. OCI also covers Medicaid
recipients in Virginia. OCI withdrew from Medicaid in West Virginia at the end
of October, 1999. OCI's present commercial service area includes the entire
states of Maryland, West Virginia and Delaware, the District of Columbia, and
most counties and cities in Virginia.
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OCCI, a non-Federally qualified HMO, became a licensed HMO in North Carolina in
1995 and South Carolina in 1996. OCCI operates in both the small and large group
commercial market. OCCI withdrew from the Medicaid program at the end of
October, 1999. OCCI's present service area includes certain areas of North
Carolina and South Carolina. OCCI has yet to market its products in South
Carolina.
OCIPA, a non-Federally qualified HMO, became a licensed HMO in Pennsylvania in
1996. OCIPA stopped writing new business in June, 1999, and expects to cease all
operations in Pennsylvania by June, 2000.
MLH, a life and health insurance company, is licensed in 31 states and the
District of Columbia and actively markets in the states in which the Company has
licensed HMOs, including Pennsylvania. MLH sells group health insurance,
including managed indemnity, PPO, and point of service health products to large
and small employers and individuals. MLH also sells dental insurance and group
term life insurance as well as short-term disability insurance.
GENERAL
HMOs typically provide or arrange for the provision of comprehensive medical
services (including physician and hospital care) to enrollees for a fixed,
prepaid premium regardless of the amount of care provided. Enrollees generally
receive care from participating primary care physicians ("PCPs") who, as
required, refer enrollees to participating specialists and hospitals. HMOs
require enrollees to utilize participating physicians and other participating
health care practitioners.
The goal of an HMO is to encourage quality health care and to perform care
coordination designed to encourage the efficient, effective, and appropriate use
of health care services. This includes monitoring physician services, hospital
admissions and lengths of stay and maximizing the appropriate use of
non-hospital based medical services.
The Company's HMO network of physicians and health care practitioners is
organized as an Individual Practice Association ("IPA"). Under the IPA model,
the HMO contracts with a broadly dispersed group of physicians and health care
practitioners to provide medical services to enrollees in the physicians' own
offices and in hospitals; the physicians and health care practitioners are
generally paid on a capitated or a negotiated fee maximum basis. Physicians and
health care practitioners may contract directly with the HMO or through a
designated organization that, in turn, contracts with the HMO.
MAMSI'S HMO PRODUCTS
MAMSI's HMOs offer a range of benefit plans for providing health care coverage
to enrollees. Generally, enrollees arrange for coverage through their employer.
However, in certain circumstances, group enrollees can convert their coverage to
an individual contract upon separation from their employer. Employers may or may
not renew their HMO agreements annually. Moreover, within each employer group,
the HMO may or may not experience increases or decreases in enrollment by
individual enrollees. MAMSI's HMOs also offer individual coverage to the
commercial and Medicaid markets in some of its service area. During 1999, the
Company ceased its participation in the Medicaid programs of West Virginia and
North Carolina.
Under traditional HMO coverage, the enrollee selects a PCP from the HMO's
network of physicians and health care practitioners. Most medical care provided
to the enrollee must be authorized and coordinated by the PCP. Generally, the
enrollee pays a copayment for all PCP and specialist office visits and may also
be required to pay a copayment for hospital admissions and emergency room
services.
5
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Except in emergencies, enrollees are generally required to utilize only those
participating professional and institutional health care physicians and
practitioners that have contracted with the IPA (see further discussion under
"HMO Arrangements with Physician and Institutional Health Care Practitioners").
OCI, M.D. IPA and OCCI also offer point-of-service coverage. In this plan,
enrollees have the choice of seeking care from the PCP or from any physician of
their choice (point-of- service option). Whenever care is provided under the
point-of-service option and the enrollee visits a physician or health care
practitioner outside of the HMO network, the plan generally covers the lesser of
80% of the requested charges or 100% of the maximum allowable charges for the
service provided. The enrollee may be responsible for the remainder of the
charge.
Additionally, MAMSI, through its subsidiaries, offers hybrid products to large
employer groups. These products offer the ability to tailor employee health care
offerings by varying benefit designs, funding methods and insurance risk. Hybrid
products generally compete in the so-called "self-funded" employer plan
marketplace. A typical hybrid product combines the use of capitated PCPs to
serve as care coordinators and employer funding of specialist and institutional
claims on an "as paid" basis. For some large groups, MAMSI, through its
subsidiary, MLH, underwrites the risk of loss on a specific and/or aggregate
stop loss basis.
OCI offers HMO coverage to recipients of Title XIX Medical Assistance
("Medicaid") in Virginia. The Medicaid plan operates in a manner similar to the
traditional HMO plan. Virginia pays a monthly premium based upon the age, sex
and geographic location of the recipients for whom OCI provides access to health
care. At December 31, 1999, OCI's Medicaid service area includes certain areas
of Virginia. OCI's Medicaid contract in Virginia expires on June 30, 2000.
Company management has made the decision to not renew this contract.
Under all coverage options, enrollees receive the following basic benefits:
primary and specialist physician services; hospital services such as diagnostic
tests, x-rays, nursing and maternity services; outpatient diagnostic tests such
as laboratory tests, x-rays, and allergy testing and injections. A pharmacy
benefit is provided under most coverage options.
MLH currently underwrites the indemnity coverage of the HMOs point-of-service
plans, except OCCI, in addition to offering stand-alone indemnity (including
PPO) health and dental insurance, aggregate and specific stop loss insurance for
self-insured groups, and group life, accidental death and short-term disability
policies. In addition, MLH provides an administrative services only ("ASO")
product to the State of Maryland. ASO business consists of allowing access to
MAMSI's network of physicians and health care practitioners, without PCPs, and
the payment of claims. MAMSI has no insurance risk on this product. MLH holds
insurance licenses in 31 states and the District of Columbia including Maryland,
Virginia, West Virginia, Delaware, Pennsylvania, North Carolina and South
Carolina.
The Company's total health plan (managed care full risk and hybrid, ASO and
indemnity health insurance) membership in the HMOs and MLH increased to
approximately 766,000 at December 31, 1999 from 731,000 at December 31, 1998, an
increase of 4.8 percent.
6
<PAGE>
The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 1999:
Employer Groups Served 28,000
Population of Aggregate HMO
Service Area 32,000,000
HMO Service Area Penetration
(All HMO's) 29%
Primary care Physicians 7,300
Specialist Physicians 15,700
Other Affiliated Health
Care Practitioners 9,300
Hospitals and Outpatient
Facilities 2,400
Pharmacies 21,000
A significant portion of the Company's premium revenue is derived from Federal,
state and local government agencies. For the years ended December 31, 1999, 1998
and 1997, approximately 8%, 11% and 11%, respectively, of premium revenue was
derived from Federal government agencies which is included in the Medicare and
Risk segments, and approximately 18%, 18% and 25%, respectively, was derived
from Maryland and Virginia state and local government agencies located in the
Company's service area which is included in the Risk segment.
PREFERRED PROVIDER ORGANIZATION ("PPO")
MAMSI offers access to its preferred provider networks through two subsidiaries:
Alliance PPO, LLC, ("Alliance") and Mid Atlantic Psychiatric Services, Inc.
("MAPSI").
PPOs allow enrollees to receive care from a network of participating physicians
and health care practitioners who agree to provide services at contractually
negotiated rates in exchange for increased patient volume. A PPO is different
than an HMO in that PPOs allow participants the choice of using health care
physicians and practitioners outside of the PPO network. The enrollee usually
has a financial incentive to seek services from a participating physician or
health care practitioner and can avoid higher out-of-pocket expenses such as
co-payments, coinsurance or deductibles that are applied when an out-of- network
physician or health care practitioner is used.
A PPO operates by being incorporated into an employer's current benefit program,
and offers access to physician, hospital and facility services; utilization
management and claims screening and re-pricing. The employer determines the
level of the benefits, eligibility and any applicable co-payments or
deductibles.
Alliance does not assume any insurance risk from medical utilization, and it is
not the claims payor. The payor can be a self-funded employer, a third party
administrator (TPA), a Health Benefits Trust Fund or a health insurance company.
In return for access to the PPO's network, Alliance charges the payor either a
per employee rate or a percentage of the savings of actual claims processed for
the services accessed. MAMSI PPOs provide access to substantially the same
network of physicians and health care practitioners as MAMSI HMOs.
Alliance is marketed primarily to and through insurance companies, insurance
brokers, consultants, third party administrators, self-insured employers and
union health and benefit trusts. The advantages of this marketing approach are
minimized marketing costs and maximized market coverage through established
employer relationships. Alliance also works directly with employers and unions
that are self-insured and using direct marketing efforts. Major competition
comes from other PPOs and insurance carriers.
7
<PAGE>
As of December 31, 1999, Alliance had contracts with approximately 19,800
employer groups that had access to the Company's entire network of physicians
and health care practitioners.
The MAPSI PPO is comprised of physicians and health care practitioners
specializing in behavioral health and substance abuse care. Similar to Alliance
PPO, MAPSI PPO does not assume any insurance risk and MAPSI's products are
marketed directly to TPAs, self-insured groups, brokers, consultants, indemnity
insurance plans and union health and benefit trusts. In addition, MAPSI
contracts with indemnity insurers that want to offer groups a managed care
behavioral health product. MAPSI believes it has a competitive advantage with
its unique behavioral health screening process that offers the employer the
benefit of enhanced coordinated treatment for employees as well as increased
cost savings. MAPSI's major competitors are ValueOptions, Magellan, and MCC,
Inc. As of December 31, 1999, MAPSI had a network of over 4,000 psychiatrists,
psychologists, social workers, and other affiliated licensed behavioral health
physicians and practitioners.
Alliance and MAPSI products are most often marketed jointly and the prospective
purchaser may also purchase the MAPSI PPO if the Alliance PPO is purchased. A
total of approximately 1,024,000 lives are covered under one or both of these
PPO products as of December 31, 1999.
PPOs are not subject to HMO regulations by virtue of their business. However,
PPOs are subject to certain state regulations governing the provision of PPO
services such as mandatory state registration. It is likely that PPOs may be
subject to increased regulatory oversight in the future.
OTHER PRODUCTS
In October, 1994, MAMSI acquired all of the outstanding stock of HomeCall, Inc.
("HomeCall") and its wholly-owned subsidiary, FirstCall, Inc. ("FirstCall"), for
approximately $10 million, including direct expenses. HomeCall is a state
licensed, Medicare certified home health agency. The combined operations of
HomeCall and FirstCall include 17 branch locations that serve virtually all of
Maryland, the District of Columbia, Northern Virginia and the Panhandle area of
West Virginia. HomeCall achieved full accreditation from the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"), following its survey of all
services in November, 1995. The Company achieved reaccreditation in November,
1998.
Also during 1994, the Company formed a home infusion services company, HomeCall
Pharmaceutical Services, Inc. ("HCPS"), which received its pharmacy license in
1994, its Federal license from the Drug Enforcement Agency in 1995, and JCAHO
accreditation in 1995 and 1998.
HomeCall, FirstCall and HCPS provide services that are generally lower cost
alternatives to institutional treatment and care. The Company believes that it
can provide better care to its members and reduce its medical costs by
substituting, where medically appropriate, in- home medical treatment for
treatment in an institutional setting.
Medical services provided by HomeCall, FirstCall and HCPS include skilled
nursing, advanced nursing in support of infusion therapy, maternal/infant
nursing, physical, speech and occupational therapy, medical social work,
nutrition consultation and home health care aides. Services provided by HCPS
include a comprehensive range of in-home drug infusion therapies, the delivery
of infusion-ready drugs for physician office based infusion therapy and some
hospice (as described below).
In April, 1996, HCPS started a mail-order pharmacy, HomeCall Mail RX, which
received its pharmacy license and its Federal license in 1996. HomeCall Mail RX
fills and delivers prescription oral medications via common carrier to patients
in their homes. Approximately 13,500 prescriptions are filled each month.
HomeCall Mail RX was sold to the Company's new Pharmacy Benefits Manager,
Merck-Medco Managed Care, LLC effective January 1, 2000.
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In November, 1996, the Company started HomeCall Hospice Services, Inc. ("HCHS"),
which received its Maryland state license to operate a general hospice care
program on December 3, 1996 and its Virginia hospice license on June 26, 1998.
Based in Columbia, Maryland, HCHS was organized to address the needs of
terminally ill patients and their families. The hospice program provides
services to individuals in the comfort of their homes. HCHS underwent a
voluntary accreditation review by JCAHO in November, 1998 and received full
accreditation.
HCHS currently serves the Baltimore, Washington, D.C. and Northern Virginia
metropolitan areas. It is the goal of HCHS to extend its service delivery area
to all geographical areas served by MAMSI. The addition of hospice services
complements MAMSI's other home care products by having a full range of services
available to its members.
In addition to providing in-home medical care to the Company's members,
HomeCall, FirstCall, HCHS and HCPS continue to provide services to other payors,
including Medicare, insurance companies, other HMOs and individuals.
The Company also has an equity interest in an ambulatory surgery center located
in Rockville, Maryland. The surgery center conducts outpatient surgery and
services to HMO enrollees and other patients.
A summary of MAMSI's membership enrollment in all product lines is as follows:
<TABLE>
<CAPTION>
MEMBERSHIP DATA AT DECEMBER 31
---------------------------------
PRODUCT LINE 1997 1998 1999
- ------------ ---------------------------------
(in thousands)
<S> <C> <C> <C>
Commercial HMO (1) 389.1 424.9 452.5
Hybrid HMO (2) 103.5 99.4 100.4
Medicaid 34.0 30.9 12.3
Medicare 11.2 7.0 -
Indemnity 132.7 157.5 189.5
ASO (3) 11.0 11.0 11.0
------- ------- -------
681.5 730.7 765.7
PPO (4) 1,006.0 1,060.0 1,024.0
------- ------- -------
Total Membership 1,687.5 1,790.7 1,789.7
======= ======= =======
</TABLE>
(1) Commercial HMO includes traditional HMO and point-of-service members.
(2) Hybrid HMO includes any business that uses MAMSI's network and care
coordination PCPs, utilization management services, claims adjudication and
payment services and that has a self-funded component. Generally, these products
include specific and/or aggregate stop loss provisions.
(3) ASO includes administrative services only business without PCPs and no
assumption of insurance risk by any MAMSI affiliate.
(4) PPO includes all business whereby access is granted to MAMSI's network of
physicians and health care practitioners. MAMSI assumes no insurance risk and
does not provide claims payment services on this business.
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HMO ARRANGEMENTS WITH PHYSICIAN AND INSTITUTIONAL HEALTH CARE PRACTITIONERS
M.D. IPA and OCI contract with PHP-MD to provide physician and other health
practitioner services to their enrollees. The HMOs are ultimately responsible
for ensuring that an adequate number of physicians and other health care
practitioners are under contract in order to provide health care services to
enrollees.
The Company contracts with primary care and specialist physicians, dentists,
social workers, psychologists, physical therapists and podiatrists. PCPs are
usually paid a monthly capitation payment for each enrollee who has chosen that
PCP. This capitation payment varies according to the age and sex of the enrollee
and according to the primary care designation of the physician chosen by the
enrollee. The primary care designations on which premiums are based fall into
one of two types: (1) family and general practice, pediatrics and internal
medicine, and (2) obstetrics and gynecology.
The HMOs have contractual arrangements with a combined total of 2,400
facilities, consisting of 400 hospitals and 2,000 non-hospital facilities, as of
December 31, 1999. These facilities are located in the Company's HMO Service
Area. Contracts with facilities are renewable annually.
HMO ARRANGEMENTS FOR OTHER SERVICES
The HMOs also contract with a number of entities to arrange for the provision of
other services, i.e. emergency care, home health care, pharmaceutical
assistance, laboratory testing and dental.
QUALITY ASSESSMENT/IMPROVEMENT
MAMSI conducts a multi disciplinary approach to its Quality Improvement ("QI")
Program to ensure the provision of quality health care and services to its HMO
enrollees in an appropriate and cost-efficient manner.
MAMSI recognizes the importance of a QI Program to determine and allocate
appropriate resources that will have the greatest impact for members. The QI
Program is designed to meet and serve the needs of employers, members,
physicians and health care practitioners as well as to monitor timeliness,
appropriateness and effectiveness of services via ongoing and systematic reviews
of key indicators and aspects of care. The QI Program conducts member
satisfaction surveys, identifies opportunities for improvements in providing
care, adopts strategies to improve outcomes and monitors the improvement to
report progress.
MAMSI's QI Committee, which operates under the direction and oversight of
MAMSI's Board of Directors, includes administrative, clinical and health care
practitioner representation. The Committee evaluates numerous quality related
issues and outcomes measuring overall services provided to enrollees.
In addition, MAMSI utilizes several quality review mechanisms. Physician and
health care practitioner applications are reviewed by a Credentials Committee in
order to determine whether the applicant meets MAMSI's criteria, including Board
Certification or eligibility.
MAMSI maintains a physician review process to determine whether the needed
levels of medical service are being provided in a timely and efficient manner.
The Company conducts medical reviews to monitor the quality of care provided.
The Company also monitors hospital and out- of-plan referrals issued by primary
care physicians.
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In most situations, prior authorization must be obtained for non-emergency
hospital admissions. Failure to secure prior authorization for non-emergency
hospital admissions of enrollees may cause claims to be denied, and in some
situations, practitioners may be sanctioned. Prior to admission for
non-emergency hospital services, MAMSI applies certain medical criteria to
authorize the admission.
After admission of an HMO enrollee, MAMSI monitors the course of hospital
treatment and coordinates discharge planning with the physician and hospital
utilization department. The clinical care coordination staff works with a
physician during the course of treatment. If the physician needs to extend an
enrollee's stay beyond the expected length of stay, the physician provides
medical justification for the necessity of such proposed action in order to
obtain specific approval.
The HMOs have established a grievance procedure to respond to enrollee and
practitioner complaints. Persons covered by HMOs are given a right to seek a
fast and fair review of adverse utilization review decisions, first internally
by a medical director of the HMO and then in certain states, by an independent
review organization or by a State regulator. Enrollees are encouraged to use
this procedure. There is a similar grievance procedure for physician complaints.
MAMSI received commendable accreditation from the National Committee for Quality
Assurance ("NCQA") for its two largest health maintenance organizations, M.D.
IPA and OCI. The commendable accreditation applies to the commercial HMO/POS
products. Commendable accreditation is given to managed care organization
product lines and products whose systems for consumer protection and quality
improvement exceed NCQA's rigorous requirements.
The Company's home health care, home infusion, and home hospice subsidiaries
underwent voluntary reaccreditation review by JCAHO in November, 1998. Full
accreditation status was awarded as a result of this process.
COMPETITION AND MARKETING STRATEGY
The health care industry is characterized by intense competition. MAMSI
recognizes the possibility that other entities with greater resources may enter
into competition with MAMSI in the future by either entering its HMO or
indemnity service area or by designing alternative health care delivery systems.
HMOs compete not only with other HMOs and managed care organizations, such as
physician and health care practitioner sponsored organizations, but also with
insurance companies that offer indemnity insurance products.
MAMSI's HMOs compete with approximately 19 HMOs or other prepaid alternative
health care delivery systems that have a presence in MAMSI's significant service
areas (Maryland, Virginia, Delaware, District of Columbia and North Carolina).
The following table sets forth MAMSI's best estimate of 1999 enrollment of HMOs
operating in its significant service areas.
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<TABLE>
<CAPTION>
Approximate
Number
Insurer/HMO of Enrollees
- ------------- ------------
<S> <C>
AETNA/U.S. Healthcare***....................... 838,000
Mid Atlantic Medical Services, Inc.* .......... 565,000
FreeState Health Plan** ....................... 541,000
Kaiser Permanente Health Plan ................. 516,192
United Healthcare ............................. 439,000
Cigna Healthcare............................... 426,351
Trigon ........................................ 297,000
Partners Healthplan of North Carolina.......... 230,000
Optima ........................................ 225,000
Blue Cross/Blue Shield of North Carolina....... 163,000
</TABLE>
Source: The InterStudy Competitive Edge - 9.2
* - Includes members covered by the Company's HMOs only.
** - This company is owned by Care First-Blue Cross/Blue Shield of Maryland.
*** - Includes NYLCARE and Prudential membership.
MAMSI's HMOs compete with other HMOs and insurance companies on the basis of
price, network and range of services offered to enrollees. PHP-MD competes with
the same entities and with other IPAs for physician services. PHP-MD believes
that its capitation payments to PCPs and the fee for service payments to
specialists are competitive with other HMOs. MAMSI believes that the freedom
IPA-model HMOs offer their enrollees in choosing from a greater number of
physicians constitutes a competitive advantage over group or staff model HMOs.
The ability to retain and attract enrollees will depend, in part, on how present
enrollees assess their benefit packages, quality of service, network of
physicians and health care practitioners, rates and the HMOs' responsiveness to
enrollee needs.
MAMSI subsidiaries employed approximately 327 full-time individuals who provide
marketing services for the Company's products as of December 31, 1999. MAMSI's
marketing strategy includes identifying and contacting employers in its HMO
Service Area. In addition, the Company employs prospecting, telemarketing,
employer group consultation, referrals by consultants, and the use of a minimum
number of selected brokers to acquire new accounts. Since 1994, the Company's
strategy has included reducing the use of brokers for new business while
increasing its internal sales force. New members acquired by the Company's
dedicated sales force accounted for 64 percent of total large group new members
and 96 percent of total small group new members in 1999.
RISK MANAGEMENT
With the exception of certain small group markets and other markets regulated by
Federal and/or state law, OCI uses underwriting criteria as a part of its risk
management efforts. Underwriting is the process of analyzing the risk of
enrolling employer groups in order to establish an appropriate premium rate.
The Company maintains professional, directors and officers, errors and
omissions, general liability and property insurance coverage in amounts believed
to be adequate. The Company requires participating hospitals to maintain
professional liability coverage and physicians to have malpractice insurance. A
professional liability insurance policy provides coverage in the event that
legal action is taken against any entity as a result of medical malpractice
committed by a physician.
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<PAGE>
In addition, MAMSI's HMOs reduce the financial impact of catastrophic losses by
maintaining reinsurance coverage for hospital costs. The reinsurer usually
indemnifies either 90% of the approved per diem or fixed charge per procedure,
or 80% of the eligible in and out of service area medical expenses in excess of
$200,000 per enrollee per year up to a lifetime maximum of $2,000,000 in
eligible medical costs with no more than $1,000,000 in any given year, or
$5,000,000 for certain PPO members who have an unlimited lifetime maximum
benefit.
GOVERNMENT REGULATION
MAMSI's HMOs and MLH are subject to state and, in some instances, Federal
regulation. Among the areas regulated are: (i) premium rate setting; (ii)
benefits provided; (iii) marketing; (iv) physician and health care practitioner
contracts; (v) quality assurance and utilization review programs; (vi) adherence
to confidentiality and medical records requirements; (vii) enrollment
requirements; (viii) financial reserves and other fiscal solvency requirements;
and (ix) appeals and grievances.
Under applicable law, HMOs must generally provide services to enrollees
substantially on a fixed, prepaid basis without regard to the actual degree of
utilization of services. The HMOs generally fix the premiums charged to
employers for a 12 month period and revise the premium with each renewal. In
setting premiums, the HMOs forecast health care utilization rates based on the
relevant demographics and also consider competitive conditions and the average
number of enrollees in the employer group. In addition to these premiums, HMO
enrollees also make co-payments to physicians and health care practitioners.
Although premiums established may vary from account to account through composite
rate factors and special treatment of certain broad classes of enrollees,
Federal regulations generally prohibit Federally qualified HMOs from traditional
experience rating of accounts on a retrospective basis. Consistent with the
practices of other Federally qualified HMOs, M.D. IPA, in some situations, bases
the premiums it charges employers in part on the age, sex and geographic
location of the enrolled employees. M.D. IPA believes that its premiums are
competitive with other HMOs and health insurers and its health coverage is a
better value for members because of the range of physician and hospital
selection and other benefits provided.
M.D. IPA contracts with the Office of Personnel Management ("OPM") to provide or
arrange health services under the Federal Employees Health Benefits Program
("FEHBP"). The contract with OPM and applicable government regulations establish
premium rating requirements for the FEHBP. The premiums established under the
OPM contract are subject to periodic review and audit to determine if they were
established in compliance with the community rating and other requirements under
the FEHBP. The results of these audits could result in material adjustments. In
recent years, OPM's review of the Company's premium rates has been completed
during the year for which the rates were in effect without significant
modification.
MAMSI's HMOs must file periodic reports with, and are subject to periodic review
by state regulatory authorities. Although MAMSI's HMOs are not regulated
specifically as insurance companies, they must comply with certain provisions of
state insurance laws as well as other laws specifically enacted to regulate
HMOs, such as minimum net worth and deposit requirements.
MLH is subject to regulation by the department of insurance in each state in
which it is licensed. These regulations subject MLH to extensive review of the
terms, administration and marketing of insurance products offered and minimum
net worth and deposit requirements. In addition, MLH is required to file
periodic reports and is subject to periodic audits and continuing oversight. The
offering of certain new insurance products may require the approval of
regulatory agencies.
13
<PAGE>
The Company's home health care subsidiaries are regulated principally in four
areas: home health care licensing; certification for participation in private
insurance and government reimbursement programs; employee licensor and training
requirements; and Federal occupational safety guidelines. The Company believes
that it is in compliance with all applicable regulations, which include
possessing the required Certificates of Need in all locations in which such
certificates are required. Additionally, the Company's pharmacy businesses have
obtained the necessary licenses and permits to operate.
MAMSI's customers include employee health benefit plans subject to the Employee
Retirement Income Security Act of 1974 ("ERISA"). To the extent that the Company
has discretionary authority in the operation of these plans, the Company could
be considered a plan fiduciary under ERISA. Plan fiduciaries are barred from
engaging in various prohibited transactions, including self-dealing. They are
also required to conduct the operations of employee benefits plans in accordance
with each plan's terms.
Due to continued concern about privacy, the accountability of health insurers
and HMOs, and the cost and availability of health care coverage, legislation has
been considered and is likely to be considered by the United States Congress and
the legislatures of the state in which the Company operates or may seek to
operate.
In 1997, the "Health Insurance Portability and Accountability Act of 1996,
Public Law 104- 191", commonly called "HIPAA" was enacted. This bill established
certain requirements for insurers, health maintenance organizations and ERISA
plans regarding eligibility rules for health care coverage. It also required the
Federal government to establish rules governing the privacy of health care
information submitted by electronic transmission. The Department of Health and
Human Services (HHS) recently published draft regulations specifying rules to
maintain the privacy of health care information submitted by electronic
transmission. These rules, once final, will apply to insurers, health
maintenance organizations and ERISA plans. Depending on the content of the final
regulations, MLH and MAMSI's HMOs may need to modify current procedures for the
transmission and processing of electronic claims as well as transactions
occurring over the Internet.
State legislatures and the U.S. Congress continue to debate and consider
legislation to amend civil tort law so as to expand "enterprise liability" to
insurers, HMOs and ERISA plans as well as other health care reform initiatives.
Neither Congress nor any state legislature in MAMSI's service area has enacted
laws that would expand an insurer's or HMO's liability in tort action.
States in the Company's service area have enacted laws regarding the internal
and external review of adverse utilization review decisions. Under these laws,
persons covered by insurers or HMOs (subject to state regulation) are given a
right to seek a fast and fair review of these decisions, first internally by a
medical director and then externally by an independent review organization
and/or a state regulator. Maryland, the District of Columbia, Virginia, North
Carolina and Pennsylvania have enacted such laws. West Virginia is considering
similar action.
State legislatures are looking at a variety of proposals to increase access to
health care coverage. This includes expanding the eligibility rules for the
Medicaid Program.
The Company believes that the current political environment will result in
continued legislative scrutiny of health insurers and HMOs and may lead to
additional legislative initiatives. The Company is unable to predict the
ultimate impact of any federal or state restructuring of the health care
delivery or financing systems, but such changes could have a material adverse
impact on the operations and financial condition of the Company.
14
<PAGE>
INVESTMENTS
The majority of the Company's investments are held by its state regulated
subsidiaries to provide capital for those subsidiaries' operations and to
satisfy capital, surplus and deposit requirements of the HMO and insurance laws
of the various states in which the Company is licensed. HMO and insurance laws
generally protect consumers of insurance products with one of the principal
focuses being on financial solvency of the companies that underwrite insurance
risk. These laws and regulations limit the types of investments that can be made
by the regulated entities with appropriate investments being deemed "admitted
assets." Admitted assets are those assets that can be used to fulfill capital
and surplus requirements. The Company's current investment policy generally
prohibits investments that would be "non-admitted" for statutory reporting
purposes. The Company has no investments in derivative financial instruments and
has no current intention of owning such investments.
EMPLOYEES
As of December 31, 1999, the Company had a total of 2,813 employees, including
2,439 full- time and 374 part-time employees. MAMSI's home health care
subsidiary employed 621 of these employees (391 on a full-time basis and 230 on
a part-time basis). None of the Company's employees are covered by a collective
bargaining agreement and the Company has not experienced any work stoppage since
its inception.
TRADEMARKS
The Company has federally registered the right to use the trademark name
"Optimum Choice, Inc."
SEGMENT INFORMATION
Segment information is included in Item 8 "Financial Statements and
Supplementary Data" on pages 44 thru 46.
ITEM 2. PROPERTIES
The Company owns seven office buildings, one of which is sublet. These buildings
are located in Rockville and Frederick, Maryland and total approximately 350,000
square feet of office and warehouse space. The Company's headquarters is located
at 4 Taft Court, Rockville, Maryland 20850.
In addition, the Company leases approximately 193,000 square feet of office
space in various locations within its service areas to support sales and
administrative operations.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as the defendant in a suit filed by certain medical
physicians and health care practitioners on March 26, 1997 in the Circuit Court
for Anne Arundel County, Maryland, which alleges that the Company improperly
reduced payments to participating physicians and health care practitioners 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.
15
<PAGE>
During 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 physicians and
health care practitioners to the carrier by using the device of offsetting
future payments to physicians and health care practitioners with the amount owed
by the physician or health care practitioner 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 matter remains within the jurisdiction of the MIA. Management
believes that the ultimate outcome of this matter will not have a material
adverse effect on the Company's financial statements as the MIA's current
position affects the method of collection of the claims reversals, rather than
the Company's legal right to the refunds.
The Company is involved in other various legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes that any
ultimate liability that could arise from these other actions will not materially
effect the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for shareholder vote in the fourth quarter of
1999.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently listed on The New York Stock Exchange,
Inc. ("NYSE") under the trading symbol MME. The following table sets forth for
the indicated periods the high and low reported sale prices of the common stock
as furnished by the NYSE.
1999 1998
----------------- -----------------
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $12.88 $7.81 $13.88 $ 9.25
Second Quarter 11.31 7.00 13.88 11.50
Third Quarter 10.25 8.25 11.19 5.00
Fourth Quarter 9.62 5.37 10.69 4.44
The Company has never paid any cash dividends on its common stock and presently
anticipates that no cash dividends will be declared in the foreseeable future.
Any dividends will depend on future earnings, the financial condition of the
Company and regulatory requirements. See Note 12 to the Consolidated Financial
Statements.
On January 11, 1999, the Company's Stock Compensation Trust ("SCT") purchased
from the Company 1,500,000 shares of Mid Atlantic Medical Services, Inc. common
stock at a price of $12.00 for $15,000 in cash and $17,985,000 in the form of a
note payable to the Company. On August 20, 1999, the SCT purchased from the
Company an additional 1,500,000 shares of Mid Atlantic Medical Services, Inc.
common stock at a price of $9.19 for $15,000 in cash and $13,766,250 in the form
of a note payable to the Company. The sales were exempt under Section 4(2) of
the Securities Act of 1933, as amended, ("1933 Act"). The SCT is used to meet
grant obligations of the Company's stock option plans, and the shares issuable
upon exercise of these options are registered under the 1933 Act.
As of March 3, 2000 there were approximately 753 stockholders on record of the
Company's common stock.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in thousands except share amounts, key ratios and operating data)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA
Revenue $1,317,316 $1,187,901 $1,111,653 $1,133,742 $ 954,907
Expense 1,277,486 1,175,665 1,090,213 1,138,677 858,567
Income (loss) before income taxes
(benefit) 39,830 12,236 21,440 (4,935) 96,340
Net income (loss) 26,322 9,045 14,489 (2,768) 61,124
Earnings (loss) per common share
Basic $0.64 $0.20 $0.31 ($0.06) $1.33
Diluted $0.64 $0.20 $0.31 ($0.06) $1.28
Weighted Average Shares
Basic 41,255,327 45,407,006 46,273,484 45,978,864 46,127,112
Diluted 41,266,604 45,473,995 46,885,666 45,978,864 47,908,379
Dividends --- --- --- --- ---
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital $ 118,995 $ 123,138 $ 128,065 $ 118,870 $ 153,668
Total assets 388,584 362,775 345,959 334,719 354,182
Long-term debt - 14 74 134 194
Stockholders' equity 186,821 191,218 208,307 184,400 217,216
Cash dividends per common share (1) --- --- --- --- ---
KEY RATIOS
Medical care ratio 87.9% 88.8% 89.4% 92.4% 81.9%
Administrative expense ratio 11.6% 11.3% 11.7% 10.7% 10.5%
Net income margin 2.0% 0.8% 1.3% (.2%) 6.4%
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services (3) 238 265 297 331 313
HMO only (2) 191 191 192 203 222
Medicare (3) - 2,425 2,566 2,698 2,531
Medicaid (3) 496 375 552 454 405
Annualized hospital admissions per
1,000 enrollees (3) 61 72 78 77 80
HMO, hybrid, ASO and indemnity
health enrollees at year end 766,000 731,000 682,000 745,000 658,000
PPO enrollees at year end 1,024,000 1,060,000 1,006,000 935,000 825,000
Participating providers at year end 34,700 33,600 28,400 24,300 21,077
</TABLE>
Notes
1. MAMSI has not declared or paid cash dividends on its common stock.
2. Days are presented exclusive of skilled nursing, neonatal intensive care
and psychiatric inpatient care.
3. Days include acute and non-acute, skilled nursing, neonatal intensive care
and psychiatric inpatient care.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
All forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations is based on
management's current knowledge of factors affecting MAMSI's business. MAMSI's
actual results may differ materially if these assumptions prove invalid.
Significant risk factors, while not all-inclusive, are:
1. The possibility of increasing price competition in the Company's market
place.
2. The possibility that the Company is not able to increase its market share
at the anticipated premium rates.
3. The possibility of increased litigation, legislation or regulation (such as
the numerous class action lawsuits that have been recently filed against
managed care companies and the pending initiatives to increase health care
regulation) that might increase regulatory oversight which, in turn, would
have the potential for increased costs.
4. The potential for increased medical expenses due to: - Increased
utilization by the Company's membership. - Inflation in practitioner 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 physicians and health care practitioners.
GENERAL
During the three year period ended December 31, 1999, the Company experienced
modest membership expansion. While membership in certain products continues to
grow, others have shown decreases when compared to 1998. The Company has
achieved its overall size by continually expanding its product lines which
include point-of-service, small group, indemnity health, hybrid products and
group term-life and through expansion into new geographic markets. Premium rates
during this time have remained at or near competitive levels for the Company's
marketplace. During 1999, the Company's consolidated operating margin showed
improvement over 1998 after consideration of non-recurring items in 1998. The
Company achieved 1999's results, in part, by implementing product price
increases and reducing or eliminating membership in products or effectively
terminating groups that had the potential for continued unprofitability. The
Company anticipates that it will continue to increase premium rates during 2000.
This is a forward-looking statement. See "Forward- Looking Information" above
for a description of those risk factors.
The Company generally receives a fixed premium amount per member per month while
the majority of medical expenses are variable and significantly affected by
spontaneous member utilization. Even with managed care controls, unusual medical
conditions can occur, such as an outbreak of influenza or a higher than normal
incidence of high cost cases (such as premature births, complex surgeries, or
rare diseases). As a result, the Company's quarterly results can be materially
affected and irregular. However, over the longer business cycle, the Company
believes that its managed care control systems, underwriting procedures (when
allowed) and network of physicians and health care practitioners should result
in continued profitability.
19
<PAGE>
Due to continued concern about privacy, the accountability of health insurers
and HMOs, and the cost and availability of health care coverage, legislation has
been considered and is likely to be considered by the United States Congress and
the legislatures of the states in which the Company operates or may seek to
operate.
In 1997, the "Health Insurance Portability and Accountability Act of 1996,
Public Law 104- 191", commonly called ("HIPAA"), was enacted. This bill
established certain requirements for insurers, health maintenance organizations
and ERISA plans regarding eligibility rules for health care coverage. It also
required the Federal government to establish rules governing the privacy of
health care information submitted by electronic transmission. The Department of
Health and Human Services (HHS) recently published draft regulations specifying
rules to maintain the privacy of health care information submitted by electronic
transmission. These rules, once final, will apply to insurers, health
maintenance organizations and ERISA plans. Depending on the content of the final
regulations, MLH and MAMSI's HMOs may need to modify current procedures for the
transmission and processing of electronic claims as well as transactions
occurring over the Internet.
State legislatures and the U.S. Congress continue to debate and consider
legislation to amend civil tort law so as to expand "enterprise liability" to
insurers, HMOs and ERISA plans as well as other health care reform initiatives.
Neither Congress nor any state legislature in the Company's service area has
enacted laws that would expand an insurer's or HMO's liability in tort action.
States in the Company's service area have enacted laws regarding the internal
and external review of adverse utilization review decisions. Under these laws,
persons covered by insurers or HMOs (subject to state regulation) are given a
right to seek a fast and fair review of these decisions, first internally by a
medical director and then externally by an independent review organization
and/or a state regulator. Maryland, the District of Columbia, Virginia, North
Carolina and Pennsylvania have enacted such laws. West Virginia is considering
similar action.
State legislatures are looking at a variety of proposals to increase access to
health care coverage. This includes expanding the eligibility rules for the
Medicaid Program.
The Company believes that the current political environment will result in
continued legislative scrutiny of health insurers and HMOs and may lead to
additional legislative initiatives. The Company is unable to predict the
ultimate impact of any federal or state restructuring of the health care
delivery or financing systems, but such changes could have a material adverse
impact on the operations and financial condition of the Company.
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company's consolidated net income for the year ended December 31, 1999
increased to $26,322,000 from $9,045,000 for the year ended December 31, 1998.
Earnings per share increased from $.20 in year ended December 31, 1998 to $.64
for the year ended December 31, 1999. The increase in earnings is attributable
to an increase in premiums per member, a reduction in medical expenses as a
percentage of health premium revenue ("medical care ratio"), offset somewhat by
an increase in administrative expense. In addition, the 1998 results include a
non-recurring item related to the results of an audit conducted in connection
with the Company's participation in the FEHBP as well as the effect of certain
real estate sales and retirements of equipment.
20
<PAGE>
Revenue for the year ended December 31, 1999 increased approximately $129.4
million or 10.9 percent over the year ended December 31, 1998. Revenue for the
year ended December 31, 1998 includes $5.7 million in gains related to the sale
of certain Company owned real estate no longer required in its operations.
Excluding these gains, year-over-year revenue increased 11.4 percent. A 6.9
percent increase in net average HMO and indemnity enrollment resulted in an
increase of approximately $77.5 million in health premium revenue while a 4.3
percent increase in average monthly premium per enrollee, combined for all
products, resulted in a $51.3 million increase in health premium revenue. The
increase in HMO and indemnity enrollment is principally due to increases in the
Company's commercial membership. Management believes that commercial health
premiums should continue to increase over the next twelve months as the Company
continues to increase its commercial membership and as new and renewing groups
are charged higher premium rates due to legislatively mandated benefit
enhancements and general price increases initiated by the Company. This is a
forward-looking statement. See "Forward-Looking Information" for a description
of the risk factors that may affect health premiums per member.
The Company has implemented increased premium rates across essentially all of
its commercial products. As the Company's contracts are generally for a one year
period, increased pricing cannot be initiated until a contract reaches its
renewal date. Therefore, price increases cannot be made across the Company's
membership at the same time. Commercial premium rate increases are expected to
continue in 2000 in the range of 7.5% to 8%. Management believes that these rate
increases may have the effect of slowing the Company's future membership growth.
In addition, management reevaluated premium reimbursement rates with regard to
its Medicare and Medicaid programs. Specifically, effective January 1, 1999, the
Company withdrew from participation in the Medicare program. In October, 1999,
the Company withdrew from participation in the North Carolina and West Virginia
Medicaid programs. The Company has decided to withdraw from the Virginia
Medicaid Program which contractually is due to expire on June 30, 2000. The
Company may effectuate this withdrawal by transferring its membership to a
non-affiliated company.
The Company's future membership growth depends on several factors such as
relative premium prices and product availability, future increases or decreases
in the Company's service area and increased competition in the Company's service
area.
The Company's home health operations contributed $23.6 million for the year
ended December 31, 1999 as compared with $20.0 million for the year ended
December 31, 1998 reflecting an increase in services provided to companies other
than MAMSI.
The medical care ratio decreased to 87.9 percent for the year ended December 31,
1999 as compared to 88.8 percent for the year ended December 31, 1998. On a per
member per month basis, medical expenses increased 3.2 percent. The decrease in
the medical care 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 and certain
state Medicaid programs, and also increased premiums per member. The ongoing
initiatives should help to control the Company's medical care ratio. The
statements in this paragraph and the preceding paragraphs regarding future
utilization rates, cost containment initiatives, total medical costs, future
increases in health premiums per member and the Virginia Medicaid Program 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 care ratio.
21
<PAGE>
Administrative expenses as a percentage of revenue ("administrative expense
ratio") increased from 11.4 percent (adjusted to exclude the effect of real
estate gains in revenue) for the year ended December 31, 1998 to 11.6 percent
for the year ended December 31, 1999. Management believes that the
administrative expense ratio will increase modestly in 2000 as additional
personnel with specialized medical and other expertise who were only with the
Company for part of 1999 are reflected for a full year. Management's expectation
concerning the administrative expense ratio is a forward-looking statement. The
administrative expense ratio is affected by changes in health premiums and other
revenues, development of the Company's expansion areas and increased
administrative activity related to business volume.
Included in the Company's year-to-date 1998 results is a $16,500,000 charge
related to an audit conducted by the Office of Inspector General concerning the
Company's participation in the FEHBP for the years 1992 - 1997. The report's
findings indicated that in the years 1992 - 1994 the FEHBP was charged rates
that exceeded the then market price. The report had no findings for the years
1995 - 1997. In early 2000, the report was finalized without material
modification.
Also reflected in the Company's 1998 results is a $4.8 million write down of
certain computer and computer related assets that the Company had identified as
being no longer of use and which were discarded or sold.
The net margin rate increased from .8 percent for the year ended December 31,
1998 to 2.0 percent for the year ended December 31, 1999. This increase is
consistent with the factors described above.
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated net income of the Company was $9,045,000 and $14,489,000 in 1998
and 1997, respectively. Diluted earnings per share was $.20 in 1998 as compared
to $.31 in 1997. This decrease in earnings is primarily attributable to a
$16,500,000 non-recurring item related to the results of an audit conducted in
connection with the Company's participation in the FEHBP. The audit covered the
periods 1992 - 1997 with the audit findings related to years 1992 - 1994. There
were no findings for the years 1995 - 1997.
Revenue for the year ended December 31, 1998 increased approximately $76.2
million or 6.9 percent over the year ended December 31, 1997. Revenue for the
year ended December 31, 1998 includes $5.7 million related to the sale of
certain Company owned real estate no longer required in its operations.
Excluding these sales, year-over-year revenue increased 6.4 percent. A two
percent increase in net average HMO and indemnity enrollment resulted in an
increase of approximately $21.2 million in health premium revenue while a 4.8
percent increase in average monthly premium per enrollee, combined for all
products, resulted in a $51.1 million increase in health premium revenue. The
increase in HMO and indemnity enrollment is principally due to increases in the
Company's commercial membership.
Fee and other income increased from $18.4 million in 1997 to $20.5 million in
1998, principally due to increased membership in the Company's PPO product.
Revenue from life and short-term disability products contributed $6.9 million in
revenue in 1998 as compared with $5.3 million in 1997. The increase is mainly
due to the products' continued popularity with customers looking for one carrier
to provide all of their employee benefit needs.
22
<PAGE>
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries decreased and contributed approximately $20.0 million
in revenue in 1998 as compared with $21.0 million in 1997. This decrease is due
to an increasing volume of business conducted for MAMSI HMO and indemnity
members which is eliminated in consolidation.
The medical care ratio decreased to 88.8 percent for 1998 compared to 89.4
percent for 1997. On a per member, per month basis, medical expenses increased
4.0 percent. Included in the year ended December 31, 1997 are the results of the
Company's identification of certain claims which were overpaid. These
overpayments were caused, in large part, by a combination of factors including
the ever increasing complexity of the claims paying process as well as
physicians and health care practitioners enhancing their ability to maximize
charges. In connection with these overpayments, during 1997 the Company
recorded, as a reduction of medical expenses, approximately $12 million relating
to claims paid in 1996.
The administrative expense ratio decreased to 11.3 percent for 1998 as compared
to 11.7 in 1997. Adjusted to exclude the effect of the $5.7 million gain on sale
of real estate, the administrative expense ratio was 11.4 percent for 1998.
Included in the Company's year-to-date 1998 results is a $16,500,000 charge
related to an audit conducted by the Office of Inspector General concerning the
Company's participation in the FEHBP for the years 1992 - 1997. The report's
findings indicate that in the years 1992 - 1994 the FEHBP was charged rates that
exceeded the then market price. The report had no findings for the years
1995-1997.
Also reflected in the Company's 1998 results is a $4.8 million write down of
certain computer and computer related assets that the Company had identified as
being no longer of use and which were discarded or sold.
Investment income decreased $4.4 million due to a decrease in realized gains on
sales of marketable equity securities of $5.3 million offset by an increase in
interest income due to higher investable balances.
Income tax expense as a percentage of pretax income decreased from 32.4 percent
in 1997 to 26.1 percent in 1998, in large part due to the relative increase of
tax exempt interest income as a percentage of pretax income.
The net margin rate decreased from 1.3 percent in 1997 to .8 percent in 1998.
This decrease is primarily due to the non-recurring item related to the
Company's participation in the FEHBP.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive and the majority of the
Company's expenses are payments to physicians and health care practitioners,
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 physician and health care practitioner 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.
23
<PAGE>
The Company's cash and investment securities increased from $184.1 million at
December 31, 1998 to $206.2 million at December 31, 1999, primarily due to the
timing of medical expense payments which traditionally lag behind increased
premiums per member and net income offset by the effect of treasury stock
purchases. Accounts receivable increased from $79.3 million at December 31, 1998
to $83.6 million at December 31, 1999, principally due to the timing of customer
payments, increases in membership and increases in the Company's home health
care customer base.
Net property and equipment decreased from $45.0 million at December 31, 1998 to
$43.7 million at December 31, 1999 primarily due to assets being depreciated.
Medical claims payable increased from $129.3 million at December 31, 1998 to
$154.4 million at December 31, 1999, primarily due to increased membership and
an increase in medical expenses per member.
Additional paid-in capital increased from $138.2 million at December 31, 1998 to
$152.6 million at December 31, 1999 due principally to an additional 3.0 million
shares of the Company's stock being placed into the SCT. This also accounts for
the change in the SCT balance.
Treasury stock increased from $75.6 million at December 31, 1998 to $104.1
million at December 31, 1999 due to the purchase of 3,194,940 additional shares
by the Company at a total cost of $28,494,000.
The Company currently has access to total revolving credit facilities of $29.0
million, which is used to provide short-term capital resources for routine cash
flow fluctuations. At December 31, 1999, approximately $3.6 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 the operations of MLH, 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>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 3,725 $ 9,787
Investment securities 202,522 174,325
Working capital advances to Maryland hospitals 15,390 12,261
----------- -----------
Total available liquid assets 221,637 196,373
Credit line availability 13,292 14,855
----------- -----------
Total short-term capital resources $ 234,929 $ 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.
24
<PAGE>
The Company's major business operations are principally conducted through its
HMOs and insurance company. HMOs and insurance companies are subject to state
regulations that, among other things, may require those companies to maintain
certain levels of equity, and restrict the amount of dividends and other
distributions that may be paid to their parent corporations (See Note 12 to the
Consolidated Financial Statements). As of December 31, 1999, those subsidiaries
of the Company were in compliance with all minimum capital requirements.
At its October 1999 Board meeting, the Board of Directors authorized a $20
million stock repurchase program to begin November 15, 1999 and extend through
June 30, 2000. As of December 31, 1999, the Company had repurchased 447,200
shares of its common stock for a total cost of approximately $3.1 million under
its active stock repurchase program.
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 have resulted
in major system failures or miscalculations. The Company incurred less than
$500,000 to bring its Y2K compliance program to completion. All of the Company's
critical vendors indicated Y2K compliance at December 31, 1999. The year 2000
date rollover was completed by the Company without significant incident. The
Company plans to continue to monitor critical systems to insure that they remain
Y2K compliant.
MARKET RISK
The Company is exposed to market risk through its investment in fixed and
variable rate debt securities that are interest rate sensitive. The Company does
not use derivative financial instruments. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer, or type of instrument. A hypothetical
ten percent change in market interest rates over the next year would not
materially impact the Company's financial position or cash flow. The Company has
no significant market risk with regard to liabilities. Debt securities at
December 31, 1999 mature according to their contractual terms as follows:
<TABLE>
<CAPTION>
There- Fair Value
Assets 2000 2001 2002 2003 2004 after Total 12/31/99
- ------ ------- ------ ------ ------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale Securities $90,648 $7,217 $5,691 $17,625 $7,002 $69,592 $197,775 $196,650
Average Interest Rate 5.34% 4.60% 4.66% 5.18% 4.89% 4.84%
Held-to-Maturity $ 2,273 $3,064 $ 501 $ 3,725 $1,465 $ 3,013 $ 14,043 $ 14,062
Average Interest Rate 5.59% 5.75% 4.70% 4.70% 4.90% 6.76%
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 305 of S-K is contained in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 1999 and 1998..... 27
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997............................... 28
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997........... 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................... 30
Notes to Consolidated Financial Statements....................... 31
Report of Ernst & Young LLP Independent Auditors................. 47
Selected Quarterly Financial Data for Fiscal Years 1999 and
1998 (Unaudited)............................................... 48
26
<PAGE>
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands except share amounts) 1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,725 $ 9,787
Investment securities 202,522 174,325
Accounts receivable, net 83,623 79,258
Prepaid expenses, advances and other 27,287 26,955
Deferred income taxes 381 1,247
-------- --------
Total current assets 317,538 291,572
Property and equipment, net 43,668 44,961
Statutory deposits 14,043 14,906
Other assets 10,357 9,055
Deferred income taxes 2,978 2,281
-------- --------
Total assets $388,584 $362,775
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 14 $ 60
Short-term borrowings 3,558 1,845
Accounts payable 21,980 19,071
Medical claims payable, net 154,403 129,265
Deferred premium revenue 16,949 17,167
Deferred income taxes 1,639 1,026
-------- --------
Total current liabilities 198,543 168,434
Notes payable - 14
Deferred income taxes 3,220 3,109
-------- --------
Total liabilities 201,763 171,557
Stockholders' equity
Common stock, $0.01 par, 100,000,000 shares authorized, 59,772,502 issued and
49,439,222 outstanding at December 31, 1999 and 56,772,502 issued and
49,634,162
outstanding at December 31, 1998 597 567
Additional paid-in capital 152,607 138,247
Stock compensation trust (common stock held in trust) (83,215) (68,926)
Treasury stock, 10,333,280 shares at December 31, 1999;
7,138,340 shares at December 31, 1998 (104,117) (75,623)
Accumulated other comprehensive (loss) income (1,013) 1,313
Retained earnings 221,962 195,640
-------- --------
Total stockholders' equity 186,821 191,218
-------- --------
Total liabilities and stockholders' equity $388,584 $362,775
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
27
<PAGE>
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands except per share amounts) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue
Health premium $1,253,063 $1,124,248 $1,051,923
Fee and other 21,352 20,501 18,351
Life and short-term disability premium 8,175 6,876 5,313
Home health services 23,630 19,962 21,025
Investment 11,096 10,622 15,041
Gain on sale of real estate - 5,692 -
---------- ---------- ----------
Total revenue 1,317,316 1,187,901 1,111,653
---------- ---------- ----------
Expense
Medical expense
Referral and ancillary care 510,114 437,279 406,840
Hospitalization, net of coordination of benefits 336,002 342,852 323,435
Primary care 83,558 81,166 83,183
Prescription drugs 170,745 136,767 127,187
Reinsurance premiums, net 539 192 (49)
---------- ---------- ----------
1,100,958 998,256 940,596
---------- ---------- ----------
Life and short-term disability claims 4,033 3,760 2,811
---------- ---------- ----------
Home health patient services 19,412 17,755 16,808
---------- ---------- ----------
Administrative expense
Salaries and benefits 99,682 85,166 80,700
Promotion and advertising 4,311 3,939 3,543
Professional services 4,559 4,066 6,499
Facilities, maintenance and supplies 26,848 27,058 26,609
Other (including interest expense of $532, $414 and $540) 17,683 14,378 12,647
---------- ---------- ----------
153,083 134,607 129,998
---------- ---------- ----------
Loss on retirement of equipment - 4,787 -
Federal Employees Health Benefits Program
accrual - 16,500 -
---------- ---------- ----------
Total expense 1,277,486 1,175,665 1,090,213
---------- ---------- ----------
Income before income taxes 39,830 12,236 21,440
Income tax expense (13,508) (3,191) (6,951)
---------- ---------- ----------
Net income $ 26,322 $ 9,045 $ 14,489
========== ========== ==========
Basic earnings per common share $ .64 $ .20 $ .31
========== ========== ==========
Diluted earnings per common share $ .64 $ .20 $ .31
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
28
<PAGE>
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional Stock Other
Common Paid-In Compensation Treasury Comprehensive Retained
(in thousands except share amounts) Stock Capital Trust Stock Income Earnings Total
------ ---------- ------------ --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 567 $173,325 $(120,652) $ (41,211) $ 265 $172,106 $184,400
Exercise of stock options for
1,061,325 shares released from the
Stock Compensation Trust (10,265) 15,124 4,859
Stock option tax benefit 3,878 3,878
Adjustment to market value for shares
held in Stock Compensation Trust (4,046) 4,046
Comprehensive Income:
Net Income 14,489 14,489
Other comprehensive income,
net of tax of $444 681 681
------ -------- --------- --------- -------- -------- --------
Total Comprehensive Income 15,170
--------
Balance, December 31, 1997 567 162,892 (101,482) (41,211) 946 186,595 208,307
Exercise of stock options for
935,425 shares released from the
Stock Compensation Trust (7,914) 13,330 5,416
Stock option tax benefit 2,495 2,495
Adjustment to market value for shares
held in Stock Compensation Trust (19,226) 19,226
Repurchase of 5,043,700 shares of
MAMSI common stock (34,412) (34,412)
Comprehensive Income:
Net Income 9,045 9,045
Other comprehensive income
net of tax of $239 367 367
------ -------- --------- --------- -------- -------- --------
Total Comprehensive Income 9,412
--------
Balance, December 31, 1998 567 138,247 (68,926) (75,623) 1,313 195,640 191,218
Exercise of stock options for
13,100 shares released from the
Stock Compensation Trust (105) 187 82
Stock option tax benefit 19 19
Purchase of 3,000,000 shares of MAMSI
common stock to be held in the
Stock Compensation Trust 30 31,751 (31,781)
Adjustment to market value for shares
held in Stock Compensation Trust (17,305) 17,305
Repurchase of 3,194,940 shares of
MAMSI common stock (28,494) (28,494)
Comprehensive Income:
Net Income 26,322 26,322
Other comprehensive loss,
net of tax of $(1,522) (2,326) (2,326)
------ -------- --------- --------- -------- -------- --------
Total Comprehensive Income 23,996
--------
Balance, December 31, 1999 $ 597 $152,607 $ (83,215) $(104,117) $ (1,013) $221,962 $186,821
====== ======== ========= ========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
29
<PAGE>
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 26,322 $ 9,045 $ 14,489
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,249 10,796 10,179
Provision for bad debts 292 34 (187)
Provision for deferred income taxes 2,415 (2,273) 7,260
(Gain) loss on sale and disposal of assets 49 (833) -
(Increase) decrease in accounts receivable (4,657) 8,563 (10,626)
(Increase) decrease in prepaid expenses, advances and other (332) (7,661) 13,029
Increase (decrease) in accounts payable 2,909 2,193 (1,877)
Increase (decrease) in medical claims payable, net 25,138 30,937 (20,321)
(Decrease) increase in deferred premium revenue (218) 1,445 5,243
-------- -------- --------
Total adjustments 35,845 43,201 2,700
-------- -------- --------
Net cash provided by operating activities 62,167 52,246 17,189
-------- -------- --------
Cash flows used in investing activities:
Purchases of investment securities (355,996) (329,400) (249,862)
Sales and maturities of investment securities 325,117 307,763 253,267
Purchases of property and equipment (8,147) (9,008) (21,016)
Purchases of statutory deposits (1,476) (100) (8,761)
Maturities of statutory deposits 1,125 - 10
Purchases of other assets (2,598) (893) (406)
Proceeds from sale of assets 486 12,574 131
-------- -------- --------
Net cash used in investing activities (41,489) (19,064) (26,637)
-------- -------- --------
Cash flows (used in) provided by financing activities:
Principal payments on notes payable (60) (60) (60)
Increase (decrease) in short-term borrowings 1,713 (404) 276
Exercise of stock options 82 5,416 4,859
Stock option tax benefit 19 2,495 3,878
Purchase of treasury stock (28,494) (34,412) -
-------- -------- --------
Net cash (used in) provided by financing activities (26,740) (26,965) 8,953
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (6,062) 6,217 (495)
Cash and cash equivalents at beginning of year 9,787 3,570 4,065
-------- -------- --------
Cash and cash equivalents at end of year $ 3,725 $ 9,787 $ 3,570
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
30
<PAGE>
Mid Atlantic Medical Services, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose
subsidiaries are active in managed health care and other life and health
insurance related activities. MAMSI's principal markets currently include
Maryland, Virginia, the District of Columbia, Delaware, West Virginia, North
Carolina and Pennsylvania. MAMSI and its subsidiaries (collectively referred to
as the "Company") have developed a broad range of managed health care and
related ancillary products and deliver these services through health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), a life and
health insurance company, home health care and home infusion services companies,
a hospice company, a 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.(R)("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and
Optimum Choice, Inc. of Pennsylvania ("OCIPA") arrange for health care services
to be provided to an enrolled population for a predetermined, prepaid fee,
regardless of the extent or nature of services provided to the enrollees. The
HMOs offer a full complement of health benefits, including physician, hospital
and prescription drug services.
The following are other significant wholly-owned subsidiaries of MAMSI:
Physicians Health Plan of Maryland, Inc. ("PHP-MD") is an individual practice
association ("IPA") that provides physician services to certain of the Company's
HMOs.
Alliance PPO, LLC ("Alliance") provides a delivery network of physicians (called
a preferred provider organization) to employers and insurance companies in
association with various health plans.
Mid Atlantic Psychiatric Services, Inc. ("MAPSI") provides psychiatric services
principally to third party payors or self-insured employer groups.
MAMSI Life and Health Insurance Company ("MLH") develops and markets indemnity
health products and group life, accidental death and short-term disability
insurance.
HomeCall, Inc., FirstCall, Inc. and HomeCall Pharmaceutical Services, Inc.
("HCPS") provide in-home medical care including skilled nursing, infusion and
therapy to MAMSI's HMO members and other payors. In addition, HCPS provides
pharmacy services to MAMSI's HMO members and other payors.
HomeCall Hospice Services, Inc. ("HCHS") began operations in December, 1996 and
provides services to terminally ill patients and their families.
The significant accounting policies followed by MAMSI and its subsidiaries are
described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MAMSI and its
subsidiaries. All significant intercompany balances have been eliminated in
consolidation.
31
<PAGE>
MAJOR CUSTOMERS
A significant portion of the Company's premium revenue is derived from federal,
state and local government agencies, including governmental employees and
Medicaid and Medicare recipients. For the years ended December 31, 1999, 1998
and 1997, approximately 8%, 11% and 11%, respectively, of premium revenue was
derived from federal government agencies which is included in the Medicare and
Risk segments, and approximately 21%, 18% and 25%, respectively, was derived
from Maryland and Virginia state and local government agencies which is included
in the Risk segment.
CASH EQUIVALENTS
Floating rate municipal putable bonds, which possess an insignificant risk of
loss from changes in interest rates and are held less than three months from the
date of purchase, are classified as cash equivalents.
INVESTMENT SECURITIES
Investment securities, consisting principally of municipal bonds and tax-free
bond funds are classified as available-for-sale. These securities are carried at
fair market value plus accrued interest and any unrealized gains and losses are
reported in other comprehensive income, net of the related tax effect. Gains and
losses are reported in earnings when realized. Gains and losses on sales of
securities are computed using the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the property and equipment. Leasehold improvements are amortized on a
straight-line basis over the lesser of the life of the improvement or the term
of the related lease.
STATUTORY DEPOSITS
Statutory deposits, consisting principally of municipal bonds and treasury notes
held in custodial accounts by state regulatory agencies, are classified as
held-to-maturity. These securities are stated at amortized cost.
GOODWILL
The excess of cost over the fair value of net assets of the acquired company in
the 1994 purchase transaction is recorded as goodwill and is classified in the
consolidated balance sheets as an other asset. Goodwill is amortized on a
straight-line basis over 15 years.
HEALTH PREMIUM
Amounts charged for health care services are recognized as premium revenue in
the month for which enrollees are entitled to receive care. Included in premium
revenue are amounts due from customers that utilize the Company's capitated
primary care physician network, its care coordination services and other
services related to health management and who self-fund, generally up to
specified limits, certain elements of medical costs, such as hospitalization and
specialist physicians. Premium revenue received in advance is recorded as
deferred premium revenue.
32
<PAGE>
FEE AND OTHER
Amounts charged to third party payors solely for use of the Company's network of
physicians and health care practitioners and its discounted fee-for-service rate
structure are recognized as fee revenue. Amounts charged for administrative
services only arrangements, entailing only claims payment services and
utilization of the provider network without utilization of the Company's primary
care physician network and care coordination services, and for which the Company
bears no insurance risk, are recognized as fee revenue.
HOME HEALTH SERVICES
Amounts charged to patients, third party payors and others for home health
services are recorded at net realizable amounts, including an estimate of
potential retroactive adjustments under cost reimbursement agreements with third
party payors.
MEDICAL EXPENSE
Medical expense consists principally of medical claims and capitation costs.
Medical claims include payments to be made on claims reported as of the balance
sheet date and estimates of health care services incurred but not reported
("IBNR") to the Company as of the balance sheet date. IBNR is estimated using an
expense forecasting model that is based on historical claims incurrence patterns
modified to consider current trends in enrollment, member utilization patterns,
timeliness of claims submissions and other factors. This estimate includes
medical costs to be incurred beyond the premium paying date that are
contractually required.
Capitation costs represent monthly fixed fees to participating primary care
physicians and other medical practitioners as retainers for providing continuing
medical care.
Medical claims reversals result from the determination that the Company has paid
claims in excess of contractually obligated amounts. Amounts recognized through
specific identification are recorded at their net realizable value as a
reduction of medical expense in the consolidated statements of operations and as
an increase in accounts receivable in the consolidated balance sheets.
The Company believes that its claims reserves are adequate to satisfy its
ultimate claims liabilities; however, the liability as established may vary
significantly from actual claims amounts, either negatively or positively, and
as such adjustments are deemed necessary, they are included in current
operations. Establishment of claims estimates is an inherently uncertain
process; there can be no certainty that currently established reserves will
prove adequate to cover actual ultimate expenses. Subsequent actual experience
could result in reserves being too high or too low which could positively or
negatively impact the Company's earnings in future periods.
COORDINATION OF BENEFITS
Coordination of benefits ("COB") results from the determination that the Company
has paid for medical claims expenses for which an enrollee has duplicate
coverage and for which another insurer is primarily liable. In the consolidated
statements of operations, such identified amounts are classified as a reduction
of hospitalization expense and, in the consolidated balance sheets, such amounts
are classified as a reduction of medical claims payable.
33
<PAGE>
INCOME TAXES
The income tax provision includes Federal and state income taxes both currently
payable and deferred because of differences between financial reporting and tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
EARNINGS PER COMMON SHARE
The Company applies Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," in calculating its earnings per share. Basic earnings per
common share are based upon the weighted average shares outstanding. Outstanding
stock options are treated as common stock equivalents for purposes of computing
diluted earnings per share. Shares held in the Company's Stock Compensation
Trust (see Note 10) are excluded from the calculation of basic and diluted
earnings per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows Statement of Financial Accounting Standards No. 107,
"Disclosure about Fair Value of Financial Instruments" ("Statement No. 107"),
which requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Statement No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. The following
methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash and cash equivalents - The carrying amount reported in the consolidated
balance sheets approximates fair value.
Investment securities - Fair values are based on quoted market prices.
Statutory deposits - Fair values are based on quoted market prices.
Short-term borrowings - The carrying amount reported in the consolidated balance
sheets approximates fair value.
ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
STOCK OPTION PLANS
As permitted by Financial Accounting Standards No. 123, the Company follows
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations in accounting for its stock
option plans. Under APB 25, because the exercise price of the Company's employee
stock options equals the market value of the underlying stock on the date of
grant, no compensation expense is recognized.
34
<PAGE>
NOTE 2 - INVESTMENTS
Investments are classified into two categories (available-for-sale or
held-to-maturity) and are valued based upon this designation. Securities
classified as available-for-sale, which include debt and equity securities that
the Company does not have the positive intent to hold to maturity, are marked to
market with the resulting unrealized gain or loss reflected in other
comprehensive income. Securities classified as held-to-maturity, which are debt
securities that the Company has both the positive intent and ability to hold to
maturity, are carried at amortized cost. The Company classifies its statutory
deposits as held-to-maturity with no effect on the recorded value. All other
investments are classified as available-for- sale. Management re-evaluates these
designations annually. During 1999, statutory deposit investments with an
amortized cost of $1,166,000 were released by state regulatory agencies and
transferred to the Company's investment securities portfolio. The unrealized
loss at the date of transfer was $21,000.
The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
-----------------------------------------------------
1999
-----------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Obligations of states and political subdivisions $121,344 $ 172 $ 939 $120,577
Municipal bond funds 74,720 - 358 74,362
Accrued interest 1,711 - - 1,711
-------- ------- ------- --------
Debt securities 197,775 172 1,297 196,650
Equity securities 6,423 60 611 5,872
-------- ------- ------- --------
Investment securities $204,198 $ 232 $ 1,908 $202,522
======== ======= ======= ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 2,597 $ 17 $ 18 $ 2,596
Obligations of states and political subdivisions 10,592 64 44 10,612
Other investments 854 - - 854
-------- ------- ------- --------
Statutory deposits $ 14,043 $ 81 $ 62 $ 14,062
======== ======= ======= ========
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------
1998
-----------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Obligations of states and political subdivisions $ 84,072 $ 1,996 $ - $ 86,068
Municipal bond funds 81,468 1 - 81,469
Accrued interest 1,210 - - 1,210
-------- ------- ------- --------
Debt securities 166,750 1,997 - 168,747
Equity securities 5,403 181 6 5,578
-------- ------- ------- --------
Investment securities $172,153 $ 2,178 $ 6 $174,325
======== ======= ======= ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 3,426 $ 157 $ - $ 3,583
Obligations of states and political subdivisions 10,626 270 - 10,896
Other investments 854 - - 854
-------- ------- ------- --------
Statutory deposits $ 14,906 $ 427 $ - $ 15,333
======== ======= ======= ========
</TABLE>
For the years ended December 31, 1999 and 1998, marketable equity
available-for-sale securities with a fair value at the date of sale of
$2,524,000 and $92,570,000, respectively, were sold. The gross realized gains on
such sales totaled $50,000 and $5,793,000, and the gross realized losses totaled
$75,000 and $3,001,000 for each of the respective periods. Realized gains and
losses are included in investment income. Other sales of investment securities
consisted principally of redemptions from municipal bond funds.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1999, by contractual maturity, are shown below.
Actual maturities may differ from contractual maturities because the issuers of
the securities may have the right to prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
-------------------------
Estimated
Fair
(in thousands) Cost Value
-------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 90,648 $ 90,331
Due after one year through five years 37,535 37,314
Due after five years through ten years 48,566 47,983
Due after ten years 21,026 21,022
-------- --------
Debt securities 197,775 196,650
Equity securities 6,423 5,872
-------- --------
$204,198 $202,522
======== ========
HELD-TO-MATURITY
Due in one year or less $ 2,273 $ 2,274
Due after one year through five years 8,757 8,732
Due after five years through ten years 2,408 2,429
Due after ten years 605 627
-------- --------
$ 14,043 $ 14,062
======== ========
</TABLE>
36
<PAGE>
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1999 1998
-------------------------
<S> <C> <C>
Premium and fee accounts $ 62,269 $ 57,399
Home health service accounts 9,039 5,909
Medical recoverables 10,574 16,204
Other 7,186 4,960
Less: allowance for doubtful accounts (5,445) (5,214)
-------- --------
$ 83,623 $ 79,258
======== ========
</TABLE>
Medical recoverables consist of refunds identified on paid claims. This amount
has been recorded as a reduction of medical expense in the consolidated
statements of operations. Other receivables consist primarily of amounts due for
reinsurance recoveries, pharmacy rebates and interest accrued on statutory
deposits and amended tax returns.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
------------------------
(in thousands) 1999 1998
------------------------
<S> <C> <C>
Land, buildings and improvements $32,086 $28,684
Computer equipment and software 31,259 28,826
Office furniture and equipment 20,776 19,498
Leasehold improvements 1,065 861
------- -------
85,186 77,869
Less: accumulated depreciation and
amortization (41,518) (32,908)
------- -------
$43,668 $44,961
======= =======
</TABLE>
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
------------------------
(in thousands) 1999 1998
------------------------
<S> <C> <C>
Notes payable $ 14 $ 74
Current portion (14) (60)
------- -------
Noncurrent portion $ - $ 14
======= =======
</TABLE>
37
<PAGE>
The Company has access to total line-of-credit and letter-of-credit facilities
of $29 million, which are subject to annual renewal. Borrowings bear interest at
a rate based on the Federal Funds rate plus .75% - 1.65% and are secured by
certain cash balances and investment securities. At December 31, 1999,
approximately $3.56 million was outstanding on one of the lines-of-credit at an
interest rate of 6.53% and approximately $12.15 million in letters-of-credit was
outstanding.
Interest expense paid in cash during 1999, 1998 and 1997 was approximately
$214,000, $188,000 and $538,000, respectively.
NOTE 6 - REINSURANCE
M.D. IPA, OCI, OCCI, OCIPA and MLH maintain reinsurance coverage to provide for
reimbursement of claims in excess of certain limits. Reinsurance for health
claims generally covers 80% of all hospital costs in excess of a deductible
amount per enrollee per year or 90% of the approved per diem or fixed charge per
procedure (subject to a $2,000,000 maximum lifetime reinsurance limit per person
and no more than $1,000,000 in a given year). The deductible per enrollee is
$200,000. Reinsurance for life and accidental death claims generally covers all
settlements in excess of $50,000 per person subject to a $950,000 maximum
recovery per person for life claims and $1,000,000 per person on accidental
death claims. Reinsurance recoveries for the years ended December 31, 1999, 1998
and 1997 were approximately $1,566,000, $1,597,000 and $2,045,000, respectively.
In the consolidated statements of operations, reinsurance premiums are shown net
of the related recoveries.
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows as of December
31:
<TABLE>
<CAPTION> --------------------------
(in thousands) 1999 1998
--------------------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation $ 1,770 $ 2,664
Receivable valuation adjustments 3,988 4,460
Unrealized investment (losses) gains (663) 859
------- -------
Total deferred tax liabilities 5,095 7,983
------- -------
Deferred tax assets:
Accrued medical expenses 1,144 3,429
Premium revenue adjustments 1,248 2,975
State net operating losses 3,133 2,449
Accrued pension expenses 875 1,263
Other 250 (450)
------- -------
Total deferred tax assets 6,650 9,666
Valuation allowance for deferred tax assets (3,055) (2,290)
------- -------
Net deferred tax assets 3,595 7,376
------- -------
$(1,500) (607)
======= =======
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 381 $ 1,247
Non-current assets - deferred income taxes 2,978 2,281
Current liabilities - deferred income taxes (1,639) (1,026)
Non-current liabilities - deferred
income taxes (3,220) (3,109)
------- -------
Net deferred tax liability $(1,500) $ (607)
======= =======
</TABLE>
38
<PAGE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
<TABLE>
<CAPTION>
---------------------------------------
(in thousands) 1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 10,536 $ 4,105 $ (1,363)
State 557 1,359 1,054
--------- --------- ---------
Total current 11,093 5,464 (309)
--------- --------- ---------
Deferred:
Federal 2,623 (1,250) 7,279
State (208) (1,023) (19)
--------- --------- ---------
Total deferred 2,415 (2,273) 7,260
--------- --------- ---------
$ 13,508 $ 3,191 $ 6,951
========= ========= =========
</TABLE>
The Company's tax provision differs from the statutory rate for Federal income
taxes for the years ended December 31 as follows:
<TABLE>
<CAPTION>
-------------------------------------
(in thousands) 1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Statutory rate (35%) $13,940 $ 4,282 $ 7,504
Tax-exempt interest (1,421) (1,369) (1,582)
State income taxes, net of Federal benefit (163) (580) 461
Increase in valuation allowance for
deferred tax assets 765 1,228 325
Other non-deductible items 566 526 575
Other, net (179) (896) (332)
------- ------- -------
$13,508 $ 3,191 $ 6,951
======= ======= =======
</TABLE>
Total tax deposits made by the Company in 1999, 1998 and 1997 were approximately
$10,027,000, $6,870,000 and $2,461,000, respectively.
NOTE 8 - RELATED PARTIES
For the years ended December 31, 1999, 1998 and 1997, certain members of the
Boards of Directors of MAMSI and affiliated corporations who are also
participating physicians provided medical services to enrollees totaling
$1,790,000, $4,430,000 and $6,103,000, respectively, which represents
approximately .3%, 1% and 1% in 1999, 1998 and 1997, respectively, of payments
to all physicians. Board members are remunerated at the same contractual level
as all other participating physicians and are selected by enrollees to render
medical services under the same guidelines as all other participating
physicians.
39
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS PLANS
PENSION PLANS
The Company has a defined contribution 401(k) savings plan covering all
full-time employees. Employees are allowed to contribute up to 23% of their
pretax earnings annually up to a maximum contribution of $10,000 and the Company
makes a matching contribution of 50% on the first 4% of contributions made by
employees. Employees vest immediately in the employee contributions and ratably
over five years in the Company contributions. During 1999, 1998 and 1997, the
Company's contribution to the 401(k) plan aggregated $1,056,000, $681,000 and
$577,000, respectively.
STOCK OPTION PLANS
The Company follows APB 25 under which no compensation expense has been
recognized in connection with its stock option plans. Pro forma information
regarding net income and earnings per share are required by Statement 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.2%, 5.6%, and 6.4%; volatility
factors of the expected market price of the Company's common stock of .59, .42,
and .42 and a weighted average life of the options of three years. The Company
anticipates that it will declare no dividends.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows (in thousands except per share amounts):
1999 1998 1997
------- ------ ------
Pro forma net income $19,856 $1,502 $9,007
Pro forma basic earnings per share .48 .03 .19
Pro forma diluted earnings per share .48 .03 .19
In years 1990 through 1996, 1998 and 1999, MAMSI implemented a non-qualified
stock option plan whereby options for the purchase of shares of common stock may
be granted to directors, officers and employees of the Company. Unexpired
authorized shares under the plans total 10,800,000. Options under the plans
generally vest over a three-year period and are exercisable at 100% of the fair
market value per share on the date the options are granted. The Company accounts
for these stock option grants in accordance with APB 25, and, accordingly,
recognizes no compensation expense for these stock option grants. Transactions
relating to the plans are summarized as follows:
40
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
1999 Exercise 1998 Exercise 1997 Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding, January 1 7,913,124 $14.98 8,099,231 $17.76 8,864,021 $ 17.02
Granted 2,541,630 $ 9.32 6,304,558 $14.77 1,128,500 $ 12.79
Exercised (13,100) $ 6.21 (935,425) $ 5.79 (1,061,325) $ 4.58
Forfeited (917,055) $16.37 (5,555,240) $20.34 (831,965) $ 19.92
--------- --------- ---------
Outstanding, December 31 9,524,599 $13.35 7,913,124 $14.98 8,099,231 $ 17.76
========= ========= =========
Available for grant, end of year 1,581,308 1,766,751 1,188,744
Exercisable, end of year 5,910,801 1,608,139 4,887,992
Option price range for exercised
shares $5.06-$7.88 $4.54-$12.63 $3.29-$14.75
Option price range at end of year $5.00-$20.00 $5.00-$27.13 $4.54-$28.50
Weighted average fair value of
options granted during year $3.85 $4.49 $4.26
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- --------------------------------
Outstanding Weighted Average Exercisable
Range of as of Remaining Weighted Average as of Weighted Average
Exercise Prices 12/31/1999 Contractual Life Exercise Price 12/31/1999 Exercise Price
- ------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 5.00 - $10.00 2,249,557 4.3 $ 8.7831 208,627 $ 8.5196
$10.01 - $15.00 2,974,846 2.6 $12.5341 1,839,678 $12.5795
$15.01 - $20.00 4,300,196 1.3 $16.2930 3,862,496 $16.3272
--------- ---------
9,524,599 2.4 $13.3455 5,910,801 $14.8852
========= =========
</TABLE>
On April 15, 1998, the Stock Option Committee of the Company's Board of
Directors authorized a voluntary exchange ("Exchange") of all existing stock
options with an exercise price of $16.00 or more per share. Each stock option
that was voluntarily tendered was replaced with a newly issued stock option
priced at $16.00 per share. As a condition of the Exchange, option holders
agreed to extend the vesting period for one year. In addition, the newly issued
stock options are exercisable for one additional year beyond the current
expiration date. Approximately 4.3 million options were exchanged for a like
number of newly issued options.
INCENTIVE COMPENSATION PLAN
The Company has an incentive compensation plan whereby managers receive bonuses
based upon the annual operating results of the Company. During 1999, incentive
compensation expense was approximately $4,200,000 which was paid to employees in
February, 2000. During 1998, $800,000 was earned and recognized as expense and
in 1997 no management bonus was earned. In addition, certain individuals receive
a cash bonus based upon the achievement of certain measurable criteria other
than the annual operating results of the Company. These bonus amounts are not
significant.
41
<PAGE>
NOTE 10 - COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION> -----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $26,322,000 $ 9,045,000 $14,489,000
Denominator:
Denominator for basic earnings per share
- weighted average shares 41,225,327 45,407,006 46,273,484
Dilutive securities - employee stock options 41,277 66,989 612,182
Denominator for diluted earnings per share
- adjusted weighted average shares 41,266,604 45,473,995 46,885,666
</TABLE>
On August 26, 1996, the Company established the MAMSI SCT to fund its
obligations arising from its various stock compensation plans. MAMSI funded the
SCT with 9,130,000 shares of newly issued MAMSI stock. In exchange, the SCT
delivered a promissory note to MAMSI for approximately $129.9 million which
represents the purchase price of the shares. Amounts owed by the SCT to MAMSI
are repaid by cash received by the SCT or will be forgiven by MAMSI, which will
result in the SCT releasing shares to satisfy MAMSI obligations for stock
compensation.
During 1999, the SCT purchased an additional 3,000,000 shares of the Company's
common stock for approximately $31.8 million. The existing promissory note has
been modified to reflect these purchases.
For financial reporting purposes, the SCT is consolidated with MAMSI. The fair
market value of the shares held by the SCT is shown as a reduction to
stockholders' equity in the Company's consolidated balance sheets. All
transactions between the SCT and MAMSI are eliminated. The difference between
the cost and fair value of common stock held in the SCT is included in the
consolidated financial statements as additional paid-in capital. At December 31,
1999, 1998 and 1997, the SCT held 10,010,850, 7,023,950 and 7,959,375 shares of
common stock at a fair market value of approximately $83.2, $68.9 and $101.5
million, respectively.
Shares held by the SCT are excluded from weighted average shares outstanding
used in the computation of earnings per common share.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office space under the terms of
non-cancelable operating leases that expire at various dates through 2004. Rent
expense relating to these operating leases approximated $3,429,000, $3,502,000
and $3,552,000 in 1999, 1998 and 1997, respectively.
42
<PAGE>
Future minimum lease commitments under non-cancelable operating leases are as
follows for the years ended December 31 (in thousands):
Year Amount
- ---- -------
2000 $ 2,720
2001 2,122
2002 1,521
2003 617
2004 178
-------
$ 7,158
=======
During 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 physicians and
health care practitioners to the carrier by using the device of offsetting
future payments to physicians and health care practitioners with the amount owed
by the physicians and health care practitioners 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. The matter
remains within the jurisdiction of the MIA. Management believes that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's financial statements as the MIA's current position affects the method
of collection of the claims reversals, rather than the Company's legal right to
the refunds.
M.D. IPA contracts with OPM to provide or arrange health services under the
FEHBP. The contract with OPM and applicable government regulations establish
premium rating requirements for the FEHBP. The premiums established under the
OPM contract are subject to periodic review and audit to determine, if they were
established in compliance with the community rating and other requirements under
the program.
In 1998, a pretax charge of approximately $16.5 million, which includes
approximately $4.4 million of interest, was recognized in the Company's
financial statements in anticipation of negotiations relating to potential
governmental claims for contracts with OPM related to an audit conducted by the
Office of Inspector General concerning the Company's participation in the FEHBP
for the years 1992-1997 related to findings for the 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. OPM's current practice is
to audit large plans every year. 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 early
2000, the Company settled all findings without material modification to its
original charge.
The Company is involved in other various legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes any
ultimate liability that could arise from these other actions will not materially
affect the Company's consolidated financial position or results of operations.
43
<PAGE>
NOTE 12 - STATUTORY REQUIREMENTS
M.D. IPA, OCI, OCCI and OCIPA are subject to insurance department regulations in
the states in which they are licensed. MLH is subject to insurance department
regulations in Maryland, its state of domicile.
Minimum required statutory net worth and actual statutory net worth as of
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Minimum Actual Minimum Actual
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
M.D. IPA $3,000,000 $57,400,000 $3,000,000 $42,000,000
OCI 3,000,000 64,100,000 3,000,000 56,000,000
MLH 500,000 52,000,000 500,000 34,500,000
OCCI 2,500,000 2,500,000 2,500,000 2,900,000
OCIPA 1,500,000 2,300,000 1,500,000 2,400,000
</TABLE>
M.D. IPA, OCI, OCCI, OCIPA and MLH were in compliance with state depository
rules at December 31, 1999 and 1998. OCCI failed to meet its working capital
requirement of $1.6 million at December 31, 1999. In February, 2000, additional
capital was provided to meet this requirement. MLH was in compliance with the
applicable risk-based capital requirements for life and health insurance
companies at December 31, 1999 and 1998, and M.D. IPA, OCI, OCCI and OCIPA were
in compliance with the applicable risk-based capital requirements at December
31, 1999. These MAMSI subsidiaries must notify state regulators before the
payment of any dividends to MAMSI and, in certain circumstances, must receive
positive affirmation prior to such payment.
NOTE 13 - RISK CONCENTRATIONS
Financial instruments that potentially subject the Company to credit risk
consist primarily of investments in marketable securities (including money
market funds, floating rate municipal putable bonds, intermediate term municipal
bonds, and common stocks) and premiums receivable. The Company receives advice
through or assigns direct management of investment in securities to professional
investment managers selected for their expertise in various markets, within
guidelines established by the Board of Directors. These guidelines include broad
diversification of investments. Concentrations of credit risk and business
volume with respect to commercial premiums receivable are generally limited due
to the large number of employer groups comprising the Company's customer base.
As of December 31, 1999, approximately 19% of premium and home health service
receivables were due from federal government agencies. The Company performs
ongoing credit evaluations of customers and generally does not require
collateral.
NOTE 14 - REPORTABLE SEGMENTS
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE
SEGMENT DERIVES ITS REVENUES
The Company has three reportable segments: Commercial risk products, Medicare
products and Preferred Provider Organizations ("PPO"). Commercial risk products
include traditional HMO and point-of-service health care plans as well as hybrid
products. Traditional products provide for the provision of comprehensive
medical care to enrollees for a fixed, prepaid premium regardless of the amount
of care provided. Hybrid products offer the ability to tailor employee health
care offerings by varying benefit designs, funding methods and insurance risk.
These products combine the use of capitated physicians to serve as care
coordinators, employer funding of specialist and institutional claims on an "as
paid" basis
44
<PAGE>
with MAMSI's underwriting of risk on a specific and/or aggregate stop loss
basis. The Medicare product is health coverage offered to Title XVIII Medicare
recipients. Under a contractual arrangement with the United States Health Care
Financing Administration ("HCFA"), the Company received a monthly premium for
which the Company provides comprehensive medical coverage to those individuals.
Effective January 1, 1999, the Company no longer participates in the Medicare
program. MAMSI offers access to its preferred provider network of physicians to
employers and insurance companies in association with various health plans. PPOs
allow enrollees to receive care from a network of participating physicians and
health care practitioners who agree to provide services at contractually
negotiated rates in exchange for increased patient volume. A PPO does not assume
insurance risk from medical utilization and it is not the claims payor.
MEASUREMENT OF SEGMENT PROFIT OR LOSS
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, not including income from the
Company's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Management does not allocate assets in the measurement of segment profit or
loss; therefore, jointly used assets are not allocated to the reportable
segments.
FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because of the
range of benefit plans offered for providing health care coverage to enrollees.
<TABLE>
<CAPTION>
REPORTABLE SEGMENTS
-----------------------------------------------------------------
(in thousands) Risk Medicare PPO All Others Totals
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenue from external customers $1,206,340 $ - $21,352 $ 78,528 $1,306,220
Segment pretax profit (loss) 20,086 - 11,103 (2,011) 29,178
-----------------------------------------------------------------
(in thousands) Risk Medicare PPO All Others Totals
-----------------------------------------------------------------
Year ended December 31, 1998:
Revenue from external customers $1,040,701 $46,414 $20,501 $ 63,971 $1,171,587
Segment pretax profit (loss) 13,251 (6,778) 10,748 519 17,740
-----------------------------------------------------------------
(in thousands) Risk Medicare PPO All Others Totals
-----------------------------------------------------------------
Year ended December 31, 1997:
Revenue from external customers $ 917,613 $53,665 $18,351 $106,983 $1,096,612
Segment pretax profit (loss) 7,282 (14,799) 9,543 5,095 7,121
</TABLE>
The sources of revenue included in the All Others category are composed
primarily of Medicaid and miscellaneous. All revenue is generated within the
United States.
45
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------
(in thousands) 1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Revenues
Total external revenues for reportable segments $1,227,692 $1,107,616 $ 989,629
Other revenues 78,528 63,971 106,983
Investment revenue not allocated 11,096 10,622 15,041
Gain on sale of real estate - 5,692 -
---------- ---------- ----------
Total consolidated revenues $1,317,316 $1,187,901 $1,111,653
========== ========== ==========
Pretax Profit
Total profit from reportable segments $ 31,189 $ 17,221 $ 2,026
Other (loss) or profit (2,011) 519 5,095
Net investment income not allocated 10,652 10,091 14,319
Gain on sale of real estate - 5,692 -
Federal Employees Health Benefits Program
accrual - (16,500) -
Loss on retirement of equipment - (4,787) -
---------- ---------- ----------
Total consolidated pretax profit $ 39,830 $ 12,236 $ 21,440
========== ========== ==========
</TABLE>
NOTE 15 - COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities, net-of-tax, were as follows:
<TABLE>
<CAPTION>
-----------------------------------------
(in thousands) 1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Unrealized holding (losses) gains arising
during period $(2,341) $ 2,055 $ 5,573
Less: Reclassification adjustment for
net (losses) gains included in net income (15) 1,688 4,892
------- ------- -------
Net unrealized (losses) gains recognized in
other comprehensive (loss) income $(2,326) $ 367 $ 681
======= ======= =======
</TABLE>
46
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Mid Atlantic Medical Services, Inc.
We have audited the accompanying consolidated balance sheets of Mid Atlantic
Medical Services, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We have conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mid
Atlantic Medical Services, Inc. and subsidiaries at December 31, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
McLean, Virginia
February 14, 2000
47
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1999 AND 1998
<TABLE>
<CAPTION>
1999 1999 1999 1999 1998 1998 1998 1998
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands except share amounts)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $313,198 $323,530 $335,250 $345,338 $289,502 $294,225 $299,546 $304,628
Expense 304,127 316,560 324,689 332,110 278,843 288,496 310,685 297,641
Income (loss) before income taxes
(benefit) 9,071 6,970 10,561 13,228 10,659 5,729 (11,139) 6,987
Net income (loss) 5,871 4,506 7,120 8,825 6,690 3,585 (6,743) 5,513
Basic earnings (loss) per share .14 .11 .17 .22 .14 .08 (.15) .13
Diluted earnings (loss) per share .14 .11 .17 .22 .14 .08 (.15) .13
</TABLE>
Included in the third quarter of 1998 is a one-time, pre-tax charge of $16.5
million related to the Company's participation in the FEHBP. See Note 11 to the
Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE>
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from
"Directors and Executive Officers" section of the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on May 1, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
"Directors and Executive Officers -- Directors' Compensation" and "Executive
Management Compensation" sections of the Proxy Statement for MAMSI's annual
meeting of shareholders to be held on May 1, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from "Stock
Owned by Management" and "Principal Stockholders" sections of the Proxy
Statement for MAMSI's annual meeting of shareholders to be held on May 1, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
"Executive Management Compensation" section of the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on May 1, 2000.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of December 31, 1999 and 1998 ... 27
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 ............................. 28
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 ......... 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ............................. 30
Notes to Consolidated Financial Statements ..................... 31
Report of Ernst & Young LLP Independent Auditors ............... 47
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
1999, 1998 and 1997 ..................................... 51
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted because they
are not required under the related instructions or are inapplicable.
50
<PAGE>
Mid Atlantic Medical Services, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at ------------------------------
Beginning Charged to Charged to Balance
of Costs Other Deductions- at End
Description Period and Expenses Accounts Write-Offs of Period
- ----------- ---------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
DEDUCTED FROM ASSET ACCOUNTS:
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts - accounts receivable
$ 5,366 $ $ (93)(1) $ (93) $ 5,180
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 762 $ $ 325 $ (25) $ 1,062
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts - accounts receivable
$ 5,180 $ 143 $ (309)(1) $ 200 $ 5,214
======== ======== ======== ======== =======
Valuation allowance - deferred tax assets
$ 1,062 $ 1,228 $ $ $ 2,290
======== ======== ======== ======== =======
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts - accounts receivable
$ 5,214 $ 462 $ (230)(1) $ $ 5,446
======== ======== ======== ======== =======
Valuation allowance - deferred tax assets
$ 2,290 $ 765 $ $ $ 3,055
======== ======== ======== ======== =======
</TABLE>
(1) The changes to the allowance were charged to premium revenue.
51
<PAGE>
(a)(3)
EXHIBITS
See the Exhibit Index on pages 62-63 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI")
(Registrant)
By: /s/ Mark D. Groban, M.D. 3/28/00
--------------------------------------------------
Mark D. Groban, M.D. Date
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Thomas P. Barbera 3/28/00
--------------------------------------------------
Thomas P. Barbera Date
Vice Chairman of the Board, President, Chief Executive Officer
and Director
By: /s/ Francis C. Bruno, M.D. 3/28/00
---------------------------------------------------
Francis C. Bruno, M.D. Date
Director
By:
---------------------------------------------------
John H. Cook, III, M.D. Date
Director
By: /s/ Raymond H. Cypess, D.V.M., Ph.D. 3/28/00
---------------------------------------------------
Raymond H. Cypess, D.V.M., Ph.D. Date
Director
By: /s/ Robert E. Foss 3/28/00
--------------------------------------------------
Robert E. Foss Date
Senior Executive Vice President and Chief Financial Officer
and Director
(Principal Financial Officer)
By: /s/ Mark D. Groban, M.D. 3/28/00
--------------------------------------------------
Mark D. Groban, M.D. Date
Chairman of the Board and Director
(Principal Executive Officer)
By: /s/ Christopher E. Mackail 3/28/00
--------------------------------------------------
Christopher E. Mackail Date
Senior Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ John P. Mamana, M.D. 3/28/00
--------------------------------------------------
John P. Mamana, M.D. Date
Director
By: /s/ William M. Mayer, M.D. 3/28/00
--------------------------------------------------
William M. Mayer, M.D. Date
Director
53
<PAGE>
By: /s/ Edward J. Muhl 3/28/00
--------------------------------------------------
Edward J. Muhl Date
Director
By: /s/ Gretchen P. Murdza 3/28/00
--------------------------------------------------
Gretchen P. Murdza Date
Chief Executive Officer of Homecare and Pharmacy
Subsidiaries and Director
By: /s/ Janet L. Norwood 3/28/00
--------------------------------------------------
Janet L. Norwood, Ph.D. Date
Director
By: /s/ John A. Paganelli 3/28/00
--------------------------------------------------
John A. Paganelli Date
Director
By:
--------------------------------------------------
Ivan R. Sabel Date
Director
By: /s/ James A. Wild 3/28/00
--------------------------------------------------
James A. Wild Date
Director
54
<PAGE>
(a)(3), (b) and(C)List of Exhibits.
<TABLE>
<CAPTION>
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
- ------- ----------------------- -------------------
<S> <C> <C>
3.1 Copy of Certificate of Incorporation of MAMSI dated
October 7, 1986..........................................................(1)
3.2 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated April 23, 1990.......................................(4)
3.3 Amended and Restated By-laws of MAMSI as of February 15, 2000............
3.4 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated June 2, 1994.........................................(4)
10.41 Copy of Agreement between M.D. IPA and Surgical Care Affiliates, Inc.,
dated April 22, 1985.....................................................(4)
10.60 1993 Non-Qualified Stock Option Plan.....................................(11)
10.61 1993 Non-Qualified Stock Option Letter Sent to Key Employees.............(11)
10.67 1994 Non-Qualified Stock Option Plan.....................................(3)
10.68 1994 Non-Qualified Stock Option Letter sent to Key Employees.............(3)
10.69 Revolving Loan Agreement with Signet Bank dated September 30, 1993.......(3)
10.72 List of States in which MAMSI Life is Licensed to Operate................(3)
10.74 1995 Non-Qualified Stock Option Plan.....................................(4)
10.75 1995 Non-Qualified Stock Option Plan letter sent to Key Employees........(4)
10.76 Agreement between OCI and the Commonwealth of Virginia governing the
Medical Assistance Program ("Medicaid") dated May 27, 1994...............(4)
10.79 1996 Non-Qualified Stock Option Plan.....................................(5)
10.80 Form of Agreement between MAMSI and Employees Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................(5)
10.81 Form of Agreement between MAMSI and George T. Jochum Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................(5)
10.82 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1996 Non-Qualified Stock Option Plan...................(5)
10 Amended and Restated Compensation Trust Agreement dated
December 20, 1996........................................................(7)
10.1 Amended and Restated Common Stock Purchase Agreement dated
December 20, 1996........................................................(7)
10.2 Replacement Promissory Note dated December 20, 1996......................(7)
10.83 1997 Management Bonus Program............................................(8)
10.84 Form of Non-Qualified Stock Option Agreement for Options Granted
under 1991, 1992, 1993, 1994 and 1995 Non-Qualified Stock Option Plan....(9)
10.85 Agreement of Purchase of Real Property by Mid-Atlantic
Medical Services, Inc....................................................(10)
10.86 1997 Amendment to Employment Agreement between George T. Jochum
and the Company..........................................................(11)
10.87 1998 Non-Qualified Stock Option Plan.....................................(11)
10.88 1998 Senior Management Bonus Plan........................................(11)
10.89 1998 Management Bonus Plan...............................................(11)
10.90 Amendment to 1994 Non-Qualified Stock Option Plan........................(11)
10.91 Amendment to 1995 Non-Qualified Stock Option Plan........................(11)
10.92 Amendment to 1996 Non-Qualified Stock Option Plan........................(11)
10.93 1999 Employment Agreement Between George T. Jochum and the Company.......(11)
10.94 Form of Agreement between MAMSI and Employees Granting Options
under the 1998 Non-Qualified Stock Option Plan...........................(12)
10.95 Form of Agreement between MAMSI and George T. Jochum Granting Options
under the 1998 Non-Qualified Stock Option Plan...........................(12)
10.96 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1998 Non-Qualified Stock Option Plan...................(12)
10.97 Memorandum to Employees and Form for Election Of Exchange
and Repricing of Stock Options...........................................(12)
10.98 Agreement of Purchase and Sale of Real Estate............................(13)
10.981 1999 Non-Qualified Stock Option Plan.....................................(14)
10.982 1999 Senior Management Bonus Plan........................................(14)
10.983 1999 Management Bonus Plan...............................................(14)
10.984 Amended and Restated Stock Compensation Trust Agreement
dated January 11, 1999...................................................(14)
10.985 Common Stock Purchase Agreement dated January 11, 1999...................(14)
10.986 Allonge to Replacement Promissory Note dated January 11, 1999............(14)
10.987 Employment Agreement between the Company and Mark D. Groban..............(14)
10.988 Employment Agreement between the Company and Thomas P. Barbera...........(14)
10.989 Employment Agreement between the Company and Robert E. Foss..............(14)
55
<PAGE>
10.990 Form of Executive Employment Agreement between the Company
and Executive Staff......................................................(14)
10.991 Form of Agreement between MAMSI and Employees Granting Options
under the 1999 Non-Qualified Stock Option Plan...........................(14)
10.992 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1999 Non-Qualified Stock Option Plan...................(14)
10.993 Employment Agreement between the Company and Mark D. Groban..............(15)
10.994 Employment Agreement between the Company and Thomas P. Barbera...........(15)
10.995 First Amendment to Employment Agreement between the Company
and Mark D. Groban.......................................................(16)
10.996 First Amendment to Employment Agreement between the Company
and Thomas P. Barbera....................................................(16)
10.997 First Amendment to Employment Agreement between the Company
and Robert E. Foss.......................................................(16)
10.998 Amended and Restated Stock Compensation Trust Agreement
dated August 20, 1999....................................................(16)
10.999 Common Stock Purchase Agreement dated August 20, 1999....................(16)
10.21 Allonge to Replacement Promissory Note dated
August 20, 1999..........................................................(16)
10.22 2000 Non-Qualified Stock Option Plan.....................................
10.23 2000 Senior Management Bonus Plan........................................
10.24 2000 Key Management Bonus Plan...........................................
10.25 Plan for Deferral of Directors Fees......................................
10.26 Form of Agreement between MAMSI and Employees Granting Options
Under the 2000 Non-Qualified Stock Option Plan...........................
10.27 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options Under the 2000 Non-Qualified Stock Option Plan...................
10.28 Form of Agreement between MAMSI and Directors Electing
to Defer Director Fees...................................................
21 Subsidiaries of the Company..............................................
23 Consent of Independent Auditors..........................................
27 Financial Data Schedule..................................................
</TABLE>
(1) Incorporated by reference to exhibits filed with the Company's Registration
Statement filed under the Securities Act of 1933 on Form S-4 (Registration
No. 33-9803).
(2) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended September 30, 1993.
(3) Incorporated by reference to exhibits filed with the Company's Annual
Report filed under the Securities Exchange Act of 1934 on Form 10-K for the
fiscal year ended December 31, 1993.
(4) Incorporated by reference to exhibits filed with the Company's Annual
Report filed under the Securities Exchange Act of 1934 on Form 10-K for the
fiscal year ended December 31, 1994.
(5) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q for the
quarterly period ended March 31, 1995.
(6) Incorporated by reference to exhibits filed with the Company's Annual
Report filed under the Securities Exchange Act of 1934 on Form 10-K for the
fiscal year ended December 31, 1995.
(7) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q/A for
the quarterly period ended September 30, 1996.
(8) Incorporated by reference to exhibits filed with the Company's Annual
Report filed under the Securities Exchange Act of 1934 on Form 10-K for the
fiscal year ended December 31, 1996.
(9) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended March 31, 1997.
56
<PAGE>
(10) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended June 30, 1997.
(11) Incorporated by reference to exhibits filed with the Company's Annual
Report filed under the Securities Exchange Act of 1934 on Form 10-K for the
fiscal year ended December 31, 1997.
(12) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended March 31, 1998.
(13) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended September 30, 1998.
(14) Incorporated by reference to exhibits filed with the Company's Annual
Report filed under the Securities Exchange Act of 1934 on Form 10-K for the
fiscal year ended December 31, 1998.
(15) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended June 30, 1999.
(16) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended September 30, 1999.
57
AMENDED AND RESTATED BY-LAWS
OF
MID ATLANTIC MEDICAL SERVICES, INC.
AS OF FEBRUARY 15, 2000
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 (8) 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 (20) 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 By-laws 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; 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;
he 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 the Chairman, Chief Executive
Officer and Senior Executive Vice Presidents of the corporation 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 countersigned 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 and, such
date shall not be more than sixty (60) days, and in the case of a meeting of
stockholders, not less than twenty-five (25) days, prior to the date on that 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 Delaware 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.
MID ATLANTIC MEDICAL SERVICES, INC.
2000 NON-QUALIFIED STOCK OPTION PLAN
Article I. Purpose, Adoption and Term of the Plan
1.01 Purpose. The purpose of the Mid Atlantic Medical Services, Inc.
2000 Non-Qualified Stock Option Plan (hereinafter referred to as the "Plan") is
to advance the interests of the Company (as hereinafter defined) and its
Subsidiaries (as hereinafter defined) by encouraging and providing for the
acquisition of an equity interest in the Company by non-employee directors,
officers and key employees through the grant of options to purchase Common Stock
(as hereinafter defined). The Plan will enable the Company to retain the
services of non-employee directors, officers and key employees upon whose
judgment, interest, and special effort the successful conduct of its operations
is largely dependent and to compete effectively with other enterprises for the
services of non-employee directors, officers and key employees as may be needed
for the continued improvement of its business.
1.02 Adoption and Term. The Plan shall become effective on May 8, 2000,
subject to the prior approval of a simple majority of the holders of Common
Stock represented, by person or by proxy, and entitled to vote at an annual or
special meeting of the holders of Common Stock. The Plan shall terminate on May
8, 2010, or such earlier date as shall be determined by the Board (as
hereinafter defined); provided, however, that, in the event the Plan is not
approved by a simple majority of the holders of Common Stock represented, by
person or by proxy, and entitled to vote at an annual or special meeting at or
before the Company's 2000 annual meeting of holders of Common Stock, the Plan
shall terminate on such date and any Options (as hereinafter defined) made under
the Plan prior to such date shall be void and of no force and effect.
Article II. Definitions
For purposes of the Plan, capitalized terms shall have the following
meanings:
2.01 "Beneficiary" means an individual, trust or estate who or that, by
will or the laws of descent and distribution, succeeds to the rights and
obligations of the Participant under the Plan and an Option Agreement upon the
Participant's death.
2.02 "Board" means the Board of Directors of the Company.
2.03 "Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor thereto. References to a section of the Code
shall include that section and any comparable section or sections of any future
legislation that amends, supplements, or supersedes said section.
2.04 "Committee" means a committee of the Board as may be appointed, from
time to time, by the Board.
(a) The Board may appoint more than one Committee to
administer the Plan. If it appoints more than one Committee, one Committee (the
"Stock Option Committee") shall have the authority to grant Options to a
Participant who is either, at the Date of Grant of the Option, a "covered
employee" as defined in Section 162(m) or who is subject to Section 16 of the
Exchange Act; however, such Committee shall also have the authority to grant
Options to other Participants. The Stock Option Committee shall be composed of
at least two directors of the Company, each of whom is a "non-employee director"
as defined in Rule 16b-3 and an "outside director" within the meaning of Section
162(m). If, however, at least two of the Company's directors are not both
"non-employee directors" and "outside directors," the Board may grant Options to
a Participant who is either a "covered employee" or subject to Section 16 of the
Exchange Act, in which case the Board may also administer the Plan and the term
"Committee" as used herein shall also include the Board. The other Committee
(the "Select Committee") shall be composed of at least one director, who may be
an officer of the Company. The Select Committee shall have authority to grant
Options to a Participant who is not, at the Date of Grant of the Option, either
a "covered employee" as defined in Section 162(m) or subject to Section 16 of
the Exchange Act.
(b) The Board may, from time to time, appoint members of each
Committee in substitution for those members who were previously appointed and
may fill vacancies, however caused, in the Committee.
(c) The Stock Option Committee and the Select Committee shall
each have the power and authority to administer the Plan in accordance with
Article III with respect to particular classes of Participants (as specified in
Section 2.04(a)) and, when used herein, the term "Committee" shall mean either
the Stock Option Committee or the Select Committee if the Board appoints more
than one Committee to administer the Plan. If, however, there is a conflict
between the determinations made by the Stock Option Committee and the Select
Committee, the determinations made by the Stock Option Committee shall control.
2.05 "Common Stock" means the Common Stock, par value $.01 per share, of
the Company.
2.06 "Company" means Mid Atlantic Medical Services, Inc., a corporation
organized under the laws of the State of Delaware, and its successors.
2.07 "Date of Grant" means the date designated by the Committee as the
date as of which it grants an Option, which shall not be earlier than the date
on which the Committee approves the granting of such Option.
2.08 "Disability" has the meaning specified in Section 22(e)(3) of the
Code.
2.09 "Disability Date" means the date as of which an Employee Participant
is determined by the Committee to have a Disability.
2.10 "Employee Participant" means a Participant who is not a Non-Employee
Director.
2.11 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
2.12 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.13 "Fair Market Value" of a share of Common Stock means, as of any given
date, the closing sales price of a share of Common Stock on such date on the
principal national securities exchange on which the Common Stock is then traded
or, if the Common Stock is not then traded on a national securities exchange,
the closing sales price or, if none, the average of the bid and asked prices of
the Common Stock on such date as reported on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq"); provided, however,
that, if there were no sales reported as of such date, Fair Market Value shall
be computed as of the last date preceding such date on which a sale was
reported; provided, further, that, if any such exchange or quotation system is
closed on any day on which Fair Market Value is to be determined, Fair Market
Value shall be determined as of the first date immediately preceding such date
on which such exchange or quotation system was open for trading. If the Common
Stock is not admitted to trade on a securities exchange or quoted on Nasdaq, the
Fair Market Value of a share of Common Stock as of any given date shall be as
determined in good faith by the Committee, in its sole and absolute discretion,
which determination may be based on, among other things, the opinion of one or
more independent and reputable appraisers qualified to value companies in the
Company's line of business. Notwithstanding the foregoing, the Fair Market Value
of a share of Common Stock shall never be less than par value per share.
2.14 "Non-Employee Director" means each member of the Board or of the
Board of Directors of a Subsidiary, in each case who is not an employee of the
Company or of any of its Subsidiaries.
2.15 "Option Agreement" means a written agreement between the Company
and a Participant specifically setting forth the terms and conditions of an
Option granted to a Participant under the Plan.
2.16 "Option" means any option to purchase Common Stock granted under
the Plan to an Employee Participant or to a Non-Employee Director. All Options
granted under the Plan shall be Options that do not qualify as incentive stock
options under Section 422 of the Code.
2.17 "Participant" means any employee or Non-Employee Director of the
Company or any of its Subsidiaries selected by the Committee to receive an
Option under the Plan in accordance with Articles V and/or VI.
2.18 "Plan" means the Mid Atlantic Medical Services, Inc. 2000
Non-Qualified Stock Option Plan as set forth herein, andas the same may be
amended from time to time.
2.19 "Rule 16b-3" means Rule 16b-3 promulgated by the SEC under Section 16
of the Exchange Act and any successor rule.
2.20 "SEC" means the Securities and Exchange Commission.
2.21 "Section 162(m)" means Section 162(m) of the Code and the regulations
thereunder.
2.22 "Subsidiary" means a company more than 50% of the equity interests of
which are beneficially owned, directly or indirectly, by the Company.
2.23 "Termination of Employment" means, with respect to an Employee
Participant, the voluntary or involuntary termination of a Participant's
employment with the Company or any of its Subsidiaries for any reason,
including, without limitation, death, Disability, retirement or as the result of
the sale or other divestiture of the Participant's employer or any similar
transaction in which the Participant's employer ceases to be the Company or one
of its Subsidiaries. Whether entering military or other government service shall
constitute Termination of Employment, and whether a Termination of Employment is
a result of Disability, shall be determined in each case by the Committee in its
sole and absolute discretion.
Article III. Administration
3.01 Committee. The Plan shall be administered by the Committee, which
shall have exclusive and final authority in each determination, interpretation,
or other action affecting the Plan and its Participants. The Committee shall
have the sole and absolute discretion to interpret the Plan, to establish and
modify administrative rules for the Plan, to select the Non-Employee Directors,
officers and other key employees to whom Options may be granted, to determine
the terms and provisions of the respective Option Agreements (which need not be
identical), to determine all claims for benefits under the Plan, to impose such
conditions and restrictions on Options as it determines appropriate, to
determine whether the shares delivered on exercise of Options will be treasury
shares or will be authorized but previously unissued shares, and to take such
steps in connection with the Plan and Options granted hereunder as it may deem
necessary or advisable. No action of the Committee will be effective if it
contravenes or amends the Plan in any respect.
3.02 Actions of the Committee. Except when the "Committee" is the
"Board" in the circumstance described in the fourth sentence of Section 2.04(a),
all determinations of the Committee shall be made by a majority vote of its
members. A majority of a Committee's members shall constitute a quorum. Any
decision or determination reduced to writing and signed by all of the members
shall be fully as effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee shall also have express
authorization to hold Committee meetings by conference telephone, or similar
communication equipment by means of which all persons participating in the
meeting can hear each other.
Article IV. Shares of Common Stock
4.01 Number of Shares of Common Stock Issuable. Subject to adjustments
as provided in Section 7.05, 2,000,000 shares of Common Stock shall be available
for Options under the Plan. Any and all of such shares may be issued pursuant to
Options granted to Employee Participants or to Non-Employee Directors. The
Common Stock to be offered under the Plan shall be authorized and unissued
Common Stock, or issued Common Stock that shall have been reacquired by the
Company and held in its treasury.
4.02 Number of Shares of Common Stock Awarded to any Participant. In
the event the purchase price of an Option is paid, or related tax or withholding
payments are satisfied, in whole or in part through the delivery of shares of
Common Stock issuable in connection with the exercise of the Option, a
Participant will be deemed to have received an Option with respect to those
shares of Common Stock.
4.03 Shares of Common Stock Subject to Terminated Options. The Common Stock
covered by any unexercised portions of terminated Options may again be subject
to new Options under the Plan.
Article V. Participation
5.01 Eligible Participants. Employee Participants shall be such
officers and other key employees of the Company or its Subsidiaries, whether or
not directors of the Company, as the Committee, in its sole and absolute
discretion, may designate from time to time. Non-Employee Director Participants
shall be such Non-Employee Directors as the Committee, in its sole and absolute
discretion, may designate from time to time. In making such designation, the
Committee may take into account the nature of the services rendered by the
officers, key employees and Non-Employee Directors, their present and potential
contributions to the success of the Company and its Subsidiaries, and such other
factors as the Committee, in its sole and absolute discretion, may deem
relevant. The Committee's designation of a Participant in any year shall not
require the Committee to designate such person to receive Options in any other
year. The Committee shall consider such factors as it deems pertinent in
selecting Participants and in determining the type and amount of their
respective Options. A Participant may hold more than one Option granted under
the Plan. During the term of the Plan, no Employee Participant may receive
Options to purchase more than 1,000,000 shares of Common Stock under the Plan.
Article VI. Stock Options
6.01 Grant of Option. Any Option granted under the Plan shall have such
terms as the Committee may, from time to time, approve, and the terms and
conditions of Options need not be the same with respect to each Participant.
6.02 Terms of Options. Options granted under the Plan shall be subject
to the following terms and conditions and shall be in such form and contain such
additional terms and conditions, not inconsistent with the terms of the Plan, as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock
purchasable under an Option shall be determined by the Committee at the
time of grant but shall not be less than the Fair Market Value of a share
of Common Stock on the Date of Grant; provided, however, that, except as
required by Rule 16b-3 with respect to Options granted to persons subject
to Section 16 of the Exchange Act, no amendment of an Option shall be
deemed to be the grant of a new Option for purposes of this Section
6.02(a). Notwithstanding the foregoing, the option price per share of
Common Stock of an Option shall never be less than par value per share.
(b) Option Term. The term of each Option shall be fixed by the
Committee, but no Option shall be exercisable more than ten years after the
Date of Grant.
(c) Exercisability. An Option Agreement with respect to Options may
contain such performance targets, waiting periods, exercise dates and
restrictions on exercise (including, but not limited to, a requirement that
an Option is exercisable in periodic installments), and restrictions on
transfer of the underlying shares of Common Stock, if any, as may be
determined by the Committee at the time of grant. To the extent not
exercised, installments shall cumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, subject to the limitations
set forth in Sections 6.02(b), (f), (g) and (h).
(d) Method of Exercise. Subject to whatever installment exercise and
waiting period provisions that apply under Section 6.02(c) and subject to
Sections 6.02(b), (f), (g) and (h), Options may be exercised in whole or in
part at any time during the term of the Option, by giving written notice of
exercise to the Company specifying the number of shares of Common Stock to
be purchased. Such notice shall be accompanied by payment in full of the
purchase price in such form as the Committee may accept (including payment
in accordance with a cashless exercise program approved by the Committee).
If and to the extent the Committee determines in its sole and absolute
discretion at or after grant, payment in full or in part may also be made
in the form of shares of Common Stock already owned by the Participant (and
for which the Participant has good title, free and clear of any liens or
encumbrances) based on the Fair Market Value of the shares of Common Stock
on the date the Option is exercised; provided, however, that any already
owned Common Stock used for payment must have been held by the Participant
for at least six months. No Common Stock shall be issued on exercise of an
Option until payment, as provided herein, therefor has been made. A
Participant shall generally have the right to dividends or other rights of
a stockholder with respect to Common Stock subject to the Option only when
certificates for shares of Common Stock are issued to the Participant.
(e) Non-Transferability of Options. No Option shall be transferable by
the Participant otherwise than by will, by the laws of descent and
distribution, or pursuant at a domestic relations order.
(f) Acceleration or Extension of Exercise Time. The Committee, in its
sole and absolute discretion, shall have the right (but shall not in any
case be obligated) to permit purchase of Common Stock subject to any Option
granted to a Participant prior to the time such Option would otherwise
become exercisable under the terms of the Option Agreement. In addition,
the Committee, in its sole and absolute discretion, shall have the right
(but shall not in any case be obligated) to permit any Option granted to a
Participant to be exercised after the day the Option would otherwise
expire, subject, however, to the limitation set forth in Section 6.02(b).
(g) Exercise of Options Upon Termination of Employment. The following
provisions apply to Options granted to Employee Participants:
(i) Exercise of Vested Options Upon Termination of Employment.
(A) Termination. Unless the Committee, in
its sole and absolute discretion,
provides for a shorter or longer period
of time in an Option Agreement or a
longer period of time in accordance
with Section 6.02(f), upon an Employee
Participant's Termination of Employment
other than by reason of death or
Disability, the Employee Participant
may, within 90 days from the date of
such Termination of Employment,
exercise all or any part of his or her
Options as were exercisable at the date
of Termination of Employment. In no
event, however, may any Option be
exercised later than the date
determined pursuant to Section 6.02(b).
(B) Disability. Unless the Committee, in
its sole and absolute discretion,
provides for a shorter or longer period
of time in an Option Agreement or a
longer period of time in accordance
with Section 6.02(f), upon an Employee
Participant's Disability Date, the
Employee Participant may, within one
year after the Disability Date,
exercise all or a part of his or her
Options, whether or not such Option was
exercisable on the Disability Date, but
only to the extent not previously
exercised. In no event, however, may
any Option be exercised later than the
date determined pursuant to Section
6.02(b).
(C) Death. Unless the Committee, in its
sole and absolute discretion, provides
for a shorter period of time in an
Option Agreement, in the event of the
death of an Employee Participant while
employed by the Company or a Subsidiary,
the Employee Participant's Beneficiary
shall be entitled to exercise any
Options that were vested at the date of
the Employee Participant's death until
the initial expiration date of such
Option determined pursuant to Section
6.02(b). Notwithstanding the above, if
the Employee Participant at the time of
death had been an employee of the
Company or a Subsidiary for a period of
ten years, 50% of the Employee
Participant's unvested Option would
become vested and subject to exercise as
stated above and if the Employee
Participant at the time of death had
been an employee of the Company or a
Subsidiary for a period of fifteen
years, all of the Employee Participant's
unvested Options would become vested and
subject to exercise as stated above and
shall expire on the date of expiration
of the Option determined pursuant to
Section 6.02(b).
(ii) Expiration of Unvested Options Upon
Termination of Employment. Subject to
Sections 6.02(f) and 6.02(g)(i)(B) and (C),
to the extent all or any part of an Option
granted to an Employee Participant was not
exercisable as of the date of Termination of
Employment, such right shall expire at the
date of such Termination of Employment.
Notwithstanding the foregoing, the
Committee, in its sole and absolute
discretion and under such terms as it deems
appropriate, may permit an Employee
Participant to continue to accrue service
with respect to the right to exercise his or
her Options.
(h) Exercise of Options Upon Termination of Service. Unless
the Committee, in its sole and absolute discretion, provides for a shorter or
longer period of time in an Option Agreement or a longer period of time in
accordance with Section 6.02(f), if a Non-Employee Director's service with the
Company or a Subsidiary terminates for any reason or if such person ceases to be
a Non-Employee Director, such Option may be exercised to the extent it was
exercisable on the date of such termination of service until the expiration of
the stated term of the Option, but only to the extent it was not previously
exercised.
Article VII. Terms Applicable to All Options Granted Under the Plan
7.01 Plan Provisions Control Option Terms. The terms of the Plan shall
govern all Options granted under the Plan, and in no event shall the Committee
have the power to grant to a Participant any Option under the Plan that is
contrary to any provisions of the Plan. If any provision of any Option granted
under the Plan conflicts with any of the terms in the Plan as constituted on the
Date of Grant of such Option, the terms in the Plan as constituted on the Date
of Grant of such Option shall control.
7.02 Option Agreement. No person shall have any rights under any Option
granted under the Plan unless and until the Company and the Participant to whom
such Option shall have been granted shall have executed and delivered an Option
Agreement authorized by the Committee expressly granting the Option to such
person and containing provisions setting forth the terms of the Option. If there
is any conflict between the provisions of an Option Agreement and the terms of
the Plan, the terms of the Plan shall control.
7.03 Modification of Option After Grant. Except as provided by the
Committee, in its sole and absolute discretion, in the Option Agreement or as
provided in Section 7.05, no Option granted under the Plan to a Participant may
be modified (unless such modification does not materially decrease the value of
the Option) after the Date of Grant except by express written agreement between
the Company and the Participant, provided that any such change (a) shall not be
inconsistent with the terms of the Plan, and (b) shall be approved by the
Committee.
7.04 Taxes. The Company shall be entitled, if the Committee deems it
necessary or desirable, to withhold (or secure payment from the Participant in
lieu of withholding) the amount of any withholding or other tax required by law
to be withheld or paid by the Company with respect to any Common Stock issuable
under such Participant's Option, and the Company may defer issuance of Common
Stock upon the grant or exercise of an Option unless indemnified to its
satisfaction against any liability for any such tax. The amount of such
withholding or tax payment shall be determined by the Committee or its delegate
and shall be payable by the Participant at such time as the Committee
determines. A Participant shall be permitted to satisfy his or her tax or
withholding obligation by (a) having cash withheld from the Participant's salary
or other compensation payable by the Company or a Subsidiary, (b) the payment of
cash by the Participant to the Company, (c) the payment in shares of Common
Stock already owned by the Participant valued at Fair Market Value, and/or (d)
the withholding from the Option, at the appropriate time, of a number of shares
of Common Stock sufficient, based upon the Fair Market Value of such Common
Stock, to satisfy such tax or withholding requirements. The Committee shall be
authorized, in its sole and absolute discretion, to establish rules and
procedures relating to any such withholding methods it deems necessary or
appropriate (including, without limitation, rules and procedures relating to
elections by Participants who are subject to the provisions of Section 16 of the
Exchange Act to have shares of Common Stock withheld from an Award to meet those
withholding obligations).
7.05 Adjustments to Reflect Capital Changes; Change in Control.
(a) Recapitalization. The number and kind of shares subject to
outstanding Options, the purchase price or exercise price of such Options, the
limit set forth in the last sentence of Section 5.01 of the Plan, and the number
and kind of shares available for Options subsequently granted under the Plan
shall be appropriately adjusted to reflect any stock dividend, stock split,
combination or exchange of shares, merger, consolidation or other change in
capitalization with a similar substantive effect upon the Plan or the Options
granted under the Plan. The Committee shall have the power and sole and absolute
discretion to determine the nature and amount of the adjustment to be made in
each case.
(b) Sale or Reorganization. After any reorganization, merger,
or consolidation in which the Company is the surviving entity, each Participant
shall, at no additional cost, be entitled upon the exercise of an Option
outstanding prior to such event to receive (subject to any required action by
stockholders), in lieu of the number of shares of Common Stock receivable on
exercise pursuant to such Option, the number and class of shares of stock or
other securities to which such Participant would have been entitled pursuant to
the terms of the reorganization, merger, or consolidation if, at the time of
such reorganization, merger, or consolidation, such Participant had been the
holder of record of a number of shares of Common Stock equal to the number of
shares of Common Stock receivable on exercise pursuant to such Option.
Comparable rights shall accrue to each Participant in the event of successive
reorganizations, mergers, or consolidations of the character described above.
(c) Options to Purchase Stock of Acquired Companies. After any
reorganization, merger, or consolidation in which the Company shall be a
surviving entity, the Committee may grant substituted Options under the
provisions of the Plan, replacing old options granted under a plan of another
party to the reorganization, merger, or consolidation whose stock subject to the
old options may no longer be issued following such reorganization, merger, or
consolidation. The foregoing adjustments and manner of application of the
foregoing provisions shall be determined by the Committee in its sole and
absolute discretion. Any such adjustments may provide for the elimination of any
fractional shares of Common Stock that might otherwise become subject to any
Options.
(d) Changes in Control. (i) Upon the dissolution or
liquidation of the Company, (ii) upon a reorganization, merger, or consolidation
in which the Company is not the surviving corporation, (iii) upon the sale of
substantially all of the property or assets of the Company to another
corporation, or (iv) if at least 50% or more of the voting stock of the Company
is sold either through a tender offer or otherwise to a party or an affiliated
group of parties, then the Plan and the Options issued thereunder shall
terminate, unless provisions are made in connection with such transaction for
the assumption of Options theretofore granted, or for the substitution for such
Options of new options of the successor corporation or a parent or subsidiary
thereof, with appropriate adjustment as to the number and kinds of shares and
the per share exercise prices. In the event such Options shall be terminated,
all outstanding Options shall be exercisable in full for at least 30 days prior
to such termination date, whether or not exercisable during such period,
subject, however, to the limitation set forth in Section 6.02(b). For purposes
of this Section 7.05(d), the Company refers to Mid Atlantic Medical Services,
Inc., MD-Individual Practice Association, Inc., Optimum Choice, Inc., and/or
Physicians Health Plan of Maryland, Inc., jointly or separately. The Committee
shall determine the date on which Options may become exercisable pursuant to
this Section 7.05(d).
7.06 Surrender of Options. Any Option granted to a Participant under
the Plan may be surrendered to the Company for cancellation on such terms as the
Committee and holder approve.
7.07 No Right to Option; No Right to Employment. No director, employee
or other person shall have any claim or right to be granted an Option. Neither
the Plan nor any action taken hereunder shall be construed as giving any
employee any right to be retained in the employ of the Company or any of its
Subsidiaries.
7.08 Options Not Includable for Benefit Purposes. Income recognized by
a Participant pursuant to the provisions of the Plan shall not be included in
the determination of benefits under any employee pension benefit plan (as such
term is defined in Section 3(2) of ERISA) or group insurance or other benefit
plans applicable to the Participant that are maintained by the Company or any of
its Subsidiaries, except as may be provided under the terms of such plans or
determined by resolution of the Board.
7.09 Governing Law. The Plan and all determinations made and actions
taken pursuant to the Plan shall be governed by the laws of the State of
Delaware other than the conflict of laws provisions of such laws, and shall be
construed in accordance therewith.
7.10 No Strict Construction. No rule of strict construction shall be
implied against the Company, the Committee, or any other person in the
interpretation of any of the terms of the Plan, any Option granted under the
Plan or any rule or procedure established by the Committee.
7.11 Compliance with Rule 16b-3 and Section 162(m). It is intended that
the Plan be applied and administered in compliance with Rule 16b-3 and with
Section 162(m). If any provision of the Plan would be in violation of Section
162(m) if applied as written, such provision shall not have effect as written
and shall be given effect so as to comply with Section 162(m) as determined by
the Committee in its sole and absolute discretion. The Board is authorized to
amend the Plan and the Committee is authorized to make any such modifications to
Option Agreements to comply with Rule 16b-3 and Section 162(m), as they may be
amended from time to time, and to make any other such amendments or
modifications deemed necessary or appropriate to better accomplish the purposes
of the Plan in light of any amendments made to Rule 16b-3 and Section 162(m).
Notwithstanding the foregoing, the Board may amend the Plan so that it (or
certain of its provisions) no longer comply with either or both of Rule 16b-3 or
Section 162(m) if the Board specifically determines that such compliance is no
longer desired and the Committee may grant Options that do not comply with Rule
16b-3 and/or Section 162(m) if the Committee determines, in its sole and
absolute discretion, that it is in the interest of the Company to do so.
7.12 Captions. The captions (i.e., all Article and Section headings)
used in the Plan are for convenience only, do not constitute a part of the Plan,
and shall not be deemed to limit, characterize, or affect in any way any
provisions of the Plan, and all provisions of the Plan shall be construed as if
no captions have been used in the Plan.
7.13 Severability. Whenever possible, each provision in the Plan and
every Option at any time granted under the Plan shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of the Plan or any Option at any time granted under the Plan shall be held to be
prohibited by or invalid under applicable law, then (a) such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law, and (b) all other provisions of
the Plan and every other Option at any time granted under the Plan shall remain
in full force and effect.
7.14 Legends. All certificates for Common Stock delivered under the
Plan shall be subject to such transfer restrictions set forth in the Plan and
such other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the SEC, any stock exchange upon which
the Common Stock is then listed, and any applicable federal or state securities
law. The Committee may cause a legend or legends to be put on any such
certificates to make appropriate references to such restrictions.
7.15 Investment Representation. The Committee may, in its sole and
absolute discretion, demand that any Participant awarded an Option deliver to
the Committee at the time of grant or exercise of such Option a written
representation that the shares of Common Stock to be acquired upon exercise are
to be acquired for investment and not for resale or with a view to the
distribution thereof. Upon such demand, delivery of such written representation
by the Participant prior to the delivery of any shares of Common Stock pursuant
to the exercise of his or her Option shall be a condition precedent to the
Participant's right to purchase or otherwise acquire such shares of Common Stock
by such grant or exercise. The Company is not legally obliged hereunder if
fulfillment of its obligations under the Plan would violate federal or state
securities laws.
7.16 Amendment and Termination.
(a) Amendment. The Board shall have complete power and
authority to amend the Plan at any time it is deemed necessary or appropriate;
provided, however, that the Board shall not, without the affirmative approval of
a simple majority of the holders of Common Stock, represented, by person or by
proxy, and entitled to vote at an annual or special meeting of the holders of
Common Stock, make any amendment that requires stockholder approval under
applicable law or rule, unless the Board determines that compliance with such
law or rule is no longer desired with respect to the Plan as a whole or the
provision to be amended. No termination or amendment of the Plan may, without
the consent of the Participant to whom any Option shall theretofore have been
granted under the Plan, adversely affect the right of such individual under such
Option; provided, however, that the Committee may, in its sole and absolute
discretion, make provision in an Option Agreement for such amendments that, in
its sole and absolute discretion, it deems appropriate.
(b) Termination. The Board shall have the right and the power
to terminate the Plan at any time. No Option shall be granted under the Plan
after the termination of the Plan, but the termination of the Plan shall not
have any other effect and any Option outstanding at the time of the termination
of the Plan may be amended and exercised and may vest after termination of the
Plan at any time prior to the expiration date of such Option to the same extent
such Option could have been amended or would have been exercisable or vest had
the Plan not terminated.
7.17 Costs and Expenses. All costs and expenses incurred in administering
the Plan shall be borne by the Company.
7.18 Unfunded Plan. The Company shall not be required to establish any
special or separate fund or make any other segregation of assets to assure the
payment of any award under the Plan.
MID ATLANTIC MEDICAL SERVICES, INC.
SENIOR MANAGEMENT BONUS PLAN
1. Purpose. The Mid Atlantic Medical Services, Inc. Senior Management Bonus
Plan is intended to increase incentives for eligible executives to attain
and maintain the highest standards of performance, to attract and retain
key executives of outstanding competence and ability, to stimulate the
active interest of key executives in the development and financial success
of the Company, to further the identity of interests of employees with
those of the Company's stockholders generally and to reward executives for
outstanding performance when certain objectives are achieved.
2. Definitions. As used herein, the terms set forth below shall have the
following respective meanings:
(a) "Board" means the Board of Directors of the Company.
(b) "Bonus" means an award payable under this Plan.
(c) "Bonus Period" means the calendar year beginning on or after the Effective
Date with respect to which the Bonus is to be paid.
(d) "Business Criteria" means the business criteria listed in Section 6 of this
Plan.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(f) "Committee" means the Committee appointed by the Board to administer the
Plan. The Committee shall be constituted at all times so as to meet the
outside director requirements of Section 162(m) of the Code.
(g) "Company" means Mid Atlantic Medical Services, Inc. and its subsidiaries.
(h) "Effective Date" means January 1, 2000.
(i) "Eligible Executives" means all employees of the Company classified in
Level 18 or above or any successor designation.
(j) "Participant" means, with respect to a Bonus Period, the Eligible
Executives selected by the Committee to be eligible to receive a Bonus for
such Bonus Period as provided in Section 5 of this Plan.
(k) "Performance Objective" means the performance objective or objectives
established pursuant to Section 5 of the Plan.
(l) "Plan" means the Mid Atlantic Medical Services, Inc. Senior Management
Bonus Plan.
(m) "Restricted Officers" means the Chief Executive Officer of the Company and
its four highest compensated officers (other than the Chief Executive
Officer) as defined in Treasury Regulation 1.162-27(c)(2).
3. Administration. The Committee shall interpret the Plan, prescribe, amend,
and rescind rules relating to it, select eligible Participants, and take
all other actions necessary for its administration, which actions shall be
final and binding upon all Participants.
4. Compliance with Section 162(m). The Plan shall be administered to comply
with Section 162(m) of the Code and regulations promulgated thereunder, and
if any Plan provision is found not to be in compliance with Section 162(m)
of the Code, the provision shall be deemed modified as necessary to meet
the requirements of Section 162(m) of the Code. Notwithstanding anything in
the Plan to the contrary, the Committee, in its absolute discretion, may
bifurcate the Plan so as to restrict, limit, or condition the applicability
of any provision of the Plan to Restricted Officers without so restricting,
limiting, or conditioning the Plan with respect to other Participants.
5. Selection of Participants and Performance Objective. Prior to the
commencement of each Bonus Period, or at such later time as permitted by
Section 162(m) of the Code and regulations thereunder, the Committee shall
determine in writing (i) the Participants who shall be eligible to receive
a Bonus for such Bonus Period, (ii) the Performance Objective, which shall
be a relative or absolute measure of any one or more of the Business
Criteria, and (iii) the formula for computing the amount of Bonus payable
to each Participant if the Performance Objective is achieved (such formula
shall comply with the requirements applicable to performance-based
compensation plans under Section 162(m) of the Code).
6. Business Criteria. The Business Criteria will include specified levels of
one or more of the following:
Operating Income Net Income
Pre-Tax Income(1) Earnings Per Share
Cash Flow Return on Investment
Return on Capital Revenue
Return on Equity Total Shareholder Return
Return on Assets Membership in Company Products
Membership in HMO Product Membership in ASO Product
Membership in Medicare Product Membership in Medicaid Product
Membership in Indemnity Product Membership in PPO Product
The above terms shall have the same meaning as in the Company's financial
statements, or if the terms are not used in the Company's financial statements,
as applied pursuant to generally accepted accounting principles, or as used in
the industry, as applicable. As determined by the Committee, the Business
Criteria shall be applied (i) in absolute terms or relative to one or more other
companies or indices and (ii) to a business unit, geographic region, one or more
separately incorporated entities, or the Company as a whole).
7. Bonus Certification. The Committee shall certify in writing prior to
payment of the Bonus that the Performance Objective has been attained and
the Bonus is payable. With respect to Committee certification, approved
minutes of the meeting in which the certification is made shall be treated
as written certification.
8. Maximum Bonus Payable. The maximum Bonus payable under this Plan to any
Participant for any Bonus Period shall be $1 million. In no event shall the
aggregate Bonuses payable to all Participants for any Bonus Period exceed
10% of the Company's average annual income before taxes for the preceding
five years (such calculation shall be in accordance with Rule 452 of the
New York Stock Exchange).
9. Discretion to Reduce Awards. The Committee, in its sole and absolute
discretion, may reduce the amount of any award otherwise payable to a
Participant.
10. Active Employment Requirement. Except as provided below, a Bonus shall be
paid for a Bonus Period only to a Participant who is actively employed by
the Company (or on approved vacation or other approved leave of absence)
throughout the Bonus Period and who is employed by the Company on the date
the Bonus is paid. To the extent consistent with the deductibility of
awards under Section 162(m) of the Code and regulations thereunder, the
Committee may in its sole discretion grant a Bonus for the Bonus Period to
a Participant who is first employed or who is promoted to a position
eligible to become a Participant under this Plan during the Bonus Period,
or whose employment is terminated during the Bonus Period because of the
Participant's retirement with entitlement to immediate pension benefits
under the Company's retirement plan, death, or because of disability as
defined in Section 22(e)(3) of the Code. In such cases of active employment
for part of a Bonus Period, a pro rata Bonus may be paid for the Bonus
Period.
11. Payment of Bonus. A Bonus shall be paid to the Participant for the Bonus
Period as provided in this Plan. The Company shall pay the Bonus to the
Participant in a single cash payment as soon as administratively
practicable after the Bonus Period and after the Committee certifies that
the Bonus is payable as provided in Section 7. In the event of the
Participant's incompetency, the Company in its sole discretion may pay any
Bonus to the Participant's guardian or directly to the Participant. In the
event of the Participant's death, any Bonus shall be paid to the
Participant's spouse or, if there is no surviving spouse, the Participant's
estate. Payments under this Section shall operate as a complete discharge
of the Committee and the Company. The Company shall deduct from any Bonus
paid under the Plan the amount of any taxes required to be withheld by the
federal or any state or local government.
12. Stockholder Approval. No Bonus shall be payable under this Plan unless the
Plan is disclosed to and approved by the stockholders of the Company in
accordance with Section 162(m) of the Code and regulations thereunder.
13. Limitation of Rights. Nothing in this Plan shall be construed to (a) give
any employee of the Company any right to be awarded any Bonus other than
that set forth herein, as determined by the Committee; (b) give a
Participant any rights whatsoever with respect to shares of common stock of
the Company; (c) limit in any way the right of the Company to terminate an
employee's employment with the Company at any time; (d) give a Participant
or any other person any interest in any fund or in any specific asset or
assets of the Company; or (e) be evidence of any agreement or
understanding, express or implied, that the Company will employ an employee
in any particular position or at any particular rate of remuneration.
14. Nonassignment. The right of a Participant to the payment of any Bonus under
the Plan may not be assigned, transferred, pledged, or encumbered, nor
shall such right or other interests be subject to attachment, garnishment,
execution, or other legal process.
15. Amendment or Termination of the Plan. The Committee may amend or terminate
the Plan at any time, except that no amendment or termination shall be made
that would impair the rights of any Participant to a Bonus that would be
payable were the Participant to terminate employment on the effective date
of such amendment or termination, unless the Participant consents to such
amendment or termination. The Plan shall automatically terminate on January
1, 2005 unless sooner terminated by action of the Committee.
16. Governing Law. The Plan shall be governed by the laws of the State of
Delaware other than the conflict of laws provisions thereof.
(1) Defined as pre-tax income before expansion or acquisition costs, charges or
credits not related to current year operations and prior to return of
physicians' withhold and physicians' bonuses.
MID ATLANTIC MEDICAL SERVICES, INC.
KEY MANAGEMENT BONUS PLAN
1. Purpose. The Mid Atlantic Medical Services, Inc. Key Management Bonus
Plan is intended to increase incentives for eligible employees to attain and
maintain the highest standards of performance, to attract and retain key
employees of outstanding competence and ability, to stimulate the active
interest of key employees in the development and financial success of the
Company, to further the identity of interests of employees with those of the
Company's stockholders generally and to reward employees for outstanding
performance when certain objectives are achieved.
2. Definitions. As used herein, the terms set forth below shall have the
following respective meanings:
(a) "Board" means the Board of Directors of the Company.
(b) "Bonus" means an award payable under this Plan.
(c) "Bonus Period" means the calendar year beginning on or after the
Effective Date with respect to which the Bonus is to be paid.
(d) "Business Criteria" means the business criteria listed in Section 6 of
this Plan.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(f) "Committee" means the Committee appointed by the Board to administer
the Plan.
(g) "Company" means Mid Atlantic Medical Services, Inc. and
its subsidiaries.
(h) "Effective Date" means January 1, 2000.
(i) "Eligible Employees" means all full-time non-sales employees of the
Company classified in Level 10 to Level 17 or any successor designation.
(j) "Participant" means, with respect to a Bonus Period, the Eligible
Employees selected by the Committee to be eligible to receive a Bonus for such
Bonus Period as provided in Section 4 of this Plan.
(k) "Performance Objective" means the performance objective or objectives
established pursuant to Section 4 of the Plan.
(l) "Plan" means the Mid Atlantic Medical Services, Inc. Key Management
Bonus Plan.
3. Administration. The Committee shall interpret the Plan, prescribe,
amend, and rescind rules relating to it, select eligible Participants, and take
all other actions necessary for its administration, which actions shall be final
and binding upon all Participants.
4. Selection of Participants and Performance Objective. Prior to or as soon
as practicable after the commencement of each Bonus Period, the Committee shall
determine in writing (i) the Participants who shall be eligible to receive a
Bonus for such Bonus Period, (ii) the Performance Objective, which shall be a
relative or absolute measure of any one or more of the Business Criteria, and
(iii) the formula for computing the amount of Bonus payable to each Participant
if the Performance Objective is achieved.
5. Business Criteria. The Business Criteria may include, but shall not be
limited to, specified levels of one or more of the following:
Operating Income Net Income
Pre-Tax Income1 Earnings Per Share
Cash Flow Return on Investment
Return on Capital Revenue
Return on Equity Total Shareholder Return
Return on Assets Membership in Company Products
Membership in HMO Product Membership in ASO Product
Membership in Medicare Product Membership in Medicaid Product
Membership in Indemnity Product Membership in PPO Product
The above terms shall have the same meaning as in the Company's financial
statements, or if the terms are not used in the Company's financial statements,
as applied pursuant to generally accepted accounting principles, or as used in
the industry, as applicable. As determined by the Committee, the Business shall
be applied (i) in absolute terms or relative to one or more other companies or
indices and (ii) to a business unit, geographic region, one or more separately
incorporated entities, or the Company as a whole).
6. Bonus Certification. The Committee shall certify in writing prior to
payment of the Bonus that the Performance Objective has been attained and the
Bonus is payable. With respect to Committee certification, approved minutes of
the meeting in which the certification is made shall be treated as written
certification.
7. Discretion to Change Awards. The Committee, in its sole and absolute
discretion, may increase or decrease the amount of any award otherwise payable
to a Participant.
8. Active Employment Requirement. Except as provided below, a Bonus
shall be paid for a Bonus Period only to a Participant who is actively employed
by the Company (or on approved vacation or other approved leave of absence)
throughout the Bonus Period and who is employed by the Company on the date the
Bonus is paid. The Committee may in its sole discretion grant a Bonus for the
Bonus Period to a Participant who is first employed or who is promoted to a
position eligible to become a Participant under this Plan during the Bonus
Period, or whose employment is terminated during the Bonus Period because of the
Participant's retirement with entitlement to immediate pension benefits under
the Company's retirement plan, death, or because of disability as defined in
Section 22(e)(3) of the Code. In such cases of active employment for part of a
Bonus Period, a pro rata Bonus may be paid for the Bonus Period.
9. Payment of Bonus. A Bonus shall be paid to the Participant for the
Bonus Period as provided in this Plan. The Company shall pay the Bonus to the
Participant in a single cash payment as soon as administratively practicable
after the Bonus Period and after the Committee certifies that the Bonus is
payable as provided in Section 6. In the event of the Participant's
incompetency, the Company in its sole discretion may pay any Bonus to the
Participant's guardian or directly to the Participant. In the event of the
Participant's death, any Bonus shall be paid to the Participant's spouse or, if
there is no surviving spouse, the Participant's estate. Payments under this
Section shall operate as a complete discharge of the Committee and the Company.
The Company shall deduct from any Bonus paid under the Plan the amount of any
taxes required to be withheld by the federal or any state or local government.
10. Limitation of Rights. Nothing in this Plan shall be construed to
(a) give any employee of the Company any right to be awarded any Bonus other
than that set forth herein, as determined by the Committee; (b) give a
Participant any rights whatsoever with respect to shares of common stock of the
Company; (c) limit in any way the right of the Company to terminate an
employee's employment with the Company at any time; (d) give a Participant or
any other person any interest in any fund or in any specific asset or assets of
the Company; or (e) be evidence of any agreement or understanding, express or
implied, that the Company will employ an employee in any particular position or
at any particular rate of remuneration.
11. Nonassignment. The right of a Participant to the payment of any Bonus
under the Plan may not be assigned, transferred, pledged, or encumbered, nor
shall such right or other interests be subject to attachment, garnishment,
execution, or other legal process.
12. Amendment or Termination of the Plan. The Committee may amend or
terminate the Plan at any time, except that no amendment or termination shall be
made that would impair the rights of any Participant to a Bonus that would be
payable were the Participant to terminate employment on the effective date of
such amendment or termination, unless the Participant consents to such amendment
or termination. The Plan shall automatically terminate on January 1, 2005 unless
sooner terminated by action of the Committee.
13. Governing Law. The Plan shall be governed by the laws of the State of
Delaware other than the conflict of laws provisions thereof.
1 Defined as pre-tax income before expansion or acquisition costs, charges or
credits not related to current year operations and prior to return of
physicians' withhold and physicians' bonuses.
MID ATLANTIC MEDICAL SERVICES, INC.
Plan for Deferral of Directors' Fees
1. Purpose.
This Plan for the Deferral of Directors' Fees, adopted by Mid Atlantic Medical
Services, Inc., Rockville, Maryland (the "Company") is for the purpose of
permitting members of its Board of Directors to defer the receipt of fees for
services as a Director, and as a member of any and all committees of the Board
of Directors.
2. Eligibility.
Any Director who is serving on the Board at the effective date of this Plan or
who is hereafter elected or appointed to membership on the Board of Directors of
the Company, may elect to defer receipt of either all or one-half of his/her
future Directors' fees, and to receive such deferred fees, together with
earnings thereon, at the time and in the manner hereafter provided, subject to
all the terms and conditions of this Plan.
3. Election to Defer.
Election to defer Directors' fees shall be made by written election on a form
provided by the Company, which shall be filed with the Secretary of the Company
on or before December 31 of any year. Such election shall be effective with
respect to Directors' fees earned for services performed during the following
calendar year, except for the year 2000 wherein if an election form is filed
with the Secretary of the Company within sixty (60) days of the effective date
of the plan, such election shall be effective with respect to fees earned by
him/her for services performed in the year 2000 but subsequent to the date of
filing of his/her election. However, if a newly-elected or appointed Director
files an election within sixty (60) days after becoming a Director, his/her
election may be made effective with respect to fees earned by him/her for
services performed in the same calendar year but subsequent to the date of
filing of his/her election.
4. Amount of Deferral.
At the time he makes his/her election, the Director shall:
a. Indicate whether the deferral shall apply to all or to one-half of
his/her Directors' fees;
b. Specify the payment date selected in accordance with paragraph 7 hereof;
and
c. Specify the method of payment selected in accordance with paragraph 8
hereof. Such election and all the terms thereof shall be irrevocable with
respect to Directors' fees earned while that election is in effect.
5. Duration and Termination.
Any Election to Defer Directors' Fees shall continue in effect indefinitely from
year to year so long as the Director continues as a Director of the Company. A
Director may terminate his/her election at any time by written notice filed with
the Secretary of the Company, which shall only be effective with respect to fees
earned for services performed subsequent to such notice of termination. A
Director may elect to change the portion of fees to be deferred, or change
his/her selection of the payment date or method of payment by filing a Revised
Election with the Secretary of the Company on or before December 31 of any year.
Such Revised Election shall apply with respect to Directors' Fees earned for
services performed during the following calendar year and thereafter. No change
of date of payment or method of payment shall apply to fees deferred under a
prior election.
6. Earnings.
Each amount of deferred compensation shall accrue earnings from the date of
deferral. Earnings shall accrue at the prime rate as periodically adjusted and
published in the Wall Street Journal. All such earnings shall be deemed to be
deferred compensation to be distributed in accordance with the terms and in the
manner set forth in this Agreement.
7. Time of Payment.
The balance of a Directors' deferred fees shall become payable either:
a. On the first of January next following the date he ceases to be a
Director; or
b. On the first day of January next following the Director's 65th birthday;
and
c. On the first day of January next following the date of either the
Director's 65th birthday and the date he ceases to be a Director, whichever
is later, as the Director shall specify at the time he makes his/her
Election to Defer.
8. Installment Payments.
When the balance of a Director's deferred fees becomes payable, such balance
shall be paid in a series of approximately equal installments, payable annually
or quarterly over a five-year or ten-year period or the life expectancy of the
Director in accordance with the mortality table in effect for actuarial
equivalence under the Company Pension Plan, as the Director shall specify at the
time he makes his/her Election to Defer. During the time that such balance of
deferred fees is being paid in installments, earnings shall continue to be
credited on the unpaid balance as provided in paragraph 6 hereof and until the
entire balance is fully paid.
9. Beneficiary Designation
If a Director dies before his/her fee account becomes payable, or before he has
received the entire balance thereof, any remaining balance thereof shall become
payable on the first day of January next following his/her death, and shall be
paid to his/her designated beneficiary in one lump sum. A Director may designate
a beneficiary, and change or revoke a designation of beneficiary, at any time
and from time to time, by a writing filed with the Secretary of the Company
prior to his/her death. If no designation of beneficiary is in effect at the
time of the Director's death, or if the last designated beneficiary shall have
predeceased the Director, the balance of his/her deferred fees shall be paid to
the estate of the Director in one lump sum.
10. General Unsecured Obligation Only.
A Director's deferred fees and all earnings thereon shall be a general unsecured
obligation of the Company and the Company shall not in any way fund its
liability for such deferred Directors' fees or earnings thereon. Any Company
memorandum or record of a Director's fee account shall be solely for the
Company's internal bookkeeping purposes and the Director, his/her designated
beneficiary or his/her estate shall not have any earnings whatsoever therein.
11. Compliance with Law.
This plan is intended to accomplish the authorized deferral of the incidence of
federal income taxes on a Director's deferred fees and the earnings thereon
until such time as the Director, his/her beneficiary or his/her estate received
actual payment of the same, as authorized by the Internal Revenue Code and
applicable law, and this plan shall be construed in accordance with such
intended purpose.
12. Amendment.
This plan may be amended by the Company at any time and from time to time in the
Company's sole discretion, or terminated in its sole discretion. No amendment or
termination of the plan shall apply with respect to a Director's fees
theretofore deferred except with the Director's consent, unless in the opinion
of legal counsel to the Company, such amendment or termination is necessary or
desirable to accomplish the purpose of this Plan or to comply with applicable
law.
13. Effective Date.
This plan shall be effective with respect to Directors' fees earned for services
performed on and after the first day of April following the date of the plan's
adoption by the Company's Board of Directors.
14. Successor Company.
The Company shall not merge or consolidate with any other company or reorganize
unless and until such succeeding and continuing company agrees to assume and
discharge the obligations of the Company under this Plan for Deferral of
Directors' Fees. Upon such assumption, the term "Company" as used in this Plan
shall be deemed to refer to such successor company.
15. Other Agreements Superseded.
This Plan shall supersede any prior Plans as to compensation earned after the
Effective Date of this Plan. Any compensation previously deferred at the request
of a Director pursuant to any prior Plan may be designated by the Director to be
included within the term of this Plan or, in the event no such designation is
made, shall continue to be payable in accordance with the terms of such prior
Plan. This Plan shall not be construed to prevent the Director or any of his/her
designated beneficiaries from receiving, in addition to the deferred
compensation provided for herein, any amounts which he may be entitled to under
any pension plan, employees' retirement plan, or any other compensation to which
he may be legally entitled as an officer or employee of the Company.
MID ATLANTIC MEDICAL SERVICES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT FOR EMPLOYEES
AGREEMENT ("Agreement") dated the date indicated on the attached Face
Sheet by and between Mid Atlantic Medical Services, Inc., a Delaware corporation
("Corporation"), and the person indicated on the attached Face Sheet, an
employee of the Corporation and/or one of its subsidiaries ("Optionee").
WHEREAS, the Corporation desires to have Optionee continue in its
employ and to provide Optionee with an incentive by sharing in the success of
the Corporation;
WHEREAS, in order to provide such an incentive to its officers and key
employees, the Corporation has adopted the Mid Atlantic Medical Services, Inc.
2000 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the Corporation desires to grant to Optionee under the Plan
options not intended to qualify as "incentive stock options" within the meaning
of Section 422 or any successor provision of the Internal Revenue Code of 1986,
as amended ("Code"); and
WHEREAS, unless otherwise provided herein, capitalized terms used in
this Agreement shall have the meaning given them in the Plan.
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the parties
hereto agree as follows:
1. Number of Shares and Price. The Corporation hereby grants to the
Optionee an option ("Option") to purchase the number of shares of Common Stock
set forth on the attached Face Sheet of this Agreement. The exercise price per
share of Common Stock of the Option shall be as is set forth on the attached
Face Sheet of this Agreement, such price being the Fair Market Value per share
of Common Stock on the Date of Grant of the Option. The Option is not intended
to qualify as an "incentive stock option" under Section 422 of the Code.
2. Term and Exercise. The Option shall expire five (5) years from the
date hereof, subject to earlier termination as set forth in Section 3. Subject
to the provisions of Section 3, the Option shall become exercisable in
installments as set forth on the attached Face Sheet of this Agreement.
3. Exercise of Option Upon Termination of Employment.
(a) Termination of Vested Option Upon Termination of Employment.
(i) Termination. Upon the Optionee's Termination of
Employment, other than by reason of death or
Disability, the Optionee may, within 90 days from the
date of such Termination of Employment, exercise all or
any part of the Option as were exercisable at the date
of Termination of Employment. In no event may the
Option be exercised later than the expiration date
described in Section 2.
(ii) Disability. Upon the Optionee's Disability Date, the
Optionee may, within one year after such Disability
Date, exercise all or a part of the Option, whether or
not it was exercisable on such Disability Date, but
only to the extent not previously exercised. In no
event, however, may the Option be exercised later than
the expiration date described in Section 2.
(iii)Death. In the event of the death of the Optionee while
employed by the Corporation or a Subsidiary, the
Optionee's Beneficiary shall be entitled to exercise
all or any part of the Option that was vested at the
date of the Optionee's death until the initial
expiration date of such Option determined pursuant to
Section 2. Notwithstanding the above, if the Optionee
at the time of death had been an employee of the
Corporation or a Subsidiary for a period of ten years,
50% of the Optionee's unvested Option will become
vested and subject to exercise as stated above and, if
the Optionee at the time of death had been an employee
of the Corporation or a Subsidiary for a period of
fifteen years, all of the Optionee's unvested Option
will become vested and subject to exercise as stated
above and shall expire on the date of expiration of the
Option determined pursuant to Section 2.
(b) Termination of Unvested Option Upon Termination of
Employment. Except as provided in Sections 3(a)(ii) and 3(a)(iii), to the extent
all or any part of the Option was not exercisable as of the date of Termination
of Employment, the unexercisable portion of the Option shall expire at the date
of such Termination of Employment.
(c) Change of Control. Notwithstanding anything to the
contrary in Section 2 or this Section 3, if one of the events specified in
Section 7.05(d)(i), (ii), (iii) or (iv) of the Plan occurs, the provisions of
such Section 7.05(d) shall determine when the Option becomes exercisable, when
it may be exercised and when it expires.
4. Exercise Procedures. The Option shall be exercisable by written
notice to the Corporation, which must be received by the Secretary of the
Corporation not later than 5:00 P.M. local time at the principal executive
office of the Corporation on the expiration date of the Option. Such written
notice shall set forth (a) the number of shares of Common Stock being purchased,
(b) the total exercise price for the shares of Common Stock being purchased, (c)
the exact name as it should appear on the stock certificate(s) to be issued for
the shares of Common Stock being purchased, and (d) the address to which the
stock certificate(s) should be sent. The exercise price of shares of Common
Stock purchased upon exercise of the Option shall be paid in full (a) in cash,
(b) by delivery to the Corporation of shares of Common Stock (which shares of
Common Stock must have been held for at least six months), (c) in any
combination of cash and shares of Common Stock, or (d) by delivery of such other
consideration as the Committee deems appropriate and in compliance with
applicable law (including payment in accordance with a cashless exercise program
approved by the Committee). If any shares of Common Stock shall be transferred
to the Corporation to satisfy all or any part of the exercise price, the part of
the exercise price deemed to have been satisfied by such transfer of shares of
Common Stock shall be equal to the product derived by multiplying the Fair
Market Value as of the date of exercise times the number of shares of Common
Stock transferred to the Corporation. Any shares of Common Stock tendered in
payment shall be duly endorsed in blank or accompanied by stock powers duly
endorsed in blank. The Optionee may not transfer to the Corporation in
satisfaction of the exercise price any fraction of a share of Common Stock, and
any portion of the exercise price that would represent less than a full share of
Common Stock must be paid in cash by the Optionee. Subject to Sections 8 and 9
hereof, certificates for the purchased shares of Common Stock will be issued and
delivered to the Optionee as soon as practicable after the receipt of such
payment of the exercise price; provided, however, that delivery of any such
shares of Common Stock shall be deemed effected for all purposes when a stock
transfer agent of the Corporation shall have deposited such certificates in the
United States mail, addressed to Optionee, at the address set forth on the Face
Sheet of this Agreement or to such other address as Optionee may from time to
time designate in a written notice to the Corporation. The Optionee shall not be
deemed for any purpose to be a shareholder of the Corporation in respect of any
shares of Common Stock as to which the Option shall not have been exercised, as
herein provided, until such shares of Common Stock have been issued to Optionee
by the Corporation hereunder.
5. Plan Provisions Control Option Terms; Modifications. The Option is
granted pursuant and subject to the terms and conditions of the Plan, the
provisions of which are incorporated herein by reference. If any provision of
this Agreement conflicts with any of the terms in the Plan as constituted on the
Date of Grant, the terms of the Plan as constituted on the Date of Grant shall
control. Except as provided in Sections 7.03 and 7.05 of the Plan, the Option
shall not be modified after the Date of Grant except by express written
agreement between the Corporation and the Optionee; provided, however, that any
such modification (a) shall not be inconsistent with the terms of the Plan, and
(b) shall be approved by the Committee.
6. Limitations on Transfer. The Option may not be assigned or transferred
other than by will, by the laws of descent and distribution or pursuant to a
domestic relations order.
7. Taxes. The Corporation shall be entitled to withhold (or secure
payment from the Optionee in lieu of withholding) the amount of any withholding
or other tax required by law to be withheld or paid by the Corporation with
respect to any shares of Common Stock issuable under this Agreement, and the
Corporation may defer issuance of shares of Common Stock upon the exercise of
the Option unless the Corporation is indemnified to its satisfaction against any
liability for any such tax. The amount of such withholding or tax payment shall
be determined by the Committee or its delegate and shall be payable by the
Optionee at such time as the Committee determines. The Optionee may satisfy his
or her tax withholding obligation by (a) having cash withheld from the
Optionee's salary or other compensation payable by the Corporation or a
Subsidiary, (b) the payment of cash to the Corporation, (c) the payment in
shares of Common Stock already owned by the Optionee valued at Fair Market
Value, and/or (d) the withholding from the Option, at the appropriate time, of a
number of shares of Common Stock sufficient, based upon the Fair Market Value of
such shares of Common Stock, to satisfy such tax withholding requirements. The
Committee shall be authorized, in its sole and absolute discretion, to establish
such rules and procedures relating to any such withholding methods as it deems
necessary or appropriate, including, without limitation, rules and procedures
relating to elections to have shares of Common Stock withheld upon exercise of
the Option to meet such withholding obligations.
8. No Exercise in Violation of Law. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she will not
exercise the Option granted hereby, and that the Corporation will not be
obligated to issue any shares of Common Stock to the Optionee hereunder, if the
exercise thereof or the issuance of such shares of Common Stock shall constitute
a violation by the Optionee or the Corporation of any provision of any law or
regulation of any governmental authority. Any determination in this connection
by the Committee shall be final, binding and conclusive.
9. Securities Law Compliance. The Optionee agrees, for the Optionee and
his or her Beneficiaries, with respect to all shares of Common Stock acquired
pursuant to the terms and conditions of the Plan and the Option (or any other
shares of Common Stock issued pursuant to a stock dividend or stock split
thereon or any securities issued in lieu thereof or in substitution or exchange
therefor), that the Optionee and his or her Beneficiaries will not sell or
otherwise dispose of these shares except pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Act"), or except in
a transaction that, in the opinion of counsel for the Corporation, is exempt
from registration under the Act. Further, the Corporation shall not be required
to sell or issue any shares under the Option if, in the opinion of the
Corporation, (a) the issuance of such shares would constitute a violation by the
Optionee or the Corporation of any applicable law or regulation of any
government authority or (b) the consent or approval of any governmental body is
necessary or desirable as condition of, or in connection with, the issuance of
such shares.
10. Adjustments. The existence of the Option shall not affect in any
way the right or power of the Corporation or its directors or shareholders to
make or authorize any or all adjustments, recapitalizations, reorganizations, or
other changes in the Corporation's capital structure or its business, or any
merger or consolidation of the Corporation, or any issuance of bonds,
debentures, preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
11. Dispute Resolution. As a condition of granting the Option, the
Optionee agrees, for the Optionee and his or her Beneficiaries, that any dispute
or disagreement that may arise under or as a result of or pursuant to the Plan
and the Option shall be determined by the Committee in its sole and absolute
discretion, and any interpretation by the Committee of the terms of the Plan and
Option shall be final, binding and conclusive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above specified.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
__________________________ By:
Thomas P. Barbera,
President and Chief Executive Officer
By:
Member of the Stock Option Committee
WITNESS: OPTIONEE
- --------------------------
(Signature)
<PAGE>
5
FACE SHEET
Notice Addresses:
Optionee:
------------------------
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: ___________
Total Options Granted: ___________
Exercise Price Per Share of Common Stock: $__________
Vesting Schedule:
Number of Shares
Date (Non-Cumulative)
06/01/2001 ___
06/01/2002 ___
06/01/2003 ___
Expiration Date:
Optioned shares must be purchased within five (5) years from the date
of grant, which is _________. That is, all options must be exercised by
__________.
MID ATLANTIC MEDICAL SERVICES, INC.
STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS
AGREEMENT ("Agreement") dated the date indicated on the attached Face
Sheet by and between Mid Atlantic Medical Services, Inc., a Delaware corporation
("Corporation"), and the person indicated on the attached Face Sheet, a
non-employee director of the Corporation and/or one of its Subsidiaries
("Optionee").
WHEREAS, the Corporation desires to have Optionee continue to serve on
its Board of Directors and to provide Optionee with an incentive by sharing in
the success of the Corporation;
WHEREAS, in order to provide such an incentive to its non-employee
directors, the Corporation has adopted the Mid Atlantic Medical Services, Inc.
2000 Non-Qualified Stock Option Plan ("Plan");
WHEREAS, the option granted hereby is not intended to qualify as an
"incentive stock option" within the meaning of Section 422 or any successor
provision of the Internal Revenue Code of 1986, as amended; and
WHEREAS, unless otherwise provided herein, capitalized terms used in
this Agreement shall have the meaning given them in the Plan;
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the parties
hereto agree as follows:
1. Number of Shares and Price. The Corporation hereby grants to the
Optionee an option ("Option") to purchase the number of shares of Common Stock
set forth on the attached Face Sheet of this Agreement. The exercise price per
share of Common Stock of the Option shall be as is set forth on the attached
Face Sheet of this Agreement, such price being the Fair Market Value per share
of Common Stock on the Date of Grant of the Option. The Option is not intended
to qualify as an "incentive stock option" under Section 422 of the Code.
2. Term and Exercise. The Option shall expire five (5) years from the
date hereof. The Option is exercisable in full on the Date of Grant. If the
Optionee's service with the Corporation terminates for any reason or if the
Optionee ceases to be a Non-Employee Director, the Option may be exercised but
only to the extent it was exercisable on the date of such termination of service
until the Option expires in accordance with the first sentence of this Section
2.
Notwithstanding anything to the contrary in this Section 2, if one of
the events specified in Section 7.05(d)(i), (ii), (iii) or (iv) of the Plan
occurs, the provisions of such Section 7.05(d) shall determine when the Option
becomes exercisable, when it may be exercised and when it expires.
3. Exercise Procedures. The Option shall be exercisable by written
notice to the Corporation, which must be received by the Secretary of the
Corporation not later than 5:00 P.M. local time at the principal executive
office of the Corporation on the expiration date of the Option. Such written
notice shall set forth (a) the number of shares of Common Stock being purchased,
(b) the total exercise price for the shares of Common Stock being purchased, (c)
the exact name as it should appear on the stock certificate(s) to be issued for
the shares of Common Stock being purchased, and (d) the address to which the
stock certificate(s) should be sent. The exercise price of shares of Common
Stock purchased upon exercise of the Option shall be paid in full (a) in cash,
(b) by delivery to the Corporation of shares of Common Stock (which shares of
Common Stock must have been held for at least six months), (c) in any
combination of cash and shares of Common Stock, or (d) by delivery of such other
consideration as the Committee deems appropriate and in compliance with
applicable law (including payment in accordance with a cashless exercise program
approved by the Committee). If any shares of Common Stock shall be transferred
to the Corporation to satisfy all or any part of the exercise price, the part of
the exercise price deemed to have been satisfied by such transfer of shares of
Common Stock shall be equal to the product derived by multiplying the Fair
Market Value as of the date of exercise times the number of shares of Common
Stock transferred to the Corporation. Any shares of Common Stock tendered in
payment shall be duly endorsed in blank or accompanied by stock powers duly
endorsed in blank. The Optionee may not transfer to the Corporation in
satisfaction of the exercise price any fraction of a share of Common Stock, and
any portion of the exercise price that would represent less than a full share of
Common Stock must be paid in cash by the Optionee. Subject to Sections 7 and 8
hereof, certificates for the purchased shares of Common Stock will be issued and
delivered to the Optionee as soon as practicable after the receipt of such
payment of the exercise price; provided, however, that delivery of any such
shares of Common Stock shall be deemed effected for all purposes when a stock
transfer agent of the Corporation shall have deposited such certificates in the
United States mail, addressed to Optionee, at the address set forth on the last
page of this Agreement or to such other address as Optionee may from time to
time designate in a written notice to the Corporation. The Optionee shall not be
deemed for any purpose to be a shareholder of the Corporation in respect of any
shares of Common Stock as to which the Option shall not have been exercised, as
herein provided, until such shares of Common Stock have been issued to Optionee
by the Corporation hereunder.
4. Plan Provisions Control Option Terms; Modifications. The Option is
granted pursuant and subject to the terms and conditions of the Plan, the
provisions of which are incorporated herein by reference. If any provision of
this Agreement conflicts with any of the terms in the Plan as constituted on the
Date of Grant, the terms of the Plan as constituted on the Date of Grant shall
control. Except as provided in Sections 7.03 and 7.05 of the Plan, the Option
shall not be modified after the Date of Grant except by express written
agreement between the Corporation and the Optionee; provided, however, that any
such modification (a) shall not be inconsistent with the terms of the Plan, and
(b) shall be approved by the Committee.
5. Limitations on Transfer. The Option may not be assigned or transferred
other than by will, by the laws of descent and distribution, or pursuant to a
domestic relations order.
6. Taxes. The Corporation shall be entitled to withhold (or secure
payment from the Optionee in lieu of withholding) the amount of any withholding
or other tax required by law to be withheld or paid by the Corporation with
respect to any shares of Common Stock issuable under this Agreement, and the
Corporation may defer issuance of shares of Common Stock upon the exercise of
the Option unless the Corporation is indemnified to its satisfaction against any
liability for any such tax. The amount of such withholding or tax payment shall
be determined by the Committee or its delegate and shall be payable by the
Optionee at such time as the Committee determines. The Optionee may satisfy his
or her tax withholding obligation by (a) having cash withheld from the
Optionee's salary or other compensation payable by the Corporation or a
Subsidiary, (b) the payment of cash to the Corporation, (c) the payment in
shares of Common Stock already owned by the Optionee valued at Fair Market
Value, and/or (d) the withholding from the Option, at the appropriate time, of a
number of shares of Common Stock sufficient, based upon the Fair Market Value of
such shares of Common Stock, to satisfy such tax withholding requirements. The
Committee shall be authorized, in its sole and absolute discretion, to establish
such rules and procedures relating to any such withholding methods as it deems
necessary or appropriate, including, without limitation, rules and procedures
relating to elections to have shares of Common Stock withheld upon exercise of
the Option to meet such withholding obligations.
7. No Exercise in Violation of Law. Notwithstanding any of the
provisions of this Agreement, the Optionee hereby agrees that he or she will not
exercise the Option granted hereby, and that the Corporation will not be
obligated to issue any shares of Common Stock to the Optionee hereunder, if the
exercise thereof or the issuance of such shares of Common Stock shall constitute
a violation by the Optionee or the Corporation of any provision of any law or
regulation of any governmental authority. Any determination in this connection
by the Committee shall be final, binding and conclusive.
8. Securities Law Compliance. The Optionee agrees, for the Optionee and
his or her Beneficiaries, with respect to all shares of Common Stock acquired
pursuant to the terms and conditions of the Plan and the Option (or any other
shares of Common Stock issued pursuant to a stock dividend or stock split
thereon or any securities issued in lieu thereof or in substitution or exchange
therefor), that the Optionee and his or her Beneficiaries will not sell or
otherwise dispose of these shares except pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Act"), or except in
a transaction that, in the opinion of counsel for the Corporation, is exempt
from registration under the Act. Further, the Corporation shall not be required
to sell or issue any shares under the Option if, in the opinion of the
Corporation, (a) the issuance of such shares would constitute a violation by the
Optionee or the Corporation of any applicable law or regulation of any
government authority or (b) the consent or approval of any governmental body is
necessary or desirable as condition of, or in connection with, the issuance of
such shares.
9. Adjustments. The existence of the Option shall not affect in any way
the right or power of the Corporation or its directors or shareholders to make
or authorize any or all adjustments, recapitalizations, reorganizations, or
other changes in the Corporation's capital structure or its business, or any
merger or consolidation of the Corporation, or any issuance of bonds,
debentures, preferred stock or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
10. Dispute Resolution. As a condition of granting the Option, the
Optionee agrees, for the Optionee and his or her Beneficiaries, that any dispute
or disagreement that may arise under or as a result of or pursuant to the Plan
and the Option shall be determined by the Committee in its sole and absolute
discretion, and any interpretation by the Committee of the terms of the Plan and
Option shall be final, binding and conclusive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above specified.
ATTEST: MID ATLANTIC MEDICAL SERVICES, INC.
__________________________ By:
Thomas P. Barbera
President and Chief Executive Officer
By:
Member of the Stock Option Committee
WITNESS: OPTIONEE
- --------------------------
<PAGE>
FACE SHEET
Notice Addresses:
Optionee:
-----------------------
4 Taft Court
Rockville, Maryland 20850
Corporation:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
Grant Date: _________________
Total Options Granted: _________________
Exercise Price per share of Common Stock: $________________
Expiration Date:
Optioned shares must be purchased within five (5) years from the date
of grant, which is ________________. That is, all options must be exercised by
________________.
MID ATLANTIC MEDICAL SERVICES, INC.
Election to Defer Director Fees
To the Secretary of
Mid Atlantic Medical Services, Inc.
In accordance with the Plan for Deferral of Directors' Fees, I hereby elect to
defer receipt of fees earned by me for services rendered as a member of the
Board of Directors of the Company during the calendar year specified below and
thereafter. This election shall be governed by all of the provisions of the
Plan.
1. This election shall be effective for the year 2000 and thereafter until
changed or terminated by me.
2. This election shall apply to:
( ) All of my Directors' fees.
( ) One-half of my Directors' fees.
3. Earnings on Deferral
The amount deferred under Section 2, and all amounts previously
deferred, shall be credited with earnings as soon as practicable
following the date of this election until such amounts are paid to me or
my designated beneficiary at the prime rate of interest as periodically
adjusted and published in the Wall Street Journal.
4. My deferred fees and all earnings thereon shall become payable on the
first day of January following:
( ) The date I cease to be a Director.
( ) The date I attain my 65th birthday.
( ) The later of the date I attain my 65th birthday and the date I cease
to be a Director.
5. When payable, my deferred fees and all earnings thereon shall be paid
to me:
( ) In a lump sum payment. ( ) In a series of five annual installments.
( ) In a series of quarterly installments over a five-year period. ( ) In
a series of ten annual installments.
( ) In a series of quarterly installments over a ten-year period.
( ) In a series of annual installments over a period of years equal to my
life expectancy for the age when my payments commence, based on the
mortality table in effect for actuarial equivalents under the Company
Pension Plan at that time.
( ) In a series of quarterly installments over a period of years equal to
my life expectancy for the age when my payments commence, based on the
mortality table in effect for actuarial equivalence under the Company
Pension Plan at that time.
6. I designate my beneficiary to receive any deferred fees and all earnings
thereon unpaid at my death:
(Name)
(Address)
I understand that this election will remain in effect indefinitely, subject to
my right to terminate it at any time as to fees earned after the filing of
notice of termination, or to change my selections in paragraph 2, 4 and 5 hereof
with respect to fees earned during succeeding calendar years. I also understand
that this election is irrevocable as to fees earned while it is in effect, but
that I may change or revoke the beneficiary designation at any time and from
time to time, effective as to all deferred fees and all earnings thereon.
Please acknowledge receipt of this election by signing the enclosed copy and
returning it to me.
(Signature)
(Date)
The foregoing election was filed with me on
---------------------------
Secretary
SUBSIDIARIES OF THE COMPANY
AS OF DECEMBER 31, 1999
1. MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI"): MAMSI, a Delaware
corporation, is the holding company for the subsidiaries listed below.
2. ALLIANCE PPO, LLC ("Alliance"): Owned 100 percent by MLH (1). Alliance, a
Maryland Limited Liability Company, provides a delivery network of physicians
(called a preferred provider organization or "PPO") to employers and insurance
companies in association with various health plans.
3. MAMSI INSURANCE AGENCY OF THE CAROLINAS, INC. ("MIACI"): Owned 100
percent by Alliance (2). MIACI, a North Carolina Corporation, contracts with
marketing representatives to sell MAMSI products in North Carolina and South
Carolina.
4. MAMSI LIFE AND HEALTH INSURANCE COMPANY ("MAMSI Life"): Owned 100 percent by
MAMSI(1). MAMSI Life, a Maryland corporation, develops and markets indemnity
health products in addition to life, accidental death and disability insurance.
5. MD-INDIVIDUAL PRACTICE ASSOCIATION, INC. (M.D. IPA"): Owned 77 percent by
PHYSICIANS HEALTH PLAN OF MARYLAND, INC. (11) and 23 percent by MAMSI (1). M.D.
IPA, a Maryland corporation, is a health maintenance organization ("HMO")
providing health care coverage for its members.
6. MD-IPA SURGICENTER, INC. ("Surgicenter"): Owned 100 percent by M.D. IPA
(5). Surgicenter, a Maryland corporation, is a general partner in a
partnership that in turn is the general partner in a limited partnership that
operates a surgery center.
7. MID ATLANTIC PSYCHIATRIC SERVICES, INC. ("MAPSI"): Owned 100 percent by
MAMSI (1). MAPSI, a Maryland corporation, provides psychiatric services to
third party payors or self-insured employer groups.
8. OPTIMUM CHOICE, INC. ("OCI"): Owned 100 percent by MAMSI (1). OCI, a
Maryland corporation, is an HMO providing health care coverage for its
members.
9. OPTIMUM CHOICE OF THE CAROLINAS, INC. ("OCCI"): Owned 100 percent by MAMSI
(1). OCCI, a North Carolina corporation, is an HMO providing health care
coverage to members who are in North Carolina and South Carolina.
10. PHYSICIANS HEALTH PLAN OF MARYLAND, INC. ("PHP-MD"): Owned 100 percent by
MAMSI (1). PHP-MD, a Maryland corporation, is an IPA that provides health care
services to certain of MAMSI's HMOs.
11. HOMECALL, INC. ("HomeCall"): Owned 100 percent by MAMSI (1). HomeCall, a
Maryland corporation, provides in-home medical care including skilled nursing
and therapy to MAMSI'S HMO members and other payors.
12. HOMECALL PHARMACEUTICAL SERVICES, INC. ("HPS"): Owned 100 percent by
MAMSI (1). HPS, a Maryland corporation, providing infusion services to
MAMSI's HMO members and other payors.
13. FIRSTCALL, INC. ("FirstCall"): Owned 100 percent by HomeCall (11) and a
Maryland corporation.
14. HOMECALL HOSPICE SERVICES, INC. ("Hospice"): Owned 100 percent by MAMSI
(1). Hospice, a Maryland corporation, that provides services to the
terminally ill.
15. OPTIMUM CHOICE, INC. OF PENNSYLVANIA ("OCIPA"): Owned 100 percent by
MAMSI (1). OCIPA, a Pennsylvania corporation, is an HMO providing health care
coverage to members in Pennsylvania.
16. MAMSI INSURANCE RESOURCES, LLC ("MIRI"): Owned 100 percent by Alliance (2).
MIRI, a Maryland Limited Liability Company, provides marketing personnel.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Number in Registration Statement Number 33-47593 on Form S-8 dated May 1,
1992, in Registration Statement Number 33-61896 on Form S-8 dated April 29,
1993, in Registration Statement Number 33-78258 on Form S-8 dated April 28,
1994, in Registration Statement Number 33-91294 on Form S-8 dated April 17,
1995, Registration Statement Number 33-02531 on Form S-8 dated April 16,
1996, Registration Statement Number 33-50275 on Form S-8 dated April 16,
1998, and in Registration Statement Number 33-75099 on Form S-8 dated March
26, 1999 of our report dated February 14, 2000, with respect to the
consolidated financial statements and schedule of Mid Atlantic Medical
Services, Inc. and subsidiaries included in the Annual Report on Form 10-K
for the year ended December 31, 1999.
/s/ Ernst & Young LLP
McLean, Virgina ---------------------
March 28, 2000 Ernst & Young LLP
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