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, 2001
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 4,
2002: Approximately $1,037 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.
47,504,822 shares of common stock as of March 4, 2002
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders to be
held on April 23, 2002 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 ............................................ 14
Item 3 Legal Proceedings ..................................... 14
Item 4 Submission of Matters to a Vote of Security Holders ... 14
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 15
Item 6 Selected Financial Data .............................. 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 17
Item 7A Quantitative and Qualitative Disclosures About
Market Risk ........................................ 26
Item 8 Financial Statements and Supplementary Data .......... 27
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 50
PART III
Item 10 Directors and Executive Officers of the Registrant ... 51
Item 11 Executive Compensation ............................... 51
Item 12 Security Ownership of Certain Beneficial Owners
and Management ..................................... 51
Item 13 Certain Relationships and Related Transactions ....... 51
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 52
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"), a preferred provider organization ("PPO"),
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 owns a
collections company and maintains a partnership interest in an outpatient
surgery center.
GENERAL DEVELOPMENT OF BUSINESS
MAMSI 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 2001, MAMSI offered HMO coverage
through three licensed HMO subsidiaries - M.D. IPA, Optimum Choice, Inc.(R)
("OCI"), and Optimum Choice of the Carolinas, Inc. ("OCCI") (hereinafter M.D.
IPA, OCI and OCCI 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 Virginia in 1985, and in
the District of Columbia in 1996. 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"). M.D. IPA
serves governmental entities such as the U.S. Office of Personnel Management
under the Federal Employees Health Benefits Program, State of Maryland
employees, and most recently D.C. Government employees.
OCI, a non-Federally qualified HMO, became a licensed HMO in Maryland in 1988,
in Virginia in 1990, in Delaware in 1993, in West Virginia in 1994 and in the
District of Columbia in 1996. OCI serves small as well as large employers. 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.
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.
4
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 and North Carolina. MLH sells group health insurance, including
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 arrange for the provision of comprehensive medical services
(including physician and hospital care) to enrollees for a fixed, prepaid
premium. Enrollees generally receive care from participating Primary Care
Physicians ("PCPs") who, when 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 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 discounted fee for service 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 experience fluctuations 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. 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, and certain other limited circumstances, 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").
OCI and M.D. IPA, in conjunction with MLH, and OCCI also offer point-of-service
coverage. This coverage allows enrollees the flexibility 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.
5
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.
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 and the processing
and payment of claims. MAMSI has no insurance risk on this product.
The Company's total health plan membership (managed care full risk and hybrid,
ASO and indemnity health insurance) in the HMOs and MLH increased to
approximately 874,000 at December 31, 2001 from 772,000 at December 31, 2000, an
increase of 13.2 percent.
The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 2001:
Employer Groups Served 36,500
Population of Aggregate HMO
Service Area 21,000,000
HMO Service Area Penetration
(All HMO's) 23%
Primary Care Physicians 8,100
Specialist Physicians 24,400
Other Affiliated Health
Care Practitioners 11,700
Hospitals and Outpatient
Facilities 2,600
Pharmacies 21,300
A significant portion of the Company's premium revenue is derived from Federal,
state and local government agencies. For the years ended December 31, 2001, 2000
and 1999, approximately 10%, 8% and 8%, respectively, of premium revenue was
derived from Federal government agencies which is included the All Others and
Risk segments (as described in Item 8 "Financial Statements and Supplementary
Data", Note 14), and approximately 15%, 14% and 21%, 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 network through its subsidiary
Alliance PPO, LLC, ("Alliance"). Effective January 1, 2001, MAMSI's former
subsidiary Mid Atlantic Psychiatric Services, Inc. ("MAPSI") was merged into
Alliance. MAPSI's behavioral health and substance abuse network continues to
operate as a product offering under Alliance.
6
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.
Alliance 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 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. Alliance provides 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 use direct marketing efforts. Major competition comes
from other PPOs and insurance carriers.
As of December 31, 2001, Alliance had contracts with approximately 18,700 groups
that had access to the Company's entire network of physicians and health care
practitioners, including MAPSI's behavioral health and substance abuse network
of over 4,500 psychiatrists, psychologists, social workers and other affiliated
licensed behavioral health physicians and practitioners.
Alliance offers optional access to its behavioral health network, MAPSI, which
is comprised of physicians and health care practitioners specializing in
behavioral health and substance abuse care. In addition, Alliance contracts with
indemnity insurers that want to offer groups a managed care behavioral health
product. Alliance believes that 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.
Alliance products are most often marketed jointly however, the purchaser may
purchase the MAPSI product only. A total of approximately 958,000 lives are
covered under one or both of these PPO products as of December 31, 2001.
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 PPOs
may be subject to increased regulatory oversight in the future.
OTHER PRODUCTS
In October, 1994, MAMSI acquired all of the outstanding stock of HomeCall, Inc.
("HomeCall") and its wholly-owned subsidiary, FirstCall, Inc. ("FirstCall"), for
approximately $10 million, including direct expenses. HomeCall is a state
licensed, Medicare certified home health agency. The combined operations of
HomeCall and FirstCall include 17 branch locations that serve virtually all of
Maryland, the District of Columbia, Northern Virginia and the Panhandle area of
West Virginia. HomeCall achieved full accreditation from the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"), following its survey of all
services in November, 1995. The Company achieved reaccreditation in 1998 and
January, 2002.
7
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.
The Company achieved reaccreditation in January, 2002.
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. The Company achieved reaccreditation in January, 2002.
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.
In January 2001, the Company established Alliance Recovery Services, LLC ("ARS")
as a collection agency which provides coordination of benefit services to TPAs
and insurance companies. ARS is licensed to do business in six states.
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 2001 2000 1999
- ------------ ---------------------------------
(in thousands)
Commercial HMO (1) 522.1 453.1 452.5
Hybrid HMO (2) 122.4 103.4 100.4
Medicaid - - 12.3
Indemnity 220.6 206.2 189.5
ASO (3) 8.9 9.3 11.0
------- ------- -------
874.0 772.0 765.7
PPO (4) 958.4 1,019.3 1,024.0
------- ------- -------
Total Membership 1,832.4 1,791.3 1,789.7
======= ======= =======
(1) Commercial HMO includes traditional HMO and point-of-service members.
(2) Hybrid HMO includes any business that uses MAMSI's network and 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 and
other health care practitioners. 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 2,600
facilities, consisting of 400 hospitals and 2,200 non-hospital facilities, as of
December 31, 2001. 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 IMPROVEMENT AND OPERATIONS
MAMSI maintains a multi-disciplinary approach to its Quality Improvement ("QI")
Program to ensure that its health plan members have access to quality health
care and services 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
appropriate training and experience.
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 elective hospital
admissions. Failure to secure prior authorization for elective hospital
admissions of enrollees may cause claims to be denied, and in some situations,
practitioners may be sanctioned. Prior to admission for elective 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 in September
2000. OCI received an Excellent Accreditation from NCQA for its commercial HMO
and POS products in September 2001.
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. Reaccreditation
was achieved in January, 2002.
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 2001
enrollment of HMOs operating in its significant service areas. This table does
not include indemnity members of any of the listed companies including MAMSI.
Certain companies listed have significant non-HMO membership.
Approximate
Number
Insurer/HMO of Members
- ------------- ------------
Mid Atlantic Medical Services, Inc............. 645,000
AETNA.......................................... 637,000
Kaiser Permanente Health Plan ................. 543,000
United Healthcare ............................. 501,000
CareFirst BlueCross BlueShield of Maryland**... 441,000
Trigon ........................................ 339,000
Cigna Healthcare............................... 309,000
Partners Healthplan of North Carolina.......... 298,000
Optima ........................................ 211,000
Blue Cross/Blue Shield of North Carolina....... 105,000
Source: The InterStudy Competitive Edge - 11.1, except for MAMSI membership
which is as of December 31, 2001.
** - Includes FreeState Health Plan, Inc., Delmarva Health Plan, Inc. and
PHN-HMO, Inc. 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 discounted 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 350 full-time individuals who provide
marketing services for the Company's products as of December 31, 2001. 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 in the small group market, the
use of a minimum number of selected brokers to acquire new accounts. Since 1994,
the Company's strategy in the small group market has been to market primarily
through its internal sales force, with less usage of independent insurance
producers. In North Carolina, however, the Company is marketing primarily
through selected independent insurance producers.
11
RISK MANAGEMENT
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 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. Transplant costs conducted
in an approved facility are reimbursed at either 90% or 80% of eligible charges
and in non-approved facilities at 50% of eligible charges. The coverage provides
reimbursement benefits for a lifetime maximum of $2,000,000 in eligible medical
costs with no more than $1,000,000 in any given year. MLH reduces the financial
impact of life and accidental death claims by maintaining reinsurance coverage
for settlement costs. 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.
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; and (x) claims adjudication processes.
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, special treatment of certain broad classes of enrollees and
projected claims experience, 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.
With the exception of certain small group markets and other markets regulated by
Federal and/or state law, OCI and MLH use underwriting criteria as a part of
their risk management efforts. Underwriting is the process of analyzing the risk
of enrolling employer groups in order to establish an appropriate premium rate.
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 requirements under the FEHBP. The results of
these audits could result in material adjustments. OPM's review of the Company's
premium rates has been completed for all years through 1999. No significant
modifications resulted from the audit of the Company's 1999 rates. OPM has not
yet reviewed 2001 or 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.
INVESTMENTS
The majority of the Company's investments are held by its state regulated
subsidiaries to satisfy capital, surplus and deposit requirements of the HMO and
insurance laws of the various states in which the Company is licensed. HMO and
insurance laws generally protect consumers of insurance products with one of the
principal focuses being on financial solvency of the companies that underwrite
insurance risk. These laws and regulations limit the types of investments that
can be made by the regulated entities with appropriate investments being deemed
"admitted assets." Admitted assets are those assets that can be used to fulfill
capital and surplus requirements. The Company's current investment policy
generally prohibits investments that would be "non-admitted" for statutory
reporting purposes. The Company has no investments in derivative financial
instruments and has no current intention of owning such investments.
EMPLOYEES
As of December 31, 2001, the Company had a total of 3,148 employees, including
2,801 full- time and 347 part-time employees. MAMSI's home health care
subsidiary employed 577 of these employees (374 on a full-time basis and 203 on
a part-time basis). None of the Company's employees are covered by a collective
bargaining agreement and the Company has notexperienced any work stoppage since
its inception.
13
TRADEMARKS
The Company has federally registered the right to use the trademark names
"Optimum Choice, Inc." and "MAMSI".
SEGMENT INFORMATION
Segment information is included in Item 8 "Financial Statements and
Supplementary Data" on pages 46 thru 47.
ITEM 2. PROPERTIES
The Company owns eight office buildings, one of which is sublet. These buildings
are located in Rockville and Frederick, Maryland and total approximately 453,000
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 171,000 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 insurance companies. The Company's
action was filed in the Circuit Court for Montgomery County, Maryland which
recently ruled in another case which is now on appeal to the Maryland Court of
Appeals 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.
On August 30, 2001, the Company filed a Demand for Arbitration with the American
Arbitration Association against Merck-Medco Managed Care, LLC ("Merck") and
related entities seeking an order relating to the parties' Integrated Drug
Program Master Agreement (the "Agreement"). The Company asserts that Merck has
reneged on its obligations under the Agreement, the aggregate amount of such
obligations totaling approximately $49 million for fiscal year ended 2000. On
October 8, 2001, Merck and related entities filed an Answer and Counterclaim
alleging breach of contract and requesting monetary relief. On October 19, 2001,
the Company filed an Answer to the Counterclaim denying all allegations and
revising its request for relief to $44.8 million. The Company believes that the
dispute will be resolved in its favor. If the matter is not resolved in the
Company's favor, the effect could be material to the Company's financial
statements. See Note 1 to the financial statements included in Item 8 for a more
complete description of the case.
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
2001.
14
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 closing prices of the common
stock as furnished by the NYSE.
2001 2000
----------------- -----------------
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $20.30 $14.94 $10.13 $ 7.63
Second Quarter 21.08 15.34 13.75 9.00
Third Quarter 23.05 17.63 16.13 12.63
Fourth Quarter 22.96 16.70 21.25 15.44
The Company has never paid any cash dividends on its common stock and presently
anticipates that no cash dividends will be declared in the foreseeable future.
Any dividends will depend on future earnings, the financial condition of the
Company and regulatory requirements. See Note 12 to the Consolidated Financial
Statements.
On July 11, 2001, the Company's Stock Compensation Trust ("SCT") purchased from
the Company 2,000,000 shares of the Company's common stock at a price of $18.25
per share for $20,000 in cash and $36,480,000 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 4, 2002 there were approximately 665 stockholders of record of the
Company's common stock.
15
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(in thousands except share amounts, key ratios and operating data)
SELECTED INCOME STATEMENT DATA
Revenue $1,807,735 $1,484,479 $1,317,316 $1,187,901 $1,111,653
Expense 1,723,393 1,427,721 1,277,486 1,175,665 1,090,213
Income before income taxes 84,342 56,758 39,830 12,236 21,440
Net income 57,195 39,406 26,322 9,045 14,489
Earnings per common share
Basic $1.48 $1.04 $0.64 $0.20 $.31
Diluted $1.41 $1.00 $0.64 $0.20 $.31
Weighted Average Shares
Basic 38,672,147 38,052,746 41,225,327 45,407,006 46,273,484
Diluted 40,502,086 39,341,037 41,266,604 45,473,995 46,885,666
Dividends --- --- --- --- ---
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital $ 192,848 $ 153,539 $ 118,995 $ 123,138 $ 128,065
Total assets 594,213 467,023 388,584 362,775 345,959
Long-term debt - - - 14 74
Stockholders' equity 281,471 225,990 186,821 191,218 208,307
Cash dividends per common share (1) --- --- --- --- ---
KEY RATIOS
Medical care ratio 85.4% 86.5% 87.9% 88.8% 89.4%
Administrative expense ratio 11.7% 12.1% 11.6% 11.3% 11.7%
Net income margin 3.2% 2.7% 2.0% 0.8% 1.3%
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services (3) 250 244 238 265 297
HMO only (2) 196 192 191 191 192
Medicare (3) - - - 2,425 2,566
Medicaid (3) - - 496 375 552
Annualized hospital admissions per
1,000 enrollees (3) 64 63 61 72 78
HMO, hybrid, ASO and indemnity
health enrollees at year end 874,000 772,000 766,000 731,000 682,000
PPO enrollees at year end 958,000 1,019,000 1,024,000 1,060,000 1,006,000
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.
16
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, all with inherent risks and
uncertainties, 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 effect on the Company due to a weaker economy.
3. The effect on the Company due to the recent acts of terrorism and any future
attacks.
4. The possibility that the Company is not able to increase its market share at
the anticipated premium rates.
5. The possibility of increased litigation, legislation or regulation (such as
the numerous class action lawsuits that have been 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.
6. The inability to predict and control 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.
- Existing disputes under risk-sharing arrangements, the Company's ability
to maintain and renew these arrangements, and any future disputes under such
arrangements.
7. The possibility that the Company is not able to negotiate new or renewal
contracts with appropriate physicians, other health care practitioners,
hospitals and facilities.
The list of significant risk factors is not intended to be exhaustive. There may
be other risk factors that would preclude the Company from realizing the
predictions made in the forward-looking statements. While the Company may
periodically update this discussion of risk factors, the Company does not
undertake to update any forward-looking statement that may be made by or on
behalf of the Company prior to its next required filing with the Securities and
Exchange Commission.
DISCUSSION OF MAMSI's BUSINESS AND IMPORTANT ACCOUNTING MATTERS
MAMSI, through its 100% owned subsidiary companies, is predominately in the
business of selling various forms of health insurance. In 2001, 96% of revenues
were earned from the sale of health insurance products, mostly to employers who
purchase health insurance for their employees. Since premium rates are generally
fixed for a one year period, it is critical to the Company's continued financial
success that its prices are set at levels that will at least cover the next
policy year's medical costs for members plus administrative costs to pay claims,
provide member services, pay taxes, and cover other related costs.
This means that we have to carefully evaluate data and estimate both future
utilization of medical services by our members and the cost of those services so
that we can set premiums at adequate levels. This is the single most important
factor in our business. Very simply, if our medical expenses are greater than
our premiums, we lose money.
17
While MAMSI's business is somewhat complex from an insurance regulatory
standpoint, its consolidated balance sheet and income statement are
straightforward and the accounting policies and procedures that we use to
produce them are reasonable and appropriate. MAMSI does not own any special
purpose entities, does not have any complex or extraordinarily risky investments
nor does it have any off balance sheet financing arrangements. In fact, MAMSI
has almost no debt outstanding. The buildings that the Company owns and uses in
its operations do not even have mortgages; they are owned free and clear. The
Company's funds are held in cash or invested in money market accounts, tax
exempt securities and other debt securities. All of the bonds we own have
investment ratings of "A" or better.
Certain of our accounting policies are extremely important to the fair
presentation of our results and financial position.
We think that the single most important accounting issue we have is the
recording, at the end of each reporting period, of an adequate liability and
corresponding expense for medical services that have been provided to our
members but for which we have not yet received a bill. This lag between date of
service and date of billing is normal in the insurance business and the
liability for these claims is called "liability for incurred, but not reported
claims" ("IBNR"). The IBNR liability is included with medical claims payable in
our balance sheet.
The determination of the Company's IBNR is a fairly complex process. The Company
employs its own actuary to aid in its determination. The primary method we use
to estimate IBNR is consistent from period to period and uses historical claims
data to develop the historical relationship of how many claims dollars have been
reported in any given month to what was received in total, once all claims were
received. This relationship gives us an indication of how much medical expense
has been incurred in months for which we have not yet received all claims. While
we use a consistent method in developing our IBNR estimate, considerable
judgment is required. To the extent that we over or under estimate our IBNR at
the end of any reporting period, the adjustment is included in the next period's
results.
Another important accounting policy relates to our risk sharing contracts.
Certain of the Company's larger vendors offer various forms of "risk-sharing" or
"guarantees" as a part of their contractual relationship with us. These
arrangements are not significant in relation to the Company's financial
statements with one exception; the Company's risk-sharing arrangement with its
Pharmacy Benefits Manager ("PBM"). The Company's PBM is responsible for
providing administrative and technical support as well as providing the ability
to process pharmacy transactions on a real time basis. The Company's current PBM
is Merck-Medco Managed Care, LLC ("Merck"). As a part of its contract with us,
Merck agreed to a pharmacy cost guarantee related to fiscal year 2000. We are
recording the amount due under this guarantee over the contract term of three
years, which commenced January 2000. The total value of the guarantee we
estimated for financial statement purposes is approximately $41 million of which
approximately $28 million has been recorded in our financial statements as a
reduction of medical expense over the first two years of the contract. This
amount is also reported in the balance sheets as a reduction of medical claims
payable. A dispute between Merck and the Company has arisen over this cost
guarantee which is in binding arbitration. While the Company believes it has
complied with the terms of its contract with Merck, and that its financial
statements are fairly stated, if the dispute is not resolved in the Company's
favor, all or part of the $28 million might have to be written-off and future
amounts not yet recognized might never be recognized. This in turn could
increase the Company's future medical expense more than currently anticipated,
which would effect the Company's overall profitability. See Note 1 to the
financial statements.
Another accounting policy that is very important to the fair presentation of our
financial results is the proper valuation of the Company's accounts receivable.
The Company bills the majority of its health insurance customers on a monthly
basis. The premium bill is typically sent out 15 days in advance of the month
being billed for, so that the Company can receive the cash at the start of the
month for which the insurance is being provided. The vast majority of our
18
customers pay in a timely fashion but some do not. After some communication, we
generally receive payment but we do not always collect what we are due. This can
happen for a variety of reasons such as customers having financial difficulties,
disputes regarding the amount of the bill or a customer failing to notify us
that they have obtained other health insurance. To properly value the accounts
receivable at its net realizable value we must determine an allowance for
doubtful accounts.
The allowance for doubtful accounts reduces the gross amount of accounts
receivable that are recorded, based on the bills sent, to the net amount that we
actually think we will receive. The allowance also reduces premium revenue by
the same amount. To determine how much to record as a reduction of the gross
accounts receivable, we prepare an accounts receivable aging. This aging
segments the total accounts receivable balance by category as to when it was due
to the Company. This allows us to evaluate how old our accounts receivable are.
We then prepare an evaluation based on historical collection percentages applied
to various categories of accounts. We also identify individual accounts that are
unlikely to pay due to financial or other problems and analyze them
individually. The aforementioned analyses are then summarized and an allowance
is developed and recorded. The Company applies this methodology on a consistent
basis from period to period.
GENERAL
During the three year period ended December 31, 2001, the Company experienced
growth in membership. While membership in certain products continues to grow,
other products have decreased when compared to 2000. 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 increased, yet remain at competitive levels for the
Company's marketplace. During 2001, the Company's consolidated operating margin
showed improvement over 2000. The Company achieved 2001'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 2002. 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.
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 further 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
19
final regulations on Transactions and Code Sets and Privacy and expects final
regulations for Unique Identifiers and Security in 2002. 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, with
the exception of North Carolina, 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 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.
20
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company's consolidated net income for the year ended December 31, 2001
increased to $57,195,000 from $39,406,000 for the year ended December 31, 2000.
Diluted earnings per share increased from $1.00 in year ended December 31, 2000
to $1.41 for the year ended December 31, 2001. 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"), and a
reduction in administrative expenses as a percentage of total revenue
("administrative expense ratio"). 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, 2001 increased approximately $323.3
million or 21.8 percent over the year ended December 31, 2000. A 10.0 percent
increase in net average HMO and indemnity enrollment resulted in an increase of
approximately $142.0 million in health premium revenue while an 11.8 percent
increase in average monthly premium per enrollee, combined for all products,
resulted in a $184.0 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 generally cannot be initiated until a contract reaches
its renewal date. Therefore, price increases are not implemented across the
Company's membership at the same time. Overall, commercial premium rate
increases are expected to continue in 2002 in the range of 11.5% to 12.0%.
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 Medicaid program. 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 program.
The Company's future membership growth depends on several factors such as
relative premium prices and product availability, future increases or decreases
in the Company's service area and increased competition in the Company's service
area.
The Company's home health operations contributed $22.7 million in revenue for
the year ended December 31, 2001 as compared with $26.3 million for the year
ended December 31, 2000 reflecting a decrease in services provided to
non-affiliated companies and a write-off of uncollectible accounts receivable in
the amount of approximately $1.5 million. Fee and other revenue decreased to
$21.2 million for the year ended December 31, 2001 from $21.8 million for the
year ended December 31, 2000. Life and short-term disability products
contributed $8.1 million in revenue for the year ended December 31, 2001 as
compared with $8.0 million for the year ended December 31, 2000.
The medical care ratio decreased to 85.4 percent for the year ended December 31,
2001 as compared to 86.5 percent for the year ended December 31, 2000. On a per
21
member per month basis, medical expenses increased 10.5 percent. The decrease in
the medical care ratio is due to increased premiums per member combined with
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 ongoing initiatives should help to control the
Company's medical care ratio. The medical expense trend is expected to be
between 10.7% and 11.5% for 2002. 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.
The administrative expense ratio decreased from 12.1 percent for the year ended
December 31, 2000 to 11.7 percent for the year ended December 31, 2001.
Management believes that the administrative expense ratio will be approximately
11.5% in 2002. 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 from $13.5 million for the year ended December 31,
2000 to $14.8 million for the year ended December 31, 2001 primarily due to an
increase in the amount of investments.
The effective tax rate increased from 30.6 percent for the year ended December
31, 2000 to 32.2 percent for the year ended December 31, 2001 primarily due to
the benefit from certain one-time tax credits that were recognized in 2000.
The net margin rate increased from 2.7 percent for the year ended December 31,
2000 to 3.2 percent for the year ended December 31, 2001. This increase is
consistent with the factors described above.
- -----------------------------------------------------------------------------
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 the medical
care ratio, offset somewhat by an increase in administrative expense.
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.
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. Fee and other revenue increased to $21.8 million for
the year ended December 31, 2000 from $21.4 million for the year ended December
31, 1999. 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.
22
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 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. 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 the
amount of investments.
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.
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 provider billing procedures. In the past, the Company's cash requirements
have been met principally from operating cash flow and it is anticipated that
this source, coupled with the Company's operating line-of-credit, will continue
to be sufficient to meet the Company's cash requirements in the future.
The Company's cash and investment securities increased from $275.2 million at
December 31, 2000 to $372.8 million at December 31, 2001, primarily due to the
timing of medical expense payments which traditionally lag behind the receipt of
increased premiums per member, cash received from the exercise of stock options
and net income offset by the effect of treasury stock purchases. Accounts
receivable increased from $90.0 million at December 31, 2000 to $105.3 million
at December 31, 2001, principally due to the timing of customer payments and
increases in membership. Prepaid expenses, advances and other increased from
$26.4 million at December 31, 2000 to $27.2 million at December 31, 2001 due to
an increase in working capital advances paid to Maryland hospitals and the
prepayment of insurance policies which cover the Company's assets and business
operations, offset by the decrease in income tax amounts paid in advance.
Net property and equipment increased from $47.2 million at December 31, 2000 to
$57.3 million at December 31, 2001 primarily due to build-out and renovation
costs associated with the purchase of facilities, for use in the Company's
operations, in late October 2001.
Medical claims payable increased from $178.7 million at December 31, 2000 to
$212.0 million at December 31, 2001, primarily due to increased membership and
an increase in medical expenses per member. Deferred premium revenue increased
from $18.5 million at December 31, 2000 to $37.7 million at December 31, 2001
due to a change in contract period with the FEHBP and an increase in cash
payments received in advance of the premium coverage period.
23
Additional paid-in capital increased from $296.3 million at December 31, 2000 to
$349.6 million at December 31, 2001 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.
The value of the SCT increased from $198.5 million at December 31, 2000 to
$204.7 million at December 31, 2001 due to the increase in the market value of
the shares of the Company's stock held in the SCT, and the purchase of an
additional 2.0 million shares of the Company's stock being placed into the SCT
offset by the exercise of employee stock options. 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.
Treasury stock increased from $135.6 million at December 31, 2000 to $185.1
million at December 31, 2001 due to the purchase of 2,717,900 additional shares
by the Company at a total cost of $49,472,000.
The Company currently has access to total revolving credit facilities of $29.0
million which are subject to annual renewal and collateral requirements, and are
used to provide short-term capital resources for routine cash flow fluctuations.
At December 31, 2001, the Company's investment security balances used as
collateral, which are parent company only investments, fell below the minimum
collateral requirements thereby reducing the credit line availability to $24.3
million. In addition, at December 31, 2001, approximately $3.7 million was drawn
against these facilities, and approximately $444,000 in letters of credit were
outstanding. While no amounts have been drawn against these letters of credit,
they reduce the Company's credit line availability.
24
Following is a schedule of the short-term capital resources available to the
Company (in thousands):
December 31, December 31,
2001 2000
------------ ------------
Cash and cash equivalents $ 4,510 $ 5,047
Investment securities 368,327 270,127
Working capital advances to Maryland hospitals 19,686 17,008
----------- -----------
Total available liquid assets 392,523 292,182
Credit line availability 20,184 13,900
----------- -----------
Total short-term capital resources $ 412,707 $ 306,082
=========== ===========
The Company believes that cash generated from operations along with its current
liquidity and borrowing capabilities are adequate for both current and planned
expanded operations.
The Company's major business operations are principally conducted through its
HMOs and its 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 risk based capital, and restrict the
amount of dividends and other distributions that may be paid to their parent
corporation (See Note 12 to the Consolidated Financial Statements). As of
December 31, 2001, those subsidiaries of the Company were in compliance with all
minimum capital and exceeded all risk based capital requirements.
During the year ended December 31, 2001, the Company repurchased an additional
2,717,900 shares of its common stock for a total cost of approximately $49.5
million. On December 31, 2001, approximately $19.3 million of unspent
authorization was available for future purchases. During January 2002, the
Company repurchased an additional 59,200 shares of its common stock for a total
cost of approximately $1.4 million. On February 14, 2002, the Board of Directors
authorized a $30 million stock repurchase program to begin immediately. This
authorization was in addition to the $17.9 million of unspent funds carried
forward from the September 2001 authorization.
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 and does not use special
purpose entities. Debt securities (most of which are exempt from Federal taxes)
at December 31, 2001 mature according to their contractual terms as follows (in
thousands):
25
There- Fair Value
Assets 2002 2003 2004 2005 2006 after Total 12/31/01
- ------ -------- ------ ------- ------- ------- ------- -------- --------
Available-for-Sale Securities $152,058 $28,931 $11,049 $15,716 $27,047 $122,007 $356,808 $360,860
Average Interest Rate 4.13% 4.49% 4.22% 4.51% 4.56% 4.49%
Held-to-Maturity $ 5,793 $ 2,428 $ 1,535 $ 861 $ 1,909 $ 5,164 $ 17,690 $ 18,031
Average Interest Rate 5.64% 4.29% 5.37% 5.78% 6.23% 6.14%
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 305 of Regulation S-K is contained in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 2001 and 2000..... 28
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999............................... 29
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001, 2000 and 1999........... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999............................... 31
Notes to Consolidated Financial Statements....................... 32
Report of Ernst & Young LLP Independent Auditors................. 49
Selected Quarterly Financial Data for Fiscal Years 2001 and
2000 (Unaudited)................................................ 50
27
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
December 31,
(in thousands except share amounts) 2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 4,510 $ 5,047
Investment securities 368,327 270,127
Accounts receivable, net 105,343 89,954
Prepaid expenses, advances and other 27,194 26,420
Deferred income taxes 216 850
-------- --------
Total current assets 505,590 392,398
Property and equipment, net 57,329 47,222
Statutory deposits 17,690 14,597
Other assets 9,385 9,793
Deferred income taxes 4,219 3,013
-------- --------
Total assets $594,213 $467,023
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 3,681 $ 3,000
Accounts payable 49,397 37,841
Medical claims payable, net 212,010 178,685
Income taxes payable 1,315 -
Deferred premium revenue 37,698 18,494
Deferred income taxes 8,641 839
-------- --------
Total current liabilities 312,742 238,859
Deferred income taxes - 2,174
-------- --------
Total liabilities 312,742 241,033
Stockholders' equity
Common stock, $0.01 par, 100,000,000 shares authorized, 63,772,502 issued and
47,884,422 outstanding at December 31, 2001 and 61,772,502 issued and
48,602,322 outstanding at December 31, 2000 637 617
Additional paid-in capital 349,595 296,347
Stock compensation trust (common stock held in trust),
9,019,450 shares outstanding at December 31, 2001;
10,019,756 shares outstanding at December 31, 2000 (204,742) (198,516)
Treasury stock, 15,888,080 shares at December 31, 2001;
13,170,180 shares at December 31, 2000 (185,110) (135,638)
Accumulated other comprehensive income 2,528 1,812
Retained earnings 318,563 261,368
-------- --------
Total stockholders' equity 281,471 225,990
-------- --------
Total liabilities and stockholders' equity $594,213 $467,023
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Operations
Year Ended December 31,
(in thousands except per share amounts) 2001 2000 1999
---------- ---------- ----------
Revenue
Health premium $1,740,938 $1,414,847 $1,253,063
Fee and other 21,244 21,811 21,352
Life and short-term disability premium 8,066 8,034 8,175
Home health services 22,715 26,304 23,630
Investment 14,772 13,483 11,096
---------- ---------- ----------
Total revenue 1,807,735 1,484,479 1,317,316
---------- ---------- ----------
Expense
Medical expense
Referral and ancillary care 722,711 582,775 510,114
Hospitalization, net of coordination of benefits 455,267 373,349 336,002
Primary care 80,408 77,616 83,558
Prescription drugs 227,760 189,388 170,745
Reinsurance premiums, net 1,084 144 539
---------- ---------- ----------
1,487,230 1,223,272 1,100,958
---------- ---------- ----------
Life and short-term disability claims 3,589 3,108 4,033
---------- ---------- ----------
Home health patient services 21,950 21,514 19,412
---------- ---------- ----------
Administrative expense
Salaries and benefits 138,425 114,561 99,682
Promotion and advertising 4,668 5,246 4,311
Professional services 9,212 8,029 6,070
Licenses and taxes 13,191 11,586 8,538
Facilities, maintenance and supplies 31,693 28,707 26,848
Other (including interest expense of $742, $1,045 and $532) 13,435 11,698 7,634
---------- ---------- ----------
210,624 179,827 153,083
---------- ---------- ----------
Total expense 1,723,393 1,427,721 1,277,486
---------- ---------- ----------
Income before income taxes 84,342 56,758 39,830
Income tax expense (27,147) (17,352) (13,508)
---------- ---------- ----------
Net income $ 57,195 $ 39,406 $ 26,322
========== ========== ==========
Basic earnings per common share $ 1.48 $ 1.04 $ .64
========== ========== ==========
Diluted earnings per common share $ 1.41 $ 1.00 $ .64
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
29
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Additional Stock Other
Common Paid-In Compensation Treasury Comprehensive Retained
(in thousands except share amounts) Stock Capital Trust Stock Income/(Loss) Earnings Total
------ ---------- ------------ --------- ------------- -------- --------
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
Exercise of stock options for
3,000,306 shares released from the
Stock Compensation Trust (2,695) 42,753 40,058
Stock option tax benefit 6,984 6,984
Purchase of 2,000,000 shares of MAMSI
common stock to be held in the
Stock Compensation Trust 20 36,480 (36,500) -
Adjustment to market value for shares
held in Stock Compensation Trust 12,479 (12,479) -
Repurchase of 2,717,900 shares of
MAMSI common stock (49,472) (49,472)
Comprehensive Income: --------
Net Income 57,195 57,195
Other comprehensive income,
net of tax of $386 716 716
------ -------- --------- --------- -------- -------- --------
Total Comprehensive Income 57,911
--------
Balance, December 31, 2001 $ 637 $349,595 $(204,742) $(185,110) $ 2,528 $318,563 $281,471
====== ======== ========= ========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
30
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
(in thousands) 2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income $ 57,195 $ 39,406 $ 26,322
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,008 10,263 10,249
Provision for bad debts 510 692 292
Provision for deferred income taxes 947 (5,280) 2,415
(Gain) loss on sale and disposal of assets (1) 356 49
Stock option tax benefit 6,984 3,529 19
Increase in accounts receivable (15,899) (7,023) (4,657)
(Increase) decrease in prepaid expenses, advances and other (3,441) 2,159 (332)
Increase in accounts payable 7,705 15,861 2,909
Increase in income taxes payable 5,038 - -
Increase in medical claims payable, net 33,325 24,282 25,138
Increase (decrease) in deferred premium revenue 19,204 1,545 (218)
-------- -------- --------
Total adjustments 71,898 46,384 35,864
-------- -------- --------
Net cash provided by operating activities 129,093 85,790 62,186
-------- -------- --------
Cash flows used in investing activities:
Purchases of investment securities (513,466) (428,185) (355,996)
Sales and maturities of investment securities 416,368 365,043 325,117
Purchases of property and equipment (20,237) (13,297) (8,147)
Purchases of statutory deposits (5,563) (3,394) (1,476)
Maturities of statutory deposits 2,421 2,782 1,125
Purchases of other assets (580) (631) (2,598)
Proceeds from sale of assets 160 377 486
-------- -------- --------
Net cash used in investing activities (120,897) (77,305) (41,489)
-------- -------- --------
Cash flows used in financing activities:
Principal payments on notes payable - (14) (60)
Increase (decrease) in short-term borrowings 681 (558) 1,713
Exercise of stock options 40,058 24,930 82
Purchase of treasury stock (49,472) (31,521) (28,494)
-------- -------- --------
Net cash used in financing activities (8,733) (7,163) (26,759)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (537) 1,322 (6,062)
Cash and cash equivalents at beginning of year 5,047 3,725 9,787
-------- -------- --------
Cash and cash equivalents at end of year $ 4,510 $ 5,047 $ 3,725
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
31
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"), a preferred provider organization ("PPO"), a life and
health insurance company, home health care and home infusion services companies,
a hospice company, a collections 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"), and Optimum Choice of the Carolinas, Inc. ("OCCI")
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. Optimum Choice,
Inc. of Pennsylvania ("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, and 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") provides services to terminally ill
patients and their families.
Beginning in January 2001, Alliance Recovery Services, LLC ("ARS") provides
coordination of benefit collection services to TPAs and insurance companies.
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 and transactions have been
eliminated in consolidation.
32
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, 2001, 2000
and 1999, approximately 10%, 8% and 8%, respectively, of premium revenue was
derived from federal government agencies which is included in the All Others and
Commercial Risk segments (as described in Note 14), and approximately 15%, 14%
and 21%, respectively, was derived from Maryland and Virginia state and local
government agencies which is included in the Commercial 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.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("Statement No. 142"), which establishes standards for financial accounting and
reporting for intangible assets at acquisition and for goodwill and other
intangible assets subsequent to their acquisition. Statement No. 142 is applied
to existing goodwill and intangible assets for fiscal years beginning December
15, 2001. The Company anticipates adopting this Statement January 1, 2002, at
which time amortization of the remaining book value of goodwill will cease. The
Company does not expect the adoption of Statement No. 142 will have a material
impact on its consolidated financial statements.
33
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.
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 product offerings
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. In the case of one
of these contracts, a dispute with the Company's pharmacy benefits manager,
Merck, has arisen involving approximately $41 million related to the settlement
of a cost guarantee for the year 2000. If the dispute is not resolved in the
Company's favor, it could be material to the Company's financial statements. The
Company is recording the amount due under the cost guarantee over the three year
34
term of the contract which commenced in January 2000. From inception through
December 31, 2001, the Company has recognized approximately $28 million of the
$41 million guarantee for financial statement purposes as a reduction of medical
expense and medical claims payable. On August 30, 2001, the Company filed a
Demand for Arbitration against Merck asserting that Merck has reneged on its
obligations under the agreement. The Company believes that it has complied with
its contractual obligations, that its financial statements are fairly stated
with regard to the aforementioned contracts and that the dispute will be
resolved in the Company's favor. See Note 11.
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.
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.
35
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 2000 financial statements have been reclassified to
conform with the 2001 presentation.
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 the state regulatory agencies and
transferred to the Company's investment securities portfolio. The unrealized
loss at the date of the transfer was $21,000. There were no such transfers in
2001 and 2000.
36
The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 2001 and 2000:
-----------------------------------------------------
2001
-----------------------------------------------------
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 $ 2,152 $ 120 $ - $ 2,272
Obligations of states and political subdivisions 206,691 5,115 1,183 210,623
Municipal bond funds 145,010 - - 145,010
Accrued interest 2,955 - - 2,955
-------- ------- ------- --------
Debt securities 356,808 5,235 1,183 360,860
Equity securities 7,630 891 1,054 7,467
-------- ------- ------- --------
Investment securities $364,438 $ 6,126 $ 2,237 $368,327
======== ======= ======= ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 7,908 $ 226 $ 1 $ 8,133
Obligations of states and political subdivisions 9,532 116 - 9,648
Other investments 250 - - 250
-------- ------- ------- --------
Statutory deposits $ 17,690 $ 342 $ 1 $ 18,031
======== ======= ======= ========
-----------------------------------------------------
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
======== ======= ======= ========
37
For the years ended December 31, 2001, 2000 and 1999, marketable equity
available-for-sale securities with a fair value at the date of sale of $900,000,
$317,000 and $2,524,000, respectively, were sold. The gross realized gains on
such sales totaled $18,000, $71,000 and $50,000, and the gross realized losses
totaled $17,000, $-0- and $75,000 for each of the respective periods. Realized
gains and losses are included in investment income. Other sales and maturities
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, 2001, 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 $152,058 $152,174
Due after one year through five years 82,743 85,801
Due after five years through ten years 105,319 106,568
Due after ten years 16,688 16,317
-------- --------
Debt securities 356,808 360,860
Equity securities 7,630 7,467
-------- --------
$364,438 $368,327
======== ========
HELD-TO-MATURITY
Due in one year or less $ 5,793 $ 5,798
Due after one year through five years 6,733 6,982
Due after five years through ten years 5,164 5,251
Due after ten years - -
-------- --------
$ 17,690 $ 18,031
======== ========
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
-------------------------
(in thousands) 2001 2000
-------------------------
Premium and fee accounts $ 84,969 $ 67,893
Home health service accounts 8,141 10,454
Medical recoverables 5,165 6,969
Other 13,715 10,775
Less: allowance for doubtful accounts (6,647) (6,137)
-------- --------
$105,343 $ 89,954
======== ========
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, interest accrued on statutory deposits
and amounts related to contractual arrangements with laboratory service
providers.
38
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
------------------------
(in thousands) 2001 2000
------------------------
Land, buildings and improvements $ 44,416 $35,207
Computer equipment and software 42,345 36,477
Office furniture and equipment 26,138 22,786
Leasehold improvements 3,856 2,144
-------- -------
116,755 96,614
Less: accumulated depreciation and
amortization (59,426) (49,392)
-------- -------
$ 57,329 $47,222
======== =======
NOTE 5 - NOTES PAYABLE
The Company has access to total revolving credit facilities of $29 million,
which are subject to annual renewal and collateral requirements, and are used to
provide short-term capital resources for routine cash flow fluctuations. At
December 31, 2001, the Company's investment security balances used as
collateral, which are parent company only investments, fell below the minimum
collateral requirements thereby reducing the credit line availability to $24.3
million. 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, 2001, approximately $3.7 million was outstanding on one of the
lines-of-credit at an interest rate of 3.42% and approximately $444,000 in
letters-of-credit were outstanding, although no amounts had been drawn.
Interest expense paid in cash on borrowings and on claims paid subsequent to
state mandated deadlines during 2001, 2000 and 1999 was approximately
$1,267,000, $444,000 and $523,000, respectively.
NOTE 6 - REINSURANCE
M.D. IPA, OCI, OCCI 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. Transplant costs conducted
in an approved facility are reimbursed at either 90% or 80% of eligible charges
and in non-approved facilities at 50% of eligible charges. The coverage provides
reimbursement benefits for a lifetime maximum of $2,000,000 in eligible medical
costs with no more than $1,000,000 in a given year. 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, 2001, 2000 and 1999 were approximately $2,319,000,
$2,044,000 and $1,566,000, 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:
39
--------------------------
(in thousands) 2001 2000
--------------------------
Deferred tax liabilities:
Accelerated depreciation $ 1,071 $ 1,344
Receivable valuation adjustments 9 1,734
Vendor guarantee revenue 10,739 -
Unrealized investment gains 1,361 975
------- -------
Total deferred tax liabilities 13,180 4,053
------- -------
Deferred tax assets:
Accrued medical expenses 1,559 1,486
Premium revenue adjustments 2,639 1,140
State net operating losses 4,144 3,802
Accrued pension expenses 3,864 1,845
Accrued vacation 400 217
Other 146 164
------- -------
Total deferred tax assets 12,752 8,654
Valuation allowance for deferred tax assets (3,778) (3,751)
------- -------
Net deferred tax assets 8,974 4,903
------- -------
$(4,206) $ 850
======= =======
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 216 $ 850
Non-current assets - deferred income taxes 4,219 3,013
Current liabilities - deferred income taxes (8,641) (839)
Non-current liabilities - deferred
income taxes - (2,174)
------- -------
Net deferred tax (liability) asset $(4,206) $ 850
======= =======
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
---------------------------------------
(in thousands) 2001 2000 1999
---------------------------------------
Current:
Federal $ 25,579 $ 22,041 $ 10,536
State 621 591 557
--------- --------- ---------
Total current 26,200 22,632 11,093
--------- --------- ---------
Deferred:
Federal 1,771 (5,019) 2,623
State (824) (261) (208)
--------- --------- ---------
Total deferred 947 (5,280) 2,415
--------- --------- ---------
$ 27,147 $ 17,352 $ 13,508
========= ========= =========
40
The Company's tax provision differs from the statutory rate for Federal income
taxes for the years ended December 31 as follows:
-------------------------------------
(in thousands) 2001 2000 1999
-------------------------------------
Statutory rate (35%) $29,520 $19,866 $13,940
Tax-exempt interest (2,870) (2,067) (1,421)
State income taxes, net of Federal benefit 22 (436) (163)
Increase in valuation allowance for
deferred tax assets 27 706 765
Other non-deductible items 529 574 566
Tax credits (191) (664) (16)
Other, net 110 (627) (163)
------- ------- -------
$27,147 $17,352 $13,508
======= ======= =======
Total tax deposits made by the Company in 2001, 2000 and 1999 were approximately
$11,750,000, $19,255,000 and $10,027,000, respectively.
At December 31, 2001, the Company has state net operating loss carryforwards of
$97,014,000 that expire in various years beginning in 2006. The losses were
generated by certain operating subsidiaries of the Company, in the normal course
of their business.
The Company records a valuation allowance for deferred tax assets when in
management's judgment that it is more likely than not that all or a portion of a
deferred tax asset will not be realized. At December 31, 2001 and 2000, the
Company recorded a valuation allowance related to state net operating loss
carryforwards.
NOTE 8 - RELATED PARTIES
For the years ended December 31, 2001, 2000 and 1999, certain members of the
Boards of Directors of MAMSI and affiliated corporations who are also
participating physicians provided medical services to enrollees totaling
$5,414,000, $4,954,000 and $1,790,000, respectively, which represents
approximately .7%, .8% and .3% in 2001, 2000 and 1999, respectively, of payments
to all physicians. Board members are remunerated at the same contractual level
as all other participating physicians and are selected by enrollees to render
medical services under the same guidelines as all other participating
physicians.
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. Only Company contributions may be invested in MAMSI stock. Employee
contributions can be invested in a variety of mutual funds. Employees vest
immediately in the employee contributions and ratably over five years in the
Company contributions. During 2001, 2000 and 1999, the Company's contribution to
the 401(k) plan aggregated $1,202,000, $1,264,000 and $1,056,000, respectively.
41
Pursuant to the employment contracts entered into by the Company with certain
key executives, effective in 2000, each executive is entitled to supplemental
retirement income benefits based upon years of service and attained salary
levels. The Company is accruing for the liability under these contracts based on
an estimated present value calculation of the future benefits payable to each
executive. Expense recognized related to this benefit was $5,783,000 and
$2,866,000 for the years ended December 31, 2001 and 2000, respectively.
STOCK OPTION PLANS
The Company follows APB 25 under which no compensation expense has been
recognized in connection with its stock option plans. Pro forma information
regarding net income and earnings per share are required by Statement 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for 2001, 2000 and 1999,
respectively: risk-free interest rates of 4.8%, 6.6%, and 5.2%; volatility
factors of the expected market price of the Company's common stock of .65, .65,
and .59 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):
2001 2000 1999
------- ------ ------
Pro forma net income $49,997 $34,020 $19,856
Pro forma basic earnings per share 1.29 .90 .48
Pro forma diluted earnings per share 1.23 .86 .48
In years 1990 through 1996, and years 1998 through 2001, MAMSI implemented a
non-qualified stock option plan whereby options for the purchase of shares of
common stock may be granted to directors, officers and employees of the Company.
Unexpired authorized shares under the plans total 10,000,000. 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:
42
2001 2000 1999
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
2001 Exercise 2000 Exercise 1999 Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding, January 1 7,978,037 $11.59 9,524,599 $13.35 7,913,124 $ 14.98
Granted 2,526,290 $16.46 3,100,763 $ 9.53 2,541,630 $ 9.32
Exercised (3,000,306) $13.35 (1,991,094) $12.52 (13,100) $ 6.21
Forfeited (355,258) $14.02 (2,656,231) $14.76 (917,055) $ 16.37
--------- --------- ---------
Outstanding, December 31 7,148,763 $12.45 7,978,037 $11.59 9,524,599 $ 13.35
========= ========= =========
Available for grant, end of year 1,251,180 1,554,976 1,581,308
Exercisable, end of year 3,977,323 4,474,207 5,910,801
Option price range for exercised
shares $5.06-$20.63 $5.06-$17.13 $5.06-$7.88
Option price range at end of year $5.00-$23.05 $5.00-$21.00 $5.00-$20.00
Weighted average fair value of
options granted during year $7.61 $4.10 $3.85
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- --------------------------------
Outstanding Weighted Average Exercisable
Range of as of Remaining Weighted Average as of Weighted Average
Exercise Prices 12/31/2001 Contractual Life Exercise Price 12/31/2001 Exercise Price
- ------------------- ----------- ---------------- ---------------- ----------- ----------------
$ 0.00 - $ 5.00 150 1.7 $ 5.00 150 $ 5.00
$ 5.01 - $ 10.00 3,245,289 2.9 $ 8.76 1,990,215 $ 8.61
$10.01 - $ 15.00 993,073 1.6 $12.62 869,266 $12.63
$15.01 - $ 20.00 2,872,096 3.6 $16.46 1,111,252 $16.53
$20.01 - $ 25.00 38,155 4.3 $21.24 6,440 $20.67
--------- ---------
7,148,763 3.0 $12.45 3,977,323 $11.72
========= =========
INCENTIVE COMPENSATION PLAN
The Company has an incentive compensation plan whereby managers receive bonuses
based upon the annual operating results of the Company. During 2001, 2000 and
1999, incentive compensation expense was approximately $9,000,000, $6,956,000
and $4,200,000, respectively, which was paid to employees in February 2002, 2001
and 2000, respectively.
NOTE 10 - COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
-----------------------------------------
2001 2000 1999
-----------------------------------------
Numerator:
Net income $57,195,000 $39,406,000 $26,322,000
Denominator:
Denominator for basic earnings per share
- weighted average shares 38,672,147 38,052,746 41,225,327
Dilutive securities - employee stock options 1,829,939 1,288,291 41,277
Denominator for diluted earnings per share
- adjusted weighted average shares 40,502,086 39,341,037 41,266,604
43
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 represented 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 2001, the SCT purchased an additional 2,000,000 of the Company's common
stock for approximately $36.5 million. The existing promissory note has been
modified to reflect these purchases.
For financial reporting purposes, the SCT is consolidated with MAMSI. The fair
market value of the shares held by the SCT is shown as a reduction to
stockholders' equity in the Company's consolidated balance sheets. All
transactions between the SCT and MAMSI are eliminated. The difference between
the cost and fair value of common stock held in the SCT is included in the
consolidated financial statements as additional paid-in capital.
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 2006. Rent
expense relating to these operating leases approximated $4,393,000, $3,470,000
and $3,429,000 in 2001, 2000 and 1999, respectively.
Future minimum lease commitments under non-cancelable operating leases are as
follows for the years ended December 31 (in thousands):
Year Amount
- ---- -------
2002 $ 3,395
2003 2,303
2004 3,168
2005 1,822
2006 1,016
-------
$11,704
=======
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. OPM typically audits plans once every five or six years, and each
audit covers the prior five or six year period. While the government's initial
on-site audits are usually followed by a post-audit briefing as well as a
preliminary audit report in which the government indicates its preliminary
results, final resolution and settlement of the audits can take two to three
years. The results of these audits could result in material adjustments to the
Company's financial statements. The Company has been audited through 1999. There
were no significant findings related to 1999.
On August 30, 2001, the Company filed a Demand for Arbitration with the American
Arbitration Association against Merck and related entities seeking an order
relating to the parties' Integrated Drug Program Master Agreement (the
"Agreement"). The Company asserts that Merck has reneged on its obligations
under the Agreement, the aggregate amount of such obligations totaling
approximately $49 million for fiscal year ended 2000. On October 8, 2001, Merck
and related entities filed an Answer and Counterclaim alleging breach of
contract and requesting monetary relief. On October 19, 2001, the Company filed
an Answer to the Counterclaim denying all allegations and revising its request
for relief to $44.8 million which includes the $41.0 million recorded for
44
financial statement purposes and additional amounts the Company believes it is
entitled to under the Agreement. The Company believes that the dispute will be
resolved in its favor. If the matter is not resolved in the Company's favor, the
effect could be material to the Company's financial statements. See Note 1.
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.
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:
2001 2000
--------------------------- --------------------------
Minimum Actual Minimum Actual
---------- ------------ ---------- -----------
M.D. IPA $3,000,000 $ 40,500,000 $3,000,000 $42,600,000
OCI 3,000,000 59,800,000 3,000,000 67,700,000
MLH 1,125,000 108,280,000 500,000 80,000,000
OCCI 2,500,000 7,100,000 2,500,000 3,600,000
OCIPA 1,500,000 2,100,000 1,500,000 2,100,000
M.D. IPA, OCI, OCCI, OCIPA and MLH were in compliance with state depository
rules at December 31, 2001 and 2000. OCCI was in compliance with its working
capital requirement of $1.6 million at December 31, 2001 and 2000. M.D. IPA,
OCI, OCCI, OCIPA and MLH exceeded the highest risk-based capital requirements at
December 31, 2001 and 2000. 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 became effective January 1, 2001. The domiciliary states of M.D.
IPA, OCI, OCCI, OCIPA and MLH have adopted the provisions of the revised manual.
The revised manual has changed, to some extent, prescribed statutory accounting
practices that M.D. IPA, OCI, OCCI, OCIPA and MLH use to prepare their
statutory-basis financial statements. The impact of these changes to MAMSI and
its insurance subsidiaries' statutory-basis capital and surplus as of January 1,
2001 was not 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, 2001, approximately 20% 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.
45
NOTE 14 - REPORTABLE SEGMENTS
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE
SEGMENT DERIVES ITS REVENUES
The Company has two reportable segments: Commercial risk 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. 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.
46
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)
----------------------------------------------------
Commercial
Risk PPO All Others Totals
----------------------------------------------------
Year ended December 31, 2001:
Revenue from external customers $1,740,938 $21,244 $30,781 $1,792,963
Segment pretax profit (loss) 60,448 10,622 (1,057) 70,013
----------------------------------------------------
Commercial
Risk 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
----------------------------------------------------
Commercial
Risk 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
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) 2001 2000 1999
--------------------------------------------
Revenues
Total external revenues for reportable segments $1,762,182 $1,426,721 $1,227,692
Other revenues 30,781 44,275 78,528
Investment revenue not allocated 14,772 13,483 11,096
---------- ---------- ----------
Total consolidated revenues $1,807,735 $1,484,479 $1,317,316
========== ========== ==========
Pretax Profit
Total profit from reportable segments $ 71,070 $ 41,679 $ 31,189
Other (loss) profit (1,057) 2,135 (2,011)
Net investment income not allocated 14,329 12,944 10,652
---------- ---------- ----------
Total consolidated pretax profit $ 84,342 $ 56,758 $ 39,830
========== ========== ==========
47
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) 2001 2000 1999
-----------------------------------------
Unrealized holding gains (losses) arising
during period $ 722 $ 2,887 $(2,341)
Less: Reclassification adjustment for
net gains (losses) included in net income 6 62 (15)
------- ------- -------
Net unrealized gains (losses) recognized in
other comprehensive income (loss) $ 716 $ 2,825 $(2,326)
======= ======= =======
48
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, 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 11, 2002
49
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 2001 AND 2000
2001 2001 2001 2001 2000 2000 2000 2000
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands except share amounts)
(unaudited)
Revenue $424,661 $450,475 $459,667 $472,932 $360,113 $368,339 $371,428 $384,599
Expense 405,342 432,656 437,049 448,346 347,050 357,169 356,779 366,723
Income before income taxes 19,319 17,819 22,618 24,586 13,063 11,170 14,649 17,876
Net income 12,882 11,986 15,036 17,291 8,602 7,313 10,974 12,517
Basic earnings per share .34 .31 .38 .45 .22 .19 .29 .33
Diluted earnings per share .32 .30 .36 .43 .22 .19 .28 .31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
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, 2002.
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, 2002.
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,
2002.
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, 2002.
51
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, 2001 and 2000 ... 28
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 ............................. 29
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001, 2000 and 1999 ......... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 ............................. 31
Notes to Consolidated Financial Statements ..................... 32
Report of Ernst & Young LLP Independent Auditors ............... 49
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
2001, 2000 and 1999 ..................................... 53
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.
52
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, 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
======== ======== ======== ======== =======
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts - accounts receivable
$ 6,137 $ 152 $ 358 (1) $ $ 6,647
======== ======== ======== ======== =======
Valuation allowance - deferred tax assets
$ 3,751 $ 27 $ $ $ 3,778
======== ======== ======== ======== =======
(1) The changes to the allowance were charged to revenue.
53
(a)(3)
EXHIBITS
See the Exhibit Index on pages 57-59 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.
54
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. 3/26/2002
--------------------------------------------------
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 3/26/2002
--------------------------------------------------
Howard M. Arnold Date
Director
By: /s/ Thomas P. Barbera 3/26/2002
--------------------------------------------------
Thomas P. Barbera Date
Vice Chairman of the Board, President, Chief Executive Officer
and Director
By: /s/ Francis C. Bruno, M.D. 3/26/2002
--------------------------------------------------
Francis C. Bruno, M.D. Date
Director
By: /s/ Raymond H. Cypess, D.V.M., Ph.D. 3/26/2002
--------------------------------------------------
Raymond H. Cypess, D.V.M., Ph.D. Date
Director
By: /s/ John W. Dillon 3/26/2002
--------------------------------------------------
John W. Dillon Date
Director
By: /s/ Robert E. Foss 3/26/2002
--------------------------------------------------
Robert E. Foss Date
Senior Executive Vice President and Chief Financial Officer
and Director
(Principal Financial Officer)
By: /s/ Mark D. Groban, M.D. 3/26/2002
--------------------------------------------------
Mark D. Groban, M.D. Date
Chairman of the Board and Director
(Principal Executive Officer)
By: /s/ Christopher E. Mackail 3/26/2002
--------------------------------------------------
Christopher E. Mackail Date
Senior Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ John P. Mamana, M.D. 3/26/2002
--------------------------------------------------
John P. Mamana, M.D. Date
Director
55
By: /s/ Edward J. Muhl 3/26/2002
--------------------------------------------------
Edward J. Muhl Date
Director
By: /s/ Janet L. Norwood 3/26/2002
--------------------------------------------------
Janet L. Norwood, Ph.D. Date
Director
By: /s/ John A. Paganelli 3/26/2002
--------------------------------------------------
John A. Paganelli Date
Director
By: /s/ 3/26/2002
--------------------------------------------------
Ivan R. Sabel, CPO Date
Director
By: /s/ James A. Wild 3/26/2002
--------------------------------------------------
James A. Wild Date
Director
56
(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)
10.990 Form of Executive Employment Agreement between the Company
and Executive Staff......................................................(14)
57
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.....................................(19)
10.33 Form of Agreement between MAMSI and Employees Granting Options
Under the 2001 Non-Qualified Stock Option Plan...........................(19)
10.34 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 2001 Non-Qualified Stock Option Plan...................(19)
10.35 Employment Agreement between the Company and Mark D. Groban..............(19)
10.36 Employment Agreement between the Company and Thomas P. Barbera...........(19)
10.37 Employment Agreement between the Company and Robert E. Foss..............(19)
10.38 Employment Agreement between the Company and Sharon C. Pavlos............(19)
10.39 Common Stock Purchase Agreement dated
July 11, 2001............................................................(20)
10.40 Allonge to Replacement Promissory Note dated
July 11, 2001............................................................(20)
10.42 2002 Non-Qualified Stock Option Plan.....................................
10.43 Form of Agreement between MAMSI and Employees Granting Options
under the 2002 Non-Qualified Stock Option Plan...........................
10.44 Form of Agreement between MAMSI and Non-Employee Directors
Granting Options under the 2002 Non-Qualified Stock Option Plan..........
21 Subsidiaries of the Company..............................................
23 Consent of Independent Auditors..........................................
(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.
58
(6) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1995.
(7) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q/A for the
quarterly period ended September 30, 1996.
(8) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1996.
(9) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended March 31, 1997.
(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.
(19) 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, 2000.
(20) 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, 2001.
59