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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
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
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
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.
4
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
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
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
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.
8
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:
MEMBERSHIP DATA AT DECEMBER 31
---------------------------------
PRODUCT LINE 1997 1998 1999
- ------------ ---------------------------------
(in thousands)
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
======= ======= =======
(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.
9
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.
10
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.
11
Approximate
Number
Insurer/HMO of Enrollees
- ------------- ------------
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
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.
12
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
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
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
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
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
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in thousands except share amounts, key ratios and operating data)
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
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
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
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
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
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
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
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):
December 31, December 31,
1999 1998
------------ ------------
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
=========== ===========
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
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:
There- Fair Value
Assets 2000 2001 2002 2003 2004 after Total 12/31/99
- ------ ------- ------ ------ ------- ------ ------- -------- --------
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%
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
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
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
December 31,
(in thousands except share amounts) 1999 1998
-------- --------
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.
27
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Operations
Year Ended December 31,
(in thousands except per share amounts) 1999 1998 1997
---------- ---------- ----------
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.
28
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Additional Stock Other
Common Paid-In Compensation Treasury Comprehensive Retained
(in thousands except share amounts) Stock Capital Trust Stock Income Earnings Total
------ ---------- ------------ --------- ------------- -------- --------
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.
29
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
(in thousands) 1999 1998 1997
-------- -------- --------
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.
30
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
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
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
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
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:
-----------------------------------------------------
1999
-----------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
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
======== ======= ======= ========
35
-----------------------------------------------------
1998
-----------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
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
======== ======= ======= ========
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.
-------------------------
Estimated
Fair
(in thousands) Cost Value
-------------------------
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
======== ========
36
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
-------------------------
(in thousands) 1999 1998
-------------------------
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
======== ========
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:
------------------------
(in thousands) 1999 1998
------------------------
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
======= =======
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at December 31:
------------------------
(in thousands) 1999 1998
------------------------
Notes payable $ 14 $ 74
Current portion (14) (60)
------- -------
Noncurrent portion $ - $ 14
======= =======
37
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:
--------------------------
(in thousands) 1999 1998
--------------------------
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)
======= =======
38
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
---------------------------------------
(in thousands) 1999 1998 1997
---------------------------------------
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
========= ========= =========
The Company's tax provision differs from the statutory rate for Federal income
taxes for the years ended December 31 as follows:
-------------------------------------
(in thousands) 1999 1998 1997
-------------------------------------
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
======= ======= =======
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
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
1999 1998 1997
----------------------- ----------------------- -----------------------
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
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
- ------------------- ----------- ---------------- ---------------- ----------- ----------------
$ 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
========= =========
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
NOTE 10 - COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
-----------------------------------------
1999 1998 1997
-----------------------------------------
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
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
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
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:
1999 1998
-------------------------- --------------------------
Minimum Actual Minimum Actual
---------- ----------- ---------- -----------
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
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
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.
REPORTABLE SEGMENTS
-----------------------------------------------------------------
(in thousands) Risk Medicare PPO All Others Totals
-----------------------------------------------------------------
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
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
--------------------------------------------
(in thousands) 1999 1998 1997
--------------------------------------------
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
========== ========== ==========
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:
-----------------------------------------
(in thousands) 1999 1998 1997
-----------------------------------------
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
======= ======= =======
46
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
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1999 AND 1998
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)
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
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
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
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
Mid Atlantic Medical Services, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
Additions
Balance at ------------------------------
Beginning Charged to Charged to Balance
of Costs Other Deductions- at End
Description Period and Expenses Accounts Write-Offs of Period
- ----------- ---------- ------------- ---------- ----------- ---------
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
======== ======== ======== ======== =======
(1) The changes to the allowance were charged to premium revenue.
51
(a)(3)
EXHIBITS
See the Exhibit Index on pages 62-63 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.
52
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
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
(a)(3), (b) and(C)List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
- ------- ----------------------- -------------------
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
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..................................................
(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
(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