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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, 2000
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 2,
2001: Approximately $756 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.
48,097,422 shares of common stock as of March 2, 2001
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders to be
held on April 23, 2001 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 ... 15
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 16
Item 6 Selected Financial Data .............................. 17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 18
Item 7A Quantitative and Qualitative Disclosures About
Market Risk ........................................ 24
Item 8 Financial Statements and Supplementary Data .......... 25
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 47
PART III
Item 10 Directors and Executive Officers of the Registrant ... 48
Item 11 Executive Compensation ............................... 48
Item 12 Security Ownership of Certain Beneficial Owners
and Management ..................................... 48
Item 13 Certain Relationships and Related Transactions ....... 48
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 49
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 providing health care coverage through its HMOs and
its life and health insurance company. During 2000, 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,
health, dental and short-term disability insurance through MAMSI Life and Health
Insurance Company ("MLH").
M.D. IPA became a licensed HMO in Maryland in 1981, in the District of Columbia
in 1996, 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 the District of Columbia in 1996, in Virginia in 1990, in Delaware in 1993
and in West Virginia in 1994. OCI generally serves small and large employers.
OCI no longer covers Medicaid recipients. 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 services small and large employers. 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 ceased all operations in Pennsylvania in 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 Maryland, Virginia, West Virginia, Delaware,
Pennsylvania, North Carolina and South Carolina. 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 facilitate 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 market in some of their service areas.
Under traditional HMO coverage, the enrollee selects a PCP from the HMO's
network of physicians and health care practitioners. For benefits to be covered,
an enrollee must generally coordinate care through 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.
Except in emergencies, enrollees must coordinate care through their PCP which
generally utilizes 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").
5
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
subsidiaries, OCI and MLH, underwrites the risk of loss on a specific and/or
aggregate stop loss basis.
OCI offered HMO coverage to recipients of Title XIX Medical Assistance
("Medicaid") in Virginia. Effective May 1, 2000, the Company transferred its
membership in the Virginia Medicaid program to a non-affiliated carrier.
Therefore, as of May 1, 2000, the Company ended its participation in any
government entitlement health insurance programs.
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 processing and payment of claims. MAMSI has no insurance risk on this
product.
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 772,000 at December 31, 2000 from 766,000 at December 31, 1999, an
increase of .8 percent.
The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 2000:
Employer Groups Served 28,100
Population of Aggregate HMO
Service Area 20,200,000
HMO Service Area Penetration
(All HMO's) 25%
Primary Care Physicians 7,700
Specialist Physicians 22,800
Other Affiliated Health
Care Practitioners 10,900
Hospitals and Outpatient
Facilities 2,300
Pharmacies 21,300
6
A significant portion of the Company's premium revenue is derived from Federal,
state and local government agencies. For the years ended December 31, 2000, 1999
and 1998, approximately 8%, 8% and 11%, respectively, of premium revenue was
derived from Federal government agencies which is included in the Medicare and
Risk segments (as described in Item 8 "Financial Statements and Supplementary
Data", Note 14), and approximately 14%, 18% and 18%, 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 (as described in
Item 8 "Financial Statements and Supplementary Data", Note 14).
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 Union 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 welfare 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 that use direct marketing efforts. Major competition
comes from other PPOs and insurance carriers.
As of December 31, 2000, Alliance had contracts with approximately 16,500 payors
that had access to the Company's entire network of physicians and health care
practitioners.
MAPSI is comprised of physicians and health care practitioners specializing in
behavioral health and substance abuse care. Similar to Alliance, MAPSI 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, 2000,
MAPSI had a network of over 4,200 psychiatrists, psychologists, social workers,
and other affiliated licensed behavioral health physicians and practitioners.
7
Alliance and MAPSI products are most often marketed jointly and the prospective
purchaser may also purchase the MAPSI products separately. A total of
approximately 1,019,000 lives are covered under one or both of these PPO
products as of December 31, 2000.
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 reasonably likely that
PPO's 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 and a specialty injectable
drug distribution 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 services.
In November, 1996, the Company started HomeCall Hospice Services, Inc. ("HHSI"),
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, HHSI 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. HHSI underwent a
voluntary accreditation review by JCAHO in November, 1998 and received full
accreditation.
HHSI currently serves the Baltimore, Washington, D.C. and Northern Virginia
metropolitan areas. It is the goal of HHSI 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, HHSI 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.
8
A summary of MAMSI's membership enrollment in all product lines is as follows:
MEMBERSHIP DATA AT DECEMBER 31
---------------------------------
PRODUCT LINE 2000 1999 1998
- ------------ ---------------------------------
(in thousands)
Commercial HMO (1) 453.1 452.5 424.9
Hybrid HMO (2) 103.4 100.4 99.4
Medicaid - 12.3 30.9
Medicare - - 7.0
Indemnity 206.2 189.5 157.5
ASO (3) 9.3 11.0 11.0
------- ------- -------
772.0 765.7 730.7
PPO (4) 1,019.3 1,024.0 1,060.0
------- ------- -------
Total Membership 1,791.3 1,789.7 1,790.7
======= ======= =======
(1) Commercial HMO includes traditional HMO and point-of-service members.
(2) Hybrid HMO includes any business that uses MAMSI's network and 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.
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
paid either a monthly capitation payment for each enrollee who has chosen that
PCP or a discounted fee for service payment. The 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 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 2,300
facilities, consisting of 300 hospitals and 2,000 non-hospital facilities, as of
December 31, 2000. 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.
9
QUALITY ASSESSMENT AND OPERATIONS
MAMSI maintains 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 and service. The QI Program conducts
member satisfaction surveys, identifies opportunities for improvements in
providing care, adopts strategies to improve outcomes and monitors improvements
to report progress.
MAMSI's HMO and PPO Network QI Committees operate under the direction and
oversight of MAMSI's Board of Directors and include administrative, clinical and
health care practitioner representation. Each 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.
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.
M.D. IPA received Excellent Accreditation from the National Committee for
Quality Assurance ("NCQA") for its commercial HMO and POS products. OCI received
Commendable Accreditation from NCQA for its commercial HMO and POS products.
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.
10
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 a significant number of HMOs or other prepaid
alternative health care delivery systems that have a presence in MAMSI's
significant service areas (Maryland, Virginia, the District of Columbia and
North Carolina). The following table sets forth MAMSI's best estimate of 2000
enrollment of HMOs operating in its significant service areas.
Approximate
Number
Insurer/HMO of Members
- ------------- ------------
AETNA/U.S. Healthcare***....................... 672,000
Mid Atlantic Medical Services, Inc.* .......... 576,000
Kaiser Permanente Health Plan ................. 552,000
United Healthcare ............................. 518,000
Cigna Healthcare............................... 478,000
FreeState Health Plan** ....................... 425,000
Partners Healthplan of North Carolina.......... 309,000
Trigon ........................................ 278,000
Optima ........................................ 229,000
Blue Cross/Blue Shield of North Carolina....... 124,000
Source: The InterStudy Competitive Edge - 10.2
* - Includes members covered by the Company's HMOs only.
** - This company is owned by Care First-Blue Cross/Blue Shield of Maryland.
*** - Includes 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 268 full-time individuals who provide
marketing services for the Company's products as of December 31, 2000. MAMSI's
marketing strategy includes identifying and contacting employers in its 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.
11
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.
In addition, MAMSI's HMOs reduce the financial impact of catastrophic losses by
maintaining reinsurance coverage for hospital costs. The reinsurer indemnifies
either 90% of the approved per diem or fixed charge per procedure, or 80% of the
eligible in and out of service area acute care 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. MLH reduces the financial impact of life and accidental death claims by
maintaining reinsurance coverage for settlement costs. The reinsurer indemnifies
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.
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;
(ix) appeals and grievances; (x) class adjudication processes; and (xi) privacy
and confidentiality of member personally identifiable information.
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.
12
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.
Through 1999, 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. OPM has not yet reviewed 2000.
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.
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. The law also
included Administration Simplification provisions to regulate and standardize
information exchanges and establish standards for the privacy and security of
individually identifiable health information.
The four key areas of Administration Simplification are: 1) Transactions and
Code Sets, 2) Unique Identifiers, 3) Security, and 4) Privacy. The Department of
Health and Human Services (HHS) has published final regulations on Transactions
and Code Sets and Privacy and expects final regulations for Unique Identifiers
and Security in 2001. These rules will apply to insurers, health maintenance
organizations, providers and ERISA plans and will effect the business operations
of these entities.
13
MLH, MAMSI's HMOs and HomeCall are in the process of accessing current
procedures and developing plans to comply with the Administration Simplification
provisions of HIPAA. The Company believes it has sufficient internal resources
to address those issues related to HIPAA compliance. If internal resources prove
to be insufficient, the Company will engage outside resources. The statements in
this paragraph regarding the future effects of HIPAA are forward-looking
statements. See "Forward-Looking Information" for a description of risk factors.
Forward-looking information is included in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 18. MAMSI has
two (2) years plus two (2) months from the effective date of the final
regulations to comply.
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, West Virginia and Pennsylvania have enacted such laws.
State legislatures are considering a variety of proposals to increase access to
health care coverage. This includes expanding the eligibility rules for the
Medicaid Program and tax credits for the purchase of group or individual
insurance. The U.S. Department of Labor recently promulgated claims processing
regulations which establish processing times for pre- service and post-service
claims and time frames for claims appeals. While the regulations are consistent
with the Company's current operations, MLH and MAMSI's HMOs may need to modify
some procedures to comply. The State of Maryland has proposed similar claims
processing regulations that MLH and MAMSI's HMOs will comply with by March 2001.
These regulations establish a new definition for clean claims, specify the
attachments insurers and HMOs may require with the original claim submission,
and establish areas where an insurer or HMO may request additional information.
The Company expects that continued legislative scrutiny of health insurers and
HMOs 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.
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.
14
EMPLOYEES
As of December 31, 2000, the Company had a total of 2,825 employees, including
2,461 full- time and 364 part-time employees. MAMSI's home health care
subsidiary employed 596 of these employees (380 on a full-time basis and 216 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 45.
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 206,000 square feet of office
space in various locations within its service areas to support sales and
administrative operations.
ITEM 3. LEGAL PROCEEDINGS
In September 2000, the Company and other HMOs operating in Maryland were served
with similar class action suits challenging the constitutionality of the law
which allows the Company to subrogate against other insurance companies. The
Company's action was filed in the Circuit Court for Montgomery County, Maryland
which recently ruled in another case that the subrogation law was
constitutional. The Company believes that its operations with respect to the law
are valid. However, the Company is not able to predict, at this time, the
ultimate outcome of this action.
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
2000.
15
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.
2000 1999
----------------- -----------------
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $10.13 $ 7.63 $12.88 $ 7.81
Second Quarter 13.75 9.00 11.31 7.00
Third Quarter 16.13 12.63 10.25 8.25
Fourth Quarter 21.25 15.44 9.62 5.37
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 August 4, 2000, the Company's Stock Compensation Trust ("SCT") purchased from
the Company 2,000,000 shares of Mid Atlantic Medical Services, Inc. common stock
at a price of $14.375 for $20,000 in cash and $28,730,000 in the form of a note
payable to the Company. The sale was 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 2, 2001 there were approximately 716 stockholders of record of the
Company's common stock.
16
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands except share amounts, key ratios and operating data)
SELECTED INCOME STATEMENT DATA
Revenue $1,484,479 $1,317,316 $1,187,901 $1,111,653 $1,133,742
Expense 1,427,721 1,277,486 1,175,665 1,090,213 1,138,677
Income (loss) before income taxes
(benefit) 56,758 39,830 12,236 21,440 (4,935)
Net income (loss) 39,406 26,322 9,045 14,489 (2,768)
Earnings (loss) per common share
Basic $1.04 $0.64 $0.20 $0.31 ($0.06)
Diluted $1.00 $0.64 $0.20 $0.31 ($0.06)
Weighted Average Shares
Basic 38,052,746 41,225,327 45,407,006 46,273,484 45,978,864
Diluted 39,341,037 41,266,604 45,473,995 46,885,666 45,978,864
Dividends --- --- --- --- ---
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital $ 153,539 $ 118,995 $ 123,138 $ 128,065 $ 118,870
Total assets 467,023 388,584 362,775 345,959 334,719
Long-term debt - - 14 74 134
Stockholders' equity 225,990 186,821 191,218 208,307 184,400
Cash dividends per common share (1) --- --- --- --- ---
KEY RATIOS
Medical care ratio 86.5% 87.9% 88.8% 89.4% 92.4%
Administrative expense ratio 12.1% 11.6% 11.3% 11.7% 10.7%
Net income margin 2.7% 2.0% 0.8% 1.3% (.2%)
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services (3) 244 238 265 297 331
HMO only (2) 192 191 191 192 203
Medicare (3) - - 2,425 2,566 2,698
Medicaid (3) - 496 375 552 454
Annualized hospital admissions per
1,000 enrollees (3) 63 61 72 78 77
HMO, hybrid, ASO and indemnity
health enrollees at year end 772,000 766,000 731,000 682,000 745,000
PPO enrollees at year end 1,019,000 1,024,000 1,060,000 1,006,000 935,000
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. The Company ceased participation in Medicare
in 1999 and Medicaid in 2000.
17
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 service
area.
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.
- Increased 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, other health care practitioners,
hospitals and facilities.
GENERAL
During the three year period ended December 31, 2000, the Company experienced
modest membership expansion. While membership in certain products continues to
grow, other products have decreased when compared to 1999. 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 2000, the Company's consolidated operating margin showed
improvement over 1999. The Company achieved 2000'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 2001. 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.
18
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. The law also
included Administration Simplification provisions to regulate and standardize
information exchanges and establish standards for the privacy and security of
individually identifiable health information.
The four key areas of Administration Simplification are: 1) Transactions and
Code Sets, 2) Unique Identifiers, 3) Security, and 4) Privacy. HHS has published
final regulations on Transactions and Code Sets and Privacy and expects final
regulations for Unique Identifiers and Security in 2001. These rules will apply
to insurers, health maintenance organizations, providers and ERISA plans and
will effect the business operations of these entities.
MLH, MAMSI's HMOs and HomeCall are in the process of assessing current
procedures and developing plans to comply with the Administration Simplification
provisions of HIPAA. The Company believes it has sufficient internal resources
to address those issues related to HIPAA compliance. If internal resources prove
to be insufficient, the Company will engage outside resources. The statements in
this paragraph regarding the future effects of HIPAA are forward-looking
statements. See "Forward-Looking Information" for a description of risk factors.
MAMSI has two (2) years plus two (2) months from the effective date of the final
regulations to comply.
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, West Virginia and Pennsylvania have enacted such laws.
State legislatures are considering a variety of proposals to increase access to
health care coverage. This includes expanding the eligibility rules for the
Medicaid Program and tax credits for the purchase of group or individual
insurance. The U.S. Department of Labor recently promulgated claims processing
regulations which establish processing times for pre- service and post-service
claims and time frames for claims appeals. While the regulations are consistent
with the Company's current operations, MLH and MAMSI's HMOs may need to modify
some procedures to comply with these regulations. The State of Maryland has
proposed similar claims processing regulations that MLH and MAMSI's HMOs will
comply with by March 2001. These regulations establish a new definition for
clean claims, specify the attachments insurers and HMOs may require with the
original claim submission, and establish areas where an insurer or HMO may
request additional information.
The Company expects that continued legislative scrutiny of health insurers and
HMOs 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.
19
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company's consolidated net income for the year ended December 31, 2000
increased to $39,406,000 from $26,322,000 for the year ended December 31, 1999.
Diluted earnings per share increased from $.64 in year ended December 31, 1999
to $1.00 for the year ended December 31, 2000. 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. The Company has priced
its health products competitively in order to increase its membership base and
thereby enhance its strategic position in its market place. The Company
currently has one of the largest HMO and managed care enrollments and also the
largest network of contract providers of medical care in its service area (which
includes the entire states of Maryland and Delaware, the District of Columbia,
most counties and cities in Virginia and certain areas of West Virginia, North
Carolina and Pennsylvania).
Revenue for the year ended December 31, 2000 increased approximately $167.2
million or 12.7 percent over the year ended December 31, 1999. A 2.2 percent
increase in net average HMO and indemnity enrollment resulted in an increase of
approximately $27.1 million in health premium revenue while a 10.5 percent
increase in average monthly premium per enrollee, combined for all products,
resulted in a $134.7 million increase in health premium revenue. 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 2001 in the range of 9.5% to 10.5%. 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. Effective May 1, 2000, the Company transferred
its membership in the Virginia Medicaid Program to a non-affiliated carrier.
Therefore, as of May 1, 2000, the Company ended its participation in any
government entitlement health insurance programs.
The Company's future membership growth depends on several factors such as
relative premium prices and product availability, future increases or decreases
in the Company's service area and increased competition in the Company's service
area.
The Company's home health operations contributed $26.3 million in revenue for
the year ended December 31, 2000 as compared with $23.6 million for the year
ended December 31, 1999 reflecting an increase in services provided to
non-affiliated companies. Life and short-term disability products contributed
$8.0 million in revenue for the year ended December 31, 2000 as compared with
$8.2 million for the year ended December 31, 1999.
20
The medical care ratio decreased to 86.5 percent for the year ended December 31,
2000 as compared to 87.9 percent for the year ended December 31, 1999. On a per
member per month basis, medical expenses increased 8.8 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,
continued activity in specialized subrogation areas and claims review for dual
health coverage, the Company's withdrawal from state Medicaid programs, and also
increased premiums per member. The ongoing initiatives should help to control
the Company's medical care ratio. The medical expense trend is expected to be
between 8.5% and 9.5% for 2001. The statements in this paragraph and the
preceding paragraphs regarding future utilization rates, cost containment
initiatives, total medical costs and trend and future increases in health
premiums per member are forward-looking statements. See "Forward-Looking
Information" above for a description of risk factors that may affect medical
expenses per member and the medical care ratio.
Administrative expenses as a percentage of revenue ("administrative expense
ratio") increased from 11.6 percent for the year ended December 31, 1999 to 12.1
percent for the year ended December 31, 2000. Management believes that the
administrative expense ratio will increase modestly in 2001. Management's
expectation concerning the administrative expense ratio is a forward-looking
statement. The administrative expense ratio is affected by changes in health
premiums and other revenues, development of the Company's expansion areas and
increased administrative activity related to business volume.
Investment income increased $2.4 million primarily due to an increase in
investment securities balances.
The effective tax rate decreased from 33.9 percent for the year ended December
31, 1999 to 30.6 percent for the year ended December 31, 2000 primarily due to
the increase in tax exempt income, the restructuring of certain operations to
increase tax efficiency and the benefit from certain one-time tax credits.
The net margin rate increased from 2.0 percent for the year ended December 31,
1999 to 2.7 percent for the year ended December 31, 2000. This increase is
consistent with the factors described above.
- -----------------------------------------------------------------------------
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 the 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.
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.
21
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 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.
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.
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.
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.
The Company's cash and investment securities increased from $206.2 million at
December 31, 1999 to $275.2 million at December 31, 2000, primarily due to the
timing of medical expense payments which traditionally lag behind the receipt of
increased premiums per member, the Company's net income and cash received from
exercise of stock options offset by the effect of treasury stock purchases.
Accounts receivable increased from $83.6 million at December 31, 1999 to $90.0
million at December 31, 2000, principally due to the timing of customer billings
and payments offset by payment on receivables due from the FEHBP. Prepaid
expenses, advances and other decreased from $27.3 million at December 31, 1999
to $26.4 million at December 31, 2000 due to collection of income tax refunds
from prior years offset by an increase in working capital advances paid to
Maryland hospitals.
22
Net property and equipment increased from $43.7 million at December 31, 1999 to
$47.2 million at December 31, 2000 primarily due to build-out and renovation
costs associated with the purchase of a building, for use in the Company's
operations, in late December 1999.
Medical claims payable increased from $154.4 million at December 31, 1999 to
$178.7 million at December 31, 2000, primarily due to increased membership and
an increase in medical expenses per member.
Additional paid-in capital increased from $152.6 million at December 31, 1999 to
$296.3 million at December 31, 2000 due to an additional 2.0 million shares of
the Company's stock being placed into the SCT, as well as an increase in the
market value of the shares of the Company's stock held in the SCT. This also
accounts for the change in the SCT balance.
Treasury stock increased from $104.1 million at December 31, 1999 to $135.6
million at December 31, 2000 due to the purchase of 2,836,900 additional shares
by the Company at a total cost of $31,521,000.
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, 2000, approximately $3.0 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 $100,000 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,
2000 1999
------------ ------------
Cash and cash equivalents $ 5,047 $ 3,725
Investment securities 270,127 202,522
Working capital advances to Maryland hospitals 17,008 15,390
----------- -----------
Total available liquid assets 292,182 221,637
Credit line availability 13,900 13,292
----------- -----------
Total short-term capital resources $ 306,082 $ 234,929
=========== ===========
The Company believes that cash generated from operations along with its current
liquidity and borrowing capabilities are adequate for both current and planned
operations.
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, 2000, those subsidiaries
of the Company were in compliance with all minimum capital requirements.
23
At its May 2000 Board meeting, the Board of Directors authorized a $20 million
stock repurchase program to begin immediately. The authorized program included
any unspent funds carried forward from the October 1999 repurchase program.
During the six months ended September 30, 2000, the Company repurchased an
additional 1,331,500 shares of its common stock for a total cost of
approximately $14.6 million. At its October 2000 Board meeting, the Board of
Directors authorized a $20 million stock repurchase program to begin
immediately. The authorized program included any unspent funds carried forward
from the May 2000 repurchase program. During the three months ended December 31,
2000, the Company repurchased an additional 399,400 shares of its common stock
for a total cost of approximately $7.2 million. During January 2001, the Company
repurchased an additional 504,900 shares of its common stock for a total cost of
approximately $7.2 million. At its February 2001 Board meeting, the Board of
Directors authorized a $20 million stock repurchase program to begin
immediately. The newly authorized program includes any unspent funds carried
forward from the October 2000 repurchase program.
MARKET RISK
The Company is exposed to market risk through its investment in fixed and
variable rate debt securities that are interest rate sensitive. The Company does
not use derivative financial instruments. The Company 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 (most of
which are exempt from Federal taxes) at December 31, 2000 mature according to
their contractual terms as follows (in thousands):
There- Fair Value
Assets 2001 2002 2003 2004 2005 after Total 12/31/00
- ------ -------- ------ ------- ------- ------- ------- -------- --------
Available-for-Sale Securities $123,647 $5,682 $18,025 $ 6,974 $10,804 $95,092 $260,224 $263,330
Average Interest Rate 5.08% 4.66% 5.15% 4.89% 5.26% 4.80%
Held-to-Maturity $ 4,992 $ 601 $ 3,802 $ 1,542 $ 820 $ 2,840 $ 14,597 $ 14,845
Average Interest Rate 5.51% 5.16% 4.35% 5.39% 5.47% 6.70%
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".
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 2000 and 1999..... 26
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998............................... 27
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998........... 28
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998............................... 29
Notes to Consolidated Financial Statements....................... 30
Report of Ernst & Young LLP Independent Auditors................. 46
Selected Quarterly Financial Data for Fiscal Years 2000 and
1999 (Unaudited)............................................... 47
25
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
December 31,
(in thousands except share amounts) 2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 5,047 $ 3,725
Investment securities 270,127 202,522
Accounts receivable, net 89,954 83,623
Prepaid expenses, advances and other 26,420 27,287
Deferred income taxes 850 381
-------- --------
Total current assets 392,398 317,538
Property and equipment, net 47,222 43,668
Statutory deposits 14,597 14,043
Other assets 9,793 10,357
Deferred income taxes 3,013 2,978
-------- --------
Total assets $467,023 $388,584
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ - $ 14
Short-term borrowings 3,000 3,558
Accounts payable 37,841 21,980
Medical claims payable, net 178,685 154,403
Deferred premium revenue 18,494 16,949
Deferred income taxes 839 1,639
-------- --------
Total current liabilities 238,859 198,543
Deferred income taxes 2,174 3,220
-------- --------
Total liabilities 241,033 201,763
Stockholders' equity
Common stock, $0.01 par, 100,000,000 shares authorized, 61,772,502 issued and
48,602,322 outstanding at December 31, 2000 and 59,772,502 issued and
49,439,222
outstanding at December 31, 1999 617 597
Additional paid-in capital 296,347 152,607
Stock compensation trust (common stock held in trust),
10,019,756 shares outstanding at December 31, 2000;
10,010,850 shares outstanding at December 31, 1999 (198,516) (83,215)
Treasury stock, 13,170,180 shares at December 31, 2000;
10,333,280 shares at December 31, 1999 (135,638) (104,117)
Accumulated other comprehensive income (loss) 1,812 (1,013)
Retained earnings 261,368 221,962
-------- --------
Total stockholders' equity 225,990 186,821
-------- --------
Total liabilities and stockholders' equity $467,023 $388,584
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
26
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Operations
Year Ended December 31,
(in thousands except per share amounts) 2000 1999 1998
---------- ---------- ----------
Revenue
Health premium $1,414,847 $1,253,063 $1,124,248
Fee and other 21,811 21,352 20,501
Life and short-term disability premium 8,034 8,175 6,876
Home health services 26,304 23,630 19,962
Investment 13,483 11,096 10,622
Gain on sale of real estate - - 5,692
---------- ---------- ----------
Total revenue 1,484,479 1,317,316 1,187,901
---------- ---------- ----------
Expense
Medical expense
Referral and ancillary care 582,775 510,114 437,279
Hospitalization, net of coordination of benefits 373,349 336,002 342,852
Primary care 77,616 83,558 81,166
Prescription drugs 189,388 170,745 136,767
Reinsurance premiums, net 144 539 192
---------- ---------- ----------
1,223,272 1,100,958 998,256
---------- ---------- ----------
Life and short-term disability claims 3,108 4,033 3,760
---------- ---------- ----------
Home health patient services 21,514 19,412 17,755
---------- ---------- ----------
Administrative expense
Salaries and benefits 114,561 99,682 85,166
Promotion and advertising 5,246 4,311 3,939
Professional services 8,029 6,070 6,233
Licenses and taxes 11,586 8,538 6,580
Facilities, maintenance and supplies 28,707 26,848 27,058
Other (including interest expense of $1,045, $532 and $414) 11,698 7,634 5,631
---------- ---------- ----------
179,827 153,083 134,607
---------- ---------- ----------
Loss on retirement of equipment - - 4,787
Federal Employees Health Benefits Program - - 16,500
---------- ---------- ----------
Total expense 1,427,721 1,277,486 1,175,665
---------- ---------- ----------
Income before income taxes 56,758 39,830 12,236
Income tax expense (17,352) (13,508) (3,191)
---------- ---------- ----------
Net income $ 39,406 $ 26,322 $ 9,045
========== ========== ==========
Basic earnings per common share $ 1.04 $ .64 $ .20
========== ========== ==========
Diluted earnings per common share $ 1.00 $ .64 $ .20
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
27
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Other
Additional Stock Comprehensive
Common Paid-In Compensation Treasury Income Retained
(in thousands except share amounts) Stock Capital Trust Stock (Loss) Earnings Total
------ ---------- ------------ --------- ------------- -------- --------
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 benefit 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
Exercise of stock options for
1,991,094 shares released from the
Stock Compensation Trust (3,443) 28,373 24,930
Stock option tax benefit 3,529 3,529
Purchase of 2,000,000 shares of MAMSI
common stock to be held in the
Stock Compensation Trust 20 28,730 (28,750) -
Adjustment to market value for shares
held in Stock Compensation Trust 114,924 (114,924) -
Repurchase of 2,836,900 shares of
MAMSI common stock (31,521) (31,521)
Comprehensive Income:
Net Income 39,406 39,406
Other comprehensive income,
net of tax of $1,638 2,825 2,825
------ -------- --------- --------- -------- -------- --------
Total Comprehensive Income 42,231
--------
Balance, December 31, 2000 $ 617 $296,347 $(198,516) $(135,638) $ 1,812 $261,368 $225,990
====== ======== ========= ========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
(in thousands) 2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income $ 39,406 $ 26,322 $ 9,045
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,263 10,249 10,796
Provision for bad debts 692 292 34
Provision for deferred income taxes (5,280) 2,415 (2,273)
Loss (gain) on sale and disposal of assets 356 49 (833)
Stock option tax benefit 3,529 19 2,495
(Increase) decrease in accounts receivable (7,023) (4,657) 8,563
Decrease (increase) in prepaid expenses, advances and other 2,159 (332) (7,661)
Increase in accounts payable 15,861 2,909 2,193
Increase in medical claims payable, net 24,282 25,138 30,937
Increase (decrease) in deferred premium revenue 1,545 (218) 1,445
-------- -------- --------
Total adjustments 46,384 35,864 45,696
-------- -------- --------
Net cash provided by operating activities 85,790 62,186 54,741
-------- -------- --------
Cash flows used in investing activities:
Purchases of investment securities (428,185) (355,996) (329,400)
Sales and maturities of investment securities 365,043 325,117 307,763
Purchases of property and equipment (13,297) (8,147) (9,008)
Purchases of statutory deposits (3,394) (1,476) (100)
Maturities of statutory deposits 2,782 1,125 -
Purchases of other assets (631) (2,598) (893)
Proceeds from sale of assets 377 486 12,574
-------- -------- --------
Net cash used in investing activities (77,305) (41,489) (19,064)
-------- -------- --------
Cash flows used in financing activities:
Principal payments on notes payable (14) (60) (60)
(Decrease) increase in short-term borrowings (558) 1,713 (404)
Exercise of stock options 24,930 82 5,416
Purchase of treasury stock (31,521) (28,494) (34,412)
-------- -------- --------
Net cash used in financing activities (7,163) (26,759) (29,460)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,322 (6,062) 6,217
Cash and cash equivalents at beginning of year 3,725 9,787 3,570
-------- -------- --------
Cash and cash equivalents at end of year $ 5,047 $ 3,725 $ 9,787
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
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 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. OCIPA ceased all operations in Pennsylvania
during 2000.
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.
HomeCall Hospice Services, Inc. ("HHSI") 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.
30
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, 2000, 1999
and 1998, approximately 8%, 8% and 11%, respectively, of premium revenue was
derived from federal government agencies which is included in the Medicare and
Risk segments (as described in Note 14), and approximately 14%, 21% and 18%,
respectively, was derived from Maryland and Virginia state and local government
agencies which is included in the Risk segment (as described in Note 14).
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.
31
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 health care 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 has entered into certain long-term vendor contracts some of which
include incentives or cost guarantees designed to provide savings to the Company
over several years. The Company typically accounts for the benefit derived from
these incentives or guarantees ratably over the contract period as a reduction
to medical expense. Because of the complexity of the Company's medical delivery
system as well as obligations imposed under the contracts, and the timing of
settlement of various contractual periods, disputes may arise as to the degree
of satisfaction of the various contractual obligations which could result in
material adjustments to the Company's financial statements. The Company believes
that it has complied with its contractual obligations and that its financial
statements are fairly stated with regard to the aforementioned contracts.
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 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.
32
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.
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
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 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.
RECLASSIFICATIONS
Certain balances in the 1999 and 1998 financial statements have been
reclassified to conform with the 2000 presentation.
33
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. There were no such transfers during
2000.
The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 2000 and 1999:
-----------------------------------------------------
2000
-----------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of
U.S. government agencies $ 2,159 $ 113 $ - $ 2,272
Obligations of states and political subdivisions 142,499 3,100 23 145,576
Municipal bond funds 113,465 - 84 113,381
Accrued interest 2,101 - - 2,101
-------- ------- ------- --------
Debt securities 260,224 3,213 107 263,330
Equity securities 7,116 1 320 6,797
-------- ------- ------- --------
Investment securities $267,340 $ 3,214 $ 427 $270,127
======== ======= ======= ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 3,160 $ 204 $ - $ 3,364
Obligations of states and political subdivisions 10,583 44 - 10,627
Other investments 854 - - 854
-------- ------- ------- --------
Statutory deposits $ 14,597 $ 248 $ - $ 14,845
======== ======= ======= ========
34
-----------------------------------------------------
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
======== ======= ======= ========
For the years ended December 31, 2000 and 1999, marketable equity
available-for-sale securities with a fair value at the date of sale of $317,000
and $2,524,000, respectively, were sold. The gross realized gains on such sales
totaled $71,000 and $50,000, and the gross realized losses totaled $-0- and
$75,000 for each of the respective periods. Realized gains and losses are
included in investment income. Other sales of investment securities consisted
principally of redemptions on municipal bond funds.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 2000, 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 $123,647 $123,580
Due after one year through five years 41,485 41,830
Due after five years through ten years 76,284 78,410
Due after ten years 18,808 19,510
-------- --------
Debt securities 260,224 263,330
Equity securities 7,116 6,797
-------- --------
$267,340 $270,127
======== ========
HELD-TO-MATURITY
Due in one year or less $ 4,992 $ 5,049
Due after one year through five years 6,765 6,852
Due after five years through ten years 2,840 2,944
Due after ten years - -
-------- --------
$ 14,597 $ 14,845
======== ========
35
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
-------------------------
(in thousands) 2000 1999
-------------------------
Premium and fee accounts $ 67,893 $ 62,269
Home health service accounts 10,454 9,942
Medical recoverables 6,969 10,574
Other 10,775 6,283
Less: allowance for doubtful accounts (6,137) (5,445)
-------- --------
$ 89,954 $ 83,623
======== ========
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) 2000 1999
------------------------
Land, buildings and improvements $35,207 $32,086
Computer equipment and software 36,477 31,259
Office furniture and equipment 22,786 20,776
Leasehold improvements 2,144 1,065
------- -------
96,614 85,186
Less: accumulated depreciation and
amortization (49,392) (41,518)
------- -------
$47,222 $43,668
======= =======
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at December 31:
------------------------
(in thousands) 2000 1999
------------------------
Notes payable $ - $ 14
Current portion - (14)
------- -------
Noncurrent portion $ - $ -
======= =======
36
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, 2000,
approximately $3.0 million was outstanding on one of the lines-of-credit at an
interest rate of 7.06% and approximately $12.10 million in letters-of-credit
were outstanding, although no amounts had been drawn.
Interest expense paid in cash during 2000, 1999 and 1998 was approximately
$444,000, $523,000 and $417,000, 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. The reinsurer for health
claims indemnifies either 90% of the approved per diem or fixed charge per
procedure, or 80% of the eligible in and out of service area acute care 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 a given
year, or $5,000,000 for certain PPO members who have an unlimited lifetime
maximum benefit. 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,
2000, 1999 and 1998 were approximately $2,044,000, $1,566,000 and $1,597,000,
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) 2000 1999
--------------------------
Deferred tax liabilities:
Accelerated depreciation $ 1,344 $ 1,770
Receivable valuation adjustments 1,734 3,988
Unrealized investment gains (losses) 975 (663)
------- -------
Total deferred tax liabilities 4,053 5,095
------- -------
Deferred tax assets:
Accrued medical expenses 1,486 1,144
Premium revenue adjustments 1,140 1,248
State net operating losses 3,802 3,133
Accrued pension expenses 1,845 875
Other 381 250
------- -------
Total deferred tax assets 8,654 6,650
Valuation allowance for deferred tax assets (3,751) (3,055)
------- -------
Net deferred tax assets 4,903 3,595
------- -------
$ 850 $(1,500)
======= =======
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 850 $ 381
Non-current assets - deferred income taxes 3,013 2,978
Current liabilities - deferred income taxes (839) (1,639)
Non-current liabilities - deferred
income taxes (2,174) (3,220)
------- -------
Net deferred tax asset (liability) $ 850 $(1,500)
======= =======
37
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
---------------------------------------
(in thousands) 2000 1999 1998
---------------------------------------
Current:
Federal $ 22,041 $ 10,536 $ 4,105
State 591 557 1,359
--------- --------- ---------
Total current 22,632 11,093 5,464
--------- --------- ---------
Deferred:
Federal (5,019) 2,623 (1,250)
State (261) (208) (1,023)
--------- --------- ---------
Total deferred (5,280) 2,415 (2,273)
--------- --------- ---------
$ 17,352 $ 13,508 $ 3,191
========= ========= =========
The Company's tax provision differs from the statutory rate for Federal income
taxes for the years ended December 31 as follows:
-------------------------------------
(in thousands) 2000 1999 1998
-------------------------------------
Statutory rate (35%) $19,866 $13,940 $ 4,282
Tax-exempt interest (2,067) (1,421) (1,369)
State income taxes, net of Federal benefit (436) (163) (580)
Increase in valuation allowance for
deferred tax assets 706 765 1,228
Other non-deductible items 574 566 526
Tax credits (664) (16) (173)
Other, net (627) (163) (723)
------- ------- -------
$17,352 $13,508 $ 3,191
======= ======= =======
Total tax deposits made by the Company in 2000, 1999 and 1998 were approximately
$19,255,000, $10,027,000 and $6,870,000, respectively.
At December 31, 2000, the Company has state net operating loss carryforwards of
$96,123,000 that expire in various years beginning 2006.
The Company records a valuation allowance for deferred tax assets when it is
management's judgement that it is more likely than not that all or a portion of
a deferred tax asset will not be realized. At December 31, 2000 and 1999, the
Company recorded a valuation allowance related to state net operating loss
carryforwards.
NOTE 8 - RELATED PARTIES
For the years ended December 31, 2000, 1999 and 1998, certain members of the
Boards of Directors of MAMSI and affiliated corporations who are also
participating physicians provided medical services to enrollees totaling
$4,954,000, $1,790,000 and $4,430,000, respectively, which represents
approximately .8%, .3% and .9% in 2000, 1999 and 1998, respectively, of payments
to all physicians. Board members are remunerated at the same contractual level
38
as all other participating physicians and are selected by enrollees to render
medical services under the same guidelines as all other participating
physicians.
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 $10,500 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 2000, 1999 and 1998, the
Company's contribution to the 401(k) plan aggregated $1,264,000, $1,056,000 and
$681,000, respectively.
Pursuant to the employment contracts entered into by the Company with key
executives, effective in 2000, each executive is entitled to supplemental
retirement income benefits based upon years of service and attained salary
levels. Expense recognized related to this benefit was $2,866,000 for the year
ended December 31, 2000.
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 2000, 1999 and 1998,
respectively: risk-free interest rates of 6.6%, 5.2%, and 5.6%; volatility
factors of the expected market price of the Company's common stock of .65, .59,
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):
2000 1999 1998
------- ------ ------
Pro forma net income $34,020 $19,856 $1,502
Pro forma basic earnings per share .90 .48 .03
Pro forma diluted earnings per share .86 .48 .03
In years 1990 through 1996, and years 1998 through 2000, 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 11,000,000. Options under the
plans generally vest over a three-year period and are exercisable at 100% of the
fair market value per share on the date the options are granted. The Company
accounts for these stock option grants in accordance with APB 25, and,
accordingly, recognizes no compensation expense for these stock option grants.
Transactions relating to the plans are summarized as follows:
39
2000 1999 1998
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
2000 Exercise 1999 Exercise 1998 Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding, January 1 9,524,599 $13.35 7,913,124 $14.98 8,099,231 $ 17.76
Granted 3,100,763 $ 9.53 2,541,630 $ 9.32 6,304,558 $ 14.77
Exercised (1,991,094) $12.52 (13,100) $ 6.21 (935,425) $ 5.79
Forfeited (2,656,231) $14.76 (917,055) $16.37 (5,555,240) $ 20.34
--------- --------- ---------
Outstanding, December 31 7,978,037 $11.59 9,524,599 $13.35 7,913,124 $ 14.98
========= ========= =========
Available for grant, end of year 1,554,976 1,581,308 1,766,751
Exercisable, end of year 4,474,207 5,910,801 1,608,139
Option price range for exercised
shares $5.06-$17.13 $5.06-$7.88 $4.54-$12.63
Option price range at end of year $5.00-$21.00 $5.00-$20.00 $5.00-$27.13
Weighted average fair value of
options granted during year $4.10 $3.85 $4.49
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- --------------------------------
Outstanding Weighted Average Exercisable
Range of as of Remaining Weighted Average as of Weighted Average
Exercise Prices 12/31/2000 Contractual Life Exercise Price 12/31/2000 Exercise Price
- ------------------- ----------- ---------------- ---------------- ----------- ----------------
$ 0.00 - $ 5.00 150 2.7 $ 5.00 100 $ 5.00
$ 5.01 - $ 10.00 4,094,324 3.9 $ 8.78 1,276,924 $ 8.61
$10.01 - $ 15.00 1,776,207 2.3 $12.55 1,223,087 $12.50
$15.01 - $ 20.00 2,086,536 1.1 $16.19 1,974,096 $16.15
$20.01 - $ 25.00 20,820 4.9 $20.69 0 $ 0.00
--------- ---------
7,978,037 2.8 $11.59 4,474,207 $13.00
========= =========
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 2000 and 1999,
incentive compensation expense was approximately $6,956,000 and $4,200,000,
respectively, which was paid to employees in February 2001 and 2000,
respectively. During 1998, $800,000 was earned and recognized as expense. 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.
40
NOTE 10 - COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
-----------------------------------------
2000 1999 1998
-----------------------------------------
Numerator:
Net income $39,406,000 $26,322,000 $ 9,045,000
Denominator:
Denominator for basic earnings per share
- weighted average shares 38,052,746 41,225,327 45,407,006
Dilutive securities - employee stock options 1,288,291 41,277 66,989
Denominator for diluted earnings per share
- adjusted weighted average shares 39,341,037 41,266,604 45,473,995
On August 26, 1996, the Company established the MAMSI SCT to fund its
obligations arising from its various stock compensation plans. MAMSI initially
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 2000 and 1999, the SCT purchased an additional 2,000,000 and 3,000,000
shares, respectively, of the Company's common stock for approximately $28.7 and
$31.8 million, respectively. 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,
2000 and 1999, the SCT held 10,019,756 and 10,010,850 shares of common stock at
a fair market value of approximately $198.5 and $83.2 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 2005. Rent
expense relating to these operating leases approximated $3,470,000, $3,429,000
and $3,502,000 in 2000, 1999 and 1998, respectively.
41
Future minimum lease commitments under non-cancelable operating leases are as
follows for the years ended December 31 (in thousands):
Year Amount
- ---- -------
2001 $ 4,017
2002 3,669
2003 2,613
2004 1,751
2005 1,134
-------
$13,184
=======
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. The results of these audits could result in material adjustments to
the Company's financial statements. The Company has been audited through 1999
with no significant findings other than noted in the next paragraph.
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 various legal actions arising in the normal course of
business, some of which seek substantial monetary damages. After review,
including consultation with legal counsel, management believes any ultimate
liability that could arise from these other actions will not materially effect
the Company's consolidated financial position or results of operations.
42
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:
2000 1999
-------------------------- --------------------------
Minimum Actual Minimum Actual
---------- ----------- ---------- -----------
M.D. IPA $3,000,000 $42,600,000 $3,000,000 $57,400,000
OCI 3,000,000 67,700,000 3,000,000 64,100,000
MLH 500,000 80,000,000 500,000 52,000,000
OCCI 2,500,000 3,600,000 2,500,000 2,500,000
OCIPA 1,500,000 2,100,000 1,500,000 2,300,000
M.D. IPA, OCI, OCCI, OCIPA and MLH were in compliance with state depository
rules at December 31, 2000 and 1999. OCCI was in compliance with its working
capital requirement of $1.6 million at December 31, 2000. M.D. IPA, OCI, OCCI,
OCIPA and MLH were in compliance with the applicable risk-based capital
requirements at December 31, 2000 and 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.
The National Association of Insurance Commissioners revised the Accounting
Practices and Procedures Manual in a process referred to as Codification. The
revised manual will be effective January 1, 2001. It is the intention of the
domiciliary states of M.D. IPA, OCI, OCCI, OCIPA and MLH to adopt the provisions
of the revised manual. The revised manual has changed, to some extent,
prescribed statutory accounting practices and will result in changes to the
accounting practices that M.D. IPA, OCI, OCCI, OCIPA and MLH use to prepare
their statutory-basis financial statements. Management believes the impact of
these changes to MAMSI and its insurance subsidiaries' statutory-basis capital
and surplus as of January 1, 2001 will not be significant.
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, 2000, approximately 15% 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.
43
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 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 provided comprehensive medical coverage to those
individuals. Effective January 1, 1999, the Company no longer participated 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, 2000:
Revenue from external customers $1,404,910 $ - $21,811 $44,275 $1,470,996
Segment pretax profit 30,773 - 10,906 2,135 43,814
-----------------------------------------------------------------
(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
44
The sources of revenue included in the All Others category are composed
primarily of Medicaid and miscellaneous. The Company ended its participation in
Medicaid in 2000. All revenue is generated within the United States.
--------------------------------------------
(in thousands) 2000 1999 1998
--------------------------------------------
Revenues
Total external revenues for reportable segments $1,426,721 $1,227,692 $1,107,616
Other revenues 44,275 78,528 63,971
Investment revenue not allocated 13,483 11,096 10,622
Gain on sale of real estate - - 5,692
---------- ---------- ----------
Total consolidated revenues $1,484,479 $1,317,316 $1,187,901
========== ========== ==========
Pretax Profit
Total profit from reportable segments $ 41,679 $ 31,189 $ 17,221
Other profit (loss) 2,135 (2,011) 519
Net investment income not allocated 12,944 10,652 10,091
Gain on sale of real estate - - 5,692
Federal Employees Health Benefits Program - - (16,500)
Loss on retirement of equipment - - (4,787)
---------- ---------- ----------
Total consolidated pretax profit $ 56,758 $ 39,830 $ 12,236
========== ========== ==========
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) 2000 1999 1998
-----------------------------------------
Unrealized holding gains (losses) arising
during period $ 2,887 $(2,341) $ 2,055
Less: Reclassification adjustment for
net gains (losses) included in net income 62 (15) 1,688
------- ------- -------
Net unrealized gains (losses) recognized in
other comprehensive income (loss) $ 2,825 $(2,326) $ 367
======= ======= =======
45
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, 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 12, 2001
46
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 2000 AND 1999
2000 2000 2000 2000 1999 1999 1999 1999
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands except share amounts)
(unaudited)
Revenue $360,113 $368,339 $371,428 $384,599 $313,198 $323,530 $335,250 $345,338
Expense 347,050 357,169 356,779 366,723 304,127 316,560 324,689 332,110
Income before income taxes 13,063 11,170 14,649 17,876 9,071 6,970 10,561 13,228
Net income 8,602 7,313 10,974 12,517 5,871 4,506 7,120 8,825
Basic earnings per share .22 .19 .29 .33 .14 .11 .17 .22
Diluted earnings per share .22 .19 .28 .31 .14 .11 .17 .22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
47
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 April 23, 2001.
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 April 23, 2001.
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 April 23,
2001.
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 April 23, 2001.
48
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, 2000 and 1999 ... 26
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 ............................. 27
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998 ......... 28
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 ............................. 29
Notes to Consolidated Financial Statements ..................... 30
Report of Ernst & Young LLP Independent Auditors ............... 46
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
2000, 1999 and 1998 ..................................... 50
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.
49
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, 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 $ 461 $ (230)(1) $ $ 5,445
======== ======== ======== ======== =======
Valuation allowance - deferred tax assets
$ 2,290 $ 765 $ $ $ 3,055
======== ======== ======== ======== =======
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts - accounts receivable
$ 5,445 $ 335 $ 357 (1) $ $ 6,137
======== ======== ======== ======== =======
Valuation allowance - deferred tax assets
$ 3,055 $ 706 $ $ 10 $ 3,751
======== ======== ======== ======== =======
(1) The changes to the allowance were charged to premium revenue.
50
(a)(3)
EXHIBITS
See the Exhibit Index on pages 54-56 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.
51
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. 3/28/2001
--------------------------------------------------
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/ Howard M. Arnold 3/28/2001
--------------------------------------------------
Howard M. Arnold Date
Director
By: /s/ Thomas P. Barbera 3/28/2001
--------------------------------------------------
Thomas P. Barbera Date
Vice Chairman of the Board, President, Chief Executive Officer
and Director
By: /s/ Francis C. Bruno, M.D. 3/28/2001
--------------------------------------------------
Francis C. Bruno, M.D. Date
Director
By: /s/ John H. Cook, III, M.D. 3/28/2001
--------------------------------------------------
John H. Cook, III, M.D. Date
Director
By: /s/ Raymond H. Cypess, D.V.M., Ph.D. 3/28/2001
--------------------------------------------------
Raymond H. Cypess, D.V.M., Ph.D. Date
Director
By: /s/ John W. Dillon 3/28/2001
--------------------------------------------------
John W. Dillon Date
Director
By: /s/ Robert E. Foss 3/28/2001
--------------------------------------------------
Robert E. Foss Date
Senior Executive Vice President and Chief Financial Officer
and Director
(Principal Financial Officer)
By: /s/ Mark D. Groban, M.D. 3/28/2001
--------------------------------------------------
Mark D. Groban, M.D. Date
Chairman of the Board and Director
(Principal Executive Officer)
By: /s/ Christopher E. Mackail 3/28/2001
--------------------------------------------------
Christopher E. Mackail Date
Senior Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
52
By: /s/ John P. Mamana, M.D. 3/28/2001
--------------------------------------------------
John P. Mamana, M.D. Date
Director
By: /s/ Edward J. Muhl 3/28/2001
--------------------------------------------------
Edward J. Muhl Date
Director
By: /s/ Janet L. Norwood 3/28/2001
--------------------------------------------------
Janet L. Norwood, Ph.D. Date
Director
By: /s/ John A. Paganelli 3/28/2001
--------------------------------------------------
John A. Paganelli Date
Director
By: /s/
--------------------------------------------------
Ivan R. Sabel, CPO Date
Director
By: /s/ James A. Wild 3/28/2001
--------------------------------------------------
James A. Wild Date
Director
53
(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)
10.72 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)
54
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.....................................(17)
10.23 2000 Senior Management Bonus Plan........................................(17)
10.24 2000 Key Management Bonus Plan...........................................(17)
10.25 Plan for Deferral of Directors Fees......................................(17)
10.26 Form of Agreement between MAMSI and Employees Granting Options
Under the 2000 Non-Qualified Stock Option Plan...........................(17)
10.27 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options Under the 2000 Non-Qualified Stock Option Plan...................(17)
10.28 Form of Agreement between MAMSI and Directors Electing
to Defer Director Fees...................................................(17)
10.29 Amended and Restated Stock Compensation Trust
Agreement dated August 4, 2000...........................................(18)
10.30 Common Stock Purchase Agreement dated
August 4, 2000...........................................................(18)
10.31 Allonge to Replace Promissory Note dated
August 4, 2000...........................................................(18)
10.32 2001 Non-Qualified Stock Option Plan.....................................
10.33 Form of Agreement between MAMSI and Employees Granting Options
Under the 2001 Non-Qualified Stock Option Plan...........................
10.34 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 2001 Non-Qualified Stock Option Plan...................
10.35 Employment Agreement between the Company and Mark D. Groban..............
10.36 Employment Agreement between the Company and Thomas P. Barbera...........
10.37 Employment Agreement between the Company and Robert E. Foss..............
10.38 Employment Agreement between the Company and Sharon C. Pavlos............
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.
55
(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.
(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.
(17) 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, 1999.
(18) 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, 2000.
56