The Company owns seven office buildings, one of which is sublet. These buildings are located in Rockville and Frederick, Maryland and total approximately 350,000 square feet of office and warehouse space. The Company's headquarters is located at 4 Taft Court, Rockville, Maryland 20850.
In addition, the Company leases approximately 206,000 square feet of office space in various locations within its service areas to support sales and administrative operations.
3. The possibility of increased litigation, legislation or regulation (such as the numerous class action lawsuits that have been recently filed against managed care companies and the pending initiatives to increase health care regulation) that might increase regulatory oversight which, in turn, would have the potential for increased costs.
State legislatures are considering a variety of proposals to increase access to health care coverage. This includes expanding the eligibility rules for the Medicaid Program and tax credits for the purchase of group or individual insurance. The U.S. Department of Labor recently promulgated claims processing regulations which establish processing times for pre- service and post-service claims and time frames for claims appeals. While the regulations are consistent with the Company's current operations, MLH and MAMSI's HMOs may need to modify some procedures to comply with these regulations. The State of Maryland has proposed similar claims processing regulations that MLH and MAMSI's HMOs will comply with by March 2001. These regulations establish a new definition for clean claims, specify the attachments insurers and HMOs may require with the original claim submission, and establish areas where an insurer or HMO may request additional information.
- ----------------------------------------------------------------------------- THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 - -----------------------------------------------------------------------------
Revenue for the year ended December 31, 2000 increased approximately $167.2 million or 12.7 percent over the year ended December 31, 1999. A 2.2 percent increase in net average HMO and indemnity enrollment resulted in an increase of approximately $27.1 million in health premium revenue while a 10.5 percent increase in average monthly premium per enrollee, combined for all products, resulted in a $134.7 million increase in health premium revenue. Management believes that commercial health premiums should continue to increase over the next twelve months as the Company continues to increase its commercial membership and as new and renewing groups are charged higher premium rates due to legislatively mandated benefit enhancements and general price increases initiated by the Company. This is a forward-looking statement. See "Forward-Looking Information" for a description of the risk factors that may affect health premiums per member.
Administrative expenses as a percentage of revenue ("administrative expense ratio") increased from 11.6 percent for the year ended December 31, 1999 to 12.1 percent for the year ended December 31, 2000. Management believes that the administrative expense ratio will increase modestly in 2001. Management's expectation concerning the administrative expense ratio is a forward-looking statement. The administrative expense ratio is affected by changes in health premiums and other revenues, development of the Company's expansion areas and increased administrative activity related to business volume.
Investment income increased $2.4 million primarily due to an increase in investment securities balances.
- ----------------------------------------------------------------------------- THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 - -----------------------------------------------------------------------------
The Company's consolidated net income for the year ended December 31, 1999 increased to $26,322,000 from $9,045,000 for the year ended December 31, 1998. Earnings per share increased from $.20 in year ended December 31, 1998 to $.64 for the year ended December 31, 1999. The increase in earnings is attributable to an increase in premiums per member, a reduction in the medical care ratio, offset somewhat by an increase in administrative expense. In addition, the 1998 results include a non-recurring item related to the results of an audit conducted in connection with the Company's participation in the FEHBP as well as the effect of certain real estate sales and retirements of equipment.
Revenue for the year ended December 31, 1999 increased approximately $129.4 million or 10.9 percent over the year ended December 31, 1998. Revenue for the year ended December 31, 1998 includes $5.7 million in gains related to the sale of certain Company owned real estate no longer required in its operations. Excluding these gains, year-over-year revenue increased 11.4 percent. A 6.9 percent increase in net average HMO and indemnity enrollment resulted in an increase of approximately $77.5 million in health premium revenue while a 4.3 percent increase in average monthly premium per enrollee, combined for all products, resulted in a $51.3 million increase in health premium revenue. The increase in HMO and indemnity enrollment is principally due to increases in the Company's commercial membership.
Included in the Company's year-to-date 1998 results is a $16,500,000 charge related to an audit conducted by the Office of Inspector General concerning the Company's participation in the FEHBP for the years 1992 - 1997. The report's findings indicated that in the years 1992 - 1994 the FEHBP was charged rates that exceeded the then market price. The report had no findings for the years 1995 - 1997.
The Company's business is not capital intensive and the majority of the Company's expenses are payments to physicians and health care practitioners, which generally vary in direct proportion to the health premium revenues received by the Company. Although medical utilization rates vary by season, the payments for such expenses lag behind cash inflow from premiums because of the lag in physician and health care practitioner billing procedures. In the past, the Company's cash requirements have been met principally from operating cash flow and it is anticipated that this source, coupled with the Company's operating line-of- credit, will continue to be sufficient in the future.
Net property and equipment increased from $43.7 million at December 31, 1999 to $47.2 million at December 31, 2000 primarily due to build-out and renovation costs associated with the purchase of a building, for use in the Company's operations, in late December 1999.
The Company believes that cash generated from operations along with its current liquidity and borrowing capabilities are adequate for both current and planned operations.
The Company's major business operations are principally conducted through its HMOs and insurance company. HMOs and insurance companies are subject to state regulations that, among other things, may require those companies to maintain certain levels of equity, and restrict the amount of dividends and other distributions that may be paid to their parent corporations (See Note 12 to the Consolidated Financial Statements). As of December 31, 2000, those subsidiaries of the Company were in compliance with all minimum capital requirements.
Consolidated Balance Sheets as of December 31, 2000 and 1999..... 26
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998............................... 27
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998........... 28
MAMSI delivers managed health care services principally through HMOs. The HMOs, MD- Individual Practice Association, Inc. ("M.D. IPA"), Optimum Choice,Inc.(R)("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc. of Pennsylvania ("OCIPA") arrange for health care services to be provided to an enrolled population for a predetermined, prepaid fee, regardless of the extent or nature of services provided to the enrollees. The HMOs offer a full complement of health benefits, including physician, hospital and prescription drug services. OCIPA ceased all operations in Pennsylvania during 2000.
The consolidated financial statements include the accounts of MAMSI and its subsidiaries. All significant intercompany balances have been eliminated in consolidation.
A significant portion of the Company's premium revenue is derived from federal, state and local government agencies, including governmental employees and Medicaid and Medicare recipients. For the years ended December 31, 2000, 1999 and 1998, approximately 8%, 8% and 11%, respectively, of premium revenue was derived from federal government agencies which is included in the Medicare and Risk segments (as described in Note 14), and approximately 14%, 21% and 18%, respectively, was derived from Maryland and Virginia state and local government agencies which is included in the Risk segment (as described in Note 14).
Certain balances in the 1999 and 1998 financial statements have been reclassified to conform with the 2000 presentation.
Investments are classified into two categories (available-for-sale or held-to-maturity) and are valued based upon this designation. Securities classified as available-for-sale, which include debt and equity securities that the Company does not have the positive intent to hold to maturity, are marked to market with the resulting unrealized gain or loss reflected in other comprehensive income. Securities classified as held-to-maturity, which are debt securities that the Company has both the positive intent and ability to hold to maturity, are carried at amortized cost. The Company classifies its statutory deposits as held-to-maturity with no effect on the recorded value. All other investments are classified as available-for- sale. Management re-evaluates these designations annually. During 1999, statutory deposit investments with an amortized cost of $1,166,000 were released by state regulatory agencies and transferred to the Company's investment securities portfolio. The unrealized loss at the date of transfer was $21,000. There were no such transfers during 2000.
The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 2000, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
Medical recoverables consist of refunds identified on paid claims. This amount has been recorded as a reduction of medical expense in the consolidated statements of operations. Other receivables consist primarily of amounts due for reinsurance recoveries, pharmacy rebates and interest accrued on statutory deposits and amended tax returns.
At December 31, 2000, the Company has state net operating loss carryforwards of $96,123,000 that expire in various years beginning 2006.
The Company records a valuation allowance for deferred tax assets when it is management's judgement that it is more likely than not that all or a portion of a deferred tax asset will not be realized. At December 31, 2000 and 1999, the Company recorded a valuation allowance related to state net operating loss carryforwards.
The Company has a defined contribution 401(k) savings plan covering all full-time employees. Employees are allowed to contribute up to 23% of their pretax earnings annually up to a maximum contribution of $10,500 and the Company makes a matching contribution of 50% on the first 4% of contributions made by employees. Employees vest immediately in the employee contributions and ratably over five years in the Company contributions. During 2000, 1999 and 1998, the Company's contribution to the 401(k) plan aggregated $1,264,000, $1,056,000 and $681,000, respectively.
Pursuant to the employment contracts entered into by the Company with key executives, effective in 2000, each executive is entitled to supplemental retirement income benefits based upon years of service and attained salary levels. Expense recognized related to this benefit was $2,866,000 for the year ended December 31, 2000.
On August 26, 1996, the Company established the MAMSI SCT to fund its obligations arising from its various stock compensation plans. MAMSI initially funded the SCT with 9,130,000 shares of newly issued MAMSI stock. In exchange, the SCT delivered a promissory note to MAMSI for approximately $129.9 million which represents the purchase price of the shares. Amounts owed by the SCT to MAMSI are repaid by cash received by the SCT or will be forgiven by MAMSI, which will result in the SCT releasing shares to satisfy MAMSI obligations for stock compensation.
For financial reporting purposes, the SCT is consolidated with MAMSI. The fair market value of the shares held by the SCT is shown as a reduction to stockholders' equity in the Company's consolidated balance sheets. All transactions between the SCT and MAMSI are eliminated. The difference between the cost and fair value of common stock held in the SCT is included in the consolidated financial statements as additional paid-in capital. At December 31, 2000 and 1999, the SCT held 10,019,756 and 10,010,850 shares of common stock at a fair market value of approximately $198.5 and $83.2 million, respectively.
M.D. IPA contracts with OPM to provide or arrange health services under the FEHBP. The contract with OPM and applicable government regulations establish premium rating requirements for the FEHBP. The premiums established under the OPM contract are subject to periodic review and audit to determine, if they were established in compliance with the community rating and other requirements under the program. The results of these audits could result in material adjustments to the Company's financial statements. The Company has been audited through 1999 with no significant findings other than noted in the next paragraph.
M.D. IPA, OCI, OCCI, OCIPA and MLH were in compliance with state depository rules at December 31, 2000 and 1999. OCCI was in compliance with its working capital requirement of $1.6 million at December 31, 2000. M.D. IPA, OCI, OCCI, OCIPA and MLH were in compliance with the applicable risk-based capital requirements at December 31, 2000 and 1999. These MAMSI subsidiaries must notify state regulators before the payment of any dividends to MAMSI and, in certain circumstances, must receive positive affirmation prior to such payment.
The National Association of Insurance Commissioners revised the Accounting Practices and Procedures Manual in a process referred to as Codification. The revised manual will be effective January 1, 2001. It is the intention of the domiciliary states of M.D. IPA, OCI, OCCI, OCIPA and MLH to adopt the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices and will result in changes to the accounting practices that M.D. IPA, OCI, OCCI, OCIPA and MLH use to prepare their statutory-basis financial statements. Management believes the impact of these changes to MAMSI and its insurance subsidiaries' statutory-basis capital and surplus as of January 1, 2001 will not be significant.
Management does not allocate assets in the measurement of segment profit or loss; therefore, jointly used assets are not allocated to the reportable segments.