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.
4. Days are presented exclusive of skilled nursing, neonatal intensive care and psychiatric inpatient care.
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.
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 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 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, -----------------------------------------------------------------------
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.
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.
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.
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.
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.
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.
----------------------------------------------------------------------- THE YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, -----------------------------------------------------------------------
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.
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
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.
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.
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.
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.
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.
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:
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:
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:
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: