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1
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 [FEE REQUIRED]
For fiscal year ended DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-13340
Mid Atlantic Medical Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1481661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 Taft Court, Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
(301) 294-5140
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock, $0.01 par value The New York Stock
per share. Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 28, 1996: Approximately $974 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.
46,595,187 shares of common stock as of February 28, 1996
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders
to be held on April 15, 1996 is incorporated by reference into Part III
of this Form 10-K.
2
FORM 10-K
INDEX
ITEM NO. DISCLOSURE REQUIRED PAGE
PART I
Item 1 Business .............................................. 3
Item 2 Properties ............................................ 14
Item 3 Legal Proceedings ..................................... 15
Item 4 Submission of Matters to a Vote of Security Holders ... 15
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 16
Item 6 Selected Financial Data .............................. 17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation ................. 18
Item 8 Financial Statements and Supplementary Data .......... 24
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 45
PART III
Item 10 Directors and Executive Officers of the Registrant ... 46
Item 11 Executive Compensation ............................... 46
Item 12 Security Ownership of Certain Beneficial Owners
and Management ..................................... 46
Item 13 Certain Relationships and Related Transactions ....... 46
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 47
3
PART I
ITEM 1. BUSINESS
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company for
subsidiaries active in managed health care and other life and health
insurance related activities. MAMSI and its subsidiaries (the
"Company") have developed a broad range of managed health care and
related ancillary products and deliver these services through health
maintenance organizations ("HMOs"), preferred provider organizations
("PPOs"), a life and health insurance company and home health care and
home infusion services companies. The Company also has 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 nonstock
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
nonstock corporation in 1979 to provide physician and other medical
services to M.D. IPA enrollees. PHP-MD operated as a non-profit
organization until it amended its articles of incorporation and was
reorganized into a stock corporation in 1984.
HEALTH MAINTENANCE ORGANIZATIONS
MAMSI's primary business is the delivery of managed health care through
its HMOs. MAMSI currently offers HMO coverage through three licensed
HMO subsidiaries - M.D. IPA, Optimum Choice, Inc. ("OCI"), and Optimum
Choice of the Carolinas, Inc. ("OCCI").
M.D. IPA became a licensed HMO in Maryland in 1981 and in Virginia in
1985. M.D. IPA's present service area (which includes all geographic
areas where the HMO has received regulatory approval to provide health
care services) includes the entire state of Maryland, the District of
Columbia and most counties and cities in Virginia including the Northern
Virginia, Richmond/Tidewater and Roanoke areas ("HMO Service Area"). In
addition to serving governmental entities, M.D. IPA generally provides
coverage to the larger commercial group market.
OCI, a non-Federally qualified HMO, became a licensed HMO in Maryland in
1988, in Virginia in 1990, in Delaware in 1993 and in West Virginia in
1994. OCI generally operates within the small business market segment,
which is comprised of employers with 50 or fewer employees and also
covers Medicaid and Medicare recipients. OCI's present service area
includes the entire states of Maryland and Delaware, the District of
Columbia, most counties and cities in Virginia, and certain areas of
West Virginia.
OCCI, a non-Federally qualified HMO, became a licensed HMO in North
Carolina in 1995. OCCI operates in both the small and large group
commercial market. OCCI's present service area includes certain areas
of North Carolina.
The Company is currently seeking an HMO license in South Carolina and
Pennsylvania.
GENERAL
HMOs provide or arrange for the provision of comprehensive medical care
(including physician and hospital care) to enrollees for a fixed,
prepaid premium regardless of the amount of care provided. Enrollees
generally receive care from participating primary care physicians
("PCPs") who, as required, refer enrollees to participating specialists
and hospitals. HMOs require patients to utilize participating
physicians and other participating health care providers. This allows
HMOs to negotiate favorable rates and control utilization to a greater
extent than traditional health insurers, while monitoring and enhancing
the quality of care provided to enrollees.
4
The goal of an HMO is to combine quality health care with management
controls designed to encourage efficient and economical use of health
care services. Such controls include monitoring physician services,
hospital admissions and lengths of stay and maximizing the use of non-
hospital based medical services. Because an HMO generally receives
fixed monthly premiums from its enrollees regardless of the health care
services provided, an HMO has an incentive to maintain the health of its
enrollees, while carefully monitoring expenses through the
implementation of various cost control strategies and effective
management.
MAMSI's HMO provider network is organized as an IPA. Under the IPA
model, the HMO contracts with a broadly dispersed group of physicians to
provide medical services to enrollees in the physicians' own offices and
in hospitals; the physicians are generally paid on a capitated or a
negotiated fee-for-service basis. Physicians may contract directly with
the HMO or through a designated organization that, in turn, contracts
with the HMO.
HMOs have been operating in the United States for more than 50 years.
Their popularity has markedly increased since the early 1970s in
response to rapidly escalating health care costs and the enactment of
the Federal Health Maintenance Organization Act of 1973 ("HMO Act").
The HMO Act and its regulations grant "qualified" status to HMOs meeting
comprehensive standards. Although qualification status is not required,
its "mandate" provisions originally provided a marketing advantage
because employers with more than 25 employees that offered health
benefits to employees were generally required to offer employees a
Federally qualified HMO if mandated by a Federally qualified HMO
operating within the relevant service area. Moreover, if a number of
such HMOs mandated such an employer, the employer was required to offer
its employees at least one Federally qualified HMO organized as a staff
or group model and at least one Federally qualified HMO organized as an
IPA, network or hybrid model. The advantages of mandating as described
above ceased on October 24, 1995 because the mandate provisions were
repealed effective on that date. This repeal is not expected to have
any significant effect on MAMSI's operations due to the increased
knowledge about and acceptance of HMOs in the marketplace.
The HMO movement began to experience a "shake-out" in the latter part of
the 1980s. After reaching an industry high of 707 HMOs in 1987,
mergers, acquisitions and closures resulted in a decrease to
approximately 541 operating HMOs in 1993. In 1994, the number of HMOs
increased by 23 to 564. As the concept of managed care continues to
gain acceptance, the number of managed care type organizations being
formed should increase in response to the marketplace, in both the
commercial and government (Medicare and Medicaid) segments. However,
the consolidation trend should also continue as HMOs, traditional
indemnity insurers and others seek to gain market share and size.
National enrollment in HMOs increased to an estimated 55 million
enrollees in 1994, up from a total of 31 million in 1987. Year-end 1994
enrollment of 55 million people represents approximately 21% of the
total U.S. population. Industry experts expect this enrollment trend to
continue. (Source of industry data - Hoechst Marion Roussel, Inc.
Managed Care Digest Series; HMO-PPO Digest, 1995; and, SMG Marketing
Group, Inc.)
MAMSI'S HMO PRODUCTS
MAMSI's HMOs offer a range of benefit plans for providing health care to
enrollees. Generally, enrollees arrange for coverage through their
employer. However, group enrollees can convert their coverage to an
individual contract upon separation from their employer. There is no
assurance that HMO agreements with employers will be renewed annually or
that, within each employer group, the HMO will not experience
disenrollment by individual enrollees. MAMSI's HMOs also offer
individual coverage to the commercial, Medicaid and Medicare markets.
Under traditional HMO coverage, the enrollee selects a PCP from the
HMO's provider network. All medical care provided to the enrollee must
be authorized and coordinated by the PCP. Generally, the enrollee pays
a copayment for all PCP and specialist office visits and may also be
required to pay a copayment for hospital admissions and emergency room
services. Except in emergencies, enrollees are generally required to
utilize only those participating professional and institutional health
care providers that have contracted with the IPA (see further discussion
under "HMO Arrangements with Physician and Institutional Providers").
5
MAMSI's HMOs, in cooperation with MAMSI Life and Health Insurance
Company ("MAMSI Life"), a wholly owned subsidiary of MAMSI, also offer
point-of-service coverage (the "preferred plan"), which is marketed to
appeal to the following customers:
1. Individuals who will not consider a closed delivery system. These
individuals prefer the flexibility of the traditional indemnity plan but
are also seeking a lower-cost alternative such as an HMO.
2. Small to mid-sized employers who are looking to limit the number of
health care plan options. In this case, the HMO would seek to be
offered as an exclusive health care provider.
In the preferred plan, enrollees have the choice of seeking care from
the PCP or from any physician of their choice. Whenever care is
provided under the point-of-service option and the enrollee visits a
provider outside of the HMO network, MAMSI Life, which underwrites this
indemnity benefit, generally covers the lesser of 80% of the bill or
100% of the established fee maximum for the service provided. The
enrollee is responsible for the remainder of the charge.
MAMSI's hybrid products provide large employer groups the ability to
tailor their 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 MAMSI
hybrid product combines the use of capitated PCPs to serve as
gatekeepers, employer funding of specialist and institutional claims on
an "as paid" basis and MAMSI's underwriting of risk of loss on a
specific and/or aggregate stop loss basis.
OCI offers HMO coverage to recipients of Title XIX Medical Assistance
("Medicaid"). The Medicaid plan operates in a manner similar to the
traditional HMO plan. The participating states pay a monthly premium
based upon the age and sex of the recipients for which OCI provides
comprehensive medical coverage. MAMSI's Medicaid service area includes
Maryland and certain areas of Virginia.
Under all coverage options, enrollees receive the following basic
benefits: primary and specialist physician services; hospital services
such as diagnostic tests, x-rays, drugs, medication, nursing and
maternity services; discounts on dental care and prescription drugs
purchased at a participating pharmacy; outpatient diagnostic tests such
as laboratory tests, x-rays, and allergy testing and injections; and
mental health, drug abuse and other medical services.
OCI also offers health coverage to Title XVIII Medicare recipients.
Under a contractual arrangement with the United States Health Care
Financing Administration ("HCFA"), OCI receives a monthly premium based
upon age, sex, county of residence and enrollment status for which OCI
provides comprehensive medical coverage to those individuals plus
certain additional benefits. Currently, approximately only 3% of the
one million Medicare recipients in MAMSI's Medicare service area (which
includes Maryland, the District of Columbia, and certain areas of
Virginia, West Virginia and Delaware) are covered through MAMSI or other
HMOs.
The Company's total health plan (managed care, ASO and indemnity health
insurance) membership in the HMOs and MAMSI Life grew to approximately
658,000 at December 31, 1995 from 508,000 at December 31, 1994, an
increase of 30%. The Company believes that enrollment will continue to
grow as the Company expands into new service areas, continues to
increase the size of its sales force and maintains its focus on the
Medicaid and Medicare markets.
6
The following table sets forth information relevant to MAMSI's HMO and
indemnity health plans as of December 31, 1995:
Employer Groups Served 16,845
Population of Aggregate HMO
Service Area 17,000,000
Service Area Penetration 3.9%
Primary Care Physicians 3,650
Specialist Physicians 11,987
Other Affiliated Health
Care Providers 5,440
Hospitals and Outpatient
Facilities 1,198
Pharmacies 3,500
A significant portion of the Company's premium revenue is derived from
Federal, state and local government agencies including governmental
employees and Medicaid and Medicare recipients. For the years ended
December 31, 1995, 1994 and 1993, approximately 7%, 9% and 11%,
respectively, of premium revenue was derived from Federal government
agencies, and approximately 21%, 18% and 11%, respectively, was derived
from state and local government agencies located in the Company's
service area.
HMO ARRANGEMENTS WITH PHYSICIAN AND INSTITUTIONAL PROVIDERS
MAMSI's HMOs contract with PHP-MD to provide physician services to their
enrollees except within North Carolina where OCCI contracts directly
with providers. The HMOs are ultimately responsible for ensuring that
an adequate number of physicians and other health care providers are
maintained in order to service enrollees.
The Company contracts with many different kinds of health care
providers, including primary care and specialist physicians, dentists,
social workers, psychologists, physical therapists and podiatrists.
PCPs are paid a monthly capitation payment for each enrollee who has
chosen that PCP. This capitation payment varies according to the age
and sex of the enrollee and according to the primary care designation of
the provider chosen by the enrollee. The primary care designations on
which premiums are based fall into one of two types: (1) family and
general practice, pediatrics and internal medicine, and (2) obstetrics
and gynecology.
PCPs may receive, in addition to capitation payments, an annual payment
that is based on a Quality Review Reconciliation. This payment
generally does not exceed 3% of their annual capitation payments. The
reconciliation evaluates the physician's practice performance as well as
quality issues such as grievance rates from members, sanctions by a
MAMSI HMO, and member transfer rate. As part of the Quality Review
Reconciliation, the Company provides a quarterly report to each PCP that
compares the physician's practice performance based on outpatient and
inpatient expenses to those of his/her peers and allows the PCP not only
to monitor the number of referrals consistent with quality medical
standards, but also to evaluate the most cost-effective consultants and
facilities within each specialty area.
Prior to July, 1, 1995, specialist providers and participating non-
physician providers were compensated on a fee-for-service basis. This
compensation was limited to an established maximum rate that reflected
the amount that similar providers of a similar service would typically
charge. Effective July 1, 1995, the Company implemented the Medicare
Resource Based Relative Value Scale methodology of provider
reimbursement. This methodology, which applies generally to specialist
health claims, has resulted in the lowering of some reimbursement
levels, mainly those having to do with office and hospital-based
procedures, while increasing payments for many evaluation and management
tasks. Management believes that this change will allow the Company to
continue to be competitive within its marketplace.
The HMOs have contractual arrangements with a combined total of 1,198
facilities, consisting of 188 hospitals and 1,010 non-hospital
facilities, as of December 31, 1995. These facilities are located in
the Company's HMO Service Area. Contracts with facilities are renewable
annually. These hospitals have provided assurance that, if discharged
enrollees require transfer to another facility, they will transfer such
enrollees to participating providers.
7
HMO ARRANGEMENTS FOR OTHER SERVICES
The HMOs have contracted with a number of entities to arrange for the
provision of other services:
EMERGENCY CARE - Enrollees may receive urgent care services as an
alternative to hospital emergency room treatment. Enrollees can use
local urgent care centers and any hospital emergency room in emergency
situations.
HOME HEALTH CARE - A number of medical care providers are engaged to
provide health care services (such as nursing, pediatric, neonatal,
orthopedic, psychiatric, geriatric, dialysis treatments, physical
therapy, speech therapy and respiratory therapy) at the home of the
enrollee. MAMSI's home health care subsidiary, HomeCall, Inc.
("HomeCall"), provides these services throughout much of the Company's
service area.
PHARMACEUTICAL ASSISTANCE - The Company has arrangements with
participating pharmacies so that an enrollee is only responsible for the
deductibles and/or copayments that are indicated on his or her
enrollment card.
LABORATORY TESTING - The Company has an arrangement with a laboratory
that conducts much of the laboratory work required by HMO providers.
Enrollees in MAMSI's PPO are similarly referred to this laboratory for
testing.
DENTAL - In addition to a dental indemnity product available from MAMSI
Life, the Company has an arrangement with an association of dentists to
provide discounted dental services through a dental PPO. The Company is
also working toward offering a capitated dental HMO plan in 1996.
QUALITY ASSESSMENT/IMPROVEMENT AND COST CONTAINMENT
MAMSI conducts a multidisciplinary approach to its Quality
Assessment/Quality Improvement ("QA/QI") Program, utilizing the
resources of all of its subsidiaries to ensure the provision of quality
health care and services to its HMO enrollees in an appropriate and
cost-efficient manner.
MAMSI recognizes the importance of a Continuous Quality Improvement
Program to determine and allocate appropriate resources that will have
the greatest impact for the members. The QA/QI Program is designed to
meet and serve the needs of employers, members and providers as well as
to monitor the timeliness, appropriateness and effectiveness of services
via ongoing and systematic reviews of key indicators and aspects of
care. The QA/QI Program conducts member satisfaction surveys,
identifies opportunities for improvements in providing care, adopts
strategies to improve outcomes and monitors the improvement to report
progress.
MAMSI's QA/QI Committee, which operates under the auspices of MAMSI's
Board of Directors, includes administrative, clinical, provider and
community representation. The Committee evaluates numerous quality
related issues and outcomes measuring overall services provided to
enrollees.
In addition, MAMSI utilizes several cost control and quality review
mechanisms. Provider applications are reviewed by a Credentials
Committee in order to determine whether the applicant meets MAMSI's
application criteria, including Board Certification or eligibility.
MAMSI maintains a physician review process to determine whether the
needed levels of medical service are being provided in a timely and
efficient manner. The Company conducts medical audits to monitor and
review the quality of care provided. The Company's Medical Director
also monitors the hospital and out-of-plan referrals issued by primary
care providers.
8
All physicians must obtain prior authorization for non-emergency
hospital admissions. The Medical Director may sanction physicians who
fail to secure prior authorization for non-emergency hospital admissions
of enrollees. Prior to admission for non-emergency hospital services,
MAMSI applies certain medical criteria to authorize the admission and
the anticipated length of stay for the diagnosis under treatment.
After admission of an HMO enrollee, MAMSI's Utilization Management
Department, in cooperation with the Medical Director, monitors the
course of hospital treatment for compliance with the previously
authorized length of stay. Although the Utilization Management staff is
not permitted to interfere with a physician's medical judgment regarding
the course of treatment, if the physician decides to extend an
enrollee's stay beyond that authorized, the physician must provide
medical justification for the necessity of such proposed action and
obtain specific approval from the Medical Director or his designee.
As required by Federal and state law, the HMOs have established a
grievance procedure to respond to enrollee complaints. Enrollees are
encouraged to use this procedure before proceeding further with a
complaint. Once this procedure is exhausted, any unresolved complaint
or grievance may be settled by binding arbitration rather than through
the courts. There is a similar grievance procedure for physician
complaints.
In 1993, MAMSI invited the National Committee for Quality Assurance
("NCQA"), a private, non-profit organization, to evaluate the Company's
methodologies in an effort to receive NCQA accreditation. NCQA
accreditation is a voluntary process. The Company did not meet certain
of NCQA's criteria and, therefore, did not receive NCQA accreditation.
MAMSI believes that it has adopted methodologies and programs designed
to respond to the concerns and questions raised in NCQA's assessment.
The Company believes that, based on its success with large group sales
since the denial of accreditation, the failure to receive NCQA
accreditation has not had a significant adverse effect on its business
or financial condition. It is MAMSI's intention to request the NCQA to
review its current methodologies sometime in 1996. Although the Company
believes that the likelihood of NCQA accreditation is high, there can be
no assurance that accreditation will be received or that MAMSI will not
experience disenrollment if accreditation is not ultimately received.
MAMSI has implemented the Health Plan and Employer Data and Information
Set ("HEDIS") 2.5, which represents a core set of performance measures
developed by NCQA to serve the employer as a purchaser.
The Company's home health care and home infusion subsidiaries underwent
voluntary accreditation review by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO") during 1995. Full accreditation
status was awarded as a result of this process.
COMPETITION AND MARKETING STRATEGY
The HMO industry is characterized by intense competition. MAMSI
recognizes the possibility that other firms with greater resources may
enter into competition with MAMSI in the future by either entering its
HMO Service Area or by designing alternative health care delivery
systems. HMOs compete not only with other HMOs, but also with insurance
companies that offer indemnity insurance products.
9
MAMSI's HMOs compete with approximately 25 HMOs or other prepaid
alternative health care delivery systems that have a presence in at
least one of the cities or counties in MAMSI's service area. The
following table sets forth MAMSI's best estimate of the HMO enrollment
in 1995 of HMOs operating in its HMO Service Area. Certain of the HMOs
are part of a larger entity and the enrollees estimated herein include
only those in MAMSI's HMO Service Area.
Approximate
Number
HMO Plan Type of Enrollees
------------- --------- ------------
Mid Atlantic Medical Services, Inc.* .......... IPA 622,000
Kaiser Permanente Health Care Program ......... Group 359,000
Health Plus (Sanus Healthcare)................. IPA 255,000
FreeState Health Plan** ....................... IPA 201,000
Humana Group Health ........................... Staff 117,000
Healthkeepers of Virginia*** .................. IPA 112,000
Capital Care**** .............................. IPA 97,000
George Washington University Health Plan ...... Group 82,000
Optima Health Plan ............................ IPA 76,000
Chesapeake Health Plan (Healthwise of
America, Inc.) .............................. IPA 66,000
Aetna Choice Healthcare Plan .................. IPA 62,000
CIGNA Health Plan of Virginia ................. IPA 56,000
Southern Health Services (Coventry Corp.) ..... IPA 51,000
U.S. Healthcare ............................... IPA 46,000
Sentara Health Plan ........................... Staff 45,000
Other HMOs (11) ............................... Various 257,000
* - Includes individuals covered by the Company's HMOs only.
** - This company is owned by Blue Cross/Blue Shield of Maryland.
*** - This company is owned by Blue Cross/Blue Shield of Virginia.
**** - This company is owned by Blue Cross/Blue Shield of the National
Capital Area.
MAMSI's HMOs compete with other HMOs and insurance companies on the
basis of price 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 the capitation payments it makes to PCPs
are competitive. MAMSI believes that the freedom IPA-model HMOs offer
their enrollees in choosing their own 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, rates and
the HMOs' responsiveness to enrollee needs. Nevertheless, physicians
increasingly provide health care services to health care organizations
that compete with MAMSI, and this trend may, over time, diminish any
competitive advantage presently enjoyed by MAMSI.
MAMSI subsidiaries employed approximately 613 full-time individuals who
provided marketing services for its HMOs as of December 31, 1995.
MAMSI's marketing strategy includes identifying and contacting employers
with more than 50 employees in its HMO Service Area in addition to
prospecting and telemarketing, employer group consultation, referrals by
consultants, and the use of selected brokers. The Company's strategy in
1995 included reducing the use of brokers for new business while
increasing its internal sales force. New members acquired by the
Company's dedicated sales force accounted for approximately 88% of total
new members in 1995.
RISK MANAGEMENT
With the exceptions of the large group market and the certain small
group markets, OCI uses underwriting criteria as a part of its risk
management efforts. Underwriting is the process of analyzing the risk
of enrolling employer groups in order to establish an appropriate
premium rate. Utilizing underwriting criteria, OCI seeks to avoid
contracting with employers that are likely to experience an actuarially
higher than expected need for medical care. OCI's use of underwriting
techniques is restricted in certain situations by state small group
reform legislation (see further discussion under "Government
Regulation").
10
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 shift part of the risk of catastrophic losses
by maintaining reinsurance coverage for hospital costs. The reinsurer
indemnifies 80% of the eligible in and out of service area medical
expenses in excess of $200,000 per enrollee per year up to a lifetime
maximum of $2,000,000 in eligible medical costs.
During 1995, PHP-MD generally placed 5% to 15% of the payments due to
participating physicians in a Claims Reserve Risk Pool. The Claims
Reserve Risk Pool constitutes a financial risk-sharing arrangement among
the participating physicians and PHP-MD. Amounts held in the Claims
Reserve Risk Pool may be distributed from time to time by PHP-MD to
participating physicians if, in the judgment of PHP-MD's Board of
Directors, PHP-MD's financial condition permits such distribution. The
following table sets forth information regarding the portion of the
amount in the Claims Reserve Risk Pool that was distributed to
participating physicians in each calendar year.
Percentage
Distributed
Year to Providers
---- ------------
1990 16
1991 5
1992 4
1993 59
1994 58
1995 4
GOVERNMENT REGULATION
MAMSI's HMOs 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) provider contracts; (v)
quality assurance and utilization review programs; (vi) adherence to
confidentiality and medical records requirements; (vii) enrollment
requirements; and (viii) financial reserves and other fiscal solvency
requirements.
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 Company generally fixes the
premiums charged to employers for a 12 month period and revises the
premium with each renewal. In setting premiums, the Company forecasts
health care utilization rates based on the relevant demographics and
also considers competitive conditions and the average number of
enrollees in the employer group. In addition to these premiums,
enrollees also make copayments to providers as required.
Although premiums established may vary from account to account through
composite rate factors and special treatment of certain broad classes of
enrollees, Federal regulations generally prohibit 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
and sex of the enrolled employees. M.D. IPA believes that its premiums
are competitive with other HMOs and health insurers and its health
coverage is a better value for members because of the range of physician
and hospital selection and other benefits provided.
M.D. IPA contracts with the Office of Personnel Management ("OPM") to
provide or arrange health services under the Federal Employees Health
Benefit Program ("FEHBP"). The contract with OPM and applicable
government regulations establish premium rating requirements for the
FEHBP. The premiums established under the OPM contract are subject to
periodic review and audit to determine if they were established in
compliance with the community rating and other requirements under the
program.
11
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.
MAMSI Life, the Company's insurance subsidiary, is domiciled in Maryland
and is licensed in over 30 states. MAMSI Life is subject to regulation
by the department of insurance in each state in which it is licensed.
These regulations subject MAMSI Life to extensive review of the terms,
administration and marketing of insurance products offered and minimum
net worth and deposit requirements. In addition, MAMSI Life 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 operations are regulated principally in
four areas: home health care licensing; certification for participation
in private insurance and government reimbursement programs; employee
licensure 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 infusion business has obtained
the necessary licenses and permits to operate as a full service
pharmacy.
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 benefit plans in accordance with each plan's
terms.
Due to the continued escalation of health care costs and the inability
of many individuals to obtain health care insurance, numerous proposals
relating to health care reform have been made, and additional proposals
may be introduced, in the United States Congress and the legislatures of
the states in which the Company operates or may seek to operate.
The United States Congress recently passed a budget reconciliation
package ("Budget Package") that included provisions reforming the
Medicare program. Under the Budget Package, Medicare beneficiaries
would be offered a variety of new health care options, including the
ability to enroll in private plans, such as HMOs, PPOs, point-of-service
plans, medical savings accounts and provider-sponsored organizations. A
traditional fee-for-service Medicare program would, however, continue to
be offered through HCFA. The Budget Package also amended current laws
that prohibit physician self-referral, guard against fraud and abuse and
eliminate the requirement that HMOs participating in the Medicare
program have membership that is composed of at least 50 percent non-
government program beneficiaries. In addition, HMOs would be paid a
monthly capitation rate that blends local and national costs with
greater weight given to the local component. A floor would be
established for payment to rural areas.
The Budget Package was submitted to President Clinton and was vetoed.
Accordingly, the ultimate form in which this legislation will take
effect and the impact of this legislation on the Company's business
cannot be predicted. Management believes that a portion of the managed
care provisions will be included in the final legislation and that
programs similar to the Company's Medicare program would be favorably
impacted by Medicare reform. It may, however, result in an increase in
the number of competitors.
The Budget Package also aimed to modify the Medicaid program by
converting the existing Medicaid program from a federal entitlement into
a block grant payment to the states. In addition, federal standards for
nursing homes would be revoked and states would have to establish and
maintain their own standards. As stated above, ultimate passage of this
legislation and the impact that this legislation would have on the
Company's business cannot be predicted.
12
In recent years, state legislatures in the Company's service area have
been active in health care reform legislation targeted at the small
group market, i.e., usually for groups of 2 to 50 employees. This small
group reform is now in place in Maryland, Virginia, Delaware and North
Carolina, but not in Washington, D.C. or West Virginia. Although
different in many of the details, this type of legislation generally
requires all HMOs and insurers that offer small group coverage to accept
all small employers who apply for coverage and to guarantee coverage to
their employees seeking coverage regardless of their health status. The
legislation also requires renewal of these small group employer plans,
limits rate renewal increases, mandates adjusted community rating and
eliminates pre-existing condition limitations either entirely or within
a short period of time, usually six months.
The Company believes that the current political environment in which it
operates will result in continued legislative scrutiny of health care
reform and may lead to additional legislative initiatives. The Company
is unable to predict the ultimate impact upon the Company of any federal
or state restructuring of the health care delivery or health care
financing systems, but such changes could have a material adverse impact
on the operations and financial condition of the Company.
The District of Columbia, which has not previously regulated HMOs, has
proposed and may enact legislation providing for regulatory oversight
similar to that currently provided by other states. The Company does
not anticipate any significant negative impact on its operations because
of possible new regulatory oversight in the District of Columbia.
PREFERRED PROVIDER ORGANIZATIONS
MAMSI offers PPO coverage through two subsidiaries: Alliance PPO, Inc.
("Alliance") and Mid Atlantic Psychiatric Services, Inc. ("MAPSI").
PPOs allow enrollees to receive care from participating physicians at
contractually negotiated rates. A PPO is different from an HMO in that
a PPO does not assume any financial risk from medical utilization nor
does it process claims payments to providers. All medical charges are
passed directly to the payor, which can be either a self-funded
employer, a health benefits trust fund or another health insurance
company. In return for access to the PPO's network, the PPO charges the
employer either a per employee rate or a percentage of the savings of
actual claims processed for the services accessed. MAMSI's PPOs provide
access to substantially the same provider network as MAMSI's HMOs.
A PPO operates by being incorporated into an employer's current benefit
program, and offers some or all of the following: access to physician,
hospital and facility services; utilization management and quality
assurance; and claims screening and repricing. The employer determines
the level of the benefits and any applicable copayments.
Alliance is marketed primarily through insurance companies, insurance
brokers, consultants, third party administrators ("TPAs"), self-insured
employers and union trusts. The advantages of a TPA marketing approach
are minimized marketing costs and maximized market coverage through
established TPA-employer relationships. Alliance also works directly
with employers and unions that are self-insured and uses direct
marketing efforts. The major competition comes from other PPOs and
individual insurance carriers. At December 31, 1995, Alliance had
contracts with approximately 19,000 employer groups that had access to
the entire IPA provider network.
The MAPSI PPO is comprised of providers specializing in mental health
and substance abuse care. MAPSI's products are marketed directly to
TPAs, self-insured groups, brokers, indemnity plans, union funds and
consultants. In addition, MAPSI contracts with indemnity insurers that
want to offer groups a managed care mental health product. MAPSI
believes it has a competitive advantage with its unique mental health
screening process that offers the employer the benefit of enhanced
coordinated treatment for employees as well as increased cost savings.
MAPSI's major competitors include CMG Health, Inc., Green Spring Mental
Health and MCC Inc. At December 31, 1995, MAPSI had a provider network
of approximately 2,600 psychiatrists, psychologists, social workers, and
other affiliated licensed mental health providers.
13
Alliance and MAPSI are most often marketed jointly and the prospective
purchaser usually also purchases the MAPSI PPO if the Alliance PPO is
purchased. The total number of lives covered under one or both of these
PPO products as of December 31, 1995 was approximately 825,000.
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
possible that PPOs may be subject to increased regulatory oversight in
the future.
OTHER PRODUCTS
MAMSI Life currently underwrites the indemnity coverage of the HMO's
preferred plans in addition to offering stand-alone indemnity health and
dental insurance, aggregate and specific stop loss insurance for self-
insured groups, and group life, accidental death and short-term
disability policies. In addition, in 1995 MAMSI Life began providing an
administrative services only ("ASO") product to the State of Maryland.
ASO business consists of allowing access to MAMSI's provider network,
without gatekeeper PCPs, and the payment of claims. MAMSI has no
insurance risk on this product. MAMSI Life holds insurance licenses in
over 30 jurisdictions including Maryland, Virginia, the District of
Columbia, West Virginia, Delaware and North Carolina. MAMSI Life also
became licensed in Pennsylvania in 1995.
On October 7, 1994, MAMSI acquired all of the outstanding stock of
HomeCall and its wholly owned subsidiary, FirstCall, Inc. ("FirstCall"),
for approximately $10 million, including direct expenses. HomeCall is a
state licensed, Medicare certified home health agency. The combined
operations of HomeCall and FirstCall include 16 branch locations that
serve virtually all of Maryland, the District of Columbia, Northern
Virginia and the Panhandle area of West Virginia.
Also during the fourth quarter of 1994, the Company formed a home
infusion services company, HomeCall Infusion Services, Inc. ("HIS"),
which received its pharmacy license in 1994 and its Federal license from
the Drug Enforcement Agency in 1995.
Homecall, FirstCall and HIS provide services that are generally lower
cost alternatives to institutional treatment and care. The Company
believes that it will 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 HIS include skilled
nursing, high tech nursing in support of infusion therapy,
maternal/infant nursing, physical, speech and occupational therapy,
medical social work, nutrition consultation and home health care aides.
Medical services provided by HIS include a comprehensive range of in
home drug infusion therapies as well as the delivery of infusion ready
drugs for physician office based infusion therapy.
In addition to providing in-home medical care to the Company's members,
HomeCall, FirstCall and HIS will continue to provide services to other
payors, including insurance companies, other HMOs and individuals.
The Company also has an equity interest in an ambulatory surgery center
located in Rockville, Maryland. The surgery center conducts outpatient
surgery and services to HMO enrollees and other patients.
14
A summary of MAMSI's membership enrollment in all product lines is as
follows:
MEMBERSHIP DATA AT DECEMBER 31
---------------------------------
PRODUCT LINE 1993 1994 1995
------------ ---------------------------------
(in thousands)
Commercial HMO (1) 382.6 393.2 430.1
Hybrid HMO (2) 48.7 82.5 94.5
Medicaid 8.7 28.0 91.0
Medicare -- .3 6.0
Indemnity -- 4.0 23.6
ASO (3) -- -- 13.2
------- ------- -------
440.0 508.0 658.4
PPO (4) 510.0 698.0 825.0
------- ------- -------
Total Membership 950.0 1,206.0 1,483.4
======= ======= =======
(1) Commercial HMO includes traditional HMO and point-of-service
members.
(2) Hybrid HMO includes any business that uses MAMSI's network and
gatekeeper 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
gatekeeper PCPs and no assumption of insurance risk by any MAMSI
affiliate.
(4) PPO includes all business whereby access is granted to MAMSI's
provider network. MAMSI assumes no risk and does not provide claims
payment services on this business.
INVESTMENTS
The majority of the Company's investments are held by its state
regulated entities to provide capital for those entities' operations and
to satisfy capital, surplus and deposit requirements of the HMO and
insurance laws of the various states in which the Company is licensed.
HMO and insurance laws generally protect consumers of insurance products
with one of the principal focuses being on financial solvency of the
company's underwriting insurance risk. These laws and regulations limit
the types of investments that can be made by the regulated entities with
appropriate investments being deemed "admitted assets." Admitted assets
are those assets that can be used to fulfill capital and surplus
requirements. The Company's current investment policy generally
prohibits investments that would be "non-admitted" for statutory
reporting purposes. The Company has no investments in derivative
financial instruments and has no current intention of owning such
investments.
EMPLOYEES
As of December 31, 1995, the Company had a total of 2,374 employees,
including 1,839 full-time and 535 part-time employees. MAMSI's home
health care subsidiaries employed 799 of these employees (394 on a full-
time basis and 405 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. The
Company believes that it has a good relationship with its employees.
ITEM 2. PROPERTIES
To accommodate the Company's rapid growth, the Company has purchased six
office buildings since 1988. These buildings are all located in
Rockville, Maryland and total approximately 244,000 square feet of
office and warehouse space. The Company's headquarters is located at 4
Taft Court, Rockville, Maryland 20850.
15
In addition, the Company leases approximately 176,000 square feet of
office space and approximately 5,200 square feet of warehouse space in
various locations within its service areas to support sales and
administrative operations.
ITEM 3. LEGAL PROCEEDINGS
During the third quarter of 1995, certain shareholders of MAMSI filed
lawsuits in the United States District Court for the District of
Maryland against MAMSI and certain current and former directors and
officers. (Ivan D. Wesley, et al. v. Mid Atlantic Medical Services,
Inc., et al., No. PJM-95-2098; Charles Rittenberg v. Mid Atlantic
Medical Services, Inc., et al., No. PJM-95-2319; Joseph J. Szlavik v.
Mid Atlantic Medical Services, Inc., et al., No. PJM-95-2346; and Robert
V. Bruchs Trust v. Mid Atlantic Medical Services, Inc., et al., No. JFM
95-2763.) These actions have been consolidated and, on November 1,
1995, a consolidated Amended Class Action Complaint was filed on behalf
of all plaintiffs under the caption In Re Mid Atlantic Medical Services,
Inc. Securities Litigation, No. PJM 95-2098. The amended complaint
alleges that MAMSI is liable under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder for its failure to
disclose in a timely fashion that it had been denied accreditation by
the NCQA and that the officers and directors named as defendants are
liable under Section 10(b) and Rule 10b-5, directly and as controlling
persons of MAMSI, for the failure to disclose. Plaintiffs seek to
represent a class of all persons who purchased the common stock of MAMSI
from March 1, 1995 through June 15, 1995. The Court has set a discovery
schedule, and has set a trial date of December 2, 1996. Currently, the
parties have undertaken limited discovery. The Company is not able to
predict the probability of a favorable or unfavorable outcome or the
amount of potential loss, in the event of an unfavorable outcome. MAMSI
believes it has meritorious defenses to the claims raised in the Amended
Complaint and intends to defend the action vigorously.
The staff of the Securities and Exchange Commission has asked MAMSI to
provide certain information relating to the denial of accreditation by
the NCQA and to sales of stock by certain officers and directors prior
to the announcement of the NCQA's action. MAMSI has voluntarily
complied with the Commission's requests.
The Company is involved in various other 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 in excess of amounts
accrued for these other actions will not materially affect the Company's
consolidated financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for shareholder vote in the fourth
quarter of 1995.
16
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is currently listed on the New York Stock
Exchange ("NYSE") under the trading symbol MME. Prior to September 29,
1994, the common stock of the Company was listed on the Nasdaq National
Market System under the trading symbol MAMS. The following table sets
forth for the indicated periods the high and low reported sale prices
(adjusted for stock dividends; see Note 12 to the consolidated financial
statements) of the common stock as furnished by the NYSE and Nasdaq.
1995 1994
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $26.13 $19.75 $22.50 $12.06
Second Quarter 25.00 16.63 28.31 18.13
Third Quarter 21.00 17.13 30.13 18.44
Fourth Quarter 25.13 17.50 30.25 18.75
The Company has never paid any cash dividends on its common stock and
presently anticipates that no cash dividends will be declared in the
foreseeable future. Any dividends will depend on future earnings, the
financial condition of the Company and regulatory requirements.
As of February 28, 1996, there were approximately 747 stockholders of
record of the Company's common stock.
17
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands except share amounts)
SELECTED INCOME STATEMENT DATA
Revenue $ 955,395 $ 749,898 $ 648,225 $ 582,489 $ 400,370
Expense 859,055 663,343 605,779 561,176 385,813
Income before income tax and cumulative
effect of accounting change 96,340 86,555 42,446 21,313 14,557
Income before cumulative effect
of accounting change 61,124 54,530 25,496 13,460 9,687
Net income 61,124 54,530 24,833 13,460 9,687
Earnings per common and common
equivalent share (1):
Income before cumulative effect of
accounting change 1.28 1.15 0.57 0.31 0.23
Net income (2) 1.28 1.15 0.55 0.31 0.23
Weighted average common and
common equivalent shares
outstanding (1) 47,908,379 47,370,211 45,109,230 43,067,144 42,852,570
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital 153,668 91,983 39,758 9,722 8,335
Total assets 354,182 268,522 189,561 130,356 100,779
Long-term debt 194 5,331 5,763 6,416 7,064
Stockholders' equity 217,216 141,326 71,963 40,389 24,859
Cash dividends per common share (3) --- --- --- --- ---
KEY RATIOS
Medical loss ratio 81.9% 80.8% 86.3% 89.9% 90.1%
Administrative expense ratio 10.6% 9.4% 8.3% 7.4% 7.3%
Net income margin 6.4% 7.3% 3.9% 2.3% 2.4%
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services 313 312 321 326 336
HMO only (4) 222 238 251 281 281
Medicare 2,531 --- --- --- ---
Medicaid 405 466 --- --- ---
Annualized hospital admissions per
1,000 enrollees 80 76 69 71 69
HMO, hybrid, ASO and indemnity
health enrollees at year end 658,000 508,000 440,000 448,000 386,000
PPO enrollees at year end 825,000 698,000 510,000 327,000 205,000
Participating providers at year end 21,077 16,950 15,500 11,900 10,000
Notes
1. Earnings per common share are computed after giving effect to
dilutive stock options. All per share amounts and weighted average
common and common equivalent shares have been adjusted to reflect all
stock dividends on a retroactive basis. See Note 12 to the consolidated
financial statements.
2. See Note 8 to the consolidated financial statements.
3. MAMSI has not declared or paid cash dividends on its common stock.
4. Days are presented exclusive of skilled nursing, neonatal intensive
care and psychiatric inpatient care.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING INFORMATION
All forward-looking information contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations
is based on management's current knowledge of factors affecting MAMSI's
business. MAMSI's actual results may differ materially if these
assumptions prove invalid. Significant risk factors, while not all
inclusive, are:
1. The possibility of increasing price competition in the Company's
market place.
2. The possibility of state or Federal budget related mandates that
reduce premiums for Medicaid or Medicare recipients.
3. The potential for increased medical expenses due to:
- Increased utilization by the Company's membership.
- Inflation of costs in the provider community.
- Federal or state mandates that increase benefits.
4. The possibility that the Company is not able to expand its service
territory as planned due to regulatory delays and/or inability to
contract with appropriate providers.
GENERAL
During the three year period ended December 31, 1995, MAMSI and its
subsidiaries (the "Company") have experienced substantial revenue growth
due to increased HMO and PPO membership. The Company has achieved its
membership growth by expanding its product line, which includes point-
of-service, small group, indemnity health, hybrid products, Medicaid and
Medicare products and through expansion into new geographic markets.
Premium rates during this time have remained at or near competitive
levels for the Company's marketplace. Operating margins have remained
positive due to the control of medical expenses and, accordingly,
profits and earnings per share have increased. The Company currently
anticipates that there may be slight increases in premium rates during
1996 and that the Company's operating margins will remain stable. This
is a forward-looking statement, and the Company's actual operating
margins may differ from management's current expectation due to risk
factors which may affect either the Company's revenues or expenses. See
"Forward-Looking Information" above for a description of these risk
factors.
The Company generally receives a fixed premium amount per member per
month while the majority of medical expenses are variable and
significantly affected by spontaneous member utilization. Even with
managed care controls, unusual medical conditions can occur, such as an
outbreak of influenza or a higher than normal incidence of high cost
cases (such as premature births, complex surgeries, or rare diseases).
As a result, the Company's quarterly results can be materially affected
and irregular. However, over the longer business cycle, the Company
believes that its managed care control systems, underwriting procedures
(when allowed) and network of providers will result in continued strong
profitability.
The United States Congress recently passed a budget reconciliation
package ("Budget Package") that included provisions reforming the
Medicare program. Under the Budget Package, Medicare beneficiaries
would be offered a variety of new health care options, including the
ability to enroll in private plans, such as HMOs, PPOs, point-of-service
plans, medical savings accounts and provider-sponsored organizations. A
traditional fee-for-service Medicare program would, however, continue to
be offered through the Health Care Financing Administration. The Budget
Package also amended current laws that prohibit physician self-referral,
guard against fraud and abuse and eliminate the requirement that HMOs
participating in the Medicare program have membership that is composed
of at least 50 percent non-government program beneficiaries. In
addition, HMOs would be paid a monthly capitation rate that blends local
and national costs with greater weight given to the local component. A
floor would be established for payment to rural areas.
19
The Budget Package was submitted to President Clinton and was vetoed.
Accordingly, the ultimate form in which this legislation will take
effect and the impact of this legislation on the Company's business
cannot be predicted. Management believes that a portion of the managed
care provisions will be included in the final legislation and that
programs similar to the Company's Medicare program would be favorably
impacted by Medicare reform. It may, however, result in an increase in
the number of competitors.
The Budget Package also aimed to modify the Medicaid program by
converting the existing Medicaid program from a federal entitlement into
a block grant payment to the states. In addition, federal standards for
nursing homes would be revoked and states would have to establish and
maintain their own standards. As stated above, ultimate passage of this
legislation and the impact that this legislation would have on the
Company's business cannot be predicted.
In recent years, state legislatures in the Company's service area have
been active in health care reform legislation targeted at the small
group market, i.e., usually for groups of 2 to 50 employees. This small
group reform is now in place in Maryland, Virginia, Delaware and North
Carolina, but not in Washington, D.C. or West Virginia. Although
different in many of the details, this type of legislation generally
requires all HMOs and insurers that offer small group coverage to accept
all small employers who apply for coverage and to guarantee coverage to
their employees seeking coverage regardless of their health status. The
legislation also requires renewal of these small group employer plans,
limits rate renewal increases, mandates adjusted community rating and
eliminates pre-existing condition limitations either entirely or within
a short period of time, usually six months.
The Company believes that the current political environment in which it
operates will result in continued legislative scrutiny of health care
reform and may lead to additional legislative initiatives. The Company
is unable to predict the ultimate impact upon the Company of any federal
or state restructuring of the health care delivery or health care
financing systems, but such changes could have a material adverse impact
on the operations and financial condition of the Company.
The District of Columbia, which has not previously regulated HMOs, has
proposed and may enact legislation providing for regulatory oversight
similar to that currently provided by other states. The Company does
not anticipate any significant negative impact on its operations because
of possible new regulatory oversight in the District of Columbia.
-----------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31,
1994
-----------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated net income for the Company was $61,124,000 and $54,530,000
in 1995 and 1994, respectively, an increase of 12 percent. Earnings per
share on net income increased 11 percent from $1.15 in 1994 to $1.28 in
1995. All earnings per share amounts reflect the 100% stock dividend
paid to stockholders on August 5, 1994 (see Note 12 to the consolidated
financial statements). The increase in earnings is primarily
attributable to an increase in membership, increased investment income
from higher invested balances and realized gains, and a reduction in per
member per month medical expenses (principally due to a reduction in the
return of physician withhold), partially offset by a reduction in
premiums per enrollee and an increase in administrative expenses
principally due to additions to the Company's internal sales force,
expansion into new geographic territories and the operations of the home
health care subsidiaries that were purchased in late 1994.
20
Revenue in 1995 increased 27 percent to $955.4 million from $749.9
million in 1994. A 27 percent increase in net average HMO and indemnity
enrollment resulted in an increase of approximately $197.2 million in
health premium revenue and a 2 percent decrease in average premiums per
HMO and indemnity enrollee reduced health premium revenue by
approximately $18.2 million. Health premiums per enrollee have declined
due to the combined effects of an increasing relative percentage of
Virginia Medicaid HMO members with lower per enrollee revenues and the
volatility of revenues from groups with alternative funding arrangements
(i.e., revenues vary in a more direct way with medical expense) coupled
with management's plan to price its commercial products competitively
(see Note 1 to the consolidated financial statements). Although health
premiums per member declined in the current period as compared to the
prior year period, management does not believe that future periods will
necessarily follow this pattern. This is a forward-looking statement.
See "Forward-Looking Information" above for a description of the risk
factors that may affect health premiums per member.
Fee and other revenue increased $5.6 million or 57 percent primarily due
to membership increases in PPO and administrative services only ("ASO")
products. Total PPO and ASO membership grew from 698,000 at December
31, 1994 to 838,200 at December 31, 1995, an increase of 20 percent.
Service revenue from the Company's home health care subsidiaries
contributed $18.9 million in revenue in 1995, and the introduction of
indemnity life, accidental death and disability products in 1995
contributed $1.4 million in revenue.
The Company currently has one of the largest HMO and managed care
enrollments 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 parts of West Virginia and North
Carolina), and also the largest network of contract providers of medical
care. Because of the full range of managed care products, service
reputation, strong provider delivery system, trained sales force, and
competitive premiums, management believes that the Company will continue
to increase its membership in 1996. Management's goal is to increase
membership in all products by 25 percent to 35 percent in 1996. This is
a forward-looking statement, and the actual membership may differ from
management's current expectation due to risk factors such as increased
competition in the Company's service area. See "Forward-Looking
Information" above for a description of these risk factors.
In 1993, MAMSI invited the National Committee for Quality Assurance
("NCQA"), a private, non-profit organization, to evaluate the Company's
methodologies in an effort to receive NCQA accreditation. NCQA
accreditation is a voluntary process. The Company did not meet certain
of NCQA's criteria and, therefore, did not receive NCQA accreditation.
MAMSI believes that it has adopted methodologies and programs designed
to respond to the concerns and questions raised in NCQA's assessment.
The Company currently believes that, based on its success with large
group sales since the denial of accreditation, the failure to receive
NCQA accreditation has not had a significant adverse effect on its
business or financial condition. It is MAMSI's intention to request the
NCQA to review its current methodologies sometime in 1996. Although the
Company believes that the likelihood of NCQA accreditation is high,
there can be no assurance that accreditation will be received or that
MAMSI will not experience disenrollment if accreditation is not
ultimately received.
The Company's home health care and home infusion subsidiaries underwent
voluntary accreditation review by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO") during 1995. Full accreditation
status was awarded as a result of this process.
Medical expenses as a percentage of premium revenue ("medical loss
ratio") increased to 81.9 percent in 1995 as compared to 80.8 percent in
1994, principally due to a decrease in average premiums per enrollee and
also higher than anticipated medical expenses in the Company's Medicare
risk product. On a per member per month basis, medical expenses
declined approximately .6 percent over the same period due to a
reduction in the return of physician withhold and offset by higher
member utilization, particularly in the Medicare product. Management
does not believe that this necessarily represents a sustainable trend.
Total medical costs may increase in future periods due to inflationary
pressures, governmentally mandated benefit increases and/or the Company
may experience increased utilization by its membership.
21
Over the past two years, the Company has achieved year-over-year
reductions in per member per month medical expenses. In order to
continue to reimburse providers at a fair level in a manner consistent
with the current medical environment, the Company implemented the
Medicare Resource Based Relative Value Scale methodology of provider
reimbursement effective July 1, 1995. This methodology, which applies
generally to specialist health claims, has resulted in the lowering of
some reimbursement levels, mainly those having to do with office and
hospital-based procedures, while increasing payments for many evaluation
and management tasks. Management believes that this change will allow
the Company to continue to be competitive within its marketplace.
Administrative expenses as a percentage of revenue ("administrative
expense ratio") increased to 10.6 percent in 1995 as compared to 9.4
percent in 1994. Administrative expenses increased 43 percent, from
$70.5 million in 1994 to $100.8 million in 1995. The increase in the
administrative expense ratio is primarily attributable to expenses of
the Company's home health care subsidiaries, which were purchased in
late 1994, the Company's territorial expansion into additional service
areas within currently served states as well as into the new states of
North Carolina (approved), South Carolina (pending), and Pennsylvania
(pending), the continued implementation of its plan to significantly
increase its employee sales force and the higher costs of administering
the Medicaid product, which became a more significant line of business
for the Company in 1995.
Investment income increased $5.4 million or 81 percent primarily due to
significantly greater invested balances and an increase in realized
gains on sales of marketable equity securities.
Deferred tax assets are recognized for deductible temporary differences
that, in management's opinion, are more likely than not to be realized
in the current or future periods. The Company's history of operating
revenue and income growth, and expectation of future operating income,
provides strong positive evidence that these deferred tax assets will be
realized. A valuation allowance has been recorded for net operating
loss carryforwards generated by certain subsidiaries that are not
deductible on a consolidated tax return. Management intends to continue
to monitor the realizability of deferred tax assets in light of future
circumstances and assess the reasonableness of the valuation allowance
on a quarterly basis.
The net margin rate decreased from 7.3 percent in 1994 to 6.4 percent in
1995. This decrease is primarily due to lower premium rates on certain
products and increased administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive and the majority of the
Company's expenses are payments to health care providers, which
generally vary in direct proportion to the 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 will continue to be sufficient in the
future.
Cash and short-term investments increased from $154.0 million at
December 31, 1994 to $215.6 million at December 31, 1995, primarily due
to operating profits and proceeds from the exercise of employee stock
options. Accounts receivable increased from $37.0 million at December
31, 1994 to $61.3 million at December 31, 1995, primarily due to the
significant increase in membership during 1995 and also an increase in
medical recoverable receivables related to new products.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement No. 115"). Statement No. 115
requires that investments in all debt securities plus equity securities
with readily determinable fair values be classified into categories,
which then establish the appropriate accounting treatment. At January
1, 1994, the Company's entire short-term investment portfolio was
classified as available-for-sale and, as a result, the net unrealized
gain associated with these securities of $1.1 million, net of tax, was
recorded as a separate component of stockholders' equity. Also on the
same date, the Company's statutory deposits, which consist of
investments held in custodial accounts by state regulatory agencies,
were classified as held-to-maturity and will continue to be carried at
amortized cost.
22
Short-term investments are marked to market at the end of every quarter
and the resulting unrealized gain or loss is reflected in the ending
stockholders' equity balance. Accordingly, stockholders' equity at
December 31, 1995 reflects an unrealized gain of $1.5 million, net of
tax, on the Company's short-term investments primarily due to
significant gains during the year in national equity markets plus the
impact of falling interest rates on the market value of the Company's
debt securities.
Net deferred income taxes decreased from $14.0 million at December 31,
1994 to $6.5 million at December 31, 1995, principally due to a change
in the tax filing status of certain subsidiary corporations, which
impacted the calculation of certain deductible temporary differences,
and also the effect of the tax recognized for unrealized gains and
losses on the Company's short-term investments.
Medical claims payable increased from $85.0 million at December 31, 1994
to $108.5 million at December 31, 1995, primarily due to the significant
increase in membership and related claim volume during 1995.
Long-term debt decreased from $5.3 million at December 31, 1994 to $.2
million at December 31, 1995, primarily due to the payoff of the
Company's mortgage note payable without prepayment penalty. The Company
has access to total revolving credit facilities of $10.0 million, which
is used to provide short-term capital resources for routine cash flow
fluctuations. At December 31, 1995, approximately $1.65 million was
drawn against the lines-of-credit and approximately $469,000 was
outstanding in letters-of-credit.
Additional paid-in capital increased from $29.4 million at December 31,
1994 to $40.4 million at December 31, 1995, due to proceeds from the
exercise and related tax benefits of stock options.
Following is a schedule of the short-term capital resources available to
the Company:
December 31
(in thousands) 1995 1994
------------------------
Cash and cash equivalents $ 10,874 $
17,054
Short-term investments 204,734 136,901
Working capital advances to Maryland
hospitals 4,053 3,982
-------- --------
Total available liquid assets 219,661 157,937
Credit line availability 7,880 8,452
-------- --------
Total short-term capital resources $ 227,541 $ 166,389
======== ========
Certain MAMSI subsidiaries that are subject to regulation by state
insurance departments must notify state regulators before the payment of
any dividends to MAMSI and, in certain circumstances, must receive
positive affirmation prior to such payment. Due to the substantial
statutory net worth of these subsidiaries, the Company does not perceive
these requirements to be a significant restriction on its ability to pay
future dividends.
The Company does not anticipate any adverse impact on future liquidity
due to medical malpractice issues because the Company carries
substantial professional liability insurance.
The Company believes that the cash flow generated from operations along
with its current liquidity and borrowing capabilities are adequate for
both current and planned expanded operations. In October 1995, MAMSI
announced the approval of a stock repurchase program. Under this
program, MAMSI may currently expend up to $60 million (including
brokerage commissions) to repurchase shares of its common stock over a
twelve month period at prices not to exceed $24.00 per share. At
December 31, 1995, no shares of common stock had been repurchased under
this program. This program will be financed through cash flow from the
Company's operations. Other capital expenditures will be made over the
next year to enhance the Company's computer systems, to establish
additional sales offices and to make necessary improvements to existing
administrative offices.
23
-----------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31,
1993
-----------------------------------------------------------------------
RESULTS OF OPERATIONS
For the year ended December 31, 1994, the Company had $54,530,000 in
consolidated net income compared to $24,833,000 for the year ended
December 31, 1993, an increase of 120 percent. The increase in earnings
is attributable to an increase in membership and per member per month
premiums and a significant reduction in the medical loss ratio over the
prior year, partially offset by an increase in the administrative
expense ratio.
Revenues for 1994 increased 16 percent to $749.9 million from $648.2
million in 1993. An 8 percent increase in average HMO enrollment
resulted in approximately a $48.1 million increase in premium revenue
and a 6 percent increase in average premiums per enrollee contributed
$40.8 million in premium revenue. Premiums per enrollee were higher in
1994 due to a combination of premium price increases and membership
gains in certain higher-priced benefit packages. Fee revenues from PPO
products and other service fees, including revenue from MAMSI's home
health care subsidiary that was acquired in October 1994, increased
approximately $8.7 million or 148 percent.
The medical loss ratio for 1994 decreased to 80.8 percent from 86.3
percent in 1993 and, on a per member per month basis, medical expenses
decreased .5 percent. This decrease in the medical loss ratio reflects
higher premiums, a reduction in membership utilization levels in 1994
and the efficacy of managed care controls developed and expanded by the
Company over the preceding three years.
The administrative expense ratio increased from 8.3 percent in 1993 to
9.4 percent in 1994. The increase in the administrative expense ratio
is primarily attributable to increased sales, marketing and advertising
expenses and the development of new products and territories.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under the
new rules, deferred taxes are recognized using the liability method,
whereby tax rates are applied to cumulative temporary differences based
on when and how they are expected to affect the tax return. The
cumulative effect of the change for the year ended December 31, 1993
reduced net income by approximately $663,000 or $.02 per share.
The net margin rate increased from 3.9 percent in 1993 to 7.3 percent in
1994. This increase is primarily due to medical expenses rising at a
lesser rate than premium revenues, partially offset by an increase in
administrative expenses.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 1995 and 1994 ... 25
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993 ............................. 26
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 ......... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 ............................. 28
Notes to Consolidated Financial Statements ..................... 29
Report of Ernst & Young LLP Independent Auditors ............... 43
Selected Quarterly Financial Data for Fiscal Years 1995
and 1994 (Unaudited) ......................................... 44
25
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
December 31,
(in thousands except share amounts) 1995 1994
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 10,874 $ 17,054
Short-term investments (Note 2) 204,734 136,901
Accounts receivable, net (Note 3) 61,263 37,031
Prepaid expenses, advances and other 8,974 5,743
Deferred income taxes (Note 8) 4,379 15,540
-------- --------
Total current assets 290,224 212,269
Property and equipment, net (Note 4) 38,704 33,668
Statutory deposits (Note 2) 10,543 9,877
Other assets 11,373 12,708
Deferred income taxes (Note 8) 3,338
-------- --------
Total assets $ 354,182 $ 268,522
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable (Note 5) $ 210 $ 726
Short-term borrowings (Note 5) 1,651 1,048
Accounts payable 15,075 17,565
Income taxes payable (Note 8) 2,589
Medical claims payable, net (Note 6) 108,490 85,014
Deferred premium revenue 10,125 13,344
Deferred income taxes (Note 8) 1,005
-------- --------
Total current liabilities 136,556 120,286
Notes payable (Note 5) 194 5,331
Deferred income taxes (Note 8) 216 1,579
-------- --------
Total liabilities 136,966 127,196
Stockholders' equity (Notes 11, 12 and 14)
Common stock, $0.01 par, 100,000,000 shares authorized,
46,631,327 issued and 46,585,387 outstanding at
December 31, 1995; 45,663,527 issued and 45,617,587
outstanding at December 31, 1994 466 456
Additional paid-in capital 40,374 29,431
Treasury stock (33) (33)
Unrealized gains and (losses) on investments, net of tax
of $1,004 and $(1,490) (Note 2) 1,535 (2,278)
Retained earnings 174,874 113,750
-------- --------
Total stockholders' equity 217,216 141,326
-------- --------
Total liabilities and stockholders' equity $ 354,182 $ 268,522
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
26
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Income
Year Ended December 31,
(in thousands except share amounts) 1995 1994 1993
---------- ---------- ----------
Revenue
Health premium $ 907,694 $ 728,743 $ 639,875
Fee and other 15,334 9,760 5,845
Life, accidental death and disability premium 1,449
Home health services 18,910 4,745
Investment 12,008 6,650 2,505
--------- --------- ---------
Total revenue 955,395 749,898 648,225
--------- --------- ---------
Expense
Medical expense
Referral and ancillary care (Notes 9 and 10) 320,412 271,042 249,750
Hospitalization, net of coordination of benefits 247,870 191,902 185,422
Primary care (Notes 9 and 10) 93,320 70,960 64,546
Prescription drugs 80,438 56,246 51,903
Reinsurance premiums, net (Note 7) 1,587 (1,160) 584
--------- --------- ---------
743,627 588,990 552,205
--------- --------- ---------
Life, accidental death and disability settlements 934
--------- --------- ---------
Home health patient services 13,684 3,817
--------- --------- ---------
Administrative expense
Salaries and benefits 63,194 42,740 34,188
Promotion and advertising 3,246 4,504 1,670
Facilities, maintenance and supplies 19,134 11,990 10,081
Professional services 3,717 2,701 2,092
Other (including interest expense of $1,010, $1,208 and $781) 11,519 8,601 5,543
--------- --------- ---------
100,810 70,536 53,574
--------- --------- ---------
Total expense 859,055 663,343 605,779
--------- --------- ---------
Income before income taxes and cumulative effect of accounting change 96,340 86,555 42,446
Provision for income taxes (Note 8) (35,216) (32,025) (16,950)
--------- --------- ---------
Income before cumulative effect of accounting change 61,124 54,530 25,496
Cumulative effect as of December 31, 1992 of change
in method of accounting for income taxes (Note 8) (663)
--------- --------- ---------
Net Income $ 61,124 $ 54,530 $ 24,833
========= ========= =========
Earnings per common and common equivalent share (Notes 11 and 12):
Income before cumulative effect of accounting change $ 1.28 $ 1.15 $ .57
Cumulative effect of accounting change (.02)
--------- --------- ---------
Net Income $ 1.28 $ 1.15 $ .55
========= ========= =========
Weighted average common and common equivalent shares outstanding (Note 12) 47,908,379 47,370,211 45,109,230
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
27
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Common Additional Unrealized
Stock Paid-In Treasury Gains and Retained
(in thousands except share amounts) $0.01 Par Capital Stock (Losses) Earnings Total
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1992 $ 143 $ 5,889 $ (30) $ 34,387 $ 40,389
Exercise of stock options for
1,212,050 shares of MAMSI
common stock 4 3,198 3,202
Recognition of the granting of
non-qualified stock options 1,957 1,957
Stock option tax benefit 1,584 1,584
50% stock dividend ($2 paid in
lieu of fractional shares) 73 (75) (2)
Net income 24,833 24,833
-------- -------- -------- -------- -------- --------
Balance, December 31, 1993 220 12,553 (30) 59,220 71,963
Adjustment to beginning balance
for change in accounting
method, net of tax of $718
(Note 2) $ 1,099 1,099
Exercise of stock options for
1,520,975 shares of MAMSI
common stock 10 6,127 6,137
Stock option tax benefit 10,973 10,973
100% stock dividend 226 (226)
Change in unrealized gains
and (losses), net of tax
benefit of $2,208 (3,377) (3,377)
Other 4 (3) 1
Net income 54,530 54,530
-------- -------- -------- -------- -------- --------
Balance, December 31, 1994 456 29,431 (33) (2,278) 113,750 141,326
Exercise of stock options for
967,800 shares of MAMSI
common stock 10 4,533 4,543
Stock option tax benefit 6,410 6,410
Change in unrealized gains
and (losses), net of tax
of $2,494 3,813 3,813
Net income 61,124 61,124
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 $ 466 $ 40,374 $ (33) $ 1,535 $ 174,874 $ 217,216
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
28
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
(in thousands) 1995 1994 1993
--------- --------- ---------
Cash flows from operating activities:
Net income $ 61,124 $ 54,530 $ 24,833
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,026 4,225 3,702
Provision for bad debts 47 370 1,018
Provision for deferred income taxes 4,971 (2,435) (1,868)
Loss on sale and disposal of assets 78 1,126 993
Cumulative effect of change in accounting principle 663
Recognition of the granting of non-qualified stock options 1,957
Other operating activities (15)
Changes in operating assets and liabilities, net of effects
of acquisition of subsidiary:
Increase in accounts receivable (24,279) (6,575) (532)
Decrease (increase) in prepaid expenses, advances and other (3,231) 726 (1,601)
Increase (decrease) in accounts payable (1,887) 5,016 (899)
Increase (decrease) in income taxes payable (2,589) (465) 1,654
Increase (decrease) in medical claims payable, net 23,476 (2,346) 25,763
Increase (decrease) in deferred premium revenue (3,219) 4,936 1,374
-------- -------- --------
Total adjustments (607) 4,578 32,209
-------- -------- --------
Net cash provided by operating activities 60,517 59,108 57,042
-------- -------- --------
Cash flows used in investing activities:
Purchases of short-term investments (426,601) (220,410) (228,414)
Sales of short-term investments 365,076 184,826 166,119
Purchases of property and equipment (10,027) (8,317) (7,162)
Acquisition of subsidiary (9,958)
Purchases of statutory deposits (1,405) (5,219) (1,381)
Maturities of statutory deposits 739 23 2,814
Purchases of other assets (725) (1,997) (553)
Proceeds from sale of assets 946 1,392 534
-------- -------- --------
Net cash used in investing activities (71,997) (59,660) (68,043)
-------- -------- --------
Cash flows provided by financing activities:
Proceeds from notes payable 300 200
Principal payments on notes payable (5,953) (678) (648)
Exercise of stock options 4,543 6,137 3,202
Stock option tax benefit 6,410 10,973 1,584
Other financing activities 1 (2)
-------- -------- --------
Net cash provided by financing activities 5,300 16,633 4,136
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (6,180) 16,081 (6,865)
Cash and cash equivalents at beginning of year 17,054 973 7,838
-------- -------- --------
Cash and cash equivalents at end of year $ 10,874 $ 17,054 $ 973
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
/TABLE
29
Mid Atlantic Medical Services, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose
subsidiaries are active in managed health care and other life and health
insurance related activities. MAMSI's principle markets currently
include Maryland, Virginia, the District of Columbia, Delaware, West
Virginia and North Carolina. MAMSI and its subsidiaries (collectively
referred to as the "Company") have developed a broad range of managed
health care and related ancillary products and deliver these services
through health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs"), a life and health insurance company, home health
care and home infusion services companies and 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 a voluntarily
enrolled population for a predetermined, prepaid fee, regardless of the
extent or nature of services provided to the enrollees. The HMOs offer
a full complement of health benefits, including physician, hospital and
prescription drug services.
The following are other significant wholly owned subsidiaries of MAMSI:
Physicians Health Plan of Maryland, Inc. ("PHP-MD") is an individual
practice association ("IPA") that provides physician services to certain
of the Company's HMOs.
Alliance PPO, Inc. ("Alliance") provides a delivery network of
physicians (called a preferred provider organization) to employers and
insurance companies in association with various health plans.
Mid Atlantic Psychiatric Services, Inc. ("MAPSI") provides psychiatric
services to third party payors or self-insured employer groups.
MAMSI Life and Health Insurance Company ("MAMSI Life") develops and
markets indemnity health products in addition to life, accidental death
and disability insurance.
HomeCall, Inc. and its wholly owned subsidiary, FirstCall, Inc.
(collectively referred to as "HomeCall"), were acquired by MAMSI in 1994
for approximately $10 million, including direct expenses. MAMSI
accounted for the acquisition using the purchase method of accounting.
HomeCall and HomeCall Infusion Services, Inc. ("HIS") provide in-home
medical care including skilled nursing, infusion and therapy to both
MAMSI's HMO members and other payors.
The significant accounting policies followed by MAMSI and its
subsidiaries are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MAMSI and
its subsidiaries. All significant intercompany balances have been
eliminated in consolidation.
MAJOR CUSTOMERS
The Company's operations are conducted within one business segment. A
significant portion of the Company's premium revenue is derived from
federal, state and local government agencies including governmental
employees and Medicaid and Medicare recipients. For the years ended
December 31, 1995, 1994, and 1993, approximately 7%, 9% and 11%,
respectively, of premium revenue was derived from federal government
agencies, and approximately 21%, 18%, and 11%, respectively, was derived
from state and local government agencies.
CASH EQUIVALENTS
Floating rate municipal putable bonds, which possess an insignificant
risk of loss from changes in interest rates, that have been held less
than three months are classified as cash equivalents.
30
SHORT-TERM INVESTMENTS
Short-term investments, consisting principally of marketable equity
securities, 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
as a separate component of stockholders' equity, net of the related tax
effect. Gains and losses are reported in earnings when realized. Gains
and losses on sales of securities are computed using the specific
identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the property and equipment. Leasehold improvements are
amortized on a straight-line basis over the lesser of the life of the
improvement or the term of the related lease.
STATUTORY DEPOSITS
Statutory deposits, consisting principally of municipal bonds and
treasury notes held in custodial accounts by state regulatory agencies,
are classified as held-to-maturity. These securities are stated at
amortized cost.
GOODWILL
The excess of cost over the fair value of net assets of the acquired
company in the 1994 purchase transaction is recorded as goodwill and is
classified in the consolidated balance sheets as an other asset.
Goodwill is amortized on a straight-line basis over 15 years.
HEALTH PREMIUM
Amounts charged for health care services are recognized as premium
revenue in the month for which enrollees are entitled to receive care.
Included in premium revenue are amounts due from entities that utilize
the Company's capitated primary care physician network, its medical
utilization management services and other services related to health
management and who self-fund, generally up to specified limits, certain
elements of medical costs, such as hospitalization and specialist
physicians. Premium revenue received in advance is recorded as deferred
premium revenue.
FEE AND OTHER
Amounts charged to third party payors solely for use of the Company's
provider network 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 utilization management services and under
which the Company bears no 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
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.
The 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
physicians and other medical providers as retainers for providing
continuing medical care.
31
The Company believes that its IBNR claims estimates are adequate to
satisfy its ultimate claims liabilities; however, the IBNR liability as
established may vary significantly from actual claims amounts, both
negatively or positively, and as such adjustments are deemed necessary
they are included in current operations.
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 income, such identified amounts are
classified as a reduction of hospitalization expense and, in the
consolidated balance sheets, such amounts are classified as a reduction
of medical claims payable.
INCOME TAXES
The income tax provision includes Federal and state income taxes both
currently payable and deferred because of differences between financial
reporting and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
EARNINGS PER COMMON SHARE
Earnings per common and common equivalent share is based upon the
weighted average number of common and common equivalent shares
outstanding. Common equivalent shares result from the assumed exercise
of outstanding stock options that have a dilutive effect when applying
the treasury stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments" ("Statement No. 107"), requires
disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents - The carrying amount reported in the
consolidated balance sheets approximates fair value.
Short-term investments - 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 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.
RECLASSIFICATIONS
Certain balances in the 1994 and 1993 financial statements have been
reclassified to conform to the 1995 presentation.
32
NOTE 2 - INVESTMENTS
Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement No. 115"). Under this
statement, securities are classified into categories and are valued
based upon this designation. Securities classified as available-for-
sale, which include debt and equity securities that the Company does not
have the positive intent to hold to maturity, are marked to market with
the resulting unrealized gain or loss reflected in stockholders' equity.
Securities classified as held-to-maturity, which includes debt
securities that the Company has both the positive intent and ability to
hold to maturity, are carried at amortized cost.
On January 1, 1994, the Company classified its short-term investments as
available-for-sale. As a result, the Company recorded net unrealized
gains of $1.1 million, net of tax, as a separate component of
stockholders equity. In addition, the Company classified its statutory
deposits as held to maturity with no effect on the recorded value.
Management re-evaluated these designations at December 31, 1995 and
determined that they continue to be appropriate.
The following is a summary of available-for-sale and held-to-maturity
securities at December 31, 1995:
-------------------------------------------------------
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 $ 20 $ 20
Obligations of states and political subdivisions 98,681 $ 1,306 $ 30 99,957
Municipal bond funds 68,204 68,204
Other debt securities 2,587 94 2,681
Accrued interest 1,163 1,163
--------- --------- --------- ---------
Debt securities 170,655 1,400 30 172,025
Equity securities 27,343 2,270 1,112 28,501
Mutual funds 4,197 11 4,208
--------- --------- --------- ---------
Short-term investments $ 202,195 $ 3,681 $ 1,142 $ 204,734
========= ========= ========= =========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 5,542 $ 167 $ 1 $ 5,708
Obligations of states and political subdivisions 4,103 181 4,284
Other investments 898 898
--------- --------- --------- ---------
Statutory deposits $ 10,543 $ 348 $ 1 $ 10,890
========= ========= ========= =========
/TABLE
33
The following is a summary of available-for-sale and held-to-maturity
securities at December 31, 1994:
-------------------------------------------------------
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 $ 610 $ 28 $ 582
Obligations of states and political subdivisions 75,229 $ 100 2,523 72,806
Municipal bond funds 38,089 38,089
Other debt securities 1,509 9 38 1,480
Accrued interest 868 868
--------- --------- --------- ---------
Debt securities 116,305 109 2,589 113,825
Equity securities 24,365 338 1,627 23,076
--------- --------- --------- ---------
Short-term investments $ 140,670 $ 447 $ 4,216 $ 136,901
========= ========= ========= =========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 6,000 $ 236 $ 5,764
Obligations of states and political subdivisions 3,611 $ 76 49 3,638
Other investments 266 266
--------- --------- --------- ---------
Statutory deposits $ 9,877 $ 76 $ 285 $ 9,668
========= ========= ========= =========
For the years ended December 31, 1995 and 1994, marketable equity
available-for-sale securities with a fair value at the date of sale of
$30,676,000 and $19,830,000, respectively, were sold. The gross
realized gains on such sales totaled $5,943,000 and $3,303,000, and the
gross realized losses totaled $1,149,000 and $794,000 for each of the
respective periods. Realized gains and losses are included in
investment income. Other sales of short-term investments consisted
principally of redemptions from municipal bond funds.
During 1994, statutory deposit investments with an amortized cost of
$2,384,000 were released by state regulatory agencies and transferred to
the Company's short-term investment portfolio. The unrealized gain at
the date of transfer for these investments was $46,000.
The amortized cost and estimated fair value of debt and marketable
equity securities at December 31, 1995, by contractual maturity, are
shown below. Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to
prepay obligations without prepayment penalties.
34
-------------------------
Estimated
Fair
(in thousands) Cost Value
-------------------------
AVAILABLE-FOR-SALE
Due in one year or less $ 78,158 $ 78,201
Due after one year through five years 33,502 33,841
Due after five years through ten years 40,312 41,220
Due after ten years 18,683 18,763
--------- ---------
Debt securities 170,655 172,025
Equity securities 27,343 28,501
Mutual funds 4,197 4,208
--------- ---------
$ 202,195 $ 204,734
========= =========
HELD-TO-MATURITY
Due in one year or less $ 3,707 $ 3,717
Due after one year through five years 4,324 4,476
Due after five years through ten years 1,181 1,213
Due after ten years 1,331 1,484
--------- ---------
$ 10,543 $ 10,890
========= =========
Net realized gains on sales of marketable equity securities was
approximately $307,000 in 1993.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
-------------------------
(in thousands) 1995 1994
-------------------------
Premium and fee accounts $ 43,737 $ 29,844
Home service accounts 2,869 3,230
Medical recoverables 10,419 3,257
Other 7,876 4,291
Less: allowance for doubtful accounts (3,638) (3,591)
--------- ---------
$ 61,263 $ 37,031
========= =========
Medical recoverables consist of refunds identified on paid claims that
will be collected in the following year. This amount has been recorded
as a reduction of medical expense in the consolidated statements of
income. Other receivables consist primarily of amounts due for
reinsurance recoveries and pharmacy rebates.
35
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
-------------------------
(in thousands) 1995 1994
-------------------------
Land, buildings and improvements $ 20,004 $ 18,061
Computer equipment and software 21,823 18,231
Office furniture and equipment 11,673 7,815
Leasehold improvements 295 183
--------- ---------
53,795 44,290
Less: accumulated depreciation and
amortization (15,091) (10,622)
--------- ---------
$ 38,704 $ 33,668
========= =========
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at December 31:
-------------------------
(in thousands) 1995 1994
-------------------------
Mortgage note payable secured by first deed
of trust on land and buildings with interest
due at 10.10 percent. Principal and interest
payments are due monthly based on a 27-year
amortization $ 5,013
Equipment term loan secured by certain
computer equipment with interest due at
9.8%. Principal is paid in equal monthly
installments with interest until maturity
in March 1996 $ 150 750
Other notes payable 254 294
Current portion (210) (726)
--------- ---------
Noncurrent portion $ 194 $ 5,331
========= =========
On September 1, 1995, the Company paid off in full, from available cash,
its mortgage note payable amounting to approximately $5.0 million.
The noncurrent portion of notes payable at December 31, 1995 mature in
future years as follows (in thousands):
1997 $ 60
1998 60
1999 60
2000 14
The Company has access to total line-of-credit and letter-of-credit
facilities of $10 million, which are subject to annual renewal.
Borrowings under facilities totalling $8.0 million bear interest at a
rate based on either the bank's prime rate or the Federal Funds rate
plus .75% and are secured by certain cash balances and short-term non-
equity securities. The remaining facility bears interest at either the
bank's prime rate or the Federal Funds rate plus 1.65% and is secured by
certain receivables. At December 31, 1995, approximately $1.65 million
was outstanding on one of the lines-of-credit at an interest rate of
6.38% and approximately $469,000 was outstanding in letters-of-credit.
Interest expense paid in cash during 1995, 1994 and 1993 was
approximately $1,541,000, $708,000 and $781,000, respectively.
36
NOTE 6 - MEDICAL CLAIMS PAYABLE
Medical claims payable consists of the following at December 31:
-------------------------
(in thousands) 1995 1994
-------------------------
Medical claims payable $ 112,362 $ 90,326
Coordination of benefits recoverable (3,872) (5,312)
--------- ---------
$ 108,490 $ 85,014
========= =========
NOTE 7 - REINSURANCE
M.D. IPA, OCI and MAMSI Life maintain reinsurance coverage to provide
for reimbursement of claims in excess of certain limits. Reinsurance
for health claims generally covers 80% of all hospital costs in excess
of a deductible amount per enrollee per year (subject to a $2,000,000
maximum lifetime reinsurance limit per person) but excludes coverage of
costs in excess of certain per diem rates. The deductible per enrollee
was raised from $100,000 to $200,000 effective October 1, 1994.
Reinsurance for life and accidental death claims generally covers all
settlements in excess of $50,000 per person subject to a $1,000,000
maximum recovery per person. Reinsurance recoveries for the years ended
December 31, 1995, 1994 and 1993 were approximately $128,000,
$3,029,000 and $1,268,000, respectively. In the consolidated statements
of income, reinsurance premiums are shown net of the related recoveries.
NOTE 8 - INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method
required by Statement No. 109, "Accounting for Income Taxes" ("Statement
No. 109"). The cumulative effect of adopting Statement No. 109 as of
January 1, 1993 was to reduce net income by approximately $663,000.
At December 31, 1995, the Company has net operating loss carryforwards
of approximately $1.7 million for income tax purposes that expire in
various years beginning in the year 2002. Approximately $1.6 million of
these carryforwards relate to HomeCall operations prior to MAMSI's
acquisition. The Company's ability to utilize these net operating loss
carryforwards is limited.
37
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) 1995 1994
-------------------------
Deferred tax liabilities:
Accelerated depreciation $ 2,597 $ 2,147
Unrealized investment gains 1,004
--------- ---------
Total deferred tax liabilities 3,601 2,147
--------- ---------
Deferred tax assets:
Accrued medical expenses 6,040 10,333
Premium revenue adjustments 710 1,555
Unrealized investment losses 1,490
Allowance recapture 1,229 1,322
Accrued pension expenses 1,199 661
Other 1,047 886
--------- ---------
Total deferred tax assets 10,225 16,247
Valuation allowance for deferred tax assets (128) (139)
--------- ---------
Net deferred tax assets 10,097 16,108
--------- ---------
$ 6,496 $ 13,961
========= =========
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 4,379 $ 15,540
Non-current assets - deferred income taxes 3,338
Current liabilities - deferred income taxes (1,005)
Non-current liabilities - deferred
income taxes (216) (1,579)
--------- ---------
Net deferred tax assets $ 6,496 $ 13,961
========= =========
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
(in thousands) 1995 1994 1993
----------------------------------------
Current:
Federal $ 32,217 $ 22,924 $ 15,828
State 5,844 3,861 2,990
--------- --------- ---------
Total current 38,061 26,785 18,818
--------- --------- ---------
Deferred:
Federal (2,207) 4,286 (1,755)
State (638) 954 (113)
--------- --------- ---------
Total deferred (2,845) 5,240 (1,868)
--------- --------- ---------
$ 35,216 $ 32,025 $ 16,950
========= ========= =========
/TABLE
38
The Company's tax provision differs from the statutory rate for Federal
income taxes for the years ended December 31 as follows:
(in thousands) 1995 1994 1993
----------------------------------------
Statutory rate (35%) $ 33,719 $ 30,294 $ 14,856
Tax-exempt interest (1,872) (1,171) (676)
State income taxes, net of Federal benefit 3,399 3,062 1,825
Increase (decrease) in valuation allowance for
deferred tax assets (11) (244) 149
Other, net (19) 84 796
--------- --------- ---------
$ 35,216 $ 32,025 $ 16,950
========= ========= =========
The income tax rate for 1993 was increased to 35% to reflect changes
adopted by the Revenue Reconciliation Act of 1993. This adjustment
resulted in an increase in the Company's net deferred tax assets of
$202,000 in 1993.
Total tax deposits made by the Company in 1995, 1994 and 1993 were
approximately $27,266,000, $25,191,000 and $15,656,000, respectively.
NOTE 9 - RISK POOL WITHHOLDINGS
Contracts with participating physicians allow for withholdings generally
ranging from 5% to 15% from primary care physicians and participating
specialists on capitation and fee for service payments. The withheld
amounts ultimately paid back to providers may be less than the total
amount withheld. Withheld liabilities and related medical expenses were
reduced by $22,802,000, $8,719,000 and $7,111,000 in 1995, 1994 and
1993, respectively.
NOTE 10 - RELATED PARTIES
For the years ended December 31, 1995, 1994 and 1993, certain members of
the Boards of Directors of MAMSI and subsidiary corporations who are
also participating physicians provided medical services to enrollees
totaling $9,699,000, $6,450,000 and $6,048,000, respectively, which
represents approximately 2% in all years 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 11 - EMPLOYEE BENEFIT 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 10% of
their pre-tax earnings annually and the Company makes a matching
contribution of 50% on the first 4% of contributions made by employees.
Employees vest immediately in the employee contributions and ratably
over six years in the Company contributions. During 1995, 1994 and
1993, the Company's contribution to the 401(k) plan aggregated $433,000,
$231,000 and $247,000, respectively.
Effective December 31, 1994, the Company discontinued its non-
contributory defined benefit pension plan (the "Plan"). Benefits earned
to date under the Plan, which covered substantially all employees, were
fully vested at that date. The obligation to provide these benefits was
satisfied as of December 31, 1995 through a combination of annuity
contracts, transfers of vested funds into the 401(k) plan and cash
withdrawals. The Company recognized a gain on the curtailment of the
defined benefit pension plan of approximately $345,000.
39
The net pension cost for the Plan was approximately $1,095,000 and
$832,000 in 1994 and 1993, respectively.
In accordance with a personal service contract negotiated by the
Company, its Chief Executive Officer is entitled to supplemental pension
benefits based upon years of service and attained salary levels.
Supplemental pension benefits of $1,682,000, $844,000 and $187,000 were
accrued for the years ended December 31, 1995, 1994 and 1993,
respectively.
INCENTIVE AND STOCK OPTION PLANS
In 1989, MAMSI implemented a non-qualified stock option plan whereby
options for the purchase of up to 750,000 shares may be granted to
officers and employees of the Company. Options issued under this plan
may be exercised at 25% of the market value at the time the options are
fully vested. The plan provides for reimbursement by the Company to the
recipients of the stock options for personal income taxes that result
upon the exercise of the options. In 1993, options under this plan for
439,800 shares of MAMSI stock were granted and vested immediately.
These options were exercised in 1993 and the Company recorded
compensation expense approximating $3,664,000 to account for the
granting and exercise of the options. At December 31, 1995, all options
that were granted to date under this plan have been exercised and no
further options will be granted under this plan.
In each year 1990 through 1995, MAMSI implemented a non-qualified stock
option plan whereby options for the purchase of shares of common stock
may be granted to officers and employees of the Company. Options under
the plans generally vest over a three-year period and are exercisable at
100 percent 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 Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for
these stock option grants.
Transactions involving the 1990 plan, which authorized options for the
purchase of up to 1,800,000 shares of common stock, are summarized as
follows:
1995 1994 1993
----------------------------------------
Outstanding, January 1 326,300 714,750 1,074,000
Granted --- 5,700 30,000
Exercised (1995 - $1.46 to $4.75 per share) (97,400) (394,150) (372,750)
Forfeited --- --- (16,500)
Outstanding, December 31 228,900 326,300 714,750
Exercisable, December 31 (1995 - $5.24
weighted average exercise price per share) 226,900 289,400 563,550
Available for grant, December 31 --- --- 5,700
Transactions involving the 1991 plan, which authorized options for the
purchase of up to 1,800,000 shares of common stock, are summarized as
follows:
1995 1994 1993
----------------------------------------
Outstanding, January 1 1,134,800 1,531,100 1,681,500
Granted 1,800 24,900 98,100
Exercised (1995 - $2.58 to $14.38 per share) (300,250) (418,200) (196,900)
Forfeited (2,400) (3,000) (51,600)
Outstanding, December 31 833,950 1,134,800 1,531,100
Exercisable, December 31 (1995 - $5.68
weighted average exercise price per share) 816,850 995,000 860,420
Available for grant, December 31 600 --- 21,900
/TABLE
40
Transactions involving the 1992 plan, which authorized options for the
purchase of up to 1,950,000 shares of common stock, are summarized as
follows:
1995 1994 1993
----------------------------------------
Outstanding, January 1 1,253,050 1,655,400 1,784,100
Granted 19,950 151,800 209,100
Exercised (1995 - $3.13 to $18.75 per share) (327,100) (496,850) (200,100)
Forfeited (21,100) (57,300) (137,700)
Outstanding, December 31 924,800 1,253,050 1,655,400
Exercisable, December 31 (1995 - $5.21
weighted average exercise price per share) 752,150 500,050 412,200
Available for grant, December 31 1,150 --- 94,500
Transactions involving the 1993 plan, which authorized options for the
purchase of up to 1,950,000 shares of common stock, are summarized as
follows:
1995 1994 1993
----------------------------------------
Outstanding, January 1 1,727,175 1,933,400 ---
Granted 69,150 104,550 2,038,500
Exercised (1995 - $5.63 to $15.31 per share) (243,050) (211,775) (2,500)
Forfeited (93,960) (99,000) (102,600)
Outstanding, December 31 1,459,315 1,727,175 1,933,400
Exercisable, December 31 (1995 - $6.55
weighted average exercise price per share) 860,175 508,925 33,500
Available for grant, December 31 33,360 8,550 14,100
Transactions involving the 1994 plan, which authorized options for the
purchase of up to 2,000,000 shares of common stock, are summarized as
follows:
1995 1994
-------------------------
Outstanding, January 1 1,984,140 ---
Granted 100,350 2,014,320
Exercised --- ---
Forfeited (145,400) (30,180)
Outstanding, December 31 1,939,090 1,984,140
Exercisable, December 31 (1995 - $26.87
weighted average exercise price per share) 625,330 ---
Available for grant, December 31 60,910 15,860
Transactions involving the 1995 plan, which authorized options for the
purchase of up to 3,000,000 shares of common stock, are summarized as
follows:
1995
----------
Outstanding, January 1 ---
Granted 2,078,850
Exercised ---
Forfeited (64,500)
Outstanding, December 31 2,014,350
Exercisable, December 31 ---
Available for grant, December 31 985,650
/TABLE
41
The Company has an incentive compensation plan whereby officers and key
employees receive bonuses based upon the annual operating results of the
Company. Incentive compensation expense was approximately $3,162,000
and $1,902,000 in 1994 and 1993, respectively. No management bonus was
earned in 1995. In addition, certain individuals will receive a cash
bonus based upon the achievement of certain measurable criteria other
than the annual operating results of the Company. These bonus amounts
are not significant.
NOTE 12 - COMMON STOCK
On April 17, 1995, the stockholders of MAMSI approved an increase in the
number of authorized shares of common stock from 60,000,000 to
100,000,000.
On June 15, 1994, the Board of Directors declared a 100% stock dividend.
The stock dividend was paid on August 5, 1994 to shareholders of record
on July 5, 1994.
On October 21, 1993, the Board of Directors declared a 50% stock
dividend. The stock dividend was paid on November 19, 1993 to
shareholders of record on November 1, 1993.
All references in the consolidated financial statements to per share
amounts, number of shares, and weighted average common and common
equivalent shares have been adjusted to reflect the stock dividends on a
retroactive basis.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office space under the terms of
noncancellable operating leases that expire at various dates through
2000. Rent expense relating to these operating leases approximated
$2,593,000, $984,000 and $720,000 in 1995, 1994 and 1993, respectively.
Future minimum lease commitments under non-cancelable operating leases
are as follows for the years ended December 31 (in thousands):
1996 $ 2,998
1997 2,467
1998 1,444
1999 833
2000 307
---------
$ 8,049
=========
During the third quarter of 1995, certain shareholders of MAMSI filed
four lawsuits in the United States District Court for the District of
Maryland against MAMSI and certain current and former directors and
officers. These actions have been consolidated and, on November 1,
1995, a consolidated Amended Class Action Complaint was filed on behalf
of all plaintiffs. The amended complaint alleges that MAMSI is liable
under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-
5 thereunder for its failure to disclose in a timely fashion that it had
been denied accreditation by the National Committee for Quality
Assurance ("NCQA") and that the officers and directors named as
defendants are liable under Section 10(b) and Rule 10b-5, directly and
as controlling persons of MAMSI, for the failure to disclose.
Plaintiffs seek to represent a class of all persons who purchased the
common stock of MAMSI from March 1, 1995 through June 15, 1995. The
Court has set a discovery schedule, and has set a trial date of December
2, 1996. Currently, the parties have undertaken limited discovery. The
Company is not able to predict the probability of a favorable or
unfavorable outcome or the amount of potential loss, in the event of an
unfavorable outcome. MAMSI believes it has meritorious defenses to the
claims raised in the amended complaint and intends to defend the action
vigorously.
The staff of the Securities and Exchange Commission has asked MAMSI to
provide certain information relating to the denial of accreditation by
the NCQA and to sales of stock by certain officers and directors prior
to the announcement of NCQA's action. MAMSI has complied voluntarily
with the Commission's requests.
42
The Company is involved in other various legal actions arising in the
normal course of business, some of which seek substantial monetary
damages. After review, including consultation with legal counsel,
management believes any ultimate liability that could arise from these
other actions would not materially affect the Company's consolidated
financial position or results of operations.
NOTE 14 - STATUTORY REQUIREMENTS
M.D. IPA, OCI and OCCI are subject to insurance department regulations
in the states in which they are licensed. The state with the highest
requirement obligated M.D. IPA and OCI to each maintain a statutory net
worth of $3.0 million at December 31, 1995 and 1994; at December 31,
1995, OCCI was required to maintain a statutory net worth of $1.0
million. The statutory net worth of M.D. IPA was approximately $57.8
million and $48.0 million for the respective periods. The statutory net
worth of OCI was approximately $19.8 million and $11.6 million for the
respective periods. The statutory net worth of OCCI was approximately
$2.5 million at December 31, 1995.
MAMSI Life is subject to insurance department regulations in Maryland,
its state of domicile. At December 31, 1995 and 1994, MAMSI Life was
obligated to maintain statutory capital and surplus funds of $3.8
million. The statutory capital and surplus funds of MAMSI Life totalled
approximately $20.9 million and $12.1 million for the respective
periods.
M.D. IPA, OCI, OCCI and MAMSI Life were in compliance with state
depository rules at December 31, 1995 and 1994. In addition, MAMSI Life
was in compliance with the applicable risk-based capital requirements
for life and health insurance companies at December 31, 1995 and 1994.
These MAMSI subsidiaries must notify state regulators before the payment
of any dividends to MAMSI and, in certain circumstances, must receive
positive affirmation prior to such payment.
NOTE 15 - 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 short-term investments in marketable 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, 1995,
approximately 18% of premium and home service receivables were due from
federal government agencies. The Company performs ongoing credit
evaluations of customers and generally does not require collateral.
43
Report of Ernst & Young LLP 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, 1995
and 1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. Our audits also included the financial
statement schedule listed in the Index to Financial Statement Schedule
at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. 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,
1995 and 1994, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles. 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.
As discussed in Notes 2 and 8 to the consolidated financial statements,
the Company changed its method of accounting for certain investments in
debt and equity securities in 1994 and for income taxes in 1993.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Washington, D.C.
February 23, 1996
44
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1995 AND 1994 (1)
1995 1995 1995 1995 1994 1994 1994 1994
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(in thousands except share amounts)
(unaudited)
Revenue $220,988 $235,516 $243,280 $255,611 $179,770 $181,803 $188,934 $199,391
Expense 193,724 213,476 220,088 231,767 158,065 162,636 168,066 174,576
Income before income tax 27,264 22,040 23,192 23,844 21,705 19,167 20,868 24,815
Net income 16,918 13,825 14,399 15,982 13,457 11,884 13,555 15,634
Earnings per common and common
equivalent share (2):
Net income 0.36 0.29 0.30 0.33 0.29 0.25 0.28 0.33
Notes
1. Certain 1994 quarterly revenue and expense amounts are different from
the amounts originally reported due to reclassifications necessary to
conform to the current presentation.
2. Earnings per common share are computed after giving effect to
dilutive stock options. All per share amounts and weighted average
common and common equivalent shares have been adjusted to reflect all
stock dividends on a retroactive basis. See Note 12 to the consolidated
financial statements.
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
"Directors and Executive Officers" in the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 15, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
"Directors and Executive Officers -- Directors' Compensation" and
"Executive Management Compensation" in the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 15, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
"Stock Owned by Management" and "Principal Stockholders" in the Proxy
Statement for MAMSI's annual meeting of shareholders to be held on April
15, 1996.
ITEM 13. CERTAIN RELATIONS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
"Executive Management Compensation" in the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 15, 1996.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of December 31, 1995 and 1994 ... 25
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993 ............................. 26
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 ......... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 ............................. 28
Notes to Consolidated Financial Statements ..................... 29
Report of Ernst & Young LLP Independent Auditors ............... 43
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
1995, 1994 and 1993 ..................................... 48
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.
48
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, 1993
Allowance for doubtful accounts - accounts receivable
$ 2,048 $ 1,018(1) $ 3,066
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 234(2) $ 149(3) $ 383
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts - accounts receivable
$ 3,066 $ 39 $ 486(4) $ 3,591
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 383 $ 244 $ 139
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts - accounts receivable
$ 3,591 $ 25 $ 22(1) $ 3,638
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 139 $ 11 $ 128
======== ======== ======== ======== ========
(1) The additions to the allowance were charged to premium revenue.
(2) The valuation allowance was created with the implementation of FASB
Statement No. 109, "Accounting for Income Taxes" on January 1, 1993.
(3) The additions to the allowance were charged to the tax provision.
(4) Total additions includes $155,000, which represents the allowance
established by an acquired company immediately prior to the acquisition.
The remaining additions were charged to premium revenue.
49
(a)(3)
EXHIBITS
See the Exhibit Index on pages 52-53 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has caused this report to be signed on its behalf by
undersigned thereunto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI")
(Registrant)
By: /s/ George T. Jochum 3/28/96
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President, and Director
Pursuant to the requirements of the Exchange Act, 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/ John L. Child 3/28/96
--------------------------------------------------
John L. Child Date
Director
By: /s/ John H. Cook, III, M.D. 3/28/96
--------------------------------------------------
John H. Cook, III, M.D. Date
Director
By: /s/ Peter L. Flaherty, Jr., M.D. 3/28/96
--------------------------------------------------
Peter L. Flaherty, Jr., M.D. Date
Vice Chairman and Director
By: /s/ Robert E. Foss 3/28/96
--------------------------------------------------
Robert E. Foss Date
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Walter Girardin 3/28/96
--------------------------------------------------
Walter Girardin Date
Director
By: /s/ Mark D. Groban, M.D. 3/28/96
--------------------------------------------------
Mark D. Groban, M.D. Date
Assistant Medical Director for Mental Health Services
and Director
By: /s/ Donald R. Hammett 3/28/96
--------------------------------------------------
Donald R. Hammett Date
Director
By: /s/ George T. Jochum 3/28/96
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President and Director
(Principal Executive Officer)
By: /s/ William M. Mayer, M.D. 3/28/96
--------------------------------------------------
William M. Mayer, M.D. Date
Director
51
By: /s/ Creighton R. Schneck 3/28/96
--------------------------------------------------
Creighton R. Schneck Date
Director
By: /s/ Mary E. Shocklee 3/28/96
--------------------------------------------------
Mary E. Shocklee Date
Controller and Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ Stanley F. Smith, R.Ph. 3/28/96
--------------------------------------------------
Stanley F. Smith, R.Ph. Date
Director
By: /s/ Alfred Talamantes 3/28/96
--------------------------------------------------
Alfred Talamantes Date
Chief Operating Officer and Director
By: /s/ James A. Wild 3/28/96
--------------------------------------------------
James A. Wild Date
Director
52
(a)(3), (b) and (c) List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
------- ----------------------- -------------------
3.1 Copy of Certificate of Incorporation of MAMSI dated
October 7, 1986..........................................................(1)
3.2 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated April 23, 1990.......................................(5)
3.3 Amended and Restated By-laws of MAMSI as of February 28, 1996............
3.4 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated June 2, 1994.........................................(5)
10.5 Copy of Agreement between M.D. IPA and the United States
Secretary of Health and Human Services dated December 20, 1985...........(1)
10.6 M.D. IPA's 1985 Stock Option Plan........................................(1)
10.7 Promissory Note signed by Thomas P. Barbera dated November 9, 1993.......(5)
10.16 1989 Non-Qualified Stock Option Plan.....................................(4)
10.17 Copy of 1989 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.20 Copy of Amendments to Agreement between M.D. IPA and the United
States Secretary of Health and Human Services dated December 24, 1987....(4)
10.26 1990 Non-Qualified Stock Option Plan.....................................(5)
10.27 Copy of 1990 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.32 Copy of Contract between George T. Jochum and M.D. IPA for the period
January 1, 1991 through January 1, 1994..................................(5)
10.35 1991 Non-Qualified Stock Option Plan.....................................(5)
10.36 Copy of 1991 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.41 Copy of Agreement between M.D. IPA and Surgical Care Affiliates, Inc.,
dated April 22, 1985.....................................................(5)
10.44 1992 Non-Qualified Stock Option Plan.....................................(5)
10.45 Copy of 1992 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.46 Agreement to Purchase 10 Taft Court dated February 10, 1992..............(5)
10.47 Agreement to Purchase 11 Taft Court dated February 14, 1992..............(5)
10.48 Equipment Term Loan Agreement with Signet Bank dated March 25, 1991......(5)
10.50 Amendment to Revolving Loan Agreement with Signet Bank dated
June 19, 1991............................................................(5)
10.53 Amendments to the Stock Option Plans effective May 15, 1991..............(5)
10.54 Summary Plan Description of the Employees Cash or Deferred Profit
Sharing (401k) Plan dated October, 1991..................................(5)
10.55 Defined Benefit Plan Agreement with the Principal Financial Group which
was approved September 12, 1991..........................................(5)
10.57 Mortgage and Loan Agreement with Aid Association for Lutherans dated
October 4, 1990..........................................................(5)
10.58 1993 Management Bonus Program............................................(2)
10.59 1993 CEO Bonus Program...................................................(2)
10.60 1993 Non-Qualified Stock Option Plan.....................................(2)
10.61 1993 Non-Qualified Stock Option Letter Sent to Key Employees.............(2)
10.62 1992 Amendment to Employment Agreement Between George T. Jochum and
the Company..............................................................(2)
10.63 Agreement to Purchase MAMSI Life and Health Insurance Company, as
amended..................................................................(2)
10.65 Agreement to Purchase 2301 Research Boulevard dated September 30, 1993...(3)
10.66 1994 Management Bonus Program............................................(4)
10.67 1994 Non-Qualified Stock Option Plan.....................................(4)
10.68 1994 Non-Qualified Stock Option Letter sent to Key Employees.............(4)
10.69 Revolving Loan Agreement with Signet Bank dated September 30, 1993.......(4)
10.70 Articles of Merger between M.D. IPA and MAMSOVA as of December 2, 1993...(4)
10.71 Agreement between OCI and the State of Maryland governing the Medical
Assistance Program ("Medicaid") dated August 5, 1993.....................(4)
10.72 List of States in which MAMSI Life is Licensed to Operate................(4)
10.73 1995 Management Bonus Program............................................(5)
10.74 1995 Non-Qualified Stock Option Plan.....................................(5)
10.75 1995 Non-Qualified Stock Option Plan letter sent to Key Employees........(5)
10.76 Agreement between OCI and the Commonwealth of Virginia governing the
Medical Assistance Program ("Medicaid") dated May 27, 1994...............(5)
10.77 1995 Amendment to Employment Agreement Between George T. Jochum and
the Company..............................................................
10.78 1996 Management Bonus Program............................................
10.79 1996 Non-Qualified Stock Option Plan.....................................
10.80 Form of Agreement between MAMSI and Employees Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................
53
10.81 Form of Agreement between MAMSI and George T. Jochum Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................
10.82 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1996 Non-Qualified Stock Option Plan...................
21 Subsidiaries of the Company..............................................
23 Consent of Independent Auditors..........................................
27 Financial Data Schedule..................................................
(1) Incorporated by reference to exhibits filed with the Company's
Registration Statement filed under the Securities Act of 1933 on Form S-
4 (Registration No. 33-9803).
(2) Incorporated by reference to exhibits filed with the Company's
Annual Report filed under the Securities Exchange Act of 1934 on Form
10-K for the fiscal year ended December 31, 1992.
(3) 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.
(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, 1993.
(5) 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.