In addition, the Company leases approximately 203,000 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.
1. Earnings (loss) 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.
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.
in an increase of approximately $171.5 million in health premium revenue while the average monthly premium per enrollee, combined for all products, remained approximately the same. Management believes that commercial health premiums should increase over the next twelve months as new and renewing groups are charged higher premium rates due to legislatively mandated benefit enhancements and general pricing increases initiated by the Company. Medicare premiums should increase due to the Company initiated reduction in certain lower rate Medicare service areas and the January 1 increase in overall Medicare premiums paid by the government. 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.
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 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
The administrative expense ratio for 1996 increased to 10.7 percent as compared to 10.5 percent for 1995. This increase is due primarily to increased salaries and expenses in certain administrative areas of the Company, including utilization management and customer service departments, as well as additional sales expenses in new expansion areas in 1996. Management believes that the administrative expense ratio will
------------------------------------------------------------------------ --THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 ------------------------------------------------------------------------ --
Revenue in 1995 increased 27 percent to $954.9 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 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.
Administrative expenses as a percentage of revenue ("administrative expense ratio") increased to 10.5 percent in 1995 as compared to 9.4 percent in 1994. Administrative expenses increased 42 percent, from $70.5 million in 1994 to $100.3 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, South Carolina, and Pennsylvania, 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.
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 and equity securities with readily determinable fair values be classified into categories, which then establish the appropriate accounting treatment. At January 1, 1995, 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.
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 expense.
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 health premium revenues received by the Company. Although medical utilization rates vary by season, the payments for such expenses lag behind cash inflow from premiums because of the lag in provider billing procedures. In the past, the Company's cash requirements have been met principally from operating cash flow and it is anticipated that this source, coupled with the Company's operating line of credit, will be sufficient in the future.
Additional paid-in capital increased from $40.4 million at December 31, 1995 to $173.3 million at December 31, 1996, principally due to the establishment of a stock compensation trust. This trust is used to provide shares of the Company s stock to meet its stock option plan obligations. Amounts recorded for treasury stock increased in 1996 by approximately $41.2 million due to stock purchases under the Company's stock repurchase program.
The Company believes that cash generated from operations along with its current liquidity and borrowing capabilities are adequate for both current and planned expanded operations. Certain 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.
Consolidated Balance Sheets as of December 31, 1996 and 1995..... 24
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994............................... 25
Interest expense paid in cash during 1996, 1995 and 1994 was approximately $688,000, $1,541,000 and $708,000, respectively.
At December 31, 1996, the Company has net operating loss carryforwards of approximately $1.3 million for income tax purposes that expire in various years beginning in the year 2002. Approximately $1.2 million of these carryforwards relate to HomeCall, Inc. operations prior to MAMSI's acquisition. The Company's ability to utilize these net operating loss carryforwards is limited.
Pro forma information regarding net income and earnings per share are required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.3% and 6.7%; volatility factors of the expected market price of the Company's common stock of .47 and .53 and a weighted average life of the options of 3 years. The Company anticipates that it will declare no dividends.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially effect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
granted. The Company accounts for these stock option grants in accordance with APB 25, and, accordingly, recognizes no compensation expense for these stock option grants. Transactions relating to the 1990 - 1996 plans are summarized as follows: