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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For fiscal year ended DECEMBER 31, 2002
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
(Address of principal executive offices)
20850
(Zip Code)
(301) 762-8205
(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.
[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X]. No [ ].
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 June 28,
2002: Approximately $1,235 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.
46,827,022 shares of common stock as of March 7, 2003
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders to be
held on April 28, 2003 is incorporated by reference into Part II, Item 5 and
Part III, Items 10, 11, 12 and 13 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 ... 15
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 16
Item 6 Selected Financial Data .............................. 17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 18
Item 7A Quantitative and Qualitative Disclosures About
Market Risk ........................................ 27
Item 8 Financial Statements and Supplementary Data .......... 28
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 53
PART III
Item 10 Directors and Executive Officers of the Registrant ... 54
Item 11 Executive Compensation ............................... 54
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters...... 54
Item 13 Certain Relationships and Related Transactions ....... 54
Item 14 Controls and Procedures .............................. 54
PART IV
Item 15 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 55
Signatures..........................................................58
Certifications......................................................60
Exhibit Index.......................................................63
-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 health care coverage and related ancillary
products and deliver these services through health maintenance organizations
("HMOs"), a preferred provider organization ("PPO"), and a life and health
insurance company. MAMSI also owns a home health care company, a home infusion
services company, a hospice company, a coordination of benefits identification
and 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 2002, MAMSI offered HMO coverage
through three licensed HMO subsidiaries - M.D. IPA, Optimum Choice, Inc.
("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 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 serves 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, as well as the District of Columbia. 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 HEALTH 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. OCI
also offers individual coverage to the commercial market in some of its service
areas.
Under traditional HMO coverage, the enrollee selects a PCP from the HMO's
network of physicians and health care practitioners. 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"). 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.
M.D. IPA and OCI, 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. Groups also have the option
of purchasing a Usual, Customary and Reasonable charges ("UCR") reimbursement
for physician or health care practitioner visits outside of the HMO network that
generally covers the lesser of 80% of the requested charges or 80% of the UCR
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. The option of dental benefits
is also available.
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. Under the MLH indemnity plan, enrollees may receive health care
services from a physician, health care practitioner or facility of their choice.
Enrollees in the MLH PPO plan are encouraged to receive health care services
from a preferred physician, health care practitioner or facility, but may
receive these services from any physician, health care practitioner or facility.
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 1,008,500 at December 31, 2002 from 874,000 at December 31, 2001,
an increase of 15.4 percent.
The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 2002:
Population of Aggregate HMO
Service Area 21,300,000
HMO Service Area Penetration
(All HMO's) 21%
Primary Care Physicians 8,500
Specialist Physicians 25,000
Other Affiliated Health
Care Practitioners 15,400
Hospitals and Outpatient
Facilities 2,600
Pharmacies 29,600
A significant portion of the Company's premium revenue is derived from Federal,
state and local government agencies. For the years ended December 31, 2002, 2001
and 2000, approximately 14%, 10% and 8%, respectively, of premium revenue was
derived from Federal government agencies which is included in the All Others and
Risk segments (as described in Item 8 "Financial Statements and Supplementary
Data", Note 15), and approximately 13%, 15% and 14%, 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 15).
-6-
PREFERRED PROVIDER ORGANIZATION
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 is a product
offering under Alliance.
PPOs allow enrollees to receive care from a network of preferred 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 preferred
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, TPAs, 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, 2002, Alliance had contracts with approximately 21,100 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 968,000 lives are
covered under one or both of these PPO products as of December 31, 2002.
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.
-7-
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. In the fourth quarter of 2002,
HomeCall reduced the number of branches it operates from 17 to 14 by combining
operations of the closed branches with other nearby branch locations. The
combined operations of HomeCall and FirstCall serve virtually all of Maryland,
the District of Columbia and Northern Virginia.
HomeCall achieved full accreditation from the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO") following its survey of all services in
1995 and 1998. The Company achieved reaccreditation in January, 2002.
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 in June, 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 twenty-eight
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 2002 2001 2000
- ------------ ---------------------------------
(in thousands)
Commercial HMO (1) 632.7 522.1 453.1
Hybrid HMO (2) 126.0 122.4 103.4
Indemnity 241.2 220.6 206.2
ASO (3) 8.6 8.9 9.3
------- ------- -------
1,008.5 874.0 772.0
PPO (4) 968.4 958.4 1,019.3
------- ------- -------
Total Membership 1,976.9 1,832.4 1,791.3
======= ======= =======
(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, or 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, 2002. 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
and laboratory testing.
-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 standards, 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 in
inpatient and outpatient settings.
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. Prior to admission for
elective hospital services, MAMSI applies certain medical criteria to authorize
the admission.
After admission of an 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 and MLH have established a procedure to respond to enrollee and
practitioner complaints and appeals. Persons covered by HMOs are also given a
right to seek a fast and fair review of adverse utilization review decisions,
first internally by a medical director of the HMO or MLH 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 procedure for physician
complaints. In accordance with the new Department of Labor rules and regulations
relating to claims payment and grievance procedures, the Company is in the
process of reviewing its current procedures for compliance.
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 January, 2002. Full
accreditation status was awarded as a result of this process.
-10-
COMPETITION AND MARKETING STRATEGY
The health care industry is characterized by intense competition. MAMSI
recognizes the possibility that other entities with greater resources may enter
into competition with MAMSI in the future by either entering its HMO or
indemnity service area or by designing alternative health care delivery systems.
HMOs compete not only with other HMOs and managed care organizations, such as
physician and health care practitioner sponsored organizations, but also with
insurance companies that offer indemnity insurance products.
MAMSI's HMOs compete with a significant number of HMOs or other prepaid
alternative health care delivery systems that have a presence in MAMSI's
significant service areas (Maryland, Virginia, the District of Columbia and
North Carolina). The following table sets forth MAMSI's best estimate of 2002
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....................... 759,000
Kaiser Foundation Health Plans, Inc...................... 514,000
United Health Group, Inc................................. 504,000
AETNA, Inc............................................... 401,000
Anthem, Inc. (formerly Trigon Blue Cross Blue Shield).... 364,000
CareFirst BlueCross BlueShield of Maryland**............. 363,000
CIGNA HealthCare, Inc.................................... 343,000
Partners National Health Plan of North Carolina, Inc..... 278,000
Sentara Health System.................................... 236,000
Blue Cross/Blue Shield of North Carolina................. 176,000
Coventry Health Care, Inc................................ 161,000
Source: The InterStudy Competitive Edge - 12.2, except for MAMSI membership
which is as of December 31, 2002.
** - 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.
As of December 31, 2002, MAMSI subsidiaries employed approximately 327 full-time
individuals who provide marketing services for the Company's products. 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 independent insurance producers 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 and West Virginia, 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 and MLH 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 (whichever is less), or 80% of the eligible in and out of service
area acute care medical expenses (if not paid at a fixed fee) 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. There is 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. The Company is
contingently liable for its reinsured losses to the extent that the reinsurance
company cannot meet its obligations under the reinsurance contracts.
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) institutional 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, including timeliness of payment.
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 determine the premiums to be charged
to employers for a 12 month period and revise the premium at 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 audited 2000-2002.
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, risk based capital and 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, risk based capital 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.
The Health Insurance Portability and Accountability Act ("HIPAA") privacy
regulations will be effective April 14, 2003. MAMSI's confidentiality committee
has been working towards compliance and anticipates full compliance by this
date. Additional information regarding HIPAA is included in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 21.
The Department of Labor has issued rules and regulations regarding claims
payment and appeal procedures effective January 1, 2003. MAMSI is adjusting its
claim payment and appeal procedures to comply with the new rules and
regulations. The Company does not expect that the cost of compliance will be
significant.
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
-13-
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, 2002, the Company had a total of 3,315 employees, including
2,989 full- time and 326 part-time employees. MAMSI's home health care
subsidiary employed 555 of these employees (370 on a full-time basis and 185 on
a part-time basis). None of the Company's employees are covered by a collective
bargaining agreement and the Company has not experienced any work stoppage since
its inception.
TRADEMARKS
The Company has federally registered the right to use the trademark names
"Optimum Choice", "MAMSI" and "emamsi".
SEGMENT INFORMATION
Segment information is included in Item 8 "Financial Statements and
Supplementary Data", Note 15.
AVAILABLE INFORMATION
MAMSI maintains a website with the address www.mamsi.com. The information
contained on the website is not included as a part of, or incorporated by
reference into, this Annual Report on Form 10-K. MAMSI's Annual Report on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to these reports, are made available via the website as soon as
reasonably practicable after MAMSI has electronically filed such material with,
or furnished such material to, the Securities and Exchange Commission.
ITEM 2. PROPERTIES
The Company owns eleven office buildings, five of which are sublet. These
buildings are located in Rockville and Frederick, Maryland and total
approximately 568,000 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 239,000 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 lawsuits challenging the constitutionality of the law
which allows the Company to subrogate against other insurance companies. The
action against the Company was filed in the Circuit Court for Montgomery County,
Maryland. The Company filed a motion for removal of the case to federal court
under ERISA which was denied on February 4, 2003. In a separate matter unrelated
to the Company, but similar in facts, the Maryland Court of Appeals recently
ruled that the retroactive portion of the law is unconstitutional under the
Maryland constitution. The Company believes that its operations with respect to
the law are valid and is pursuing all available defenses. The Company does not
believe, at this time, the ultimate outcome of this action will be material to
the Company's financial statements.
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
-14-
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
2002.
-15-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently listed on The New York Stock Exchange,
Inc. ("NYSE") under the trading symbol MME. The following table sets forth for
the indicated periods the high and low reported closing prices of the common
stock as furnished by the NYSE.
2002 2001
----------------- -----------------
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $28.90 $22.65 $20.30 $14.94
Second Quarter 39.14 27.95 21.08 15.34
Third Quarter 37.00 27.79 23.05 17.63
Fourth Quarter 42.70 29.12 22.96 16.70
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.
See Note 13 included in Item 8 "Financial Statements and Supplementary Data."
On September 6, 2002, 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
$34.95 per share for $20,000 in cash and $69,880,000 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 7, 2003 there were approximately 634 stockholders of record of the
Company's common stock.
The information regarding securities authorized for issuance under equity
compensation plans is incorporated by reference from the "Equity Compensation
Plans" section of the Proxy Statement for MAMSI's annual meeting of shareholders
to be held on April 28, 2003.
-16-
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(in thousands except share amounts, key ratios and operating data)
SELECTED INCOME STATEMENT DATA
Revenue $2,328,029 $1,807,735 $1,484,479 $1,317,316 $1,187,901
Expense 2,180,711 1,723,393 1,427,721 1,277,486 1,175,665
Income before income taxes 147,318 84,342 56,758 39,830 12,236
Net income 97,413 57,195 39,406 26,322 9,045
Earnings per common share
Basic $2.49 $1.48 $1.04 $0.64 $0.20
Diluted $2.34 $1.41 $1.00 $0.64 $0.20
Weighted Average Shares
Basic 39,171,996 38,672,147 38,052,746 41,225,327 45,407,006
Diluted 41,657,009 40,502,086 39,341,037 41,266,604 45,473,995
Dividends (1) --- --- --- --- ---
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital $ 225,994 $ 193,026 $ 153,717 $ 118,995 $ 123,138
Total assets 773,028 594,213 467,023 388,584 362,775
Long-term debt - - - - 14
Stockholders' equity 346,565 281,471 225,990 186,821 191,218
Cash dividends per common share (1) --- --- --- --- ---
KEY RATIOS
Medical care ratio 84.2% 85.4% 86.5% 87.9% 88.8%
Administrative expense ratio 10.8% 11.7% 12.1% 11.6% 11.3%
Net income margin 4.2% 3.2% 2.7% 2.0% 0.8%
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services (3) 253 250 244 238 265
HMO only (2) 194 196 192 191 191
Medicare (3) - - - - 2,425
Medicaid (3) - - - 496 375
Annualized hospital admissions per
1,000 enrollees (3) 66 64 63 61 72
HMO, hybrid, ASO and indemnity
health enrollees at year end 1,009,000 874,000 772,000 766,000 731,000
PPO enrollees at year end 968,000 958,000 1,019,000 1,024,000 1,060,000
Notes
1. MAMSI has not declared or paid cash dividends on its common stock.
2. Days are presented exclusive of skilled nursing, neonatal intensive care and
psychiatric inpatient care.
3. Days include acute and non-acute, skilled nursing, neonatal intensive care
and psychiatric inpatient care. The Company ceased participation in Medicare
in 1999 and Medicaid in 2000.
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
All forward-looking information contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations is based on
management's current knowledge of factors, all of which have inherent risks and
uncertainties that affect 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 of a weak economy on the Company.
3. The effect on the Company due to the acts of terrorism and the threat of
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 have the potential for increased costs,
and/or increased regulation of rates which might have the potential to
decrease revenue.
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.
- The ultimate accuracy of the Company's estimate of the liability
for incurred but not reported claims.
- The potential for disputes under its risk-sharing arrangements,
and the Company's ability to maintain and renew these
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.
CRITICAL ACCOUNTING POLICIES
MAMSI, through its 100% owned subsidiary companies, is predominately in the
business of selling various forms of health insurance. In 2002, 97% 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 premiums 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.
-18-
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.
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 either
uses in its operations or are currently leased to other entities do not 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 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. Various factors such as timing of the receipt of claims,
seasonal utilization, and underlying cost inflation affect the ultimate
development of claims expense. 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. The table below indicates how much we believe we have
over-estimated or (under-estimated) our IBNR liability for the past three years:
Over/(Under) As a % of
Year Estimated Medical Expense
---- ----------- ---------------
2001 $31,294,000 1.64%
2000 7,701,000 .52%
1999 (4,407,000) (.36%)
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
-19-
pharmacy transactions on a real time basis. The Company's PBM through December
31, 2002 was Medco Health Solutions, Inc. (formerly known as 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 recorded the amount due
under this guarantee over the contract term of three years, which expired
December 31, 2002. The total value of the guarantee for financial statement
purposes was approximately $41.0 million which has been recorded in our
financial statements as a reduction of medical expense over the three years of
the contract. At December 31, 2001, approximately $28.1 million was also
reported in the balance sheet as a reduction of claims payable. In April 2002,
the Company received payment of $41.0 million from Merck. At December 31, 2002,
no amounts related to the 2000 guarantee remain unrecognized. In addition to the
2000 guarantee, the Company's former PBM contract provided for a risk-sharing
arrangement for the years 2001 and 2002. The 2001 risk-sharing arrangement is in
the process of being finalized and settled. It is anticipated that the 2002
risk-sharing arrangement will be settled in July, 2003. As of December 31, 2002,
the Company has recorded what it believes to be a reasonable estimate of the
results of these risk-share arrangements. See Note 1 included in Item 8
"Financial Statements and Supplementary Data". Beginning January 1, 2003, the
Company retained Express Scripts, Inc. as its PBM.
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
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, 2002, the Company experienced
significant growth in membership. 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. Premium rates
during this time have increased, yet remain at competitive levels for the
Company's marketplace. During 2002, the Company's consolidated operating margin
showed improvement over 2001. The Company achieved 2002's results, in part, by
implementing product price increases and carefully underwriting groups, when
allowed by regulation, that had the potential for continued unprofitability. The
Company anticipates that it will continue to increase premium rates during 2003.
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
-20-
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. The U.S.
Department of Health and Human Services has published final regulations on
Transactions and Code Sets, Privacy and the National Employer Identifier, and
Security. 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 have assessed current procedures and developed
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. MAMSI will comply with the regulations by
the applicable compliance deadlines. 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.
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.
-21-
- -----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated net income for the year ended December 31, 2002 increased to
$97,413,000 from $57,195,000 for the year ended December 31, 2001. Diluted
earnings per share increased from $1.41 in year ended December 31, 2001 to $2.34
for the year ended December 31, 2002. The increase in earnings is attributable
to an increase in members, 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).
Health premium revenue for the year ended December 31, 2002 increased
approximately $518.7 million or 29.8 percent over the year ended December 31,
2001. A 16.8 percent increase in net average HMO and indemnity enrollment
resulted in an increase of approximately $293.0 million in health premium
revenue while an 11.1 percent increase in average monthly premium per enrollee,
combined for all products, resulted in a $225.7 million increase in health
premium revenue. Management believes that commercial health premiums will
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
medical cost inflation, both of which cause the Company to increase its premium
rates. 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 rates are
currently expected to increase in 2003 by approximately 13.0%, net of buy-downs,
resulting in a per member per month increase of between 12.25% and 12.75%.
Management believes that these rate increases may have the effect of slowing the
Company's future membership growth.
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 currently anticipates its 2003 membership growth to be in the
4% to 5% range.
The Company's home health operations contributed $22.0 million in revenue for
the year ended December 31, 2002 as compared with $22.7 million for the year
ended December 31, 2001, reflecting a decrease in Medicare referrals. Fee and
other revenue increased to $22.4 million for the year ended December 31, 2002
from $21.2 million for the year ended December 31, 2001, primarily due to an
increase in rental income from company owned facilities. Life and short-term
disability products contributed $9.1 million in revenue for the year ended
December 31, 2002 as compared with $8.1 million for the year ended December 31,
2001.
Investment income increased from $14.8 million for the year ended December 31,
2001 to $15.0 million for the year ended December 31, 2002. While investment
balances increased, investment income remained stable primarily due to the
decline in interest rates.
-22-
The medical care ratio decreased to 84.2 percent for the year ended December 31,
2002 as compared to 85.4 percent for the year ended December 31, 2001. On a per
member per month basis, medical expenses increased 9.5 percent. The reduction 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, and also increased premiums per member. The ongoing initiatives
should help to control the Company's medical care ratio. Included in medical
expense for the year ended December 31, 2002 is a net favorable development of
prior years' medical cost estimates of $31,294,000. This was due to the level of
completion of claims which in retrospect was higher than that assumed for 2001.
For the year ended December 31, 2001, the net favorable development of prior
years' medical cost estimates approximated $7,701,000. The medical expense trend
is currently expected to be between 11.5% and 12.5% for 2003. 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 11.7 percent for the year ended
December 31, 2001 to 10.8 percent for the year ended December 31, 2002. The
decrease in the administrative expense ratio is principally due to increases in
premium rates and membership, and management's efforts to control costs as the
business volume increases. Management currently believes that the administrative
expense ratio will be approximately 10.8% for 2003. Management's expectations
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, increased administrative
activity related to business volume and to price increases from the Company's
vendors.
The effective tax rate increased from 32.2 percent for the year ended December
31, 2001 to 33.9 percent for the year ended December 31, 2002 primarily due to
the increase in pre-tax income and the fact that tax exempt interest was a
smaller portion of total income.
The net margin rate increased from 3.2 percent for the year ended December 31,
2001 to 4.2 percent for the year ended December 31, 2002. This increase is
consistent with the factors previously described.
- -----------------------------------------------------------------------------
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 the medical
care ratio, and a reduction in the administrative expense ratio.
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 9.9 percent
increase in net average HMO and indemnity enrollment resulted in an increase of
approximately $140.7 million in health premium revenue while an 11.9 percent
increase in average monthly premium per enrollee, combined for all products,
resulted in a $185.3 million increase in health premium revenue.
-23-
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.
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.
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
member per month basis, medical expenses increased 10.5 percent. Results for
2001 were positively impacted by approximately $7,701,000 of favorable
development of prior period estimates of medical costs. Results for 2000 were
negatively impacted by approximately $4,407,000 of unfavorable development of
prior period estimates of medical costs. 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 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. 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.
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.
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 $121.1 million from
$372.8 million at December 31, 2001 to $493.9 million at December 31, 2002,
primarily due to the timing of medical expense payments which traditionally lag
behind the receipt of increased premiums per member, the $41.0 million payment
received from Merck in April 2002, cash received from the exercise of stock
options and net income offset by the effect of treasury stock purchases and
purchases of three buildings and other capital expenditures. Accounts receivable
increased from $105.3 million at December 31, 2001 to $118.1 million at December
31, 2002, principally due to increased membership. Prepaid expenses, advances
and other increased from $27.4 million at December 31, 2001 to $37.1 million at
December 31, 2002 primarily due to an increase in the unamortized portion of
prepayments for insurance policies which cover the Company's assets and business
operations and an increase in working capital advances paid to Maryland
hospitals.
-24-
Net property and equipment increased from $57.3 million at December 31, 2001 to
$82.7 million at December 31, 2002 due to the purchase of furniture and computer
hardware necessitated by the Company's growth, the purchase of a parcel of land
adjacent to an existing Company owned facility, and the purchase of three
additional office buildings for approximately $22.0 million at the site of its
corporate headquarters in Rockville, Maryland. These buildings will provide
additional contiguous office space for current and future operations.
Claims payable increased from $212.0 million at December 31, 2001 to $297.3
million at December 31, 2002, primarily due to increased membership and an
increase in medical expenses per member, the timing of payments to physicians
and health care practitioners, and the receipt of the $41.0 million payment from
Merck of which $28.1 million had been recorded as a reduction of claims payable
at December 31, 2001. Deferred premium revenue decreased from $37.7 million at
December 31, 2001 to $33.9 million at December 31, 2002 due to a decrease in
cash payments received in advance of the premium coverage period. Unearned
revenue increased from $1.7 million at December 31, 2001 to $14.6 million at
December 31, 2002 primarily due to incentive cash payments received related to
certain long-term medical services vendor contracts.
Additional paid-in capital increased from $349.6 million at December 31, 2001 to
$466.2 million at December 31, 2002 due to an additional 2.0 million shares of
the Company's stock being acquired by the SCT, the exercise of employee stock
options, 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 $204.7 million at December 31, 2001 to
$269.3 million at December 31, 2002 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 acquired by 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 $185.1 million at December 31, 2001 to $276.2
million at December 31, 2002 due to the purchase of 2,897,300 additional shares
by the Company at a total cost of $91.1 million.
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, 2002, 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 $24.1
million. In addition, at December 31, 2002, approximately $3.2 million was drawn
against these facilities, and approximately $614,000 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.
-25-
Following is a schedule of the short-term capital resources available to the
Company:
December 31, December 31,
(in thousands) 2002 2001
------------ ------------
Cash and cash equivalents $ 7,144 $ 4,510
Investment securities 486,740 368,327
Working capital advances to Maryland hospitals 23,791 19,686
----------- -----------
Total available liquid assets 517,675 392,523
Credit line availability 20,217 20,184
----------- -----------
Total short-term capital resources $ 537,892 $ 412,707
=========== ===========
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, require those companies to maintain
certain levels of equity and Risk Based Capital ("RBC"), and restrict the amount
of dividends and other distributions that may be paid to their parent
corporation (See Note 13 included in Item 8 "Financial Statements and
Supplementary Data"). As of December 31, 2002, those subsidiaries of the Company
were in compliance with all minimum capital requirements and M.D. IPA, OCI, MLH
and OCIPA exceeded all RBC requirements. OCCI failed to meet its RBC Company
Action Level ("CAL") of $3.8 million at December 31, 2002. In February, 2003,
additional capital was provided to meet this requirement.
During the year ended December 31, 2002, the Company repurchased an additional
2,897,300 shares of its common stock for a total cost of approximately $91.1
million. On December 31, 2002, approximately $1.3 million of unspent
authorization was available for future purchases. On January 16, 2003, the Board
of Directors authorized a $20.0 million stock repurchase program to begin
immediately. During January 2003, the Company repurchased an additional 85,000
shares of its common stock for a total cost of approximately $2.8 million. On
February 12, 2003, the Board of Directors increased the outstanding unspent
authorization by $31.5 million to a total of $50.0 million.
CONTRACTUAL OBLIGATIONS
The Company is contractually obligated to make payments as follows within the
next five years (in thousands):
Contractual 1 2-3 4-5 After 5
Obligation Total Year Years Years Years
-------------- ------- ------- ------- ------- --------
Short-term borrowings $3,219 $3,219 $ - $ - $ -
Operating leases 8,041 3,659 3,904 478 -
-26-
Operating lease terms range from one to five years with renewal provisions at
the Company's option.
The Company is subject to various contracts with certain health care providers
and pharmacy benefit managers. Such contracts involve payments from the Company,
generally on a monthly basis, in the ordinary course of business and are not
included in the above table.
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 affect 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, 2002 mature according to their contractual terms as follows (in
thousands):
There- Fair Value
Assets 2003 2004 2005 2006 2007 after Total 12/31/02
- ------ -------- ------- ------- ------- ------- -------- -------- --------
Available-for-sale securities $229,879 $10,986 $18,517 $27,784 $39,102 $137,907 $464,175 $478,380
Average interest rate 4.20% 3.83% 4.20% 4.56% 4.20% 4.24%
Held-to-maturity $ 7,391 $ 1,528 $ 962 $ 623 $ 350 $ 10,687 $ 21,541 $ 22,852
Average interest rate 3.74% 5.37% 5.42% 6.12% 5.71% 5.09%
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".
-27-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 2002 and 2001..... 29
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000............................... 30
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000........... 31
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000............................... 32
Notes to Consolidated Financial Statements....................... 33
Report of Ernst & Young LLP Independent Auditors................. 52
Selected Quarterly Financial Data for Fiscal Years 2002 and
2001 (Unaudited)................................................ 53
-28-
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
December 31,
(in thousands except share amounts) 2002 2001
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 7,144 $ 4,510
Investment securities 486,740 368,327
Accounts receivable, net 118,050 105,343
Prepaid expenses, advances and other 37,104 27,372
Deferred income taxes 3,419 216
-------- --------
Total current assets 652,457 505,768
Property and equipment, net 82,683 57,329
Statutory deposits 21,541 17,690
Other assets 8,951 9,207
Deferred income taxes 7,396 4,219
-------- --------
Total assets $773,028 $594,213
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 3,219 $ 3,681
Accounts payable 62,434 47,730
Claims payable, net 297,304 212,010
Income taxes payable 12,751 1,315
Deferred premium revenue 33,901 37,698
Unearned revenue 14,592 1,667
Deferred income taxes 2,262 8,641
-------- --------
Total liabilities 426,463 312,742
-------- --------
Stockholders' equity
Common stock, $0.01 par, 100,000,000 shares authorized, 65,772,502 issued and
46,987,122 outstanding at December 31, 2002; 63,772,502 issued and 47,884,422
outstanding at December 31, 2001 657 637
Additional paid-in capital 466,154 349,595
Stock compensation trust (common stock held in trust),
8,311,590 shares outstanding at December 31, 2002;
9,019,450 shares outstanding at December 31, 2001 (269,296) (204,742)
Treasury stock, 18,785,380 shares at December 31, 2002;
15,888,080 shares at December 31, 2001 (276,205) (185,110)
Accumulated other comprehensive income 9,279 2,528
Retained earnings 415,976 318,563
-------- --------
Total stockholders' equity 346,565 281,471
-------- --------
Total liabilities and stockholders' equity $773,028 $594,213
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-29-
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Operations
Year Ended December 31,
(in thousands except per share amounts) 2002 2001 2000
---------- ---------- ----------
Revenue
Health premium $2,259,600 $1,740,938 $1,414,847
Fee and other 22,416 21,244 21,811
Life and short-term disability premium 9,085 8,066 8,034
Home health services 21,961 22,715 26,304
Investment 14,967 14,772 13,483
---------- ---------- ----------
Total revenue 2,328,029 1,807,735 1,484,479
---------- ---------- ----------
Expense
Medical expense
Referral and ancillary care 931,297 722,711 582,775
Hospitalization 580,181 455,267 373,349
Primary care 90,699 80,408 77,616
Prescription drugs 299,796 227,760 189,388
Reinsurance premiums, net 1,094 1,084 144
---------- ---------- ----------
1,903,067 1,487,230 1,223,272
---------- ---------- ----------
Life and short-term disability claims 3,901 3,589 3,108
---------- ---------- ----------
Home health patient services 22,140 21,950 21,514
---------- ---------- ----------
Administrative expense
Salaries and benefits 163,376 141,430 117,021
Promotion and advertising 6,277 4,668 5,246
Professional services 9,298 6,208 5,568
Licenses and taxes 16,599 13,669 11,586
Facilities, maintenance and supplies 37,860 32,258 29,389
Other (including interest expense of $743, $742 and $1,045) 18,193 12,391 11,017
---------- ---------- ----------
251,603 210,624 179,827
---------- ---------- ----------
Total expense 2,180,711 1,723,393 1,427,721
---------- ---------- ----------
Income before income taxes 147,318 84,342 56,758
Income tax expense (49,905) (27,147) (17,352)
---------- ---------- ----------
Net income $ 97,413 $ 57,195 $ 39,406
========== ========== ==========
Basic earnings per common share $ 2.49 $ 1.48 $ 1.04
========== ========== ==========
Diluted earnings per common share $ 2.34 $ 1.41 $ 1.00
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-30-
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, 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
Exercise of stock options for
2,707,860 shares released from the
Stock Compensation Trust (5,480) 37,038 31,558
Stock option tax benefit 20,467 20,467
Purchase of 2,000,000 shares of MAMSI
common stock to be held in the
Stock Compensation Trust 20 69,880 (69,900) -
Adjustment to market value for shares
held in Stock Compensation Trust 31,692 (31,692) -
Repurchase of 2,897,300 shares of
MAMSI common stock (91,095) (91,095)
Comprehensive income: --------
Net income 97,413 97,413
Other comprehensive income,
net of tax of $3,635 6,751 6,751
------ -------- --------- --------- -------- -------- --------
Total comprehensive income 104,164
--------
Balance, December 31, 2002 $ 657 $466,154 $(269,296) $(276,205) $ 9,279 $415,976 $346,565
====== ======== ========= ========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-31-
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
(in thousands) 2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income $ 97,413 $ 57,195 $ 39,406
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,417 11,008 10,263
Provision for bad debts 421 510 692
(Benefit) provision for deferred income taxes (16,394) 947 (5,280)
Loss (gain) on sale and disposal of assets 156 (1) 356
Stock option tax benefit 20,467 6,984 3,529
Increase in accounts receivable (13,128) (15,899) (7,023)
(Increase) decrease in prepaid expenses, advances and other (9,440) (3,441) 2,139
Increase in accounts payable 14,704 13,222 12,528
Increase in income taxes payable 11,436 7,705 -
Increase in claims payable, net 85,294 33,325 24,282
(Decrease) increase in deferred premium revenue (3,797) 19,204 1,545
Increase (decrease) in unearned revenue 12,925 (1,666) 3,333
-------- -------- --------
Total adjustments 114,061 71,898 46,364
-------- -------- --------
Net cash provided by operating activities 211,474 129,093 85,770
-------- -------- --------
Cash flows used in investing activities:
Purchases of investment securities (735,160) (513,466) (428,185)
Sales and maturities of investment securities 627,345 416,368 365,043
Purchases of property and equipment (36,753) (20,237) (13,297)
Purchases of statutory deposits (4,231) (5,563) (3,394)
Maturities of statutory deposits 100 2,421 2,782
Purchases of other assets (317) (580) (611)
Proceeds from sale of assets 175 160 377
-------- -------- --------
Net cash used in investing activities (148,841) (120,897) (77,285)
-------- -------- --------
Cash flows used in financing activities:
Principal payments on notes payable - - (14)
(Decrease) increase in short-term borrowings (462) 681 (558)
Exercise of stock options 31,558 40,058 24,930
Purchase of treasury stock (91,095) (49,472) (31,521)
-------- -------- --------
Net cash used in financing activities (59,999) (8,733) (7,163)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,634 (537) 1,322
Cash and cash equivalents at beginning of year 4,510 5,047 3,725
-------- -------- --------
Cash and cash equivalents at end of year $ 7,144 $ 4,510 $ 5,047
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-32-
Mid Atlantic Medical Services, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mid Atlantic Medical Services, Inc. is a holding company whose subsidiaries are
active in managed health care and other life and health insurance related
activities. MAMSI's principal markets are currently in Maryland, Virginia, the
District of Columbia, Delaware, West Virginia, North Carolina and Pennsylvania.
MAMSI and its subsidiaries (collectively referred to as "MAMSI" or the
"Company") offer a broad range of health care coverage and related ancillary
products and deliver these services through health maintenance organizations
("HMOs"), a preferred provider organization ("PPO"), and a life and health
insurance company. MAMSI also owns a home health care company, a home infusion
services company, a hospice company, a coordination of benefits identification
and collections company and maintains a partnership interest in an outpatient
surgery center.
MAMSI delivers managed health care services principally through HMOs. The HMOs,
MD- Individual Practice Association, Inc. ("M.D. IPA"), Optimum Choice,Inc.
("OCI"), 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.
Alliance Recovery Services, LLC ("ARS") provides coordination of benefits
identification and collection services to Third Party Administrators ("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.
-33-
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 recipients (through 2000). For the years ended December 31, 2002, 2001
and 2000, approximately 14%, 10% 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 15), and approximately 13%, 15%
and 14%, respectively, was derived from Maryland and Virginia state and local
government agencies which is included in the Commercial Risk segment (as
described in Note 15).
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.
The Company periodically reviews its debt and equity securities to determine
whether a decline in fair value below the carrying value exists and is
other-than-temporary. If a decline in market value is noted and considered
other-than-temporary, the cost basis or carrying amount of the security is
written down to fair value and the amount of the write-down is included in
earnings.
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 companies
is recorded as goodwill and is classified in the consolidated balance sheets as
an other asset.
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 after
December 15, 2001. Statement No. 142 requires goodwill to be tested for
impairment on an annual basis and between annual tests in certain circumstances,
and written down when impaired, rather than being amortized as previous
accounting standards required.
-34-
The Company adopted this Statement January 1, 2002, at which time amortization
of the remaining book value of goodwill ceased. The Company is required to
perform an annual impairment review of its goodwill balance beginning with a
recurring annual measurement date. The Company has chosen October 1 to be its
annual measurement date for its impairment review. The Company considers a
discounted cash flow analysis, which includes profitability information,
including estimated future operating results, potential savings to the Company,
trends and other available information, in assessing whether the carrying value
of intangible assets can be recovered. Under Statement No. 142, goodwill
impairment is deemed to exist if the carrying value of a reporting unit exceeds
its estimated fair value. As of December 31, 2002, the Company's estimated fair
value exceeded the carrying value of its goodwill and therefore, no impairment
to its goodwill was identified. As the Company does not have a material amount
of goodwill, the adoption of Statement No. 142 did not have a significant effect
on the consolidated financial statements.
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 excluding co-payments from
members, 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.
-35-
The Company has entered into certain long-term medical services related 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 PBM, Merck, arose over its 2000 guarantee which involved
approximately $41.0 million which had been recorded in the Company's financial
statements as a reduction of medical expense over the three years of the
contract. At December 31, 2001, approximately $28.1 million was also reported in
the balance sheet as a reduction of claims payable. On April 24, 2002, the
Company reached a settlement of its dispute with Merck. Under the terms of the
settlement, the Company has received payment of $41.0 million. In addition to
the 2000 guarantee, the Company's former PBM contract provided for a
risk-sharing arrangement for the years 2001 and 2002. The 2001 risk-sharing
arrangement is in the process of being finalized and settled. It is anticipated
that the 2002 risk-sharing arrangement will be settled in July, 2003. As of
December 31, 2002, the Company has recorded what it believes to be a reasonable
estimate of the results of these risk-share arrangements.
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 affect the
Company's earnings in future periods. For the years ended December 31, 2002,
2001 and 2000, the Company estimates that it over-estimated or (under-estimated)
its claims reserves by $31,294,000, $7,701,000 and $(4,407,000), respectively.
See Note 5.
Premium deficiency reserves, if any, are recognized when it is probable that the
expected future health care cost of a group of existing contracts (and the costs
necessary to maintain those contracts) will exceed future anticipated premiums,
investment income and reinsurance recoveries on those contracts. The Company
groups contracts consistent with its underwriting. The Company evaluates the
need for premium deficiency reserves on a quarterly basis. An immaterial amount
of reserves was required at December 31, 2002 and 2001.
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 medical expense and, in the consolidated balance sheets, such amounts are
classified as a reduction of 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.
-36-
EARNINGS PER COMMON SHARE
Basic earnings per common share are calculated using 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 11) are excluded from the
calculation of basic and diluted earnings per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents - The carrying amount reported in the consolidated
balance sheets approximates fair value.
Investment securities - Fair values are based on quoted market prices.
Statutory deposits - Fair values are based on quoted market prices.
Short-term borrowings - The carrying amount reported in the consolidated balance
sheets approximates fair value.
ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
STOCK OPTION PLANS
On December 31, 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("Statement 148"). Statement 148 amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"), to provide
alternative methods of transition for an entity that changes to the fair value
method of accounting for stock-based employee compensation. Statement 148 does
not amend Statement 123 to require companies to account for stock-based employee
awards using the fair value method.
As permitted by Statement 123, as amended by Statement 148, 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. See Note 10 for further
information on the Company's stock option plans.
RECLASSIFICATIONS
Certain balances in the 2001 and 2000 financial statements have been
reclassified to conform with the 2002 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
-37-
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.
-38-
The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 2002 and 2001:
-----------------------------------------------------
2002
-----------------------------------------------------
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 $ 2,169 $ 266 $ - $ 2,435
Obligations of states and political subdivisions 256,777 13,950 11 270,716
Municipal bond funds 201,864 - - 201,864
Accrued interest 3,365 - - 3,365
-------- ------- ------- --------
Debt securities 464,175 14,216 11 478,380
Equity securities 8,290 141 71 8,360
-------- ------- ------- --------
Investment securities $472,465 $14,357 $ 82 $486,740
======== ======= ======= ========
Held-to maturity securities
U.S. Treasury securities and obligations
of U.S. government agencies $ 12,007 $ 917 $ - $ 12,924
Obligations of states and political subdivisions 9,284 394 - 9,678
Other investments 250 - - 250
-------- ------- ------- --------
Statutory deposits $ 21,541 $ 1,311 $ - $ 22,852
======== ======= ======= ========
-----------------------------------------------------
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
======== ======= ======= ========
-39-
For the years ended December 31, 2001 and 2000, marketable equity
available-for-sale securities with a fair value at the date of sale of $900,000
and $317,000, respectively, were sold. The gross realized gains on such sales
totaled $18,000 and $71,000, and the gross realized losses totaled $17,000 and
$-0- for each of the respective periods. There were no sales in 2002. 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, 2002, 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 $229,879 $230,382
Due after one year through five years 128,205 136,598
Due after five years through ten years 102,921 108,230
Due after ten years 3,170 3,170
-------- --------
Debt securities 464,175 478,380
Equity securities 8,290 8,360
-------- --------
$472,465 $486,740
======== ========
Held-to-maturity
Due in one year or less $ 7,391 $ 7,421
Due after one year through five years 8,362 9,016
Due after five years through ten years 5,788 6,415
Due after ten years - -
-------- --------
$ 21,541 $ 22,852
======== ========
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
-------------------------
(in thousands) 2002 2001
-------------------------
Premium and fee accounts $ 95,463 $ 84,969
Home health service accounts 6,810 8,141
Medical recoverables 4,059 5,165
Pharmacy rebates 15,094 9,009
Other 3,692 4,706
Less: allowance for doubtful accounts (7,068) (6,647)
-------- --------
$118,050 $105,343
======== ========
Medical recoverables consist of refunds identified on paid claims, and pharmacy
rebates consist of amounts due for contractual arrangements with the Company's
PBM. These amounts have been recorded as a reduction of medical expense in the
consolidated statements of operations. Other receivables consist primarily of
amounts due for reinsurance recoveries, interest accrued on statutory deposits
and amounts related to contractual arrangements with laboratory service
providers.
-40-
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
------------------------
(in thousands) 2002 2001
------------------------
Land, buildings and improvements $ 69,769 $ 44,416
Computer equipment and software 48,682 42,345
Office furniture and equipment 30,200 26,138
Leasehold improvements 4,155 3,856
-------- -------
152,806 116,755
Less: accumulated depreciation and
amortization (70,123) (59,426)
-------- -------
$ 82,683 $ 57,329
======== ========
NOTE 5 - CLAIMS PAYABLE
The following tables show the components of claims payable for the years ended
December 31, 2002, 2001 and 2000 (in thousands):
--------------------------------
2002 2001 2000
--------------------------------
Reserve for incurred but
not reported claims $247,983 $206,526 $165,806
Claims received, not yet
paid and other items 49,321 33,598 27,776
Amortized value of
pharmacy cost guarantee
related to the year 2000 - (28,114) (14,897)
-------- -------- --------
Total claims payable $297,304 $212,010 $178,685
======== ======== ========
The following table shows the components of the change in claims payable for the
years ended December 31, 2002, 2001 and 2000 for each year's Dates of Service
("DOS") (in thousands except for percentages):
2001 &
For the Year Ended December 31, 2002: Life & 2002 Prior
Medical STD Total DOS DOS
------------------------------------ -----------------------
Beginning of the year $ 210,700 $ 1,310 $ 212,010 $ - $ 212,010
Components of medical expense:
Estimated cost incurred 1,934,361 3,901 1,938,262 1,938,262 -
Estimated redundancy (31,294) - (31,294) - (31,294)
---------- -------- ---------- ---------- ---------
1,903,067 3,901 1,906,968 1,938,262 (31,294)
Payments for medical expense (1,818,046) (3,628) (1,821,674) (1,652,538) (169,136)
---------- -------- ---------- ---------- ---------
End of the year $ 295,721 $ 1,583 $ 297,304 $ 285,724 $ 11,580
========== ======== ========== ========== =========
Prior year redundancy as a
percentage of current year
medical expense 1.64%
-41-
For the Year Ended December 31, 2001: 2000 &
Life & 2001 Prior
Medical STD Total DOS DOS
----------------------------------- -----------------------
Beginning of the year $ 177,435 $ 1,250 $ 178,685 $ - $ 178,685
Components of medical expense:
Estimated cost incurred 1,494,931 3,589 1,498,520 1,498,520 -
Estimated redundancy (7,701) - (7,701) - (7,701)
---------- -------- ---------- ---------- ---------
1,487,230 3,589 1,490,819 1,498,520 (7,701)
Payments for medical expense (1,453,965) (3,529) (1,457,494) (1,277,361) (180,133)
---------- -------- ---------- ---------- ---------
End of the year $ 210,700 $ 1,310 $ 212,010 $ 221,159 $ (9,149)
========== ======== ========== ========== =========
Prior year redundancy as a
percentage of current year
medical expense 0.52%
For the Year Ended December 31, 2000:
1999 &
Life & Total 2000 Prior
Medical STD Total DOS DOS
------------------------------------ ------------------------
Beginning of the year $ 153,237 $ 1,166 $ 154,403 $ - $ 154,403
Components of medical expense:
Estimated cost incurred 1,218,865 3,108 1,221,973 1,221,973 -
Estimated deficiency 4,407 - 4,407 - 4,407
---------- ------- ---------- ---------- ---------
1,223,272 3,108 1,226,380 1,221,973 4,407
Payments for medical expense (1,199,074) (3,024) (1,202,098) (1,048,160) (153,938)
---------- ------- ---------- --------- ---------
End of the year $ 177,435 $ 1,250 $ 178,685 $ 173,813 $ 4,872
========== ======= ========== ========== =========
Prior year deficiency as a
percentage of current year
medical expense (0.36%)
The Company does not track the redundancy/(deficiency) related to its life and
short-term disability business. Any actual redundancy/(deficiency) would be
immaterial to the tables above and the Company's financial statements.
NOTE 6 - 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, 2002, 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 $24.1
million. Borrowings bear interest at a rate based on Libor plus .65% and are
secured by certain cash balances and investment securities. At December 31,
2002, approximately $3.2 million was outstanding on one of the lines-of-credit
at an interest rate of 2.93% and approximately $614,000 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 2002, 2001 and 2000 was approximately $770,000,
$1,267,000 and $444,000, respectively.
-42-
NOTE 7 - 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 (whichever is less), or 80% of the eligible in and out of service area
acute care medical expenses (if not paid at a fixed fee) 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. There is 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, 2002, 2001
and 2000 were approximately $2,866,000, $2,319,000 and $2,044,000, respectively.
In the consolidated statements of operations, reinsurance premiums are shown net
of the related recoveries. The Company is contingently liable for its reinsured
losses to the extent that the reinsurance company cannot meet its obligations
under the reinsurance contracts.
NOTE 8 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows as of December
31:
--------------------------
(in thousands) 2002 2001
--------------------------
Deferred tax liabilities:
Accelerated depreciation $ 1,407 $ 1,071
Receivable valuation adjustments - 9
Vendor guarantee revenue 3,183 10,739
Unrealized investment gains 4,996 1,361
------- -------
Total deferred tax liabilities 9,586 13,180
------- -------
Deferred tax assets:
Accrued medical expenses 1,769 1,559
Premium revenue adjustments 2,661 2,639
Receivable valuation adjustments 658 -
State net operating losses 4,152 4,144
Accrued pension expenses 7,563 3,864
Accrued vacation 324 400
Advanced revenue 4,623 -
Other 466 146
------- -------
Total deferred tax assets 22,216 12,752
Valuation allowance for deferred tax assets (4,077) (3,778)
------- -------
Net deferred tax assets 18,139 8,974
------- -------
$ 8,553 $(4,206)
======= =======
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 3,419 $ 216
Non-current assets - deferred income taxes 7,396 4,219
Current liabilities - deferred income taxes (2,262) (8,641)
------- -------
Net deferred tax asset (liability) $ 8,553 $(4,206)
======= =======
-43-
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
---------------------------------------
(in thousands) 2002 2001 2000
---------------------------------------
Current:
Federal $ 65,405 $ 25,579 $ 22,041
State 894 621 591
--------- --------- ---------
Total current 66,299 26,200 22,632
--------- --------- ---------
Deferred:
Federal (15,683) 1,771 (5,019)
State (711) (824) (261)
--------- --------- ---------
Total deferred (16,394) 947 (5,280)
--------- --------- ---------
$ 49,905 $ 27,147 $ 17,352
========= ========= =========
The Company's tax provision differs from the statutory rate for Federal income
taxes for the years ended December 31 as follows:
-------------------------------------
(in thousands) 2002 2001 2000
-------------------------------------
Statutory rate (35%) $51,561 $29,520 $19,866
Tax-exempt interest (3,314) (2,870) (2,067)
State income taxes, net of Federal benefit 474 22 (436)
Increase in valuation allowance for
deferred tax assets 299 27 706
Other non-deductible items 451 529 574
Tax credits (191) (191) (664)
Other, net 625 110 (627)
------- ------- -------
$49,905 $27,147 $17,352
======= ======= =======
Total tax deposits made by the Company in 2002, 2001 and 2000 were approximately
$34,750,000, $11,750,000 and $19,255,000, respectively.
At December 31, 2002, the Company has state net operating loss carryforwards of
$94,399,000 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 it is more likely than not that all or a portion of a
deferred tax asset will not be realized. At December 31, 2002 and 2001, the
Company recorded a valuation allowance related to certain state net operating
loss carryforwards.
-44-
NOTE 9 - RELATED PARTIES
For the years ended December 31, 2002, 2001 and 2000, certain members of the
Boards of Directors of MAMSI and affiliated corporations who are also
participating physicians provided medical services to enrollees totaling
$4,533,000, $5,414,000 and $4,954,000, respectively, which represents
approximately .4%, .7% and .8% in 2002, 2001 and 2000, 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 10 - 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 50% of their
pretax earnings annually up to a maximum contribution of $11,000 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 2002, 2001 and 2000, the Company's contribution to
the 401(k) plan aggregated $1,359,000, $1,355,000 and $1,388,000, respectively.
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 $10,423,000,
$5,783,000 and $2,866,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
STOCK OPTION PLANS
The Company follows APB 25 under which no compensation expense has been
recognized for financial statement purposes in connection with its stock option
plans. Pro forma information regarding net income and earnings per share are
required by Statement 123, as amended by Statement 148, 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 2002, 2001 and 2000, respectively:
risk- free interest rates of 3.9%, 4.8% and 6.6%; volatility factors of the
expected market price of the Company's common stock of .53, .65 and .65 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.
-45-
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. In accordance with
Statement 148, the following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Statement 123 (in thousands except per share amounts):
-------------------------------
2002 2001 2000
-------------------------------
Net income, as reported $97,413 $57,195 $39,406
Basic earnings per share, as reported 2.49 1.48 1.04
Diluted earnings per share, as reported 2.34 1.41 1.00
Stock-based compensation, net of tax $ 9,218 $ 7,198 $ 5,386
Basic earnings per share .24 .19 .14
Diluted earnings per share .22 .18 .14
Pro forma net income $88,195 $49,997 $34,020
Pro forma basic earnings per share 2.25 1.29 .90
Pro forma diluted earnings per share 2.12 1.23 .86
In years 1990 through 1996, and years 1998 through 2002, 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 9,000,000. 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:
----------------------- ----------------------- -----------------------
2002 2001 2000
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
2002 Exercise 2001 Exercise 2000 Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding, January 1 7,148,763 $12.45 7,978,037 $11.59 9,524,599 $13.35
Granted 2,169,070 $28.29 2,526,290 $16.46 3,100,763 $ 9.53
Exercised (2,707,860) $11.65 (3,000,306) $13.35 (1,991,094) $12.52
Forfeited (208,252) $18.69 (355,258) $14.02 (2,656,231) $14.76
--------- --------- ---------
Outstanding, December 31 6,401,721 $17.95 7,148,763 $12.45 7,978,037 $11.59
========= ========= =========
Available for grant, end of year 1,249,017 1,251,180 1,554,976
Exercisable, end of year 3,638,899 3,977,323 4,474,207
Option price range for exercised
shares $5.00-$28.20 $5.06-$20.63 $5.06-$17.13
Option price range at end of year $5.37-$42.08 $5.00-$23.05 $5.00-$21.00
Weighted average fair value of
options granted during year $11.06 $7.61 $4.10
-46-
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- --------------------------------
Outstanding Weighted Average Exercisable
Range of as of Remaining Weighted Average as of Weighted Average
Exercise Prices 12/31/2002 Contractual Life Exercise Price 12/31/2002 Exercise Price
- ------------------- ----------- ---------------- ---------------- ----------- ----------------
$ 5.01 - $ 10.00 1,854,635 2.0 $ 8.74 1,600,885 $ 8.68
$10.01 - $ 15.00 311,494 1.0 $12.59 273,309 $12.45
$15.01 - $ 20.00 2,104,611 3.1 $16.56 1,302,531 $16.73
$20.01 - $ 25.00 826,660 4.0 $22.67 406,124 $22.68
$25.01 - $ 30.00 294,411 4.1 $25.40 950 $26.46
$30.01 - $ 35.00 978,040 4.4 $33.27 55,100 $33.30
$35.01 - $ 40.00 28,630 4.8 $36.67 - $ -
$40.01 - $ 45.00 3,240 4.8 $41.61 - $ -
--------- ---------
6,401,721 3.1 $17.95 3,638,899 $13.78
========= =========
INCENTIVE COMPENSATION PLAN
The Company has an incentive compensation plan whereby managers receive bonuses
based upon improvement in the annual operating results of the Company. During
2002, 2001 and 2000, incentive compensation expense was approximately
$11,000,000, $9,000,000 and $7,000,000, respectively, which was paid to
employees in February 2003, 2002 and 2001, respectively.
NOTE 11 - COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
-----------------------------------------
2002 2001 2000
-----------------------------------------
Numerator:
Net income $97,413,000 $57,195,000 $39,406,000
Denominator:
Denominator for basic earnings per share
- weighted average shares 39,171,996 38,672,147 38,052,746
Dilutive securities - employee stock options 2,485,013 1,829,939 1,288,291
Denominator for diluted earnings per share
- adjusted weighted average shares 41,657,009 40,502,086 39,341,037
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 2002, the SCT purchased an additional 2,000,000 of the Company's common
stock for approximately $69.9 million. The existing promissory note has been
modified to reflect these purchases.
-47-
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 12 - COMMITMENTS AND CONTINGENCIES
The Company leases office space under the terms of non-cancelable operating
leases that expire at various dates through 2007. Rent expense relating to these
operating leases approximated $4,253,000, $4,393,000 and $3,470,000 in 2002,
2001 and 2000, respectively.
Future minimum lease commitments under non-cancelable operating leases are as
follows for the years ended December 31 (in thousands):
Year Amount
- ---- -------
2003 $ 3,659
2004 2,668
2005 1,236
2006 293
2007 185
-------
$ 8,041
=======
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. In the normal course of business, OPM
audits health plans with which it contracts to verify, among other things, that
the premiums calculated and charged to OPM are established in compliance with
the best community rating guidelines established by OPM. OPM typically audits
plans once every five or six years, and each audit covers the prior five or six
year period. While the government's initial on-site audits are usually followed
by a post-audit briefing as well as a preliminary audit report in which the
government indicates its preliminary results, final resolution and settlement of
the audits can take two to three years. 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.
OPM has not yet audited 2000-2002.
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 affect
the Company's consolidated financial position or results of operations.
NOTE 13 - 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.
-48-
Minimum required levels of Risk Based Capital-Company Action Level ("RBC CAL")
and statutory net worth and actual statutory net worth as of December 31 are as
follows:
2002 2001
------------------------------------------ -----------------------------------------
Required Actual Required Actual
RBC CAL Net Worth Net Worth RBC CAL Net Worth Net Worth
----------- ----------- ------------ ----------- ---------- ------------
M.D. IPA $13,500,000 $ 3,000,000 $ 50,800,000 $ 9,700,000 $3,000,000 $ 40,500,000
OCI 50,900,000 3,000,000 94,000,000 39,500,000 3,000,000 59,800,000
MLH 43,600,000 1,125,000 175,200,000 35,600,000 1,125,000 108,280,000
OCCI 3,800,000 2,500,000 3,400,000 2,500,000 2,500,000 7,100,000
OCIPA 6,000 1,500,000 2,100,000 17,000 1,500,000 2,100,000
M.D. IPA, OCI, OCCI, OCIPA and MLH were in compliance with state depository
rules at December 31, 2002 and 2001. OCCI was in compliance with its working
capital requirement of $1.6 million at December 31, 2002 and 2001. M.D. IPA,
OCI, OCIPA and MLH exceeded the highest RBC requirements at December 31, 2002
and 2001. OCCI failed to meet its RBC CAL of $3.8 million at December 31, 2002.
In February, 2003, additional capital was provided to meet this requirement.
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 annual 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 14 - 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, 2002, approximately 24% of premium and home health service
receivables were due from federal government agencies. The Company performs
ongoing credit evaluations of customers and generally does not require
collateral.
NOTE 15 - 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
-49-
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.
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, 2002:
Revenue from external customers $2,259,600 $22,416 $31,046 $2,313,062
Segment pretax profit (loss) 124,064 10,311 (1,575) 132,800
---------------------------------------------------
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
The sources of revenue included in the All Others category are composed
primarily of Medicaid, life and STD and home health. The Company ended its
participation in Medicaid in 2000. All revenue is generated within the United
States.
-50-
--------------------------------------------
(in thousands) 2002 2001 2000
--------------------------------------------
Revenues
Total external revenues for reportable segments $2,282,016 $1,762,182 $1,426,721
Other revenues 31,046 30,781 44,275
Investment revenue not allocated 14,967 14,772 13,483
---------- ---------- ----------
Total consolidated revenues $2,328,029 $1,807,735 $1,484,479
========== ========== ==========
Pretax Profit
Total profit from reportable segments $ 134,375 $ 71,070 $ 41,679
Other (loss) profit (1,575) (1,057) 2,135
Net investment income not allocated 14,518 14,329 12,944
---------- ---------- ----------
Total consolidated pretax profit $ 147,318 $ 84,342 $ 56,758
========== ========== ==========
NOTE 16 - COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income related to changes in
unrealized gains on securities, net-of-tax, were as follows:
-----------------------------------------
(in thousands) 2002 2001 2000
-----------------------------------------
Unrealized holding gains arising during
period $ 6,781 $ 722 $ 2,887
Less: Reclassification adjustment for
net gains included in net income 30 6 62
------- ------- -------
Net unrealized gains recognized in
other comprehensive income $ 6,751 $ 716 $ 2,825
======= ======= =======
NOTE 17 - FOURTH QUARTER ADJUSTMENTS
The Company made adjustments in the fourth quarter of 2002 resulting from the
determination that certain estimates relating to claims flow patterns that were
assumed in establishing the IBNR liability for medical claims during 2002 should
be revised to reflect faster receipt of claims by the Company. This change in
estimate reduced accounts receivable and premium revenue by $3,000,000 and
reduced claims payable and medical expenses by $24,000,000. Net income increased
by $12,789,000 and fully diluted earnings per share by $.31.
-51-
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, 2002 and 2001, 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, 2002. Our audits also included the financial statement schedule listed in
the Index at Item 15(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 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, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, 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 10, 2003
-52-
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 2002 AND 2001
2002 2002 2002 2002 2001 2001 2001 2001
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands except share amounts)
(unaudited)
Revenue $550,163 $575,263 $595,467 $607,136 $424,661 $450,475 $459,667 $472,932
Expense 522,489 547,999 561,830 548,393 405,342 432,656 437,049 448,346
Income before income taxes 27,674 27,264 33,637 58,743 19,319 17,819 22,618 24,586
Net income 18,853 18,423 22,523 37,614 12,882 11,986 15,036 17,291
Basic earnings per share .48 .47 .57 .96 .34 .31 .38 .45
Diluted earnings per share .45 .44 .54 .91 .32 .30 .36 .43
The Company made adjustments in the fourth quarter of 2002 resulting from the
determination that certain estimates relating to claims flow patterns that were
assumed in establishing the IBNR liability for medical claims during 2002 should
be revised to reflect faster receipt of claims by the Company. This change in
estimate reduced accounts receivable and premium revenue by $3,000,000 and
reduced claims payable and medical expenses by $24,000,000. Net income increased
by $12,789,000 and fully diluted earnings per share by $.31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-53-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
"Directors and Executive Officers" section of the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 28, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
"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 28, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the
"Stock Owned by Management" and "Principal Stockholders" sections of the Proxy
Statement for MAMSI's annual meeting of shareholders to be held on April 28,
2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
"Executive Management Compensation" section of the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 28, 2003.
ITEM 14. CONTROLS AND PROCEDURES
Based on the evaluation by the Chief Executive Officer and Chief Financial
Officer of the Company as of a date within 90 days of the filing date of this
annual report, the Company's disclosure controls and procedures are adequately
designed to ensure that the information required to be included in this report
has been recorded, processed, summarized and reported on a timely basis. There
have not been any significant changes in the Company's internal controls or in
other factors that could significantly affect these controls and there have been
no corrective actions taken with regard to significant deficiencies and material
weaknesses subsequent to the date of such officers' evaluation.
-54-
PART IV
ITEM 15. 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, 2002 and 2001 ... 29
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 ............................. 30
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000 ......... 31
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 ............................. 32
Notes to Consolidated Financial Statements ..................... 33
Report of Ernst & Young LLP Independent Auditors ............... 52
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
2002, 2001 and 2000 ..................................... 56
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.
-55-
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, 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
======== ======== ======== ======== =======
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts - accounts receivable
$ 6,647 $ 186 $ 235 (1) $ $ 7,068
======== ======== ======== ======== =======
Valuation allowance - deferred tax assets
$ 3,778 $ 299 $ $ $ 4,077
======== ======== ======== ======== =======
(1) The changes to the allowance were charged to revenue.
-56-
(a)(3)
EXHIBITS
See the Exhibit Index on pages 63-66 of this Form 10-K.
(b) REPORTS ON FORM 8-K
None.
-57-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI")
(Registrant)
By: /s/ Mark D. Groban, M.D. 3/28/2003
--------------------------------------------------
Mark D. Groban, M.D. Date
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Howard M. Arnold 3/28/2003
--------------------------------------------------
Howard M. Arnold Date
Director
By: /s/ Thomas P. Barbera 3/28/2003
--------------------------------------------------
Thomas P. Barbera Date
Vice Chairman of the Board, President, Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ Francis C. Bruno, M.D. 3/28/2003
--------------------------------------------------
Francis C. Bruno, M.D. Date
Director
By: /s/ Raymond H. Cypess, D.V.M., Ph.D. 3/28/2003
--------------------------------------------------
Raymond H. Cypess, D.V.M., Ph.D. Date
Director
By: /s/ John W. Dillon 3/28/2003
--------------------------------------------------
John W. Dillon Date
Director
By: /s/ Robert E. Foss 3/28/2003
--------------------------------------------------
Robert E. Foss Date
Senior Executive Vice President and Chief Financial Officer
and Director
(Principal Financial Officer)
By: /s/ Mark D. Groban, M.D. 3/28/2003
--------------------------------------------------
Mark D. Groban, M.D. Date
Chairman of the Board and Director
By: /s/ Christopher E. Mackail 3/28/2003
--------------------------------------------------
Christopher E. Mackail Date
Senior Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ John P. Mamana, M.D. 3/28/2003
--------------------------------------------------
John P. Mamana, M.D. Date
Director
-58-
By: /s/ Edward J. Muhl 3/28/2003
--------------------------------------------------
Edward J. Muhl Date
Director
By: /s/ Janet L. Norwood 3/28/2003
--------------------------------------------------
Janet L. Norwood, Ph.D. Date
Director
By: /s/ John A. Paganelli 3/28/2003
--------------------------------------------------
John A. Paganelli Date
Director
By: /s/ Ivan R. Sabel 3/28/2003
--------------------------------------------------
Ivan R. Sabel, CPO Date
Director
By: /s/ James A. Wild 3/28/2003
--------------------------------------------------
James A. Wild Date
Director
-59-
CERTIFICATION
I, Thomas P. Barbera, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Mid Atlantic Medical
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and to the audit committee
of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Thomas P. Barbera
----------------------
Thomas P. Barbera
President and Chief Executive Officer
-60-
CERTIFICATION
I, Robert E. Foss, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Mid Atlantic Medical
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and to the audit committee
of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Robert E. Foss
----------------------
Robert E. Foss
Senior Executive Vice President and
Chief Financial Officer
-61-
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Mid Atlantic Medical Services, Inc.
("Company") on Form 10-K for the period ended December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof ("Report"), the
undersigned, in the capacity and on the date indicated below, hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: March 28, 2003
/s/ Thomas P. Barbera /s/ Robert E. Foss
----------------------- ------------------------
Thomas P. Barbera Robert E. Foss
President and Senior Executive Vice President and
Chief Executive Officer Chief Financial Officer
-62-
(a)(3) 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)
10.67 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)
10.991 Form of Agreement between MAMSI and Employees Granting Options
under the 1999 Non-Qualified Stock Option Plan...........................(14)
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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.....................................(21)
10.43 Form of Agreement between MAMSI and Employees Granting Options
under the 2002 Non-Qualified Stock Option Plan...........................(21)
10.44 Form of Agreement between MAMSI and Non-Employee Directors
Granting Options under the 2002 Non-Qualified Stock Option Plan..........(21)
10.45 Common Stock Purchase Agreement dated
September 6, 2002........................................................(22)
10.46 Allonge to Replacement Promissory Note dated
September 6, 2002........................................................(22)
10.47 2003 Non-Qualified Stock Option Plan.....................................
10.48 Form of Agreement between MAMSI and Employees Granting Options
under the 2003 Non-Qualified Stock Option Plan...........................
10.49 Form of Agreement between MAMSI and Non-Employee Directors
Granting Options under the 2003 Non-Qualified Stock Option Plan..........
10.50 Plan for Deferral of Selected Executives' Compensation...................
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.
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(3) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1993.
(4) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1994.
(5) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act on Form 10-Q for the quarterly
period ended March 31, 1995.
(6) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1995.
(7) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q/A for the
quarterly period ended September 30, 1996.
(8) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1996.
(9) Incorporated by reference to exhibits filed with the Company's Quarterly
Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended March 31, 1997.
(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.
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(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.
(21) 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, 2001.
(22) 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, 2002.
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