-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DZ/QeUvpjtnRb1+IWEa2zLEkI0baSeq7NXOQrMuaInHwZYF0WpL1yNJSnD2xhCs2 CzshPI+DkPh/p7DRfGikig== 0001188112-04-001856.txt : 20041122 0001188112-04-001856.hdr.sgml : 20041122 20041122150922 ACCESSION NUMBER: 0001188112-04-001856 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20041122 DATE AS OF CHANGE: 20041122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIIX GROUP INC CENTRAL INDEX KEY: 0001064063 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE CARRIERS, NEC [6399] IRS NUMBER: 223586492 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14593 FILM NUMBER: 041160501 BUSINESS ADDRESS: STREET 1: 2 PRINCESS ROAD CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648 BUSINESS PHONE: 6098962404 MAIL ADDRESS: STREET 1: 2 PRINCESS ROAD CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648 10-K 1 t10k-3883.txt 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Period From _________ to __________. Commission File Number: 001-14593 THE MIIX GROUP, INCORPORATED (Exact name of Registrant as specified in its charter) DELAWARE 22-3586492 (State or other jurisdiction of incorporation or (I.R.S. employer organization) identification number) TWO PRINCESS ROAD, LAWRENCEVILLE, NEW JERSEY 08648 (Address of principal executive offices and zip code) (609) 896-2404 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: ------------------------------------- ------------------------------------ Name of Each Exchange on Which Title of Each Class Registered ------------------------------------- ------------------------------------ Common Stock, par value $0.01 per share None ------------------------------------- ------------------------------------ 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 periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES / / NO /X/ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES / / NO /X/ The aggregate market value on October 28, 2004 of the voting stock held by non-affiliates of the registrant was $1,119,474. As of October 28, 2004, the number of outstanding shares of the Registrant's Common Stock was 13,993,425. THE MIIX GROUP, INCORPORATED 2003 FORM 10-K TABLE OF CONTENTS PART I ......................................................................2 ITEM 1. BUSINESS..............................................................2 ITEM 2. PROPERTIES...........................................................20 ITEM 3. LEGAL PROCEEDINGS....................................................20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................21 PART II .....................................................................21 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................................................21 ITEM 6. SELECTED FINANCIAL DATA..............................................25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.............................................26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................................38 ITEM 9A. CONTROLS AND PROCEDURES..............................................38 ITEM 9B. OTHER INFORMATION....................................................38 PART III .....................................................................38 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................38 ITEM 11. EXECUTIVE COMPENSATION...............................................39 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......44 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................49 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...............................51 PART IV .....................................................................51 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......51 SIGNATURES....................................................................60 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES..................................F-1 1 FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements that are based on the Company's estimates and expectations concerning future events and anticipated results and are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. In particular, the Company anticipates that its capital reserves and liquidity are insufficient to allow it to continue to operate. This and other risks are set forth in the Company's filings made from time to time with the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "project" and similar expressions identify forward-looking statements. The Company's expectations regarding future earnings, wind-down initiatives, underwriting, cost controls, adequacy of loss and loss adjustment expense reserves, and enhancing shareholder value depend on a variety of factors, including economic, competitive and market conditions which may be beyond the Company's control and are thus difficult or impossible to predict. In light of the significant uncertainties inherent in the forward-looking information herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company's objectives or plans will be realized. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. PART I ITEM 1. BUSINESS The MIIX Group, Incorporated ("The MIIX Group") was organized as a Delaware corporation in October 1997 and, until September 28, 2004 (see "Subsequent Events" below), was the parent company of a group of medical malpractice insurance and insurance-related subsidiaries. Upon its formation, The MIIX Group succeeded to the business of its predecessor. Until about 1991, the Company's business was based primarily in New Jersey and written through its largest insurance subsidiary, MIIX Insurance Company ("MIIX"). During 1991-2000, the Company expanded to 24 other states, writing through both MIIX and Lawrenceville Property and Casualty Company ("LP&C"). The MIIX Group began operating as a publicly traded company on July 30, 1999. As a result of net losses reported in 2000 and 2001, the insurance subsidiaries ceased writing new or renewal business in all states by September 1, 2002, consistent with the withdrawal requirements of individual states. By December 31, 2003, all insurance policies written by MIIX had expired. Since ceasing to write new insurance policies in 2002, the Company's business has consisted principally of managing the runoff of existing claims, the Company's investment portfolio, and the operations of a New Jersey insurance company, MIIX Advantage Insurance Company of New Jersey, which was renamed "MDAdvantage Insurance Company of New Jersey"("MDAdvantage"). For purposes of this Annual Report on Form 10-K, the "Company" refers at all times to The MIIX Group and its subsidiaries, collectively; the term "The MIIX Group" refers at all times to The MIIX Group, Incorporated, excluding its subsidiaries. "MIIX" refers to MIIX Insurance Company. "MIIX Advantage" and "MDAdvantage" both refer to MIIX Advantage Insurance Company of New Jersey, renamed in August 2004 to MDAdvantage Insurance Company of New Jersey. MDAdvantage is not owned by the Company, rather it has a contractual arrangement for its management with New Jersey State Medical Underwriters, Inc. (the "Underwriter"), a subsidiary of The MIIX Group. See Part I, Item 13 of this Form 10-K. SUBSEQUENT EVENTS. In furtherance of the ongoing monitoring of the runoff of MIIX's insurance operations, the New Jersey Department of Banking and Insurance ("New Jersey Department") appointed an Administrative Supervisor in April 2004. MIIX continued to operate in voluntary solvent runoff until September 28, 2004 when it was placed in rehabilitation by the New Jersey Department. See "Regulation - Order of Rehabilitation" on page 17 of this Form 10-K. MIIX's excess reinsurance contracts currently in place contain a provision allowing reinsurers to offer additional reinsurance coverage that MIIX is obligated to accept. In September and October 2004, the reinsurers initiated requests for 2 additional premiums in accordance with contract terms. MIIX is without sufficient surplus to purchase the requested coverage. See "Reinsurance - Reinsurance Ceded." During the summer of 2004, the Company retained financial advisors to assist in exploring all of its alternatives. In connection with that exploration, the financial advisors have contacted more than 50 prospective purchasers of assets of MIIX or investors in MIIX. As a consequence of that effort, the Company has received one indication of interest from MDAdvantage to acquire certain assets of the Underwriter and one additional possible offer. The Company is proceeding to negotiate with MDAdvantage the documentation relating to a possible sale of the Underwriter's assets, subject to the receipt of all necessary approvals and "higher or better offers" prior to closing. The Company is also continuing to seek other buyers for its assets. Lawrenceville Re, Ltd. ("Lawrenceville Re") is the sole remaining operating asset of the Company, and it has minimal activity. The Company anticipates that its current cash position will not allow it to continue to operate and that it will be required to wind up its business. Significant aspects of the description of the Company's business contained in this report are historical in nature and are not necessarily reflective of the Company's current activities. OVERVIEW HISTORY OF BUSINESS Medical professional liability insurance, also known as medical malpractice insurance, insures the physician, other medical professionals or health care institutions against liabilities arising from the rendering, or failure to render, medical professional services. Under the typical medical professional liability policy, the insurer also is obligated to defend the insured against alleged claims. The Company had total revenues and a net loss of $15.4 million and $314.7 million, respectively, in 2003, total revenues and a net loss of $165.0 million and $116.0 million, respectively, in 2002 and total revenues and a net loss of $233.3 million and $157.6 million, respectively, in 2001. As of December 31, 2003, the Company had total assets of $1.3 billion and a deficiency in total stockholders' equity of $(278.5) million. RESERVE ADJUSTMENTS In 2001 and 2002, prior year gross loss and Loss Adjustment Expense ("LAE") reserves were adjusted by $117.9 million and $161.2 million, respectively, to reflect adverse development on several lines of business including New Jersey and other states' physicians, Pennsylvania hospitals and hospital excess. The adjustments were related to increases in severity and frequency. These trends continued in 2003 and were complicated by acceleration in the claims process attributable to tort and judicial reform in Pennsylvania and New Jersey and the impact of MIIX and LP&C entering voluntary solvent runoff in 2002. Loss and LAE reserves for 2003 were established by the Company as a result of an internal actuarial review, an external opining actuarial review and an external actuarial review performed in conjunction with the filing of MIIX's Annual Audited Statutory Financial Statements ("Audited Report"). As a result of these reviews, prior year gross loss and LAE reserves were increased by $353.0 million. The increase was attributable to adverse development and increased severity in the New Jersey and Pennsylvania physician and hospital excess lines of business. As of December 31, 2003, MIIX's Total Adjusted Capital, as filed in its Audited Report, was a deficit of $(305.6) million, which is below the Mandatory Control Level. MIIX continued to operate in voluntary solvent runoff until September 28, 2004 when the State of New Jersey entered an Order of Rehabilitation of MIIX. See "Regulation - Order of Rehabilitation." Additionally, MIIX completed the merger of LP&C into MIIX on December 31, 2003. As a result of the losses occurring in 2001 and 2002, the Company's various insurance subsidiaries were required by the New Jersey Department and other applicable state regulatory bodies to cease writing insurance by September 1, 2002. As a result, the Company's business activities since that date have been limited to managing claims, managing its investment portfolio and, through its underwriting subsidiary, providing claims management and underwriting and related services to MIIX and MDAdvantage. By December 31, 2003, all insurance policies written by the Company had expired. 3 OTHER RECENT DEVELOPMENTS: 2003-2004 Primarily as a result of the dramatic increases in reserves over the past three years, the Company has experienced a number of adverse developments. The following are among the most significant. During 2003, MIIX entered into an Order with the New Jersey Department that set forth the framework for the regulatory monitoring of MIIX and established certain operating limitations on MIIX. On September 28, 2004, the Superior Court of New Jersey entered an Order placing MIIX into rehabilitation. See "Regulation - - Order of Rehabilitation" on page 17 of this Form 10-K. The trading of The MIIX Group's common stock was suspended at the opening of business on April 28, 2003 by the New York Stock Exchange ("NYSE") because The MIIX Group was "below criteria" as its total capitalization was less than $50 million over a 30-day trading period and stockholders' equity was less than $50 million. The MIIX Group's common stock now trades on the Over-The-Counter ("OTC") Bulletin Board under the ticker symbol "MIIX." See "Risks and Uncertainties." During 2002, the Company engaged financial advisors to assist it in obtaining offers for the Company's assets. No viable offers to make a significant investment in the Company or to purchase all of the Company were received. In 2004, the Company engaged additional financial advisors to assist it in exploring all available alternatives, and the Company continues to be interested in entertaining any and all offers by any interested parties for its assets and/or for investment in the Company. In connection with that exploration, the financial advisors have contacted more than 50 prospective purchasers of assets of the Company or investors in the Company. As a consequence of that effort, the Company has received one indication of interest from MDAdvantage to acquire certain assets of the Underwriter and one additional possible offer. The Company is proceeding to negotiate with MDAdvantage the documentation relating to a possible sale of the Underwriter's assets, subject to the receipt of all necessary approvals and "higher or better offers" prior to closing. The Company is also continuing to seek other buyers for its assets. CLAIMS Although entry of the Order of Rehabilitation for MIIX on September 28, 2004, gave the New Jersey Department authority over claims, the Company's Claims Department was responsible for claims investigation, establishment of appropriate case reserves for loss and Allocated Loss Adjustment Expense ("ALAE"), defense planning and coordination, supervision of attorneys engaged by the Company to defend a claim and negotiation of the settlement or other disposition of a claim at December 31, 2003. All of the Company's primary policies require it to defend its insureds. Medical malpractice claims often involve the evaluation of highly technical medical issues, severe injuries and conflicting medical opinions. In almost all cases, the person bringing the claim against the insured is already represented by legal counsel when the claim is reported to the Company. Litigation defense has historically been provided almost exclusively by private law firms with lawyers whose primary focus is defending malpractice cases. LOSS AND LAE RESERVES As discussed above, the Company has recorded substantial increases in its loss and LAE Reserves in each of the past three years. In consequence, the Company ceased writing medical malpractice insurance in New Jersey as of September 1, 2002, and in all other states in accordance with their respective specific requirements. In September 2004, MIIX was determined by the New Jersey Department to be in hazardous financial condition, and on September 28, 2004, an Order of Rehabilitation was entered with respect to MIIX. The discussion that follows summarizes the methodology employed by the Company in establishing loss and LAE reserves and some of the adverse developments experienced by the Company over the past few years. Loss reserves recorded by the Company include estimates of amounts to be paid for losses and for LAE. LAE consists of two types of costs, ALAE and Unallocated Loss Adjustment Expenses ("ULAE"). ALAE are settlement costs that can be allocated to a specific claim such as attorney fees and court costs. ULAE consists of costs that are general in nature and cannot be allocated to any specific claim, including 4 mainly salaries and overhead associated with the Company's Claims Department. ULAE reserves recorded by the Company represent management's best estimate of the internal costs necessary to settle all incurred claims, including Incurred But Not Reported ("IBNR") claims. The determination of loss and LAE reserves involves the projection of ultimate losses through quarterly actuarial analyses. Included in the Company's claims history are losses and LAE paid by the Company in prior periods, and case reserves for anticipated losses and ALAE developed by the Company's Claims Department as claims are reported and investigated. Management relies primarily on such historical loss experience in determining reserve levels on the assumption that historical loss experience provides a good indication of future loss experience despite the uncertainties in loss trends and the delays in reporting and settling claims. There are significant uncertainties in estimating ultimate losses in the casualty insurance business. The uncertainties are even greater for companies writing long-tail casualty insurance, such as medical malpractice insurance, and in particular the occurrence-like coverage that make up a substantial portion of the Company's current reserves. These additional uncertainties are due primarily to the longer period of time during which an insured may seek coverage for a claim with respect to an occurrence-like policy as opposed to a claims-made policy. In 2004, the Company is still experiencing development on claims associated with coverage written in the 1970's. With the longer claim reporting and development period, reserves are more likely to be affected by, among other factors, changes in judicial liability standards and interpretation of insurance contracts, changes in the rate of inflation and changes in the propensities of individuals to file claims. These uncertainties inherent in estimating losses have been exacerbated by several factors in the past several years. The Company's entry into runoff in 2002 resulted in a continuous decline of policies in force during 2003, with no policies remaining in force as of December 31, 2003. This caused a significant and continuing decrease in new claim reports as well as an overall significant decrease in total pending claims. The decreased pending claims, and especially the decreased new claim reports, which consumed disproportionately longer set-up time, have allowed a greatly increased time for each claim handler to work on existing claims. This has resulted in an acceleration in the setting up of case reserves, departing significantly from the historic patterns the Company has relied upon to estimate future development and IBNR. Simultaneously, significant changes in the litigation environment in New Jersey, which represents approximately 50% of the Company's reserves, resulted in faster processing of claims and a corresponding acceleration in case reserving. The court system in New Jersey instituted its "Best Practices" initiative in September 2000 which was intended to speed cases through the courts. This initiative has substantially speeded up trials in New Jersey and thus has affected the entire claims management process. In June 2003, the courts issued a public report stating that the court system in New Jersey had reached its lowest level of backlogged cases since 1980. As a result of these various uncertainties, estimates reflected in earlier loss reserves may be revised, as has been the case in each of the past three years. METHODOLOGIES. The Company sets and adjusts financial statement loss and LAE reserves beginning with the claims adjudication process. Claims examiners establish case reserves by a process that includes extensive development and use of statistical information that allows for comparison of individual claim characteristics against historical patterns and emerging trends. This process also provides critical information for use in establishing the IBNR component of the financial statement reserves. The determination of loss and LAE reserves involves the projection of ultimate loss and ALAE through various actuarial techniques, including: o Incurred Development Method o Berquist-Sherman Method o Bornhuetter-Ferguson Method o Frequency-Severity Method o ALAE-to-Indemnity Ratio Method o Audit Method 5 ULAE reserves are projected through a Paid-to-Paid Ratio Method. A brief description of each of these methods follows: o Incurred Development Method: Historical patterns of loss and ALAE emergence are observed and selections of period-to-period development factors are made to estimate the relative development within a Coverage Year from one maturity point to the next. These selected factors are applied to the latest reported incurred loss and ALAE amounts for each Coverage Year. This method is used mainly for relatively mature Coverage Years. o Berquist-Sherman Method: Changing conditions in the claim management process can cause significant distortions in reserve projections. The Berquist-Sherman Method adjusts the historical data to the conditions inherent in the most recent data. This allows selections of period-to-period development factors which take into account the changes in conditions. o Bornhuetter-Ferguson Method: This method relies on the assumption that the remaining unreported loss and ALAE amounts are a function of the total expected amounts rather than a function of the latest reported incurred loss and ALAE amounts. Expected future development amounts are added to current reported incurred loss and ALAE amounts for each Coverage Year. The expected future development amounts for each Coverage Year are derived by multiplying an a-priori expected ultimate loss and ALAE amount by the estimated percentage of ultimate loss and ALAE unreported, to date. This percentage is based on the factors selected within the Incurred Development Method. The a-priori expected ultimate loss and ALAE amount is derived via either of two approaches: (1) it is assumed to match the prior quarter's selected ultimate loss and ALAE amount; or (2) it is based upon a more mature Coverage Year's selected ultimate loss and ALAE amount as a ratio to earned premium, the current Coverage Year's earned premium and estimated effects of rate and mix-of-business differences between the more mature and current Coverage Years. This method is used mainly for relatively immature Coverage Years. o Frequency-Severity Method: Ultimate reported claim counts and ultimate average loss and ALAE per claim are projected separately, and then multiplied together. Ultimate claim counts are derived in a manner similar to the Incurred Development Method; however, the implied ultimate claim counts are analyzed as ratios to exposure level to achieve implied frequencies. Final frequencies are selected judgmentally and multiplied by the exposure measure to obtain final ultimate reported claim counts. Ultimate average loss and ALAE per claim are derived through curve-fitting techniques in which the a-priori parameters are the estimated ultimate reported claim counts and ultimate loss and ALAE amounts achieved via another method. Selected curve fits are extrapolated to more recent Coverage Years for which credible severity information may not yet exist. This method is used mainly for relatively immature Coverage Years. o ALAE-to-Indemnity Ratio Method: This method is only used to estimate ultimate ALAE amounts when loss and ALAE are projected independently. Both ALAE and indemnity amounts must have been projected to ultimate using other methodologies. Then ratios of (ultimate ALAE)-to-(ultimate indemnity) are calculated for each Coverage Year, and appropriate ratios are judgmentally selected for each year. More mature Coverage Years serve as a basis for the selections in immature years. Then, the selected ratios are multiplied by the ultimate indemnity amounts. This method is used mainly for relatively immature Coverage Years. o Audit Method: Claims personnel review individual claims and estimate their ultimate loss and ALAE amounts based on their specific characteristics. This method is mainly used for segments of the business with low frequency and high severity exposures. o Paid-to-Paid Ratio Method: Historical ratios of (paid ULAE)-to-(paid indemnity and ALAE) are calculated and serve as a basis for the judgmental selection of a corresponding ratio to be expected in the future. This ratio is applied to the estimated indemnity and ALAE reserves. 6 RESERVES BY POLICY TYPE AND YEAR. The Company also reserves by policy type and by year. In addition to claims-made insurance coverage, the Company offered traditional occurrence professional liability insurance coverage from 1977 through 1986 and offered a form of occurrence-like coverage, "modified claims-made," from 1987 to August 31, 2002. The Company's modified claims-made policy was the Permanent Protection Policy ("PPP"). Under the PPP, coverage was provided for claims reported to the Company during the policy period arising from incidents since inception of the policy. The PPP included "tail coverage" for claims reported after expiration of the policy for occurrences during the policy period, and thus was reserved on an occurrence basis. As displayed in the table below, loss and LAE reserves carried for PPP policies and traditional occurrence professional liability policies constituted approximately 67% of the gross loss and LAE reserves at December 31, 2003. The following table provides a summary of gross loss and LAE reserves by policy type.
Gross Loss and Loss Adjustment Expense Reserves by Policy Type (In thousands) Professional Liability --------------------------------------------------- Occurrence/ % of Claims % of % of Total Gross Occurrence-Like Total Made Total Other Total Reserves --------------- ----- -------- ----- ------- ----- ----------- Gross Reserves Held as of: December 31, 2001 $832,290 69.5% $357,495 29.9% $7,213 0.6% $1,196,998 December 31, 2002 750,175 65.1% 395,774 34.4% 5,686 0.5% 1,151,635 December 31, 2003 812,527 66.7% 401,564 32.9% 4,866 0.4% 1,218,957
As displayed in the above table, the proportion of the gross loss and LAE reserves held on claims-made medical professional liability policies has grown from 29.9% of total gross loss and LAE reserves held at December 31, 2001 to 32.9% at December 31, 2003. This has primarily been the result of the Company's claims-made policy form writings during 1997 through 2002. New Jersey Physician business was primarily written under the occurrence-like PPP policy. The majority of policies sold in other states were claims-made. Since a significant portion of the Company's reserves are recorded on an occurrence basis, and given the long time that typically elapses between the coverage incident and the resolution of the claim, IBNR reserves have consistently represented a majority of the gross reserves recorded by the Company. The following table summarizes the components of gross loss and LAE reserves, including ULAE reserves, and indicates that IBNR reserves constitute a majority of gross reserves on a consistent basis:
Components of Gross Loss and Loss Adjustment Expense Reserves (In thousands) Loss and Loss and Total ALAE Case % of ALAE IBNR % of ULAE % of Gross Reserves Total Reserves Total Reserves Total Reserves --------- ------ --------- ------ -------- ----- ---------- Gross Reserves Held as of: December 31, 2001 $429,493 35.9% $719,268 60.1% $48,237 4.0% $1,196,998 December 31, 2002 436,873 37.9% 696,287 60.5% 18,475 1.6% 1,151,635 December 31, 2003 463,686 38.0% 737,070 60.5% 18,201 1.5% 1,218,957
The Company issued occurrence policies since 1977 and occurrence-like PPP policies since 1987. There is a significant lag in reporting of incidents or occurrences inherent in the medical malpractice insurance industry. As a result the Company continues to adjust open claims that are associated with coverage written in the 1970's. 7 The following table illustrates the amount and percentage of gross loss and LAE reserves held by the Company at December 31, 2003 categorized by year. Gross Loss and Loss Adjustment Expense Reserves By Coverage Year As of December 31, 2003 (In thousands) Coverage Year Gross Reserves % of Total - ---------------------------------------------- -------------- ------------ 1977-93..................................... $ 54,046 4.4% 1994........................................ 22,686 1.9% 1995........................................ 24,410 2.0% 1996........................................ 48,590 4.0% 1997........................................ 65,042 5.3% 1998........................................ 127,485 10.5% 1999........................................ 173,043 14.2% 2000........................................ 219,946 18.0% 2001........................................ 264,136 21.7% 2002........................................ 186,341 15.3% 2003........................................ 33,232 2.7% ------------ ------ Total Gross Reserves held by the Company.... $ 1,218,957 100.0% ============ ====== As shown in the above tables, at December 31, 2003, approximately 67% of gross reserves are occurrence based; over 60% of gross reserves are IBNR reserves, and approximately 72% of gross reserves relate to the most recent five coverage years, which are the most immature (and, therefore, most subject to variability) in terms of loss development. Activity in the liability for unpaid losses and LAE gross of reinsurance is summarized as follows:
Years Ended December 31, -------------------------------------- 2003 2002 2001 -------- -------- -------- (In thousands) Balance at January 1, gross of reinsurance recoverable................................... $1,151,635 $1,196,998 $1,142,530 Incurred related to: Current year............................... 33,582 150,612 230,399 Prior years................................ 352,983 161,207 117,881 ---------- ---------- ---------- Total incurred.................................. 386,565 311,819 348,280 ---------- ---------- ---------- Paid related to: Current year............................... 350 2,648 2,570 Prior years................................ 318,893 354,534 291,242 ---------- ---------- ---------- Total paid...................................... 319,243 357,182 293,812 ---------- ---------- ---------- Balance at December 31, gross of reinsurance recoverable................................... 1,218,957 1,151,635 1,196,998 Reinsurance recoverable......................... 425,785 457,005 463,275 ---------- ---------- ---------- Balance at December 31, net of reinsurance...... $ 793,172 $ 694,630 $ 733,723 ========== ========== ==========
The Company increased prior year gross reserves by $353.0 million, $161.2 million and $117.9 million during 2003, 2002 and 2001, respectively. Notwithstanding management's analysis and determination in setting its best estimate of aggregate reserves reported in the financial statements, which may or may not require adjustments to aggregate prior year reserves, management regularly evaluates, and adjusts when appropriate, its estimates of coverage year ultimate losses and LAE. Accordingly, reserves established for losses and LAE on individual coverage years may experience greater volatility than aggregate reserves reported in the Company's financial statements. Individual coverage year reserves cover a smaller amount of 8 business over a shorter period of time than do the aggregate reserves, which are an accumulation of reserves pertaining to all coverage years. Estimated ultimate losses and LAE associated with individual coverage years were adjusted in 2003, 2002 and 2001. The following table presents the estimated ultimate losses and LAE gross of reinsurance (including changes in such estimates) by coverage year:
Coverage Year Development (In thousands) Changes in Estimated Ultimate Losses and LAE Estimated Ultimate for the Years Ended Losses and LAE as of December 31, December 31, ---------------------------------------------------- -------------------------------------- Coverage Year 2000 2001 2002 2003 2001 2002 2003 - ------------- ---------- ---------- ---------- ---------- --------- --------- --------- 1993 and Prior $1,330,901 $1,332,284 $1,336,850 $1,360,565 $ 1,383 $ 4,566 $23,715 1994 143,651 152,787 159,170 168,681 9,136 6,383 9,511 1995 155,128 156,665 163,978 170,515 1,537 7,313 6,537 1996 179,902 186,510 217,126 238,018 6,608 30,616 20,893 1997 205,156 226,797 235,972 255,709 21,641 9,175 19,737 1998 242,349 278,821 303,113 339,270 36,472 24,292 36,156 1999 307,246 332,052 358,724 414,796 24,806 26,672 56,071 2000 276,261 292,559 321,075 374,179 16,298 28,516 53,104 2001 230,399 254,073 330,614 23,674 76,541 2002 150,612 201,329 50,717 2003 33,582 33,582 ---------- ---------- ---------- ---------- --------- --------- -------- Total Estimated Ultimate Losses and LAE 2,840,594 3,188,874 3,500,693 3,887,258 $ 117,881 $ 161,207 $386,565 ========= ========= ======== Less: Total Paid Loss and LAE 1,698,064 1,991,876 2,349,058 2,668,301 ---------- ---------- ---------- ---------- Gross Loss and LAE Reserves at December 31 $1,142,530 $1,196,998 $1,151,635 $1,218,957 ========== ========== ========== ==========
2001, 2002, 2003 ADJUSTMENTS. In 2001 and 2002, prior year gross loss and LAE reserves were adjusted by $117.9 million and $161.2 million, respectively, to reflect adverse development on several lines of business including New Jersey and other states' physicians, Pennsylvania hospitals and hospital excess. The adjustments were related to increases in severity and frequency. Specific factors noted in management's actuarial analysis giving rise to the coverage year reserve development in 2001 included the following: overall reserves across all coverage years were significantly adjusted to reflect increased loss severity seen during 2001. Claims were adjudicated or settled at higher values than the Company had previously experienced. This increase in severity was seen primarily in the Company's Pennsylvania institutions' book, and, to a lesser degree, in the Company's core New Jersey physician book, as well as in the physician business in many other states, including, most particularly, Pennsylvania, Texas and Ohio. Development in prior coverage years through 1996 primarily reflects this severity trend in Pennsylvania and New Jersey. Development on coverage years 1997 through 2000 was primarily composed of increases to Pennsylvania physician and institutional reserves as well as increases to reserves on physician business in states outside of New Jersey and Pennsylvania. The increases to reserves held on business outside of New Jersey and Pennsylvania reflected increased severity as well as, to a lesser extent, greater than previously anticipated loss frequency. Specific factors in management's actuarial analysis giving rise to the coverage year development in 2002 were increased loss severity, re-underwriting initiatives undertaken by the Company since 1999 and the acceleration of claim reporting, settlement and payments experienced by the Company during 2002. The continued increase in severity of claims was particularly noted in the physician book in Texas, Ohio and New Jersey, and in the hospital book in Pennsylvania and all other markets in 2002. The majority of the adverse development in all markets was observed in coverage years prior to 2000. A significant acceleration of claim reporting was observed in the first half of 2002 in Pennsylvania attributable to a rush to file suits ahead of pending tort reform legislation in this state. The Pennsylvania book also showed indications of acceleration of the claim settlement process, which the Company believes is attributable to its runoff status, lifting of stays that had delayed many cases and general efforts by the Pennsylvania court system to clear the backlog of cases. The New Jersey physician book showed significant acceleration in the claim settlement process in the latter half of the year with claim settlement rates in some of the older coverage years (1998 and prior) at 100% or more above expected levels. The 9 Company believes the acceleration in New Jersey is attributable to its runoff status, as well as the continued effects of the "Best Practices" initiative mandated by the New Jersey Supreme Court in September 2000. These trends continued in 2003 and were complicated by acceleration in the claims process attributable to tort and judicial reform in Pennsylvania and New Jersey and the impact on the internal claim process of the Company entering voluntary solvent runoff in 2002. After extensive analyses, the Company's prior year gross loss and LAE reserves were adjusted by $353.0 million for 2003. The increase was primarily attributable to adverse development and increased severity in New Jersey and Pennsylvania physician lines of business and the hospital excess lines in all jurisdictions. The 2003 adjustments were established as a result of an extensive process, which included an internal actuarial review of data valued at September 30, 2003, December 31, 2003, March 31, 2004, and June 30, 2004, an external opining actuarial review of data valued at September 30, 2003, December 31, 2003 and June 30, 2004 and an external actuarial review performed in conjunction with filing MIIX's Audited Report. The reason for the extensive actuarial analyses on multiple quarters of data was to determine how much of the development in the loss experience of the Company from quarter to quarter was attributable to acceleration in the claim handling process and environment as opposed to adverse development in terms of increased severity. Management and 2 external actuarial analyses concur that there is acceleration in the development of the Company's data. Determining, however, what portion is acceleration versus adversity is extremely difficult. Management sought out multiple actuarial reviews over four successive quarters of development data to evaluate the volatile data. The extreme uncertainty in the data and analyses has been the result of several factors. The Company's entry into runoff in 2002 resulted in a continuous decline of policies in force during 2003, with no policies remaining in force as of December 31, 2003. This caused a significant and continuing decrease in new claim reports as well as an overall significant decrease in total pending claims. The decreased pending claims and especially the reduced new claim reports, which consumed a disproportionately longer time to initially set up, have allowed greatly increased time for each claim handler to work on existing claims. This has resulted in an acceleration in the setting up of case reserves, departing significantly from the historic patterns the Company has relied upon to estimate future development and IBNR. Simultaneously, significant changes in the litigation environment in New Jersey, which represents approximately 50% of the Company's reserves, resulted in the faster processing of claims and a corresponding acceleration in case reserving. The court system in New Jersey instituted its "Best Practices" initiative in September 2000, which was intended to speed cases through the courts. This initiative has substantially speeded up trials in New Jersey and, thus, has affected the entire claims management process. In June 2003, the courts issued a public report stating that the court system in New Jersey had reached its lowest level of backlogged cases since 1980. 10 On a net of reinsurance basis, the activity in the liability for unpaid losses and LAE is summarized as follows:
Years Ended December 31, ------------------------------------------- 2003 2002 2001 --------- --------- --------- (In thousands) Balance at January 1, net of reinsurance recoverable.......................... $ 694,630 $ 733,723 $ 710,484 Incurred related to: Current year.................................. 33,582 146,619 203,975 Prior years................................... 237,357 49,868 46,793 ---------- ---------- ---------- Total incurred..................................... 270,939 196,487 250,768 ---------- ---------- ---------- Paid related to: Current year.................................. 350 2,648 2,571 Prior years................................... 172,047 232,932 224,958 ---------- ---------- ---------- Total paid......................................... 172,397 235,580 227,529 ---------- ---------- ---------- Balance at December 31, net of reinsurance recoverable.......................... 793,172 694,630 733,723 Reinsurance recoverable............................ 425,785 457,005 463,275 ---------- ---------- ---------- Balance at December 31, gross of reinsurance....... $1,218,957 $1,151,635 $1,196,998 ---------- ---------- ----------
The following tables reflect the development of reserves for unpaid losses and LAE, including reserves on assumed reinsurance, for the periods indicated at the end of that year and each subsequent year. The first line shows the reserves as originally reported at the end of the stated year. Reserves at each calendar year-end include the estimated unpaid liabilities for that report or accident year and for all prior report or accident years. The section under the caption "Liability reestimated as of" shows the originally reported reserves as adjusted as of the end of each subsequent year to reflect the cumulative amounts paid and all other facts and circumstances discovered during each year. The line "Cumulative redundancy (deficiency)" reflects the difference between the latest reestimated reserves and the reserves as originally established. The section under the caption "Cumulative amount of liability paid through" shows the cumulative amounts paid through each subsequent year on those claims for which reserves were carried as of each specific year end. The tables reflect the effect of all changes in amounts of prior periods. For example, if a loss determined in 1998 to be $100,000 was first reserved in 1993 at $150,000, the $50,000 redundancy (original estimate minus actual loss) would be included in the cumulative redundancy in each of the years 1993 through 1997 shown below. The tables present development data by calendar year and do not relate the data to the year in which the claim was reported or the incident actually occurred. Conditions and trends that have affected the development of these reserves in the past will not necessarily recur in the future. 11
TABLE I. LOSS AND LAE RESERVES DEVELOPMENT - GROSS 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) LOSS AND LAE RESERVES $667,200 $688,455 $748,660 $795,449 $876,721 $ 951,659 $1,053,597 $1,142,530 $1,196,998 $1,151,635 LIABILITY REESTIMATED AS OF: One year later 623,988 688,455 748,660 795,654 880,543 968,173 1,100,809 1,260,411 1,358,205 1,504,617 Two years later 623,986 688,450 744,130 793,170 878,233 962,709 1,202,392 1,397,944 1,660,471 Three years later 623,989 689,122 739,106 772,567 863,657 1,039,486 1,311,410 1,623,669 Four years later 624,567 674,224 715,136 766,597 903,962 1,121,831 1,484,030 Five years later 606,219 647,203 707,312 785,261 962,015 1,238,380 Six years later 588,748 653,275 719,368 834,139 1,042,407 Seven years later 595,682 663,794 737,630 894,795 Eight years later 597,065 674,743 777,393 Nine years later 601,631 707,969 Ten years later 625,346 CUMULATIVE REDUNDANCY (DEFICIENCY) 41,854 (19,514) (28,733) (99,346) (165,686) (286,721) (430,433) (481,139) (463,473) (352,983) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) CUMULATIVE AMOUNT OF LIABILITY PAID THROUGH: One year later $ 83,522 $ 98,053 $116,532 $101,217 $141,954 $ 164,524 $ 230,005 $ 291,242 $ 354,535 $ 318,893 Two years later 179,714 212,284 214,484 231,755 298,785 370,911 497,982 620,952 661,087 Three years later 284,828 293,323 332,920 373,232 470,693 588,348 755,339 888,421 Four years later 343,563 407,357 452,055 514,813 634,094 771,226 968,729 Five years later 436,921 492,388 553,205 629,774 757,853 896,538 Six years later 486,861 552,039 621,022 707,116 828,050 Seven years later 524,025 594,337 655,511 745,480 Eight years later 548,388 618,134 676,667 Nine years later 562,629 631,646 Ten years later 571,715 TABLE II. LOSS AND LAE RESERVES DEVELOPMENT - NET 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) LOSS AND LAE RESERVES-GROSS $667,200 $688,455 $748,660 $795,449 $876,721 $951,659 $1,053,597 $1,142,530 $1,196,998 $1,151,635 REINSURANCE RECOVERABLE ON UNPAID LOSSES 62,682 112,917 165,729 221,749 270,731 325,795 406,409 432,046 463,275 457,005 -------- -------- -------- -------- -------- -------- -------- ---------- ---------- ---------- 604,518 575,538 582,931 573,700 605,990 625,864 647,188 710,484 733,723 694,630 LIABILITY REESTIMATED AS OF: One year later 559,518 575,538 582,931 573,700 603,906 611,850 698,491 757,277 783,590 931,987 Two year later 559,518 575,538 582,931 573,321 603,809 649,454 738,008 765,508 988,667 Three years later 559,518 575,538 580,883 588,477 627,292 678,666 674,266 888,819 Four years later 559,518 575,124 579,766 595,479 611,087 622,337 756,560 Five years later 559,133 566,608 587,836 587,991 596,751 699,426 Six years later 548,242 576,831 586,777 583,738 634,088 Seven year later 561,953 580,940 587,266 619,876 Eight years later 564,486 582,625 621,539 Nine years later 568,076 615,361 Ten years later 591,551 CUMULATIVE REDUNDANCY (DEFICIENCY) 12,967 (39,823) (38,608) (46,176) (28,098) (73,562) (109,372) (178,335) (254,944) (237,357) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) CUMULATIVE AMOUNT OF LIABILITY PAID THROUGH: One year later $ 82,572 $ 97,496 $116,194 $ 84,276 $134,666 $157,359 $ 211,393 $ 224,958 $232,932 $172,048 Two years later 178,357 211,426 197,370 214,404 284,887 345,305 413,084 433,064 392,640 Three years later 283,370 278,571 315,743 365,517 439,372 496,456 548,839 553,688 Four years later 328,836 392,522 437,779 492,617 536,488 557,648 615,383 Five years later 422,194 478,731 524,447 550,600 542,294 582,701 Six years later 473,702 523,901 549,919 531,001 560,675 Seven years later 508,269 544,626 533,102 548,031 Eight years later 528,303 528,347 548,006 Nine years later 530,409 541,619 Ten years later 539,255
The aggregate excess reinsurance contracts, in place from 1995 through 1999, provide coverage above aggregate retentions for losses and ALAE other than certain losses and ALAE retained by MIIX or reinsured under other insignificant reinsurance contracts. The aggregate reinsurance contracts, therefore, have the effect of holding underwriting year net incurred losses and ALAE for years 1995 through 1999 at a constant level provided such losses and ALAE ceded under the aggregate excess reinsurance contracts remain within the coverage limits available in each underwriting year. Ceded losses and ALAE have remained within coverage limits in each year since 1995 with the exception of 1998 and 1999. Loss and LAE reserves have exceeded contract limits in 1998 and 1999 by $6.3 million and $4.5 million, respectively. The aggregate excess reinsurance contracts for 2000 and 2001 cover New Jersey and Pennsylvania physician business 12 only. The aggregate excess reinsurance contract for 2002 covers New Jersey physician business only. The aggregate contracts operate on a funds held basis and provide for premium adjustments based on loss experience. See "Business - Reinsurance" and "Management's Discussion and Analysis of Financial Condition and Results of Operation - Risks and Uncertainties." REINSURANCE The Company follows customary industry practice by reinsuring some of its business. The Company typically cedes to reinsurers a portion of its risks and pays a fee based upon premiums received on all policies subject to such reinsurance. Insurance is ceded principally to reduce net liability on individual risks and to provide aggregate loss and LAE protection. Although reinsurance does not legally discharge the ceding insurer from its primary liability for the full extent of the policies reinsured, it does make the reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company reviews its reinsurance needs annually and makes changes in its reinsurance arrangements as necessary. The Company did not purchase reinsurance in 2003 because it was no longer writing insurance policies. In prior years, the Company reinsured its risks primarily under two reinsurance contracts, the Specific Contract and the Aggregate Contract. See "Business -- Loss and LAE Reserves -- Table II -- Loss and LAE Reserves Development -- Net." Each of the aggregate excess reinsurance contracts contains an adjustable premium provision that may result in changes to ceded premium and related funds held charges, based on loss experience under the contract. The table below presents a summary of activity for the aggregate excess reinsurance contracts for each of the last three years. Aggregate Excess Reinsurance Contracts Activity (In millions) 2003 2002 2001 ---- ---- ---- Ceded losses incurred $98.8 $97.7 $85.9 Ceded premium $50.1 $54.4 $54.7 Funds held charges $43.0 $54.2 $42.5 Each of the aggregate excess reinsurance contracts also contains a profit sharing provision whereby a significant portion of any favorable gross loss and ALAE reserve development may ultimately be returned to the Company once all subject losses and ALAE have been paid or the contract has been commuted. Profit sharing is recorded by the Company after the funds withheld balance related to an aggregate excess reinsurance contract exceeds the related ceded reserves, after any adjustments under the adjustable premium provisions. Profit sharing is recorded as an offset to funds held charges and to the funds withheld liability. Each of the aggregate excess reinsurance contracts also contains a provision requiring that the funds withheld be placed in trust should the A.M. Best rating assigned to MIIX fall below B+. Under the contracts, and as a result of the downgrade of MIIX's A.M. Best rating to below B+ during the first quarter of 2002, reinsurers requested that assets supporting the funds withheld account be placed in trust. MIIX established the required trust accounts in accordance with contract provisions. Each of the aggregate excess reinsurance contracts also contains a provision allowing reinsurers to offer additional reinsurance coverage that MIIX is obligated to accept. In September and October 2004, the reinsurers initiated requests for additional premiums from MIIX in accordance with provisions of the contracts. Reinsurers are prohibited from canceling current reinsurance agreements or making additional premium charges to MIIX under the September 28, 2004 Order of Rehabilitation. The major elements of all ceded reinsurance activity are summarized in the following table: For the Years Ended December 31, ------------------------------------ 2003 2002 2001 -------- -------- -------- (In thousands) Ceded premiums earned.................... $ 50,707 $ 59,325 $67,529 Ceded losses and LAE..................... 115,626 115,332 97,509 Funds held charges....................... 42,996 54,209 42,476 13 MIIX seeks to control credit risk from reinsurance by placing the reinsurance with large, highly rated reinsurers and by collateralizing amounts recoverable from reinsurers. The following table identifies the Company's most significant reinsurers, the total amount recoverable from them for unpaid losses, prepaid reinsurance premiums and other amounts as of December 31, 2003, and collateral held by the Company in the form of funds withheld and letters of credit as of December 31, 2003. No other single reinsurer's percentage participation in 2003 exceeded 5% of the total reinsurance recoverable at December 31, 2003. At December 31, 2003 --------------------------------- Total Amounts Total Amount of Reinsurer Recoverable Collateral Held - -------------------------------------------- ------------- --------------- (In thousands) Hannover Reinsurance (Ireland) Ltd.......... $214,226 $207,754 Eisen und Stahl Reinsurance (Ireland) Ltd... 53,556 51,814 London Life and Casualty Reinsurance Corporation.............................. 37,970 41,559 Underwriters Reinsurance Company (Barbados). 74,565 79,326 Swiss Reinsurance/European Reinsurance...... 68,351 59,410 The Company analyzes the credit quality of its reinsurers and relies on its brokers and intermediaries to assist in such analysis. To date, the Company has not experienced any material difficulties in collecting reinsurance recoverables. REINSURANCE ASSUMED. The Company did not assume reinsurance in 2003 or 2002, consistent with its decision to discontinue writing insurance. On July 1, 2002, an excess of loss contract providing medical professional liability coverage on an institutional account was commuted. The commutation of this treaty had no impact on the Company's financial condition or results of operations. REINSURANCE COMMUTED. In June 2004, MIIX commuted its 1995 aggregate excess reinsurance treaty. The commutation agreement provided for the release of applicable funds held balances and trust fund assets. The reduction to earnings as a result of the commutation was $3.3 million in 2004. INVESTMENT PORTFOLIO When MIIX was placed by court order into rehabilitation on September 28, 2004, the New Jersey Department assumed full control of MIIX's investment portfolio. The Company's investment policy, prior to that time, placed primary emphasis on holding investment grade, fixed maturity securities, maximizing after-tax yields while minimizing credit risks and preserving liquidity. In doing so, the Company used independent fixed income portfolio managers and an investment consultant operating under the guidance of investment policies established at the direction of the Company's Board of Directors (the "Board"). Under the Order of Rehabilitation, which was entered on September 28, 2004, the New Jersey Department has assumed control of the investment portfolio. As a result, the Company presently exercises no control over its investments, the liquidation of those investments, or investment policy. The discussion set forth below and elsewhere in this 10-K is as of December 31, 2003, and does not describe the management of MIIX's investment portfolio as at present, as the New Jersey Department's approach to the management of that portfolio is not known to the Company. 14 The following table sets forth the composition of the investment portfolio of the Company at the dates indicated. All of the fixed maturity investments were held as available-for-sale.
December 31, 2003 December 31, 2002 -------------------------- -------------------------- Cost or Cost or Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- ---------- ---------- (In thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies.................................. $ 99,778 $ 100,011 $ 108,725 $ 112,499 Obligations of states and political subdivisions.............................. 7,795 7,695 0 0 Foreign securities - U.S. dollar denominated............................... 0 0 6,946 7,351 Corporate securities........................ 218,666 229,268 280,152 285,183 Mortgage-backed and other asset-backed securities................................ 354,558 358,761 375,591 383,547 ---------- ---------- ---------- ---------- Total fixed maturity investments............ 680,797 695,735 771,414 788,580 Equity investments.......................... 2,781 3,226 4,804 5,187 Short-term.................................. 56,470 56,468 262,537 262,537 ---------- ---------- ---------- ---------- Total investments........................ $ 740,048 $ 755,429 $1,038,755 $1,056,304 ========== ========== ========== ==========
The investment portfolio of fixed maturity investments consisted primarily of intermediate-term, investment-grade securities with an allocation to below investment-grade (i.e. high yield) fixed maturity investments not to exceed 7.5% of invested assets as per the Company's investment policy prior to 2003. In 2003, as a result of the runoff of MIIX, the Company elected to opportunistically eliminate its exposure to below investment-grade securities as market conditions permit. At December 31, 2003, the average credit quality of the fixed income portfolio was AA. The table below contains additional information concerning the investment ratings of the longer term fixed maturity investments at December 31, 2003:
Amortized Fair Percentage of S&P Rating of Investment (1) Cost Value Fair Value - --------------------------------------------------- ----------- ------- ------------- (In thousands) AAA (including U.S. Government and Agencies)....... $441,001 $445,533 64.0% AA................................................. 82,110 84,355 12.1% A.................................................. 124,476 129,234 18.6% BBB................................................ 3,513 3,665 0.5% Other Ratings (below investment grade)............. 29,697 32,948 4.8% -------- -------- ------ Total........................................... $680,797 $695,735 100.0% ======== ======== ======
(1) The ratings set forth above are based on the ratings, if any, assigned by Standard & Poor's Rating Services ("S&P"). If S&P's ratings were unavailable, the equivalent ratings supplied by another nationally recognized ratings agency were used. The following table sets forth certain information concerning the maturities of fixed maturity investments, excluding equity and short-term fixed maturity securities, in the investment portfolio as of December 31, 2003, by contractual maturity:
Amortized Fair Percentage of Maturity of Investment Cost Value Fair Value - --------------------------------------------------- ---------- ---------- ------------- (In thousands) Due one year or less............................... $ 15,071 $ 15,400 2.2% Due after one year through five years.............. 183,973 187,039 26.9% Due after five years through ten years............. 102,697 109,292 15.7% Due after ten years................................ 24,498 25,243 3.6% Mortgage-backed and other asset-backed securities.. 354,558 358,761 51.6% -------- -------- ------ Totals.......................................... $680,797 $695,735 100.0% ======== ======== ======
15 The effective duration of the securities in the longer term fixed maturity portfolio (excluding short-term investments) as of December 31, 2003, was 3.2 years. Mortgage-backed securities represent approximately 24.2% of the total fixed income portfolio and are allocated equally across "standard" and "more complex" securities, while the asset-backed portfolio represents approximately 27.4% of the total fixed income portfolio. Asset-backed securities may involve certain risks not presented by other securities. These risks may be enhanced during periods of economic downturn such as what was experienced in the past year. Risks include default, lack of liquidity, price volatility and sensitivity to interest rates. Standard mortgage-backed securities are issued on and collateralized by an underlying pool of single-family home mortgages. Principal and interest payments from the underlying pool are distributed pro rata to the security holders. More complex mortgage-backed security structures prioritize the distribution of interest and principal payments to different classes of securities that are backed by the same underlying collateral mortgages. CUSTOMERS The Company's only significant customer activity is providing third party management services to MDAdvantage. REGULATION The Company's insurance subsidiaries are subject to supervisory regulation by their respective states of incorporation, commonly called the state of domicile. MIIX is domiciled in New Jersey, MIIX Insurance Company of New York ("MIIX New York") is domiciled in New York and Lawrenceville Re is domiciled in Bermuda. Therefore, the laws and regulations of these states, and those of Bermuda, including the tort liability laws and the laws relating to professional liability exposures and reports, had the most significant impact on the operations of the combined company. HOLDING COMPANY REGULATION. As part of a holding company system, MIIX and MIIX New York are subject to the Insurance Holding Company Systems Acts (the "Holding Company Act") of their domiciliary states. In general, a state's Holding Company Act requires the domestic company to file information periodically with the state insurance department and other state regulatory authorities, including information relating to its capital structure, ownership, financial condition and general business operations. The Holding Company Act also provides that the acquisition or change of "control" of a domestic insurance company or of any person or entity that controls such an insurance company cannot be consummated without prior regulatory approval. EXAMINATION OF INSURANCE COMPANIES. Every insurance company is subject to a periodic financial examination under the authority of the insurance commissioner of its state of domicile. The last completed periodic financial examination of MIIX as of December 31, 2000, was completed on October 30, 2003, and a report was issued on December 23, 2003. The New York Insurance Department ("New York Department") conducted an examination of MIIX New York as of December 31, 2001. The examination report was filed by the New York Department on January 7, 2004. Currently, the Company has no financial examination in progress. The Company has not undergone a market conduct examination. RISK-BASED CAPITAL. In addition to state-imposed insurance laws and regulations, insurers are subject to the general statutory accounting practices and procedures and the reporting format of the National Association of Insurance Commissioners ("NAIC"). The NAIC's methodology for assessing the adequacy of statutory surplus of property and casualty insurers includes an RBC formula that attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potentially under-capitalized companies. Under the formula, a company determines its RBC by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). The RBC rules provide for different levels of regulatory attention depending on an insurance company's RBC. 16 At December 31, 2003, MIIX's RBC was below the Mandatory Control Level and continues at this level. During 2003, MIIX entered into an Order with the New Jersey Department that set forth the framework for the regulatory monitoring of MIIX and established certain operating limitations on MIIX. The limitations, among other things, required the approval of the New Jersey Department prior to payment of dividends by the Company's insurance subsidiary, and for lending arrangements, investments and inter-company arrangements outside of the normal course of business, and required MIIX to periodically provide information relating to its operations and finances to the New Jersey Department. In April 2004, the New Jersey Department appointed an Administrative Supervisor as part of its ongoing efforts to monitor MIIX's runoff operations. ORDER OF REHABILITATION. On September 28, 2004, the Superior Court of New Jersey entered an Order placing MIIX and its wholly owned subsidiaries, MIIX New York and Lawrenceville Holdings, Inc., into rehabilitation and naming the Commissioner of the New Jersey Department as Rehabilitator with immediate and exclusive control over the business and property of MIIX. The Order provides that The MIIX Group and the Underwriter will continue to provide administrative services to MIIX pursuant to the current Management Services Agreement until terminated by the New Jersey Department after appropriate notice. The Order does not stay payment of claims for any litigation currently pending against MIIX or its insureds and does not bar claimants from filing new actions against MIIX insureds. The Order, however, prohibits persons from filing any new action or new claim directly against MIIX without permission of the Court. The Order also requires notice to and consent of the Rehabilitator for the assignment of any contract to which MIIX is a party. Reinsurers are prohibited from canceling current reinsurance agreements or making additional premium charges to MIIX under the September 28, 2004 Order of Rehabilitation. EMPLOYEES When the Company initially entered runoff in 2002, it employed 237 persons. At December 31, 2003, the Company employed 94 persons. During 2003, as a result of its reduced insurance operations, the Company reduced the number of employees by 24 persons. None of the Company's employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are good. AVAILABLE INFORMATION The Company files annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including those that filed electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company also makes available free of charge through its Internet website (http://www.MIIX.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13, or 15(d) or 16(a) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information concerning the individuals who serve as executive officers of The MIIX Group. At December 31, 2003, The MIIX Group had seven executive officers, Ms. Costante, Mr. Davis, Mr. Grab, Ms. Mason, Mr. Roynan, Mr. Sugerman and Ms. Williams. 17 Name Position - ---- -------- Patricia A. Costante Chairman and Chief Executive Officer William Davis Senior Vice President, Claims Edward M. Grab Senior Vice President, Chief Actuary Verice M. Mason Senior Vice President and General Counsel James Roynan Senior Vice President, Information Systems Allen G. Sugerman Chief Financial Officer and Treasurer Catherine E. Williams Senior Vice President, Business Development and Corporate Secretary PATRICIA A. COSTANTE (47), Chairman and Chief Executive Officer. Patricia A. Costante has been Chairman since 2002 and Chief Executive Officer of the Company since 2001. Before being named Chief Executive Officer, Ms. Costante was the Company's Chief Operating Officer from September 2001 to November 2001. Prior to serving as Chief Operating Officer, she was Senior Vice President responsible for the sale and delivery of all products and services to the New Jersey physician market from March 2000 to September 2001. Prior to being named Senior Vice President, Ms. Costante was Executive Vice President and Chief Operating Officer of MIIX Healthcare Group, Inc., a subsidiary of the Underwriter from April 1998 to March 2000 and from July 1996 to April 1998 served as Assistant Vice President. Ms. Costante is Vice Chairman of the Board of Trustees, Catholic Charities, Diocese of Trenton. WILLIAM G. DAVIS, JR. (56), Senior Vice President, Claims Operations. Mr. Davis has been Senior Vice President, Claims since March 2002. He is responsible for Claims Operations. Prior to serving as Senior Vice President, Mr. Davis served as Vice President, Claims Operations from September 1995 to February 2000 and Assistant Vice President, Claims from June 1992 to September 1995. Mr. Davis was terminated from the Company effective January 26, 2004. EDWARD M. GRAB (48), Senior Vice President, Chief Actuary. Mr. Grab has served as Senior Vice President since March 2000. He is responsible for actuarial services and staff underwriting functions which includes underwriting policy and risk management services. Prior to serving as Senior Vice President, Mr. Grab served as Vice President, Chief Actuary from October 1999 to March 2000. Before joining the Company, he was Vice President and Actuary for Zurich Financial Services from March 1996 to June 1999 where he directed the actuarial department in support of four strategic business units with a combined book of $1 billion. VERICE M. MASON (52), Senior Vice President and General Counsel. Ms. Mason has served as Senior Vice President and General Counsel since June 2002. She is responsible for all legal and regulatory matters involving the Company. Prior to serving as Senior Vice President and General Counsel, Ms. Mason served as Senior Vice President, Legal and Regulatory Affairs from February 2002 to June 2002. Prior to being named Senior Vice President, Legal and Regulatory Affairs, Ms. Mason served as Vice President, Legal and Regulatory Affairs from June 1999 to February 2002 and Assistant Vice President, Associate General Counsel from June 1995 to June 1999. Ms. Mason resigned from the Company effective October 29, 2004. JAMES P. ROYNAN (43), Senior Vice President, Information Systems. Mr. Roynan has served as Senior Vice President since December 2002. He is responsible for strategy and implementation for all process improvement, information technology, systems and integration, network administration, software development and technical support activity. Prior to serving as Senior Vice President Mr. Roynan served as Vice President, Information Systems from December 2001 to December 2002. Prior to joining the Company Mr. Roynan served as Executive Vice President and CIO of Xyan, Inc. from September 2000 to May 2001. From February 2000 to August 2000 Mr. Roynan served as Executive Vice President and COO of WePlayIt, Inc. From January 1992 to January 2000 Mr. Roynan served as Vice President, Technology Solutions of Reed Technologies and Information Services. Mr. Roynan was terminated from the Company effective January 26, 2004. 18 ALLEN G. SUGERMAN (53), Chief Financial Officer and Treasurer. Mr. Sugerman has served as Chief Financial Officer since July 2002. Mr. Sugerman has been a principal of Altila Corporation, a health care management consulting firm, since 1990. He has more than 25 years of diversified financial and operational experience. CATHERINE E. WILLIAMS (43), Senior Vice President, Business Development and Corporate Secretary. Ms. Williams has served as Senior Vice President since December 2001. She is responsible for business development, corporate governance, shareholder relations, human resources and facilities management. Prior to serving as Senior Vice President, Ms. Williams served as Vice President, Corporate Secretary from August 1999 to December 2001 and as Assistant Corporate Secretary from May 1997 to August 1999. The following sets forth information regarding Directors of the Company as of December 31, 2003. PATRICIA A. COSTANTE (47), Director since 2001. Patricia A. Costante has been Chairman since 2002 and Chief Executive Officer of the Company since 2001. Before being named Chief Executive Officer, Ms. Costante was the Company's Chief Operating Officer from September 2001 to November 2001. Prior to serving as Chief Operating Officer, she was Senior Vice President responsible for the sale and delivery of all products and services to the New Jersey physician market from March 2000 to September 2001. Prior to being named Senior Vice President, Ms. Costante was Executive Vice President and Chief Operating Officer of MIIX Healthcare Group, Inc., a subsidiary of the Underwriter, now a subsidiary of the Company, from April 1998 to March 2000 and from July 1996 to April 1998, served as Assistant Vice President. Ms. Costante is Vice-Chairman, Board of Trustees, Catholic Charities, Diocese of Trenton. ANGELO S. AGRO, M.D. (55), Director since 1997. Dr. Agro has been a member of the Board of Directors of the Underwriter since 1990. He is a physician certified by the American Board of Otolaryngology and practices in Andalusia, Alabama with Andalusia Greater Regional Otolaryngology. He is a member of the American Academy of Otolaryngology, the American Medical Association and the American College of Surgeons. SCOTT L. BARBEE (31), Director since 2003. Mr. Barbee has been Managing Director of Berno, Gambal & Barbee, Inc. since 1997. He is also lead manager of the Aegis Value Fund. Prior to his appointment as a Managing Director, Mr. Barbee was a broker with Berno & Gambal Capital Management from December 1996 until June 1997. Mr. Barbee is a Chartered Financial Analyst. Mr. Barbee resigned from the Board on October 13, 2004. HARRY M. CARNES, M.D. (72), Director since 1997. Dr. Carnes has served as a member of the Board of Directors of the Underwriter since 1989. He is a board certified physician practicing in Audubon, New Jersey. Dr. Carnes is a member of the American Academy of Family Practice, the American Medical Association, the Camden County Medical Society, the Medical Society of New Jersey and the New Jersey Medical Political Action Committee. DOMINICK D'AGOSTA (63), Director since 2003. Mr. D'Agosta has served in the Office of the Chairman of Fleet Bank of New Jersey since 2001. Prior to this position, he served in the Office of the President of Summit Bank from 1996 to 2001. Mr. D'Agosta has 44 years of experience in the banking industry and has worked in various senior management positions, which included positions in marketing, operations and branch administration. He serves as Vice Chair of the Hudson County Chamber of Commerce, Chairman of the Meadowlands Chamber of Commerce and the Urban League of Hudson County, Director of Commerce and Industry Association, National Conference for Community & Justice, Arthritis Foundation of New Jersey and Bon Secours of Canterbury Partnership for Care. Mr. D'Agosta is Chair of the New Jersey City University Foundation and Director of Yes Youth Consultation Service. PAUL J. HIRSCH, M.D. (67), Vice Chairman of the Board of Directors since 1997. Dr. Hirsch has served as Vice Chairman of the Board of Directors of the Underwriter, now a subsidiary of the Company since 1990. He is a board certified physician practicing in Bridgewater, New Jersey, with BioSport Orthopedics and Sports Medicine. Dr. Hirsch is President and Medical Director of InterMedix, an orthopedic specialty care network. He is a member of the American Academy of Orthopedic Surgeons, the American Orthopedic Association, the American College 19 of Surgeons, the American Medical Association, and the Medical Society of New Jersey. He currently serves on the Board of Trustees for Raritan Valley Community College. Dr. Hirsch is a clinical professor of orthopedic surgery at Seton Hall School of Graduate Medical Education and Editor in Chief of NEW JERSEY MEDICINE. A. RICHARD MISKOFF, D.O. (62), Director since 1997. Dr. Miskoff served as a member of the Board of Governors of Medical Inter-Insurance Exchange of New Jersey, the predecessor of MIIX Insurance Company, from 1994 to 1999. He is a board certified physician practicing in Edison, New Jersey. Dr. Miskoff is a member of the American Osteopathic Association, the American Society of Clinical Oncologists, the American Society of Hematology, and the New Jersey Association of Osteopathic Physicians. He is past president of the Middlesex County Medical Society of Osteopathic Physicians. Dr. Miskoff is Director of the Cancer Program at JFK Medical Center, Edison, New Jersey. CARL RESTIVO, JR., M.D. (58), Director since 1997. Dr. Restivo has been a member of the Board of Directors of the Underwriter since 1997. He is a board certified physician practicing in Jersey City, New Jersey. Dr. Restivo is a member of the Arthritis Foundation and the New Jersey Chapter of the American Medical Association. Dr. Restivo resigned from the Board effective May 1, 2004. MARTIN L. SORGER, M.D. (70), Director since 1997. Dr. Sorger served as a member of the Board of Governors of Medical Inter-Insurance Exchange of New Jersey from 1979 to 1999. He is a board certified orthopedic physician practicing in Glen Ridge, New Jersey, and a member of the Montclair Orthopedic Group. Dr. Sorger is a member of the American Academy of Orthopedic Surgeons, the American Medical Association, the American College of Surgeons and a former member of its Board of Councilors. He is a member of the executive committee and past president of the New Jersey Orthopedic Society. Dr. Sorger is Vice President of InterMedix, an orthopedic specialty care network. BESSIE M. SULLIVAN, M.D. (63), Director since 1997. Dr. Sullivan was a member of the Board of Governors of Medical Inter-Insurance Exchange of New Jersey from 1992 to 1999. She is a board certified physician practicing in Edison, New Jersey with Arthritis, Allergy & Immunology Center. Dr. Sullivan is a member of the American Medical Association and the American Rheumatism Association, a trustee and Secretary of the Medical Society of New Jersey and a member of the Executive Committee of the Union County Medical Society. Because the Company's securities are not traded on a national securities exchange or quoted on a national quotation system, the Company is not required to maintain an audit committee under the federal securities laws. Under state law, the Company must maintain an audit committee, although no audit committee financial expert is required. The Company has sought to engage an audit committee expert but has been unsuccessful in its efforts. ITEM 2. PROPERTIES The Underwriter leases approximately 25,000 square feet of space from Gordon Lawrenceville Realty Associates, LLC ("Gordon") in Lawrenceville, New Jersey, the location of its home office operations. The Underwriter entered into the lease agreement with Gordon as of November 25, 2003, with an effective date of April 27, 2004. The lease agreement was amended on June 22, 2004, and October 1, 2004. The term of the lease is for five years with an option to renew for an additional five years. ITEM 3. LEGAL PROCEEDINGS GLASSER V. THE MIIX GROUP, INC. ET AL. On February 5, 2003, a shareholder of the Company instituted a putative class action in the United States District Court for the District of New Jersey against the Company, present and former directors and officers of the Company, the Medical Society of New Jersey ("MSNJ") and Fox-Pitt Kelton, Inc. ("FPK"), which acted as financial advisor to the Company. The complaint alleges that the Company and its directors and officers engaged in securities fraud, breaches of fiduciary duty and violations of New Jersey antitrust laws in connection with the MIIX Advantage contracts and alleged misrepresentations and omissions of material fact in various SEC filings by the Company. On May 13, 2003, another shareholder of the Company instituted a separate putative class action in the United States District Court for the District of New Jersey 20 (WASSERSTRUM V. THE MIIX GROUP, INC., ET AL.) against the Company and certain of its officers alleging securities fraud. The law firms representing plaintiffs in the two actions agreed to consolidate the plaintiffs' claim against the Company. On August 12, 2003, a Consolidated Amended Complaint (the "Complaint") was filed by the plaintiffs against the Company, present and former directors and officers of the Company and MSNJ alleging securities fraud based on alleged misrepresentations and omissions of material fact in various SEC filings by the Company concerning the Company's financial condition, its statement of reserves, the pricing of its policies, the MIIX Advantage contracts and other matters. The Complaint seeks certification of a plaintiff class of the Company's shareholders from July 30, 1999 to September 12, 2002 and unspecified damages, pre- and post-judgment interest, attorneys' fees and costs. On October 21, 2003, the Company filed a motion to dismiss the Complaint, which is currently pending. On December 11, 2003, the Court ordered that the case be submitted to mediation and stayed all proceedings pending mediation. The parties are engaging in mediation discussions. FOX-PITT KELTON V. THE MIIX GROUP, INC. On February 10, 2003, FPK, which had been engaged as financial advisor to the Company, instituted suit against the Company in the Supreme Court of New York to recover fees allegedly due from the Company as a result of the investment banking services it rendered in connection with the Company's efforts to dispose of assets or obtain capital and the agreements entered into between the Company and MIIX Advantage. FPK filed a motion for summary judgment in its favor, which was denied by the Court. On April 28, 2004, the suit was dismissed with prejudice. WEISFELD V. THE MIIX GROUP, INC., ET AL. On November 20, 2002, a former executive of MSNJ filed suit in the Superior Court of New Jersey against MSNJ and certain of its officers, including MSNJ officers who were also MIIX Group board members, alleging wrongful discharge and defamation. On March 19, 2003, plaintiff filed pleadings amending the Complaint to include The MIIX Group as a defendant, alleging that The MIIX Group tortiously interfered with his employment relationship and that its alleged influence over MSNJ was a causative factor in his discharge. Motions to dismiss plaintiff's Amended Complaint were filed by all defendants. By order dated August 19, 2003, the Court granted the defendants' motions to dismiss and the entire Complaint was dismissed with prejudice. On October 2, 2003, plaintiffs filed a notice of appeal of the dismissal of the Complaint with the Superior Court of New Jersey, Appellate Division. Oral argument in the Appellate Division was held on October 25, 2004. The parties are awaiting the Court's decision. Given the Company's current financial condition, any negative outcome of the litigation requiring the payment of damages could have a material adverse effect on the Company. The Company may also be a party to litigation from time to time in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The MIIX Group common stock became publicly tradable on the NYSE on July 30, 1999 under the symbol of "MHU." The trading of the MIIX Group's common stock was suspended from trading on the NYSE at the opening of business on April 28, 2003. The MIIX Group's common stock now trades on the OTC Bulletin Board and the "pink sheets" maintained by the National Quotation Bureau, Inc. ("Quotation Bureau") under the ticker symbol "MIIX." The following table shows the price ranges per share in each quarter during 2003 and 2002: 21 Common Stock ------------ High Low ---- --- 2003 First Quarter $1.50 $0.63 Second Quarter $0.95 $0.23 Third Quarter $1.01 $0.01 Fourth Quarter $1.85 $0.85 2002 First Quarter $13.50 $2.46 Second Quarter $ 2.48 $0.73 Third Quarter $ 1.75 $0.60 Fourth Quarter $ 2.03 $1.00 On October 28, 2004, the closing price of the The MIIX Group stock was $0.08. The MIIX Group stock is thinly traded and the stock price has been volatile in the last fiscal year. For these reasons, there can be no assurance that an active market will be available in which to trade The MIIX Group stock, which could affect a stockholders' ability to sell The MIIX Group shares and could depress the market price of its shares. The MIIX Group's common stock trades on the OTC Bulletin Board and the "pink sheets" maintained by the Quotation Bureau. The lack of liquidity could further reduce the trading price and increase the transaction costs of trading shares of The MIIX Group. Calculation of Aggregate Market Value of Non-Affiliate Shares For the purpose of calculating the aggregate market value of the shares of The MIIX Group common stock held by non-affiliates, as shown on the cover page of this Report, it has been assumed that all the outstanding shares were held by non-affiliates except for the shares held by directors. However, this should not be deemed to constitute an admission that all directors of the Company are, in fact, affiliates of the Company. The following table sets forth information concerning shareholdings of officers, directors and principal stockholders of the Company. Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners as of December 31, 2003.
Shares of Stock Options Vested Name Common Stock & Exercisable(1) Total % of Class - ---- ------------ ---------------- ----- ---------- Christian Leone(2) 948,094 0 948,094 6.44% Medical Society of New Jersey (3) 821,365 0 821,365 5.58% Berno, Gambal& Barbee, Inc.(4) 797,850 0 797,850 5.42% Patricia A. Costante 248,014 103,750 351,764 2.39% Angelo S. Agro, M.D. 2,228 31,250 33,478 * Scott L. Barbee (4) 242,200 0 242,200 1.70% Harry M. Carnes, M.D. (5) 20,111 60,794 80,905 * Paul J. Hirsch, M.D. (6) 30,381 34,732 65,113 * A. Richard Miskoff, D.O. 714 37,802 38,516 * Carl Restivo, MD 69,076 33,107 102,183 * Martin L. Sorger, M.D. (7) 6,593 33,107 39,700 * Bessie M. Sullivan, M.D. 1,667 60,794 62,461 * William G. Davis 164,016 7,450 171,466 1.16% Edward M. Grab 207,795 55,000 262,795 1.79% Verice M. Mason 214,741 7,450 222,191 1.51% Catherine E. Williams 154,403 25,000 179,403 1.22% All directors and officers as a group(16 persons) 1,509,805 490,236 2,000,041 13.59%
22 * Less than 1% of the number of shares of Common Stock outstanding as of December 31, 2003. (1) Represents shares of common stock subject to options held by the named individual exercisable on or prior to December 31, 2003. (2) Based on the Schedule 13G filed with the SEC on June 23, 2003. The address for this stockholder is c/o Luxor Capital Group LLC, 599 Lexington Avenue, 35th Floor, New York, New York 10022. Christian Leone has sole power to dispose of 948,094 shares of common stock. Christian Leone has sole voting power to vote 948,094 shares owned. (3) MSNJ has sole power to vote all shares. Pursuant to the Stock Purchase Agreement dated October 15, 1997 between MSNJ and the Company, MSNJ received 814,815 shares of the Company's common stock. MSNJ may not transfer any of the 814,815 shares for a period of ten years following October 15, 1997, without the approval of the Company. The address of MSNJ is Two Princess Road, Lawrenceville, New Jersey 08648. (4) Based on Schedule 13G/A filed with the SEC on February 17, 2004. The address for this stockholder is 1100 North Glebe Road, Suite 1040, Arlington, VA 22201. William S. Berno, Paul Gambal and Scott L. Barbee are the owners of Berno, Gambal & Barbee, Inc. The aggregate amount beneficially owned by Messrs. Berno, Gambal and Barbee amounted to 797,850; 800,350; 1,010,050 shares of common stock, respectively. Berno, Gambal & Barbee, Inc. has the sole voting power over 720,000 shares of common stock and the sole power to dispose of 797,850 shares of common stock. Messrs. Berno, Gambal and Barbee have shared power to dispose of 797,850 shares of common stock and shared voting power over 720,000 shares of common stock. In addition, Mr. Gambal has sole power to dispose of and vote 2,500 shares of common stock and Mr. Barbee has sole power to dispose of and vote 242,200 shares of common stock. (5) Dr. Carnes' shares include 1,400 shares held by his grandchildren. Dr. Carnes disclaims beneficial ownership of the shares owned by his grandchildren. (6) Dr. Hirsch is a trustee and participant of the BioSport Orthopedic and Sports Medicine Profit Sharing Plan. The Plan currently holds 10,000 shares of common stock, which are included in the shares of common stock and the total shares shown. Dr. Hirsch disclaims beneficial ownership of shares held pursuant to the Plan except to the extent that he is a participant in the Plan. (7) Dr. Sorger's shares include 2,000 shares held by his son. Dr. Sorger disclaims beneficial ownership of the shares owned by his son. Based on Schedule 13D filed with the SEC on October 6, 2004, the Company has determined that Tyndall Capital Partners has acquired approximately 4.9% of the Company's outstanding capital stock. The address for this stockholder is 153 East 53rd Street, 55th Floor, New York, New York 10022. Tyndall Partners, L.P., owns 519,126 shares of common stock as of September 28, 2004. Tyndall Institutional Partners, L.P., own 222,500 shares of common stock as of September 28, 2004. Tyndall Capital Partners, L.P. possesses investment control over all securities owned by Tyndall Partners, L.P. and Tyndall Institutional Partners, L.P. and sole power to dispose of and vote 741,626 shares of common stock. REGISTERED SHAREHOLDERS The number of registered stockholders of The MIIX Group common stock as of October 28, 2004 was 5,913. That number excludes the beneficial owners of shares held in "street" names or held through participants in depositories. DIVIDENDS The MIIX Group is a holding company largely dependent upon dividends from its subsidiaries to pay dividends to its shareholders. The insurance company subsidiaries are restricted by state regulation in the amount of dividends they can pay in relation to surplus and net income without the consent of the applicable state regulatory authority, principally the New Jersey Department. 23 During 2002, the Board suspended dividend payments to its stockholders. Recent regulatory limitations imposed on MIIX currently prohibit its ability to declare and pay dividends. The Company does not expect to pay dividends for the foreseeable future. STOCKHOLDER RIGHTS PLAN. On June 27, 2001 the Company's Board adopted a Stockholder Rights Plan (the "Rights Plan") and declared a dividend of one Right for every outstanding share of common stock, par value $0.01, per share, to be distributed on July 10, 2001 to stockholders of record as of the close of business on that date. The Rights will expire on June 27, 2011 or upon the earlier redemption of the Rights, and they are not exercisable until a distribution date on the occurrence of certain specified events as defined below. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, $0.01 par value at a price of $35.00 per one-thousandth of a share, subject to adjustments. The Rights will, on the distribution date, become exercisable ten (10) days after a public announcement that a party has acquired at least 15% or commenced a tender or exchange offer that would result in any party or group owning 15% or more of the Company's outstanding shares of common stock and the acquiring party is determined by a majority of the Company's directors to be an "Adverse Person" as defined in the Rights Plan. Each holder of a Right, other than the "acquiring person," as defined in the Rights Plan, or "adverse person," will in such event have the right to receive shares of the Company's common stock having a market value of two times the exercise price of the Right. In the event that the Company is acquired in a merger or other business combination, or if more than 50% of the Company's assets or earning power is sold or transferred, each holder of a Right would have the right to receive common stock of the acquiring company with a market value of two times the purchase price of the Right. Following the occurrence of any of these triggering events, any Rights that are beneficially owned by an acquiring person will immediately become null and void. The Company may redeem the Rights for $0.001 per Right at any time until ten (10) days following the stock acquisition date. 24 ITEM 6. SELECTED FINANCIAL DATA SUMMARY FINANCIAL AND OPERATING DATA The following table sets forth selected consolidated financial and operating data for the Company.
(In thousands, except per share amounts) For the Years Ended December 31, ------------------------------------------------------------------------------------ 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- INCOME STATEMENT DATA: Total premiums written................. $ (633) $ 96,209 $ 231,946 $ 226,126 $ 257,100 ========== ========== ========== ========== ========== Net premiums earned.....................$ (26,078) $ 100,220 $ 146,852 $ 184,062 $ 187,845 Net investment income................... 35,930 60,838 80,193 85,158 75,661 Realized investment losses.............. (1,597) (3,521) (2,184) (4,156) (6,770) Other revenue........................... 7,126 7,439 8,439 7,452 8,323 ---------- ---------- ---------- ---------- ---------- Total revenues................... 15,381 164,976 233,300 272,516 265,059 ---------- ---------- ---------- ---------- ---------- Losses and loss adjustment expenses............................. 270,939 196,487 250,768 279,224 174,986 Underwriting expenses................... 22,249 33,125 47,121 38,560 42,618 Funds held charges...................... 42,996 54,209 42,476 7,502 14,338 Other expenses.......................... 691 3,454 3,404 5,828 3,333 Restructuring charge.................... 0 2,552 0 0 2,409 ---------- ---------- ---------- ---------- ---------- Total expenses................... 336,875 289,827 343,769 331,114 237,684 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes................................ (321,494) (124,851) (110,469) (58,598) 27,375 Income tax expense (benefit)............ (6,769) (11,240) 41,892 (22,140) 6,617 Cumulative effect of an accounting change, net of tax (1).............................. 0 (2,373) (5,283) 0 0 ---------- ---------- ---------- ----------- ---------- Net income (loss)................$ (314,725) $ (115,984) $ (157,644) $ (36,458) $ 20,758 ========== ========== ========== ========== ========== BALANCE SHEET DATA (AT END OF PERIOD): Total investments....................$ 755,429 $1,056,304 $1,228,058 $1,259,312 $1,182,943 Total assets......................... 1,278,639 1,616,863 1,895,863 1,897,353 1,837,158 Total liabilities.................... 1,557,160 1,575,597 1,764,377 1,607,912 1,518,454 Total stockholders' equity (deficiency)....................... (278,521) 41,266 131,486 289,441 318,704 ADDITIONAL DATA: GAAP ratios: Loss ratio........................... NM 196.1% 170.8% 151.7% 93.1% Expense ratio........................ NM 33.1% 32.1% 21.0% 22.7% ---------- ---------- ---------- ----------- ---------- Combined ratio....................... NM 229.2% 202.9% 172.7% 115.8% ========== ========== ========== =========== ========== Statutory surplus (deficit).............$ (252,098) $ 75,812 $ 125,485 $ 231,498 $ 268,445 ========== ========== ========== ========== ========== Basic and Diluted earnings (loss) per share (2).................$ (23.42) $ (8.67) $ (11.66) $ (2.59) $ 1.54 ========== ========== ========== ========== ========== Dividend per share......................$ 0.00 $ 0.00 $ 0.20 $ 0.20 $ 0.10 ========== ========== ========== ========== ========== Book value per share ...................$ (19.21) $ 3.08 $ 9.75 $ 21.34 $ 20.94 ========== ========== ========== ========== ==========
NM - Not Meaningful (1) On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is no longer amortized as an expense, but instead is reviewed and tested for impairment under a fair value approach. SFAS No. 142 requires that goodwill be tested for impairment at least annually, or more frequently as a result of an event or change in circumstances that would indicate impairment may be necessary. On January 1, 2002, the Company recorded a $2.4 million impairment related to goodwill, net of $0 tax ($0.18 per diluted share). If SFAS No. 142 were in effect beginning January 1, 2001, the financial statement impact would have been approximately $444,000, net of tax, ($0.03 per diluted share) for the 12 months ended December 31, 2001. 25 On April 1, 2001, the Company adopted the provisions of EITF No. 99-20, "Recognition of Interest Income and Impairment of Purchased and Retained Beneficial Interests in Securitized Financial Assets." This standard established new guidelines for recognition of income and other-than-temporary decline for interests in securitized assets. EITF 99-20 requires the Company to recognize an other-than-temporary decline if the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent, prior, estimation date. The difference between the book value of the security and its fair value must be recognized as an other-than-temporary decline and the security's yield is adjusted to market yield. This new guidance also adopts the prospective method for adjusting the yield used to recognize interest income for changes in estimated future cash flows since the last quarterly evaluation date. On April 1, 2001, the Company recognized $5.3 million of other-than-temporary declines, net of tax ($0.39 per diluted share) as the cumulative effect of a change in accounting principle. (2) Basic and diluted loss per share of common stock for the year ended December 31, 2003 is computed using the weighted average number of common shares outstanding during the year of 13,436,586. Basic and diluted loss per share of common stock for the year ended December 31, 2002 is computed using the weighted average number of common shares outstanding during the year of 13,385,124. Basic and diluted loss per share of common stock for the year ended December 31, 2001 is computed using the weighted average number of common shares outstanding during the year of 13,524,959. Basic and diluted loss per share of common stock for the year ended December 31, 2000 is computed using the weighted average number of common shares outstanding during the year of 14,100,043. Basic earnings per share of common stock for the year ended December 31, 1999 is computed using the weighted average number of common shares outstanding during the year of 13,497,110. Diluted earnings per share of common stock for the year ended December 31, 1999 is computed using the weighted average number of common shares outstanding during the year of 13,534,052. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The medical malpractice industry is cyclical in nature. Many factors influence the financial results of the medical malpractice industry, several of which are beyond the control of the Company. These factors include, among other things, changes in severity and frequency of claims; changes to applicable law; regulatory reform; and changes in inflation, interest rates and general economic conditions. The Company was subjected to a number of adverse developments during fiscal 2001-2003 as a result of unexpected and unprecedented increases in loss severity related to prior years' business. As a result of the net losses reported in 2001, the RBC of two of the Company's then operating subsidiaries, MIIX and LP&C, fell below the standards adopted by the NAIC. Both companies triggered RBC events requiring the filing of a corrective action plan with each state of domicile. As a result, both companies entered solvent runoff during 2002. In 2001 and 2002, loss and LAE reserves were adjusted to reflect adverse development on several lines of business including New Jersey and other states' physicians, Pennsylvania hospitals and hospital excess. The adjustments were related to increases in severity and frequency. These trends continued in 2003 and were complicated by acceleration in the claims process attributable to tort and judicial reform in Pennsylvania and New Jersey and the impact of the Company's entering voluntary solvent runoff in 2002. Loss and LAE reserves for 2003 were established as a result of an internal actuarial review, an external opining actuarial review and an external actuarial review performed in conjunction with filing of MIIX's Audited Report. As a result of these reviews, prior year gross loss and LAE reserves were adjusted by $353.0 million. The increase was attributable primarily to adverse development and increased severity in the New Jersey and Pennsylvania physician and hospital excess lines of business. On September 28, 2004, MIIX was placed in rehabilitation. See "Regulation - Order of Rehabilitation." As a result, the discussion below, which is as of December 31, 2003, reflects operations of MIIX that are no longer controlled by the Company. During the summer of 2004, the Company retained financial advisors to assist in 26 exploring all of its alternatives. In connection with that exploration, the financial advisors have contacted more than 50 prospective purchasers of assets of the Company or investors in the Company. As a consequence of that effort, the Company has received one indication of interest from MDAdvantage to acquire certain assets of the Underwriter and one additional possible offer. The Company is proceeding to negotiate with MDAdvantage the documentation relating to a possible sale of the Underwriter's assets, subject to the receipt of all necessary approvals and "higher or better offers" prior to closing. The Company is also continuing to seek other buyers for its assets. The future viability and wind-down of the Company will be dependent on cash flow from managing the MDAdvantage contract and the operations of Lawrenceville Re. LOSS AND LAE RESERVES The determination of loss and LAE reserves involves the projection of ultimate losses through quarterly actuarial analyses of the claims history of the Company and other professional liability insurers, subject to adjustments deemed appropriate by the Company due to changing circumstances. Management relies primarily on such historical experience in determining reserve levels on the assumption that historical loss experience provides a good indication of future loss experience despite the uncertainties in loss trends and the delays in reporting and settling claims. As additional information becomes available, the estimates reflected in earlier loss reserves have been and may continue to be revised. The Company increased prior year gross reserves by $353.0 million, $161.2 million and $117.9 million in 2003, 2002 and 2001, respectively. The Company offered traditional occurrence coverage from 1977 through 1986 and offered a form of occurrence-like coverage, "modified claims-made," from 1987 to August 31, 2002. Occurrence and modified claims-made coverages constituted the majority of the Company's business throughout its history. In recent years, however, the Company increased its claims-made business. Development of losses and LAE is longer and slower for occurrence business than claims-made business. Reserves for IBNR claims have consistently represented the majority of total loss and LAE reserves held by the Company. At December 31, 2003 and 2002, gross IBNR reserves composed 60.5% of total gross loss and LAE reserves. As a consequence of runoff and the expiration of all in force policies, new claims being reported are declining rapidly. As the claim inventory matures, the reserves will shift from IBNR to "case" reserves for known claims, with IBNR reserves ultimately approaching zero. Gross loss and LAE reserves on claims-made medical malpractice policies amounted to $401.6 million, or 32.9% of total gross loss and LAE reserves at December 31, 2003, compared to gross loss and LAE reserves on claims-made policies of $395.8 million, or 34.4% of total gross loss and LAE reserves at December 31, 2002. REINSURANCE The Company currently reinsures its risks under various Specific Excess and Aggregate Excess of Loss Reinsurance Contracts, along with five Facultative Contracts. During January 2002, the Company renewed five institutional policies with Facultative Reinsurance Contracts, which reduced the amount of risk that MIIX retained on each policy. The contracts are on a quota share basis; therefore MIIX shares a portion of the premium and loss on each Facultative Reinsurance Contract. The quota share amount that MIIX retains ranges between 25% and 50%. The Aggregate Contract in 2002 provided coverages on an aggregate excess of loss and quota share basis. The primary coverage afforded under the Aggregate Contract attaches above a Company retention measured as a 65% loss and ALAE ratio. Reinsurers provide coverage for an additional 75% loss and ALAE ratio, with an aggregate annual limit of $100 million. The Company has maintained aggregate excess of loss coverage generally similar to that described above since 1993. MIIX's aggregate reinsurance contracts are maintained on a funds withheld basis, whereby MIIX holds the ceded premiums in a funds withheld account for the purpose of paying losses and related LAE. Interest charges are credited on funds withheld at predetermined contractual rates. Each of the aggregate excess reinsurance contracts also contains a provision requiring that the funds withheld be placed in trust should the A.M. Best rating assigned to MIIX fall below B+. On March 22, 2002, A.M. Best lowered the rating of MIIX to C+, and MIIX withdrew from the interactive rating process with A.M. Best. As a result of the downgrade, reinsurers 27 requested that assets supporting the funds withheld account be placed in a trust. MIIX has established the required trust accounts and moved invested assets into trusts in accordance with these contract provisions. Each of the aggregate excess reinsurance contracts also contains a provision allowing reinsurers to offer additional reinsurance coverage that MIIX is obligated to accept. In September and October 2004, the reinsurers initiated requests for additional premiums from MIIX in accordance with provisions of the contracts. Reinsurers are prohibited from canceling current reinsurance agreements or making additional premium charges to MIIX under the September 28, 2004 Order of Rehabilitation. In June 2004, MIIX commuted its 1995 aggregate excess reinsurance treaty. The commutation agreement provided for the release of applicable funds held balances and trust fund assets. The reduction to earnings as a result of the commutation was $3.3 million in 2004. UNDERWRITING EXPENSES The Company's underwriting expenses decreased during 2003 and 2002 mainly due to the Company having ceased insurance operations resulting in reduced commissions, premium taxes and a reduction in compensation and benefits resulting from downsizing actions taken during 2003 and 2002. The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto appearing elsewhere in this Annual Report. The consolidated financial statements for 2003 include the accounts and operations of The MIIX Group and its wholly-owned subsidiaries. CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reporting amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to income taxes, loss and LAE reserves, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: FINANCIAL REPORTING. The Company has not reported the operations of MIIX as discontinued operations because the Company continues to have significant continuing involvement in the operations of MIIX through November 2004. Employees of the Underwriter continue to service, process and adjudicate claims and perform administrative services subsequent to the September 28, 2004 Order of Rehabilitation. Therefore, the Company will not record MIIX as a discontinued operation until this activity diminishes significantly. As of September 30, 2004, the Company began using the equity method of accounting for its investment in MIIX and has recorded the investment at $-0-. REINSURANCE. Reinsurance recoverables include the balances due from reinsurance companies for paid and unpaid losses and LAE that will be recovered from reinsurers, based on contracts in force. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its primary obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk with respect to the individual reinsurers, which participate in its ceded programs to minimize its exposure to significant losses from reinsurer insolvencies. The Company holds collateral in the form of letters of credit or trust accounts for amounts recoverable from reinsurers that are not designated as authorized reinsurers by the domiciliary Departments of Insurance. 28 PREMIUMS. Premiums are recorded as earned over the period the policies to which they apply are in force. The reserve for unearned premiums is determined on a monthly pro-rata basis. Gross premiums include both direct and assumed premiums earned. LOSS AND LOSS ADJUSTMENT EXPENSES. The Company estimates its liability for losses and LAE using actuarial projections of ultimate losses and LAE and other quantitative and qualitative analyses of conditions expected to affect the future development of claims and related expenses. The estimated liability for losses is based upon paid and case reserve estimates for losses reported, adjusted through judgmental formulaic calculations to develop ultimate loss expectations; related estimates of IBNR losses and expected cash reserve developments based on past experience and projected future trends; deduction of amounts for reinsurance placed with reinsurers; and estimates received related to assumed reinsurance. Amounts attributable to ceded reinsurance derived in estimating the liability for loss and LAE are reclassified as assets in the consolidated balance sheets as required by FAS No. 113. The liability for LAE is provided by estimating future expenses to be incurred in settlement of claims provided for in the liability for losses and is estimated using similar techniques. The Company's determination of loss and LAE reserves involved the projection of ultimate loss and ALAE through several actuarial techniques. For a brief description of each of these techniques, refer to "Business - Loss and LAE Reserves." The liabilities for losses and LAE and the related estimation methods are continually reviewed and revised to reflect current conditions and trends. The resulting adjustments are reflected in the operating results of the current year. While management believes the liabilities for losses and LAE are adequate to cover the ultimate liability, the actual ultimate loss costs may vary from the amounts presently provided and such differences may be material. However, as indicated elsewhere, on September 28, 2004, the New Jersey Department placed MIIX in rehabilitation, which resulted in the New Jersey Department having full control of MIIX operations. The Company also has direct and assumed liabilities under covered extended reporting endorsements associated with claims-made policy forms, which generally provide at no additional charge, continuing coverage for claims-made insureds in the event of death, disability or retirement. These liabilities are carried within unearned premium reserves and are estimated through formula calculations that have been verified by the Company's independent actuarial firm using techniques, which possess elements of both loss reserves and pension liabilities, and thus include additional assumptions for mortality, morbidity, retirement, interest and inflation. Since the Company had no policies in force as of December 31, 2003, the Company had no liability with respect to extended reporting endorsements at that date. INVESTMENTS. Under the Order of Rehabilitation, which was entered on September 28, 2004, the New Jersey Department has assumed control of the investment portfolio. As a result, the Company presently exercises no control over its investments, the liquidation of those investments, or investment policy. The discussion set forth below and elsewhere in this Form 10-K is as of December 31, 2003, and does not describe the management of the investment portfolio as at present, as the New Jersey Department's approach to the management of that portfolio is not known to the Company. The Company designated its entire investment portfolio as available-for-sale. As such, all investments are carried at their fair values. The fair value of securities is based upon quoted market prices when available. Where market prices or broker quotations are not available, the fair value is estimated based upon discounted cash flow, applying current interest rates for similar financial instruments with comparable terms and credit quality. The estimated fair value of a financial instrument may be significantly different from the amount that could be realized if the security were sold immediately. The Company has no securities classified as "trading" or "held-to-maturity." Investments are recorded at the trade date. Securities available-for-sale, deemed to have declines in fair value that are other than temporary, are written down to fair value and a realized loss recorded in operations. The fixed maturity securities to which these write-downs apply are generally of investment grade quality at the time of purchase but, are subsequently down graded by rating agencies to "below-investment grade." Factors considered by 29 the Company in determining whether declines in the fair value of fixed maturity securities are other than temporary include: (1) the significance of the decline, (2) the Company's ability and intent to retain the investment for a sufficient period of time for it to recover, (3) the time period during which there has been a significant decline in value, and (4) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer. Based upon these factors, securities that have indications of potential impairment are subject to review. Where such analysis results in a conclusion that declines in fair values are other than temporary, the security is written down to fair value. See Note 5 (Investments), to the consolidated financial statements for a general discussion of the methodologies and assumptions used to determine estimated fair values. As the discussion above indicates, there are risks and uncertainties associated with determining whether declines in the fair value of investments are other than temporary. These include subsequent significant changes in general overall economic conditions as well as specific business conditions affecting particular issuers, future financial market effects such as interest rate spreads, stability of foreign governments and economies, future ratings agency actions and significant accounting, fraud or corporate governance issues that may adversely affect certain investments. In addition, there are often significant estimates and assumptions required by the Company to estimate the fair values of securities, including projections of expected future cash flows and pricing of private securities. The Company is routinely monitoring developments and updating underlying assumptions and financial models based upon new information. Premiums and discounts on investments (other than loan-backed and asset-backed bonds) are amortized/accreted to investment income using the interest method over the contractual lives of the investments. Realized investment gains and losses are included as a component of revenues based on a specific identification of the investment sold. Short-term investments include investments maturing within one-year and other cash and cash equivalent balances earning interest. RISKS AND UNCERTAINTIES The Company's business is subject to a number of risks and uncertainties. However, many of these risks and uncertainties were impacted by the September 28, 2004 Order of Rehabilitation. The risks include: The Company may not be able to retain the key employees necessary to operate the Company. The loss of any of its key executives and/or senior managers may materially adversely impact the Company's ability to continue to manage its business. The Company may not be able to maintain adequate cash flow and liquidity. The Company's scope of operations has been significantly diminished. As a result of the entry of the Order or Rehabilitation, the Company no longer controls the operations of MIIX, the process of resolving claims, or the management of MIIX's investment portfolio. As a result, the Company's cash flow has decreased significantly. The Company does not believe that it has adequate cash to continue to operate. The Company is subject to litigation that could have a material adverse effect on its financial condition. In 2002, a stockholder of the Company filed a putative class action suit against the Company, among other plaintiffs, alleging securities fraud, breaches of fiduciary duty, violations of New Jersey antitrust laws and alleged misrepresentations and omissions of material facts in various of the Company's filings with the SEC. See "Legal Proceedings." Because of the foregoing risks and uncertainties, the Company's financial statements and the discussion that follows in Management's Discussion and Analysis of Financial Condition and Results of Operation should not be relied upon by investors as indicating the Company's ability to operate. 30 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2003, COMPARED TO YEAR ENDED DECEMBER 31, 2002 The Company ceased its insurance underwriting operations in 2002 and entered solvent runoff. The financial results of the Company reflect the cessation of insurance underwriting operations. During this same period the Company was impacted by the historic decline in interest rates and the continuing decline in the size of the investment portfolio as a result of claims settlements. NET PREMIUMS EARNED. Net premiums earned were $(26.1) million in 2003 compared to $100.2 million in 2002, a decrease of approximately $126.3 million. This net decrease is composed of decreased direct and ceded premiums earned. Direct premiums earned decreased $134.9 million, or 84.6%, to $24.6 million in 2003 from $159.5 million in 2002 primarily due to ceasing insurance operations, commutations and cancellation activity during the last nine months of 2002. Direct earned premiums were impacted by the return of approximately $4.9 million associated with the commutation of a large institutional policy during the fourth quarter of 2002. Ceded premiums earned decreased by $8.6 million, or 14.5%, to $50.7 million in 2003 from $59.3 million in 2002 primarily due to lower direct earned premium, offset by additional ceded premiums of $56.3 million associated with the reserve adjustment during 2003 as compared to $44.8 million associated with the reserve adjustment during 2002. Total negative premiums written in 2003 were $0.6 million, a decrease of $96.8 million from total premiums written of $96.2 million in 2002. The net decrease in total premiums written is primarily due to the Company's cessation of writing or renewing premiums in all states, in accordance with each state's specific non-renewal requirements. NET INVESTMENT INCOME. Net investment income decreased $24.9 million, or 41.0%, to $35.9 million in 2003 from $60.8 million in 2002. The decrease was primarily attributable to the combined effects of lower market yields, a decrease in average invested assets resulting mainly from claims payments and a corresponding increase in average short-duration investments held during 2003. Because the Company's insurance subsidiary was in solvent runoff, the Company modified its investment portfolio to: (1) manage an expected increase in accelerated claims and a lower invested asset base and (2) improve the overall average credit quality of the portfolio. This modification involved selling the portfolio's longer duration securities, opportunistically selling below investment grade holdings and using the proceeds, over time, to acquire shorter duration, high quality securities. Accordingly, the Company experienced losses over time mainly concentrated in the sale of its below investment-grade securities. Average invested assets at amortized cost decreased to approximately $889.4 million in 2003 from $1.15 billion in 2002. The average annual pre-tax yield on the investment portfolio decreased to 4.03% in 2003 from 5.31% in 2002 primarily as a result of lower market yields and an increase in short-duration investments held during 2003 for the reasons set forth above. REALIZED INVESTMENT GAINS AND LOSSES. Net realized investment losses were $1.6 million in 2003 compared to net realized investment losses of $3.5 million in 2002. In 2003, realized gains of approximately $20.7 million were recognized primarily due to sales of fixed maturity investments as a result of investment portfolio modifications, offset by $22.3 million of realized losses, including approximately $19.4 million of losses related to other-than-temporary declines in investment values, of which $8.7 million was attributable to Conseco/Greentree Financial corporate bonds and $8.5 million to collateralized bond obligations. In 2002, net realized gains of approximately $13.4 million were recognized primarily due to sales of fixed maturity investments as a result of investment portfolio modifications and recognized approximately $16.9 million of losses related to other-than-temporary declines in investment values, of which $8.9 million was attributable to collateralized bond obligations and $4.8 million was associated with United Airlines corporate bonds. EITF 99-20 established new guidelines for recognition of income and other-than-temporary declines for interests in securitized assets. OTHER REVENUE. Other revenue decreased $0.3 million, or 4.1%, to $7.1 million in 2003 compared to $7.4 million in 2002. This net decrease is primarily composed of decreases of $2.7 million in finance charge revenue, $1.3 million due to the sale of Hamilton National Leasing Corporation ("HNL") and $0.3 million attributable to 31 other non-insurance business activity, offset by increases of $1.5 million associated with management services and $2.5 million in renewal rights revenue from MIIX Advantage. LOSS AND LOSS ADJUSTMENT EXPENSES. Losses and LAE increased $74.4 million, or 37.9%, to $270.9 million in 2003 from $196.5 million in 2002. Losses and LAE were net of ceded losses and LAE of $115.6 million in 2003 and $115.3 million in 2002. The Company recorded a $237.4 million net adjustment to loss and LAE reserves in 2003 to maintain the loss and LAE reserve at management's best estimate levels. Loss and LAE reserve for 2003 included an increase to direct and assumed prior year loss and ALAE reserves of $353.0 million reduced by ceded loss and LAE reserves of $119.9 million. Adjustments to direct and assumed loss and ALAE reserves included a net increase in Pennsylvania hospitals of $67.6 million, a net increase to New Jersey physicians business of $190.4 million, an increase to Pennsylvania physicians of $20.9 million and a net increase to all other states hospitals and physicians business of $60.3 million and $30.5 million, respectively. The net adjustment primarily reflects adverse development and increased severity trends, and to a certain extent acceleration of claims, particularly with respect to Pennsylvania hospital claims and to New Jersey physicians for coverage years prior to 1999. UNDERWRITING EXPENSES. Underwriting expenses decreased $10.9 million, or 32.9%, to $22.2 million in 2003 from $33.1 million in 2002. This decrease is primarily due to the effects of discontinued insurance operations, with reduced commissions, premium taxes and a reduction in compensation and benefits resulting from downsizing actions taken during 2003. FUNDS HELD CHARGES. Funds held charges decreased $11.2 million, or 20.7%, to $43.0 million in 2003 from $54.2 million in 2002. Funds held charges relate to the Company's ceded aggregate reinsurance contracts, and represent balances due to reinsurers, which are withheld as collateral for losses and LAE ceded under the contracts. Funds held charges are calculated based upon the beginning of quarter funds held balances and are adjusted based upon changes to ceded premiums associated with changes in ceded losses. OTHER EXPENSES. Other expenses decreased $2.8 million, or 80.0%, to $0.7 million in 2003 from $3.5 million in 2002. This net decrease is primarily due to the sale of substantially all the assets of the Company's leasing subsidiary, HNL, effective April 30, 2002 and a decrease in the expenses of MIIX Healthcare Group. RESTRUCTURING CHARGE. The Company announced in March, 2002 that LP&C's operations would be placed into runoff and recorded a restructuring charge of $2.6 million during the first quarter of 2002 relating to the reduction of regional and home office staff and the closing of regional offices in Dallas and Indianapolis. No such event occurred during 2003. CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE, NET OF TAX. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill no longer be amortized as an expense, but instead reviewed and tested for impairment under a fair value approach. The cumulative effect of adopting SFAS No. 142 was a charge of $2.4 million on January 1, 2002. On April 1, 2001, the Company adopted EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," which established new guidelines for recognition of income and other-than-temporary declines for interests in securitized assets. The cumulative effect of adopting EITF 99-20 was $5.3 million, net of $2.8 million tax, on April 1, 2001. INCOME TAXES. An income tax benefit of $6.8 million was recorded in 2003, compared to an income tax benefit of $11.2 million in 2002. The tax benefit in 2003 primarily reflects the reduction in the deferred tax valuation allowance specifically resulting from changes in deferred taxes on unrealized portfolio gains. The deferred tax benefit recorded in operations is offset by a charge in other comprehensive income. 32 YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001 NET PREMIUMS EARNED. Net premiums earned were $100.2 million in 2002 compared to $146.9 million in 2001, a decrease of approximately $46.7 million or 31.8%. This net decrease is composed of decreased direct, assumed and ceded premiums earned. Direct premiums earned decreased $54.4 million or 25.4% to $159.5 million in 2002 from $213.9 million in 2001 primarily due to ceasing insurance operations, commutations and cancellation activity during the last nine months of 2002. Direct earned premiums were impacted by the return of approximately $4.9 million associated with the commutation of a large institutional policy during the fourth quarter of 2002. Assumed premiums earned decreased by $0.4 million or 100.0% to $0 from $0.4 million in 2001 primarily due to nonrenewal of a large poorly performing excess of loss reinsurance contract effective January 1, 2001. Ceded premiums earned decreased by $8.1 million or 12.1% to $59.3 million in 2002 from $67.5 million in 2001 primarily due to lower direct earned premium, offset by additional ceded premiums of $44.8 million associated with the reserve adjustment during 2002 as compared to $40.1 million associated with the reserve adjustment during 2001. Total premiums written in 2002 were $96.2 million, a decrease of $135.7 million, or 58.5% from total premiums written of $231.9 million in 2001. The net decrease in total premiums written is primarily due to the Company's cessation of writing or renewing premiums in all states, in accordance with each state's specific non-renewal requirements. NET INVESTMENT INCOME. Net investment income decreased $19.4 million, or 24.2%, to $60.8 million in 2002 from $80.2 million in 2001. The decrease was primarily attributable to the combined effects of lower market yields and a decrease in average invested assets resulting mainly from claims payments and a corresponding increase in average short-term investments held during 2002. Because two of the Company's insurance subsidiaries, MIIX and LP&C, were in solvent runoff, the Company has modified its investment portfolio to (1) manage an expected increase in accelerated claims and a lower invested asset base and (2) improve the overall average credit quality of the portfolio. Average invested assets at amortized cost decreased to approximately $1.15 billion in 2002 from $1.26 billion in 2001. The average annual pre-tax yield on the investment portfolio decreased to 5.31% in 2002 from 6.38% in 2001 primarily as the result of lower market yields and an increase in short-duration investments held during 2002 for the reasons set forth above. REALIZED INVESTMENT GAINS AND LOSSES. Net realized investment losses increased $1.3 million, or 61.2%, to net realized investment losses of $3.5 million in 2002 compared to net realized investment losses of $2.2 million in 2001. In 2002, net realized gains of approximately $13.4 million were recognized primarily due to sales of fixed maturity investments as a result of investment portfolio modifications and recognized approximately $16.9 million of losses related to other-than-temporary declines in investment values, of which $8.9 million was attributable to collateralized bond obligations and $4.8 million was associated with United Airlines corporate bonds. In 2001, $19.7 million of net realized gains were taken primarily from continued repositioning of the portfolio, offset by $21.8 million of losses related to other-than-temporary declines in investment values, including $8.1 million ($5.3 million net of tax) resulting from activity following adoption of EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" effective April 1, 2001. EITF 99-20 established new guidelines for recognition of income and other-than-temporary declines for interests in securitized assets. OTHER REVENUE. Other revenue decreased $1.0 million, or 11.8%, to $7.4 million in 2002 compared to $8.4 million in 2001. This net decrease is composed of (1) a decrease of approximately $2.4 million due to the sale of substantially all of the assets of the Company's leasing subsidiary, HNL, effective April 30, 2002, (2) an increase of $1.7 million associated with management services and related contracts with MIIX Advantage, which commenced insurance operations on September 1, 2002 and (3) a net decrease of approximately $0.3 million attributable to other non-insurance business activity. LOSS AND LOSS ADJUSTMENT EXPENSES. Losses and LAE decreased $54.3 million, or 21.6%, to $196.5 million in 2002 from $250.8 million in 2001. Losses and LAE were net of ceded losses and LAE of $115.3 million in 2002 and $97.5 million in 2001. The ratio of net losses and LAE to net premiums earned increased to 196.1% in 2002 from 170.8% in 2001. 33 As a result of a reserve study conducted by the Company and the annual external actuarial review, the Company recorded a $20.5 million net adjustment to loss and LAE reserves for the fourth quarter ended December 31, 2002, to maintain the loss and LAE reserve at management's best estimate levels. Loss and LAE reserve for the quarter ended December 31, 2002, included an increase to direct and assumed loss and LAE reserves of $85.1 million reduced by ceded loss and ALAE reserves of $64.6 million. Adjustments to direct and assumed loss and LAE reserves included a net increase in Pennsylvania hospitals of $42.0 million, a net increase to New Jersey physicians business of $34.7 million, a decrease to Pennsylvania physicians of $6.1 million and a net increase to all other states hospitals and physicians business of $10.1 million and $4.4 million, respectively. The net adjustment primarily reflects adverse severity trends and, to a certain extent, an acceleration of claims particularly with respect to Pennsylvania hospital claims and to New Jersey physicians for coverage years prior to 1999. Through the nine months ended September 30, 2002, reserve adjustments had been made to maintain the loss and LAE reserve at management's best estimate levels. The reserve adjustments recorded for the three months ending September 30, 2002, followed from an internal study conducted by the Company. Loss and LAE reserves for the quarter ended September 30, 2002, included a net increase to direct and assumed loss and ALAE reserves of $30.7 million and a net decrease to ULAE reserves of $24.1 million. Ceded loss and ALAE reserves were increased by $11.2 million. Adjustments to direct and assumed loss and ALAE reserves included a net increase in Pennsylvania hospital reserves of $23.5 million, a net decrease in Pennsylvania physician reserves of $9.5 million, a net decrease in New Jersey physician reserves of $0.8 million, and a net increase in reserves held on all other business, written primarily in Texas and Ohio, of $17.5 million. The net adjustment primarily reflected adverse severity trends, particularly with respect to Pennsylvania hospital claims, somewhat offset by better than expected activity in the 2002 coverage year. The net adjustment to ULAE reserves primarily reflected the greater level of claims activity associated with claims-made business written in recent years. Claims-made business generally has a shorter development tail than occurrence policies, so the duration of anticipated future claim handling activity, and claim activity costs per dollar of indemnity payment, diminished. For the three months ending March 31, 2002, the Company strengthened loss reserves based on updated actuarial information, which became available as of March 31, 2002. The Company recorded a $29.5 million net adjustment to loss and LAE reserves as of March 31, 2002. Prior year gross and ceded loss and LAE reserves were increased by $54.5 million and $25.0 million, respectively. The strengthening in prior year gross loss and LAE reserves consists of $31.3 million attributable to physician business written by LP&C for the coverage years of 1998-2001, $31.3 million related to New Jersey physicians primarily for business earned during 1994-1996, and other increases of $8.0 million relating primarily to Pennsylvania institutional business for the 1999-2001 coverage years. These increases were partly offset by reductions in prior year gross loss and LAE reserves of $9.5 million related to Pennsylvania physician business earned primarily during 1998 and 1999 and $6.6 million related to New Jersey physician business earned during 2001, reflecting the Company's recent improvements in underwriting, risk selection and pricing disciplines. As a result of reserve studies conducted by the Company, the Company's outside actuary and a second actuarial firm specializing in medical malpractice reserving, the Company recorded a $64.5 million net adjustment to loss and LAE reserves as of December 31, 2001. During 2001, the Company increased direct and assumed prior year loss and LAE reserves of $113.1 million and $4.8 million, respectively. During 2001, ceded reserves associated with the Company's aggregate reinsurance contracts increased by $61.7 million. The increase in prior year loss and LAE reserves resulted from three primary factors: increased loss severity, particularly in the Pennsylvania institutions and New Jersey physicians book; adverse development in the form of additional frequency and severity relating to physicians business in certain states, primarily in Pennsylvania, Texas and Ohio; and adverse development associated with reserves held on an assumed excess of loss reinsurance contract which was non-renewed January 1, 2001. The increase in current year loss and LAE reserves resulted primarily from increased severity levels and reduced profitability indications from prior accident years. UNDERWRITING EXPENSES. Underwriting expenses decreased $14.0 million, or 29.7%, to $33.1 million in 2002 from $47.1 million in 2001. This decrease is primarily due to the effects of discontinued insurance operations, with reduced commissions, premium 34 taxes and a reduction in compensation and benefits resulting from downsizing actions taken during 2002. The ratio of underwriting expenses to net premiums earned increased to 33.1% in 2002 from 32.1% in 2001. The increase resulted primarily from lower net earned premiums which was impacted by additional ceded premiums associated with additional losses ceded under the Company's aggregate reinsurance contracts. FUNDS HELD CHARGES. Funds held charges increased $11.7 million, or 27.6%, to $54.2 million in 2002 from $42.5 million in 2001. Funds held charges relate to the Company's ceded aggregate reinsurance contracts, and represent balances due to reinsurers which are withheld as collateral for losses and LAE ceded under the contracts. Funds held charges increased $30.0 million resulting from adjustments made to ceded loss and LAE reserves and ceded premiums recorded during the first, third and fourth quarters of 2002. In 2001, funds held charges increased $19.8 million resulting from changes to less reserves, ceded losses and ceded premiums during 2001. Funds held charges are calculated based upon the beginning of quarter funds held balances and are adjusted based upon changes to ceded premiums associated with changes in ceded losses. OTHER EXPENSES. Other expenses increased $0.1 million, or 1.5%, to $3.5 million in 2002 from $3.4 million in 2001. This net increase is primarily due to increased costs resulting from management services provided to MIIX Advantage, which commenced operations on September 1, 2002, offset by the sale of substantially all the assets of the Company's leasing subsidiary, HNL, effective April 30, 2002. RESTRUCTURING CHARGE. The Company announced in March, 2002, that LP&C's operations would be placed into runoff and recorded a restructuring charge of $2.6 million during the first quarter of 2002 relating to the reduction of regional and home office staff and the closing of regional offices in Dallas and Indianapolis. No such event occurred during 2001. CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE, NET OF TAX. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill no longer be amortized as an expense, but instead reviewed and tested for impairment under a fair value approach. The cumulative effect of adopting SFAS No. 142 was a charge of $2.4 million on January 1, 2002. On April 1, 2001, the Company adopted EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," which established new guidelines for recognition of income and other-than-temporary declines for interests in securitized assets. The cumulative effect of adopting EITF 99-20 was $5.3 million, net of $2.8 million tax, on April 1, 2001. INCOME TAXES. An income tax benefit of $11.2 million was recorded in 2002, as compared to an income tax expense of $41.9 million in 2001. The tax benefit resulted from the recognition of a net operating loss carryback due to a tax law change enacted during 2002. This benefit was net of an increase in the valuation allowance of $29.7 million during 2002. At December 31, 2001, the Company recorded a $95.1 million valuation allowance against the net deferred tax asset in accordance with Statement of Financial Accounting Standards 109, "Accounting for Income Taxes," offset by an increase in pre-tax loss of $52.0 million resulting in an increased tax benefit of $18.2 million at a 35% tax rate, a tax contingency reserve release of $10.2 million, and a net increase in taxes of $2.9 million in other items including $1.0 million due to lower tax exempt interest. The release of the tax contingency reserve resulted from the establishment of the valuation allowance, at full value. LIQUIDITY AND CAPITAL RESOURCES The MIIX Group is a holding company whose assets primarily consist of all of the capital stock of its subsidiaries. Cash flow needs at the holding company level include corporate operating expenses. Prior to the Order of Rehabilitation, the Company's principal sources of funds were dividends and other permissible payments from its subsidiaries and revenues from its non-insurance operations. Subsequent to the Order of Rehabilitation, the Company's principal source of funds is derived from the management contract with MDAdvantage. The Company does not believe that its cash flow will be sufficient to allow it to continue to operate. Accordingly, the Company continues the wind-down of its business activities. See "Recent Developments," "Management's Discussion and Analysis of Financial Condition and 35 Results of Operation - Risks and Uncertainties," "Business - Business Strategy" and "Business - Regulation - Risk-Based Capital." MIIX, while in runoff through September 28, 2004, needed to have cash and liquid assets available to meet its obligations to policyholders in accordance with contractual obligations, in addition to having funds available to meet ordinary operating costs. The primary sources of the Company's liquidity are net investment income, proceeds from the maturity or sale of invested assets, recoveries from reinsurance, revenues from non-insurance operations and unearned premium. Funds are used to pay losses and LAE, operating expenses, reinsurance premiums and taxes. The Company's net cash flow used in operating activities were approximately $(280.4) million, $(181.7) million and $(24.3) million for the years ended December 31, 2003, 2002 and 2001, respectively. The decrease in cash flow during 2003 was primarily the result of increased loss payments reflecting the maturation of the Company's expansion book of business and the settlement of several higher severity cases, lower investment income and a decrease in premium collection reflecting the decrease in written premium offset. Because of the inherent unpredictability related to the timing of the payment of claims, it is not unusual for cash flow from operations for a medical malpractice insurance company to vary, perhaps substantially, from year to year. However, as a result of the Order of Rehabilitation on September 28, 2004, the Company no longer has control over the operations of MIIX and, accordingly, the financial position and results of operations of MIIX will no longer be reflected in the Company's financial statements after September 28, 2004. See "Business - Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operation - Risks and Uncertainties." The Company, through the normal course of operations, entered into contractual obligations relating to leases for premises and equipment. The following table details the Company obligations for the years presented (In thousands). Less Than 1 1-3 More Than 3 ------------ ----- ----------- Total Year Years Years ------- ----- ----- -------- Operating leases: Equipment $ 390 $ 181 $ 209 $ 0 Premises 1,748 282 733 733 ------- ------ ----- -------- Total $ 2,138 $ 463 $ 942 $ 733 ======= ====== ===== ======== The Company investments consisted primarily of fixed-maturity securities. The Company's investment strategy sought to maximize after-tax income through holding an investment grade, intermediate term, diversified, taxable bond portfolio, while maintaining an adequate level of liquidity. Approximately $56.5 million was set aside in short-term investments to provide for acceleration of claims. If claim payments continue at current levels these funds will be inadequate and the investment portfolio will be diminished faster than anticipated. Any diminution of the investment portfolio will reduce net investment income. At December 31, 2003, the portfolio had an average credit quality of "AA," an average duration of 3.2 years and an annualized yield of 4.0%. At December 31, 2003, and 2002, the Company held collateral of $292.1 million and $332.7 million, respectively, in the form of funds held, and $161.2 million in the form of letters of credit, for recoverable amounts on ceded unpaid losses and LAE under certain reinsurance contracts. Under the contracts, reinsurers may require that a trust fund be established to hold the collateral should one or more triggering events occur, such as a downgrade in the Company's A.M. Best rating below B+, a reduction in statutory capital and surplus to less than $60 million, or a change in control. Under the contracts, and as a result of the downgrade of the Company's A.M. Best rating to below B+ during the first quarter of 2002, reinsurers requested that assets supporting the funds withheld account be placed in trust. The Company established the required trust accounts in accordance with contract provisions. The Company does not anticipate a material impact on the Company's financial condition or results of operations from placing the funds withheld in trust. In accordance with the provisions of the reinsurance contracts, the funds held are credited with interest at contractual rates ranging from 6.0% to 8.6%, which is recorded as an expense in the year incurred. 36 The tables below provide, as of December 31, 2003 and 2002, information about the Company's fixed maturity investments, which are sensitive to changes in interest rates, showing principal amounts and the average yield applicable thereto by expected maturity date and type of investment. The expected maturities displayed have been compiled based upon the earlier of the investment call date or the maturity date or, for mortgage-backed securities, expected payment patterns based on statistical analysis and management's judgment. Actual cash flows could differ, perhaps significantly, from the expected amounts. The information on the tables below and the paragraphs that follow represent historical information and do not discuss the change resulting from the Order of Rehabilitation on September 28, 2004.
At December 31, 2003: Expected Maturity Date ---------------------------------------------------------------------------------- Total (In thousands) Principal 2004 2005 2006 2007 2008 Thereafter Amounts Fair Value ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- Government & Agency $ 20,364 $ 13,441 $ 41,045 $ 3,020 $ 17,455 $ 14,365 $ 109,690 $ 100,011 - - Average Yield ... 1.24% 1.57% 2.46% 3.38% 4.12% 4.49% 2.68% Corporate ......... $ 14,972 $ 8,450 $ 23,775 $ 36,930 $ 31,300 $ 131,338 $ 246,766 $ 229,268 - - Average Yield ... 5.86% 4.58% 3.35% 3.75% 3.83% 5.43% 4.77% Mortgage-Backed ... $ 0 $ 18 $ 2,643 $ 922 $ 552 $ 232,407 $ 236,543 $ 242,196 - - Average Yield ... 0.00% 6.64% 5.53% 4.00% 6.16% 5.09% 5.09% Asset-Backed ...... $ 74 $ 1,125 $ 10,531 $ 13,890 $ 6,815 $ 90,992 $ 123,427 $ 116,565 - - Average Yield .... 5.80% 1.22% 2.15% 2.37% 2.08% 4.83% 4.14% Municipal ......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 8,200 $ 8,200 $ 7,695 - - Average Yield ... 0.00% 0.00% 0.00% 0.00% 0.00% 4.91% 4.91% ----------- ----------- ------------ --------- ----------- ---------- ---------- ---------- TOTALS ............ $ 35,410 $ 23,035 $ 77,995 $ 54,762 $ 56,122 $ 477,302 $ 724,626 $ 695,735 At December 31, 2002: Expected Maturity Date ---------------------------------------------------------------------------------- Total (In thousands) Principal 2003 2004 2005 2006 2007 Thereafter Amounts Fair Value ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- Government & Agency $ 8,066 $ 15,780 $ 3,195 $ 14,645 $ 14,515 $ 53,930 $ 110,131 $ 119,850 - - Average Yield ... 4.30% 3.60% 2.97% 3.81% 3.43% 5.36% 4.38% Corporate ......... $ 8,475 $ 18,600 $ 11,750 $ 19,625 $ 23,900 $ 217,279 $ 299,629 $ 285,183 - - Average Yield ... 7.62% 6.79% 5.16% 5.24% 4.45% 5.95% 5.82% Mortgage-Backed ... $ 0 $ 0 $ 54 $ 2,688 $ 0 $ 171,970 $ 174,712 $ 181,347 - - Average Yield ... 0.00% 0.00% 6.73% 5.60% 0.00% 6.10% 6.10% Asset-Backed ...... $ 0 $ 212 $ 0 $ 6,411 $ 1,637 $ 191,605 $ 199,865 $ 202,200 - - Average Yield ... 0.00% 5.84% 0.00% 5.01% 6.89% 6.21% 6.19% ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- TOTALS ............ $ 16,541 $ 34,592 $ 14,999 $ 43,369 $ 40,052 $ 634,784 $ 784,337 $ 788,580
At December 31, 2003, the Company had net unrealized gains on its fixed maturity investment portfolio of $14.9 million. The net unrealized gains were the result of the decline in market interest rates during 2003, 2002 and 2001. Management does not expect that significant unrealized losses will be realized on the fixed maturity portfolio given the credit quality of the portfolio at December 31, 2003 and the Company's policy of matching asset and liability maturities. Asset and liability matching is an important part of the Company's portfolio management process. The Company utilizes financial modeling and scenario analysis to closely monitor the effective modified duration of assets and liabilities in order to minimize mismatching. The goal of effective asset/liability management is to allow payment of claims and operating expenses from operating funds without disrupting the Company's long-term investment strategy. In addition to interest rate risk, fixed maturity securities like those comprising the Company's investment portfolio involve other risks such as default (or credit deteriorating quality). The Company manages these issues by limiting the amount of higher risk corporate obligations (determined, among other variables, by credit rating assigned by private rating agencies) in which it invests. At December 31, 2003, approximately 52% of the investment portfolio was concentrated in mortgage-backed and asset-backed securities. Mortgage-backed and asset-backed securities involve similar risks associated with fixed maturity investments: interest rate risk, reinvestment rate risk and default or credit risk. In addition, mortgage-backed and asset-backed securities also possess prepayment risk, which is the risk that a security's originally scheduled interest and principal payments will differ considerably due to changes in the level of interest rates. The Company purchased mortgage-backed and asset-backed securities structured to enhance credit quality and/or provide prepayment stability. Short-term investments are composed of highly rated money market instruments. 37 The Company also held a number of equity investments. At December 31, 2003, the cost and fair value of equity investments was $2.8 million and $3.2 million, respectively. At December 31, 2002, the cost and fair value of equity investments was $4.8 million and $5.2 million, respectively. The value of the common stock investments is dependent upon general conditions in the securities markets and the business and financial performance of the individual companies in the equity portfolio. EFFECTS OF INFLATION The Company considers the effects of inflation in reserving for losses and LAE. There may be long periods between the sale of insurance coverage and the reporting of losses, particularly with respect to coverage provided by the Company on occurrence-basis policies. Further, there are typically significant periods of time between reporting and settlement of losses. The actual effects of inflation on the Company's operating results cannot be accurately known until losses are reported and ultimately settled. Management believes that the Company's pricing and loss and LAE reserving processes adequately incorporate the effects of inflation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are included in Item 7 under "Management's Discussion and Analysis of Financial Condition and Results of Operation." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE A disagreement existed between the Company and Ernst & Young LLP related to the Company's preliminary loss and LAE reserve balances, primarily due to differences of opinion as to the effect of claim acceleration and severity related to the estimation of loss and LAE reserve balances as of December 31, 2003. As a result of additional analysis performed by the Company resulting in a reserve adjustment recorded as of December 31, 2003, the Company and Ernst & Young LLP no longer have a disagreement. ITEM 9A. CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, and with the participation of management, The MIIX Group's Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of The MIIX Group's disclosure controls and procedures (as defined in the Exchange Act Rule 15d-14). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that The MIIX Group's disclosure controls and procedures are effective in providing them with timely material information that is required to be disclosed in reports The MIIX Group files under Section 15(d) of the Exchange Act. There were no significant changes in The MIIX Group's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors of the Company. See Part I of this Form 10-K. 38 (b) Executive Officers of the Company. See Part I of this Form 10-K. (c) Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Exchange Act generally requires the Company's Executive Officers and Directors, and persons who own more than ten percent of the common stock, to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Regulations promulgated by the SEC require the Company to disclose in this Annual Report any reporting violations with respect to the fiscal year 2003, which came to the Company's attention based on a review of the applicable filings made by the Company's officers and directors with the SEC. Based solely on review of such forms received by it, no reporting person made a late filing under Section 16(a). The foregoing statements are based solely on a review of the copies of such reports furnished to the Company by its officers, directors and security holders and their written representations that such reports accurately reflect all reportable transactions and holdings. (d) Code of Ethics The Company adopted a Code of Ethics on December 10, 2003. The Company will provide to any person without charge a copy of such Code of Ethics upon request to: Corporate Secretary, The MIIX Group, Two Princess Road, Lawrenceville, New Jersey 08648. ITEM 11. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth information concerning the compensation of (1) the Company's current Chairman and Chief Executive Officer, and (2) the five other most highly compensated Executive Officers of the Company for the year ended December 31 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE Annual Compensation Long-term Compensation ------------------- ---------------------- Other Securities Annual Restricted Underlying All Other Name and Principal Compensa Stock Options/SARs Compensa- Position Year Salary($) Bonus($) Tion($) Award (#) (#) Tion($)(6) - -------- ---- --------- ----- ---- ----- --- ---------- Patricia A. Costante 2003 413,772 323,750(1) 0 250,000(2) 0 60,106 Chairman and 2002 370,000 323,750 0 0 0 55,884 Chief Executive Officer 2001 259,038 0 0 10,000(3) 95,000 5,345 Allen G. Sugerman(4) 2003 350,000 50,000 78,886 0 0 0 Chief Financial Officer & 2002 158,869 0 54,082 0 0 0 Treasurer 2001 0 0 0 0 0 0 Edward M. Grab 2003 246,786 201,250(1) 97,257(5) 223,735(2) 0 22,276 Senior Vice President and 2002 229,423 201,250 0 0 0 25,232 Chief Actuary 2001 199,237 0 0 0 35,000 5,358 Verice M. Mason 2003 214,735 72,688(1) 0 225,510(2) 0 7,276 Senior Vice President and 2002 200,758 24,229 0 0 0 13,958 General Counsel 2001 182,746 10,000 0 0 2,450 12,661 Catherine E. Williams 2003 181,056 123,750(1) 0 163,716(2) 0 17,579 Senior Vice President, 2002 164,039 41,250 0 0 0 9,828 Business Development and 2001 121,442 0 0 0 20,000 10,375 Corporate Secretary William G. Davis 2003 165,595 59,319(1) 0 173,262(2) 0 6,597 Senior Vice President, Claims 2002 157,718 19,772 0 0 0 5,938 2001 142,446 5,000 0 0 2,450 5,007
(1) Includes retention payments under the Employee Retention Incentive Plan for Ms. Costante, Mr. Grab, Ms. Mason, Ms. Williams and Mr. Davis of $323,750, $201,250, $72,688, $123,750 and $59,319, respectively. 39 In 2002, the Company developed an Employee Retention Incentive Plan (the "Retention Plan") to encourage key executives and employees to continue their employment with the Company. The Compensation Committee approved the Retention Plan in 2002 for eligible employees of the Company and the Underwriter. The Committee recognizes the importance of retaining key employees during this critical time as the Company actively engages in strategies to realize value for stockholders. The Retention Plan was offered to key supervisors and senior managers and certain key executives, including Ms. Costante, Ms. Mason, Ms. Williams, Mr. Grab and Mr. Davis. Cash payments under the Retention Plan were based on a percentage of salary and only vested if the employee was employed on the vesting dates set forth in the Plan or was terminated without cause. The Retention Plan was administered over the 18-month period which began March 5, 2002 and ended on September 5, 2003. In the event of a change of control, equity infusion into the Company in excess of $20 million, or the entry of an order of rehabilitation or liquidation of any of the Company's New Jersey insurance subsidiaries, the commencement of an involuntary proceeding of bankruptcy or a resolution of the Company to make a voluntary bankruptcy filing and the termination of the covered employee without cause, all Retention Plan payments would have accelerated and become immediately payable. Under the Retention Plan, key supervisors and senior managers were eligible to receive 15-50% of salary, key vice presidents from 25-50% of salary, senior vice presidents from 50-175% and the Chief Executive Officer was eligible to receive 175% of salary. Ms. Costante and Mr. Grab earned the balance of their retention payments on September 5, 2003, and the Company paid them $323,750 and $201,250, respectively, on that date. With respect to Ms. Costante and Mr. Grab, all payments received under the Retention Plan were used, after deduction for taxes, first to extinguish the outstanding balances and interest thereon under their respective stock loans. Ms. Mason, Ms. Williams and Mr. Davis were entitled to receive a total of $96,917, $165,000 and $79,092, respectively, under the Retention Plan. Ms. Mason, Ms. Williams and Mr. Davis earned twenty-five percent of their retention payments on March 5, 2003 and fifty percent on September 5, 2003, and the Company paid them a total of $72,688, $123,750 and $59,319, respectively. The Retention Plan is not provided in lieu of any annual performance incentive plan or arrangements maintained by the Company as part of its general compensation programs or as part of any Employment Agreement or similar instrument entered into between the Company and the Executives. The Retention Plan was filed as an exhibit to the Company's Annual Report on Form 10-K, for the year ended December 31, 2001. (2) Amounts consist of shares of restricted common stock granted on February 26, 2003. The value of the restricted common stock on February 26, 2003, was $1,331,547. The table below represents the individual grants and vesting schedules.
Restricted Stock Restricted Stock Total Value of Restricted Retention Promotion Restricted Restricted Common Named Executive Officer Stock Bonus* Bonus** Bonus*** Stock Granted Stock Granted ----------------------- ------------ ------- -------- ------------- ------------- Patricia A. Costante 93,580 156,420 - 250,000 $321,250 William G. Davis 21,708 129,001 22,553 173,262 $222,642 Edward M. Grab 31,323 192,412 - 223,735 $287,499 Verice M. Mason 28,545 167,315 29,650 225,510 $289,780 Catherine E. Williams 22,471 141,245 - 163,716 $210,375 Totals 197,627 786,393 52,203 1,036,223 $1,331,547 * Vests 100% on anniversary of the grant date, February 26, 2003. ** Vests 25% on each six month anniversary of the grant date, February 26, 2003. *** Vests 50% on each of the first and second anniversaries of the grant date, February 26, 2003.
40 (3) Amount consists of shares of restricted common stock granted on December 19, 2001. The value of the restricted common stock on December 19, 2001, was $117,900. The restricted common stock vests one-third on the third anniversary of the date of grant and one-third on each of the next two anniversaries of the grant date. (4) Of the $350,000 listed under "Salary," $302,000 was paid to Altila Corporation. Of the $78,886 listed under Other Compensation, $56,853 was reimbursement for travel related expenses paid to Altila Corporation, $9,000 was for a car allowance and $13,033 was for flexible benefits paid to Mr. Sugerman as provided for in his Employment Agreement. (5) On November 12, 2003, the Compensation Committee approved a retention program for Mr. Grab. Under the retention program, Mr. Grab's outstanding stock loan balance of $97,257 was forgiven subject to his continued employment with the Company through December 31, 2004. (6) Amounts in this column include the following:
Matching Contributions under Group Term Life Name and Principal Retirement Savings Unused Vacation Insurance Premiums Position Year Plan (401(K) Plan) ($) Payments ($) ($) - -------- ---- --------------------- ------------ ------------------ Patricia A. Costante 2003 6,000 53,449 657 Chairman and 2002 5,500 49,807 577 Chief Executive Officer 2001 5,100 0 245 William G. Davis 2003 6,000 0 597 Senior Vice President, Claims 2002 5,387 0 551 2001 4,521 0 486 Edward M. Grab 2003 6,000 15,921 355 Senior Vice President and 2002 5,500 19,420 312 Chief Actuary 2001 5,100 0 258 Verice M. Mason 2003 6,000 821 455 Senior Vice President and 2002 5,500 8,059 399 General Counsel 2001 5,100 7,327 234 Catherine E. Williams 2003 6,000 11,421 158 Senior Vice President, Business 2002 5,500 4,190 138 Development and Corporate Secretary 2001 3,856 6,442 77
41 Option Grant Table There were no options granted to Executive Officers during the fiscal year ended December 31, 2003. The following table sets forth information with respect to the exercisable and unexercisable options held by the Named Executive Officers as of December 31, 2003. AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR(1) AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Shares Options/SARs Options/SARs at Acquired on At Fiscal Year-End (#) Fiscal Year-End ($) Exercise Value Realized Unexercisable (U)/ Unexercisable (U)/ (#)(1) ($) Exercisable (E) Exercisable (E) ------ --- --------------- --------------- 11,250 U 0 U Patricia A. Costante 0 0 103,750 E 0 E 0 U 0 U Allen G. Sugerman 0 0 0 E 0 E 613 U 0 U William G. Davis 0 0 6,837 E 0 E 0 U 0 U Edward M. Grab 0 0 55,000 E 0 E 613 U 0 U Verice M. Mason 0 0 6,837 E 0 E 0 U 0 U Catherine E. Williams 0 0 25,000 E 0 E
(1) None of the Named Executive Officers exercised options during the fiscal year ended December 31, 2003. Employment and Severance Agreements Each of Mmes. Costante, Mason and Williams and Messrs. Sugerman, Grab and Davis (collectively, the "Executives") is party to an employment agreement with the Company dated December 19, 2001, March 19, 2002, October 31, 2001, July 17, 2003 and March 1, 2000, and March 19, 2002, respectively (each an "Employment Agreement"). Each Employment Agreement, except for Mr. Sugerman's Employment Agreement, is for an indefinite term, subject to the right of the Company and the Executive to terminate the Agreement in accordance with its terms. The Employment Agreements of Mmes. Costante, Mason and Williams and Messrs. Grab and Davis provide for an annual base salary of $370,000, $190,500, $115,000, $165,000 and $159,390, respectively. Under each of the Employment Agreements, other than Mr. Sugerman's and Ms. Costante's Employment Agreements, base salary may be adjusted as deemed appropriate by the Board taking into account the recommendation of the Chief Executive Officer. As of January 1, 2004, the annual base salary for Mmes. Costante, Mason and Williams and Messrs. Grab and Davis was $415,000, $215,000, $181,500, $247,250 and $165,765, respectively. Mr. Sugerman's Employment Agreement is for a period of one year ending on July 17, 2004 and provides for a base salary of $48,000. In addition, the Company entered into agreement with Altila Corporation ("Altila") under which the Company leases from Altila the services provided by Mr. Sugerman as Chief Financial Officer of the Company. Under the agreement, the Company pays Altila $302,000 per year for Mr. Sugerman's services, plus reimbursement of Mr. Sugerman's reasonable out of pocket expenses. During 2003, the Company paid Altila $302,000 under this agreement for Mr. Sugerman's services. Mr. Sugerman is a principal of Altila. Mr. Sugerman's Employment Agreement has been extended for a period of one year through July 17, 2005 under the same terms and conditions. 42 Under each of the Employment Agreements, bonuses are payable at the discretion of the Board of the Company, based on the Company's and the individual Executive's achievement of certain goals and objectives established by the Board on an annual basis. With respect to Mr. Sugerman, his Employment Agreement provides that he is eligible to receive an annual cash bonus of up to $225,000, at the discretion of the Company's Board, based on the achievement of specific goals and objectives. In addition, Mr. Sugerman's Employment Agreement provides that he is eligible to receive a transaction bonus upon the consummation of a major capital infusion into the Company in excess of $10 million or a sale or merger of the Company in exchange for consideration in excess of a certain amount, provided that either such transaction is initiated during the term of Mr. Sugerman's employment and closed no later than six months thereafter. The transaction bonus that Mr. Sugerman will be entitled to receive upon the consummation of such a transaction is: (a) in the case of a capital infusion into the Company, $17,500 for each $1 million in capital raised in excess of $10 million, up to a maximum of $350,000; and (b) $350,000 in the event of a sale or merger of the Company, for consideration of an amount in excess of $46.5 million, the Company's net book value at June 30, 2003. In the event of the consummation of a transaction or transactions involving both a capital infusion into and the sale or merger of the Company, Mr. Sugerman is entitled to receive only one transaction bonus, which shall be the greater of the two applicable bonuses. In the event of the termination of the employment of any of the Executives, except Mr. Sugerman, by the Company without cause, their Employment Agreements provide for a continuation of their health benefits and severance pay of up to two years' base salary in the case of Ms. Costante and up to one year's base salary in the case of the other Executives or, in each case, if sooner, until the date upon which the Executive obtains new full-time employment. If termination occurs within six months of a change in control of the Company, in addition to a continuation of his or her health benefits, the terminated Executive will receive a severance payment in the amount of three years' base salary in the case of Ms. Costante and two years' base salary in the case of the other Executives other than Mr. Sugerman. In the event of the termination of employment of Mr. Sugerman without cause, his Employment Agreement provides for a continuation of his health benefits and base salary through the end of the term of his Employment Agreement and the prorated portion of any cash bonus earned through the date of any such termination of employment. Under the terms of their Employment Agreements and the Company's Amended and Restated 1998 Long-Term Incentive Equity Plan, the Executives may be granted options to purchase common stock. The exercise price of each option is equal to the fair market value of the common stock on the grant date. Deferred Compensation Plans The Company is party to Deferred Compensation Agreements with each of Mmes. Costante, Mason and Williams and Messrs. Grab and Davis. Pursuant to their respective Agreements, the Executives may elect to defer payment of portions of their compensation and dividend equivalents awarded pursuant to the Company's Amended and Restated 1998 Long-Term Incentive Equity Plan. Interest is credited quarterly on the deferred amounts at a rate equal to the aggregate yield on the Company's investment portfolio, or at the request of the Executive, at a rate equal to the return associated with another investment. Distributions of benefits shall commence no earlier than March 1, 2005, in the case of Ms. Costante and Mr. Grab, March 19, 2007 in the case of Ms. Mason and Mr. Davis and October 31, 2006 in the case of Ms. Williams, but shall be accelerated upon the date that the applicable Executive ceases to be employed by the Company, or upon such Executive's death, whichever is the earliest to occur. As of December 31, 2003, Ms. Costante, Mr. Davis, Mr. Grab, Ms. Mason and Ms. Williams had deferred the receipt of $31,817, $0, $15,260, $0, and $1,106 respectively, pursuant to their Deferred Compensation Agreements. The Deferred Compensation Plan was terminated effective March 25, 2004. Deferred compensation that had accrued was paid to Ms. Costante, Mr. Grab and Ms. Williams in the amounts of $31,487, $15,404 and $1,117, respectively. In the case of Ms. Costante, payment received under the Deferred Compensation Plan was used, after deduction for taxes, first to extinguish the outstanding balance and interest thereon under her stock loan. 43 Pension Benefits The Company has a retirement plan (the "Retirement Plan") that provides retirement benefits for substantially all employees of the Company. The Retirement Plan is an employee non-contributory, tax-qualified defined benefit pension plan. The Retirement Plan was amended effective April 1, 2000, and provides each covered employee with a notional account balance, which is credited with 3% of each year's basic annual compensation (if at least 1,000 hours of service are earned) up to Internal Revenue Code limits. Additionally, interest will be credited to the accounts each year based on the rate for five-year U.S. Treasury Bonds in the preceding November. The normal form of benefit payment from the Retirement Plan as amended April 1, 2000 is a single life annuity. Covered employees attaining age 21 and having completed 90 days of service are eligible to participate in the Retirement Plan. Covered employees who terminate employment prior to normal retirement may elect to defer receipt of their benefits until their normal retirement date, in which case they will continue to earn interest credits as described above. The following table sets forth the compensation, service, and estimated annual benefits payable under the Retirement Plan to the following officers or employees assuming retirement at age 65: ESTIMATED ANNUAL BENEFIT YEARS OF CREDITED SERVICE AT AGE 65 Current Years of Plan Service Annual Officer Compensation* 12/31/03 Benefit** ------- ------------- -------- --------- Patricia A. Costante $200,000 7 $ 20,076 Allen G. Sugerman $200,000 1 $ 8,433 William G. Davis $165,766 23 $103,017 Edward M. Grab $200,000 4 $ 14,733 Verice M. Mason $200,000 9 $ 18,292 Catherine E. Williams $181,000 7 $ 19,471 *For purposes of benefit projections, plan compensation is limited to $200,000. **Estimated annual benefit at age 65. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS See Part II of this Form 10-K. The following table provides certain information with respect to the Company's equity compensation plans in effect as of December 31, 2003: 44
Equity Compensation Plan Information (c) Number of securities remaining available for (a) (b) future issuance under Number of securities to Weighed-average exercise equity compensation be issued upon exercise price of outstanding plans (excluding of outstanding options, options, warrants AND securities reflected in Plan Category Warrants and Rights Rights Column (A)) - ------------- ------------------- ------ ----------- Equity compensation plans approved by security holders 661,250* $8.33 263,774 Equity compensation plans not approved by security holders 0 0.00 0 --------- ----- -------- Total 661,250* $8.33 263,774
* Does not include outstanding restricted stock awards COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Company's director and executive compensation programs are administered by the Compensation Committee of the Board (the "Committee"). The Committee consists of three non-employee directors, who are appointed by the Board. Executive Compensation Executive Compensation Philosophy The executive compensation philosophy has been adjusted to reflect the significant challenges and uncertainties inherent in managing the downsizing and run-off of the Company's insurance business, and the efforts to develop current and future business possibilities under its circumstances. It is critical that the Company retain the best talent possible in order to maximize the resources of the Company. The executive compensation philosophy is to: (i) provide competitive compensation and benefit levels to help the Company retain highly qualified executive employees, (ii) align compensation strategies with overall business objectives, and (iii) reward executive employees based on their performance. Under the current circumstances, the principal challenge that the Company's Compensation Committee faces is created by the Company's uncertain future, which the Committee believes makes it extremely difficult to attract new talent. Executive Compensation Principles The Company's executive compensation program is generally designed to best prevent executive attrition, to be competitive with compensation levels of a defined peer group of distressed companies, to reward performance against predetermined goals, and to recognize the changing nature of the Company's business and the challenges that it confronts. Competitive compensation levels are evaluated periodically based on an analysis by an independent third party of executive compensation of a public company peer group of distressed companies and relevant survey information. The Company has used cash and equity-based instruments to align executive rewards with the achievement of individual and corporate objectives. In light of the Company's current circumstances, the Committee also evaluated the likely compensation that would be required to be paid to run-off or re-organization specialists. Any change in executive compensation must be approved by the New Jersey Department of Banking and Insurance ("NJDOBI"). 45 Employee Equity Ownership The Company strives to ensure that stockholders and executive members of management share long-term common interests. The Committee believes that employee stock ownership and equity incentives strengthen the link between executive rewards and long-term corporate performance. In that regard, executive and other employees are eligible to receive grants of equity under the Company's 1998 Long-Term Incentive Equity Plan (the "Plan") which was approved by stockholders on July 15, 1998, and as amended and approved by the Board of Directors on September 15, 1999. Elements of Executive Compensation Compensation elements offered by the Company include the following: Base Salaries Base salaries for key executives are targeted to be at or below the median level of the peer group, and are subject to review and adjustment annually, based on individual performance. Annual Cash Bonuses Key executives are eligible for an annual incentive bonus based on achieving certain predetermined individual, and/or corporate operating and strategic objectives. Certain other members of the management team are eligible to receive bonuses based on individual and corporate performance. Although all senior executives achieved their individual performance goals for 2003, no cash bonuses were awarded because of the current financial condition of the Company. At the current time, the payment of any bonuses awarded would require the approval of the New Jersey Department of Banking and Insurance. Long-Term Incentives Equity grants are an important component of total compensation and provide a long-term incentive to participants to align performance with stockholders' interests. The Company offers executives and eligible management employees the opportunity to receive grants of stock (stock options, restricted Common Stock or performance stock) under the Plan. Employee Retention Incentive The Committee approved an Employee Retention Incentive Plan (the "Retention Incentive Plan") in 2002 for eligible employees of the Company and the New Jersey State Medical Underwriters, Inc. ("Underwriter"). The Committee recognizes the importance of retaining key employees during this critical time as the Company actively engages in strategies to realize value for stockholders. The Retention Incentive Plan was offered to key supervisors and senior managers and certain key executives, including Ms. Costante, Ms. Mason, Ms. Williams, Mr. Grab and Mr. Davis. Cash payments under the Retention Incentive Plan were based on a percentage of salary and only vested if the employee was employed on the vesting dates set forth in the Plan or was terminated without cause. The Retention Incentive Plan was administered over the 18-month period which began March 5, 2002 and ended on September 5, 2003. In the event of a change of control, equity infusion into the Company in excess of $20 million, or the entry of an order of rehabilitation or liquidation of any of the Company's New Jersey insurance subsidiaries, the commencement of an involuntary proceeding of bankruptcy or a resolution of the Company to make a voluntary bankruptcy filing and the termination of the covered employee without cause, all Retention Incentive Plan payments would have accelerated and become immediately payable. Under the Retention Incentive Plan, key supervisors and senior managers were eligible to receive 15-50% of salary, key vice presidents from 25-50% of salary, senior vice presidents from 50-175% and the Chief Executive Officer was eligible to receive 175% of salary. Ms. Costante and Mr. Grab earned the balance of their retention payments on September 5, 2003, and the Company paid them $323,750 and $201,250, respectively, on that date. With respect to Ms. Costante and Mr. Grab, all payments received under the Retention Incentive Plan were used, after deduction for taxes, first to extinguish the outstanding balances and interest thereon under their respective stock loans. Ms. Mason, Ms. Williams and Mr. Davis were entitled 46 to receive a total of $96,917, $165,000 and $79,092, respectively, under the Retention Incentive Plan. Ms. Mason, Ms. Williams and Mr. Davis earned twenty-five percent of their retention payments on March 5, 2003 and fifty percent on September 5, 2003, and the Company paid them a total of $72,688, $123,750 and $59,319, respectively. Directors Compensation Directors Compensation Philosophy The compensation philosophy for non-employee Directors of the Company is to provide competitive compensation to best enable the Company to attract and retain highly qualified individuals. Directors Compensation Elements The Company provides Directors, who are not officers or employees of the Company or any of its subsidiaries, the following compensation: (i) an annual stipend of $40,000 per year for the Chairman of the Board, $25,000 for the Vice-Chairman of the Board, $15,000 for the Chairman of the Audit Committee, the Chairman of the Compensation Committee and Executive Committee members, and $10,000 for all other directors; (2) a per meeting fee of $1,200 and $600 for attendance at each Board or Committee meeting, respectively (directors who attend any Board or Committee meeting via telephone receive 25% of the meeting fee); and (3) an annual grant of 15,000 options on the Company's Common Stock, which vest 25% on the date of grant and 25% at each of the next three grant anniversary dates. The Directors have elected to suspend this grant for 2004. Director fees may be taken either in cash or in stock options; however, the Directors have elected to suspend this option for 2004. The number of stock option shares granted in lieu of the cash stipend is determined by the fair market value of the Company's stock on the date of grant. These options vest immediately. All stock options are granted at fair market value on the date of grant. The total annual compensation for non-employee directors, including stipend and meeting fees is capped as follows: Chairman of the Board - $50,000; Vice-Chairman of the Board - $35,000; Chairman of the Audit Committee, Chairman of the Compensation Committee and Executive Committee members - $25,000; all other directors - $20,000. Directors serving in more than one of the positions listed above are subject to the highest applicable cap. The Compensation Committee's Review of Chief Executive Officer Compensation is as follows. Base Salary Based on a review of the Chief Executive Officer's performance, it was determined that Ms. Costante achieved all of her individual performance goals in an exemplary manner. Under normal conditions, based on Ms. Costante's position, responsibility and accomplishments, the Committee would have considered a significant increase in base salary. Given the Company's financial condition, however, her base salary remains unchanged at $415,000. Ms. Costante was commended as an outstanding leader, especially in light of the many challenges facing the Company. The Chief Executive Officer's ability to skillfully manage relationships with regulatory authorities and stockholders and to retain and motivate key executives necessary to maximize the resources of the Company are examples of her extraordinary leadership abilities. Ms. Costante continues to demonstrate integrity, excellent communication skills and strategic focus. Annual Incentive Compensation The annual incentive plan goals for 2003 were based on a combination of corporate strategic initiatives, operating and financial, plus certain identified, individual performance measures. The operating and financial targets included goals for revenue, expense and net income before taxes. The corporate goals were not accomplished due primarily to the significant increase in loss reserves relating to prior years' business. Ms. Costante was eligible to receive incentive compensation related to attainment of individual goals under the Plan for 2003; however, in light of the Company's current financial situation, no cash bonus was awarded. 47 Long-Term Equity Awards Stock options are another key element of the Chief Executive Officer's total compensation. Equity-based compensation produces a long-term link between stockholders and the rewards provided to key Executive Officers. Ms. Costante was eligible to receive a long-term incentive equity award related to attainment of individual goals under the Plan for 2003; however, in light of the Company's current financial situation, no equity award was granted. The Committee does not anticipate that any additional stock grants will be made. March 10, 2004 A. Richard Miskoff, D.O., Chairman Harry M. Carnes, M.D. Bessie M. Sullivan, M.D. Stock Performance Graph The graph set forth below shows the cumulative total return to holders of the Company's Common Stock from July 30, 1999 to December 31, 2003, computed by dividing (X) the difference between the price per share at the beginning and end of such period by (Y) the share price at the beginning of the period assuming the reinvestment of all dividends paid on the Company's Common Stock during the period, and compares the return to the performance at the beginning and end of such period of the Standard & Poor's 500 Index and the Standard & Poor's Insurance (Property and Casualty) - 500 index. The graph assumes $100 invested on July 30, 1999 in the Company's Common Stock (at $17.80 per share), the Standard & Poor's Index and the Standard & Poor's Insurance (Property and Casualty) - 500 Index. The return for both Standard & Poor's indices assumes reinvestment of all dividends for the period. CUMULATIVE TOTAL RETURN [PERFORMANCE GRAPH]
Base Period COMPANY/INDEX 7/30/99 12/31/99 12/29/00 12/31/01 12/31/02 12/31/03 - ------------- ----------- -------- -------- -------- -------- -------- The MIIX Group, Incorporated* 100 81.80 41.86 68.55 9.44 5.11 S&P 500 Index 100 111.21 99.58 86.51 67.51 86.87 Insurance (P&C) - 500 Index 100 80.32 122.53 110.82 98.79 124.86 *The measurement period begins on the date of the Company's initial public offering.
48 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MIIX HOLDINGS AND MIIX ADVANTAGE On August 28, 2002, the Company and certain of its affiliates entered into a series of contracts with MIIX Advantage Holdings, Inc. ("MIIX Holdings") and MIIX Advantage, relating to, among other things, the transfer of insurance policy renewal rights to MIIX Advantage and the use of the "MIIX" name and associated marks by MIIX Holdings and MIIX Advantage. In connection with the transaction, the Company also agreed to provide certain management services to MIIX Advantage. The material contracts involved in the transaction include a: (a) Management Services Agreement, (b) Non-Competition and Renewal Rights Agreement, and (c) Intellectual Property License Agreement (together, the "Agreements"). All of these Agreements were filed as exhibits to the Company's Form 8-K filed with the SEC on September 12, 2002. The Company is currently negotiating the sale of certain assets of the Underwriter to MDAdvantage, although the transaction is not complete or binding at the present time. Management Services Agreement Under the Management Services Agreement, the Underwriter, a wholly-owned subsidiary of the Company, provides management and operational services to MDAdvantage for an initial term of eight years, and thereafter is automatically renewed for successive five-year terms unless the Company or MIIX Holdings provides notice to the other party of an intention not to renew within 24 months of the original or then current term of the agreement. The agreement also provides for termination in the event of a dissolution, liquidation or bankruptcy of the Company, the Underwriter, MDAdvantage or MIIX Holdings or upon a change of control of the Company or the Underwriter under certain circumstances. In exchange, MDAdvantage agrees to pay the Underwriter an amount equal to the direct costs incurred by the Underwriter in providing the services, an allocated amount of overhead costs (including without limitation employee compensation and benefits), and an incentive payment based on the ratio of MDAdvantage's operating expenses to premium revenues. In 2003, MDAdvantage paid the Underwriter approximately $3,879,000 under the Management Services Agreement. Non-Competition and Renewal Rights Agreement Under the Non-Competition and Renewal Rights Agreement, (i) the Company and its affiliates agreed not to compete with MIIX Advantage in connection with its New Jersey physician insurance business, (ii) MIIX Advantage is permitted to issue insurance policies to the Company's former policyholders after their current policies expire, and (iii) MIIX Holdings and MIIX Advantage agree not to engage in activities other than providing medical professional liability and associated general liability insurance to eligible New Jersey physicians. In exchange, MIIX Advantage agreed to pay a specified amount to the Company for each MIIX Advantage policy that MIIX Advantage issues to a former policyholder of the Company. The amount paid to the Company for each policy will be (i) ten percent (10%) of the gross written premiums received by MIIX Advantage, if no other commissions are payable by MIIX Advantage to an unaffiliated broker with respect to the policy, or (ii) three percent (3%) of the gross written premiums received by MIIX Advantage, if any other commissions are payable by MIIX Advantage to an unaffiliated broker. MIIX Advantage agrees to use its best efforts to issue insurance policies to the Company's former policyholders after their current policies expire. MIIX Advantage made payments to MIIX under the Non-Competition and Renewal Rights Agreement in 2003 in the amount of approximately $2,716,700. Intellectual Property License Agreement Under the Intellectual Property License Agreement, MIIX Holdings and MIIX Advantage may use the "MIIX" name, associated service marks and certain other intangible assets of the Underwriter (which holds the intellectual property assets of the Company and its affiliates), in connection with providing medical professional liability and associated general liability insurance to eligible New Jersey physicians. In exchange, MIIX Advantage paid the Underwriter $2,000,000 in 2002 under the Intellectual Property License Agreement. 49 Method for Determining Consideration In the case of each of the agreements described above, the amounts payable by MIIX Holdings and/or MIIX Advantage to the Company were negotiated in a process designed to ensure that the terms were based on terms found in comparable transactions. Also, as part of the transactions, MIIX Holdings and MIIX Advantage agreed to reimburse the Company for the fees and expenses incurred by the Company in connection with the formation and capitalization of MIIX Holdings and MIIX Advantage. The agreements were submitted to the New Jersey Department and some of the terms in the agreements reflect changed terms requested by the New Jersey Department. Finally, the Company received an opinion from an independent investment bank engaged by the Company stating that, subject to other provisions contained in the opinion, the consideration to be received by the Company in connection with the Agreements was fair, from a financial point of view, to the Company. This opinion was filed with the Company's Form 8-K filed with the SEC on September 12, 2002. Relationships between MIIX Holdings and MIIX Advantage and the Company As of December 31, 2003, eight of the Company's ten Directors were directors of MIIX Holdings and MIIX Advantage, although the number of the Company's Directors serving on the MIIX Holdings and MIIX Advantage boards of directors will be reduced to no more than seven (7) in 2004, no more than six (6) in 2005 and no more than five (5) in 2006. MIIX Advantage currently provides medical malpractice insurance coverage to Drs. Carnes, Miskoff, Hirsch, Sorger and Sullivan. The following Executive Officers serve, without additional compensation, as Executive Officers of MIIX Holdings and MIIX Advantage as of December 31, 2003: Ms. Costante, Mr. Sugerman, Ms. Williams, Mr. Grab, Mr. Davis, Mr. Roynan and Ms. Mason. ALTILA CORPORATION On July 17, 2003, the Company entered into an agreement with Altila under which Altila provides a leased employee, Allen Sugerman, to serve as Chief Financial Officer of the Company. Under the agreement, the Company pays Altila $302,000 per year for Mr. Sugerman's services as the Chief Financial Officer, plus reimbursement of Mr. Sugerman's reasonable out of pocket expenses. During 2003, the Company paid Altila $302,000 for Mr. Sugerman's services and $56,853 for travel and related expenses under this agreement. Mr. Sugerman is a principal of Altila. STOCK PURCHASE AND LOAN AGREEMENTS The Company is party to Stock Purchase and Loan Agreements with each of Ms. Costante and Mr. Grab (the "Stock Purchase and Loan Agreements"). The proceeds of such loans were used to purchase unregistered shares of common stock from the Company at the price of the common stock as of the date the loans were made. The interest rate charged on the amounts outstanding under each loan is 6.21% for Ms. Costante and Mr. Grab, compounded annually. Each loan is for a term of five years and provides for full recourse against the borrower. On March 5, 2002, the Stock Purchase and Loan Agreements were amended and Ms. Costante and Mr. Grab tendered the stock each had purchased to the Company, to apply the proceeds to their respective outstanding loan balances. In addition, Ms. Costante and Mr. Grab each received a payment under the Retention Plan on September 5, 2003, which each applied to further reduce their respective outstanding loan balances. As of March 5, 2004, Ms. Costante's obligation was $45,706 and Mr. Grab's obligation was $0. The maturity date of Ms. Costante's loan is March 1, 2005. The largest amount outstanding under the Stock Purchase and Loan Agreements during 2003 for Ms. Costante and Mr. Grab was $229,443 and $195,946, respectively. During 2003, Mr. Grab's outstanding loan balance of $97,257 was forgiven as a retention incentive subject to his continued employment with the Company through December 31, 2004. Should Mr. Grab voluntarily resign from the Company prior to December 31, 2004, he will be obligated to repay the then outstanding loan balance, including accrued interest, according to the terms of the Stock Loan Repayment Agreement and Note, as amended. 50 At December 31, 2003, the Company determined the outstanding loan balance due from a former executive officer of the Company was uncollectible. The Company wrote off the $2.0 million balance at December 31, 2003. The Stock Loan Repayment Agreements are filed with the SEC as an exhibit to the Company's Form 10-K filing for the year ended December 31, 2001. The Company believes that the terms of the transactions described above are fair to the Company. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees The Audit Committee appointed Ernst & Young LLP as independent auditors to audit the financial statements of the Company for fiscal years 2003 and 2002. Annual audit fees for the 2003 and 2002 fiscal years were $818,600 and $492,000, respectively. All Other Fees All other fees for audit related services for the 2003 and 2002 fiscal years were $0 and $259,000, respectively, and for all other non-audit services were $0 and $26,348, respectively. Other Matters The Audit Committee has considered whether the provision of the non-audit services described above and other non-audit services is compatible with maintaining the independence of its independent auditors, Ernst & Young LLP, and has determined that such services does not impair the independence of Ernst & Young LLP. The Audit Committee pre-approves all auditing services and permitted non-audited services (including the fees and terms thereof) to be performed for the Company by its independent auditor, subject to the de minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act, which are approved by the Committee prior to the completion of the audit. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) and (2) and (d) The financial statements filed as part of this Report are listed on the Index to Financial Statements and Schedules on page F-1. The required schedules filed as part of this Report are identified on the Index to Financial Statements and Schedules on page F-1 of this Report. All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions, are inapplicable or the required information is included in the consolidated financial statements, and therefore omitted. (a)(3) and (c) The following exhibits are filed herewith unless otherwise indicated: Exhibit Number Description 2.1 Plan of Reorganization of Medical Inter-Insurance Exchange (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 2.2 Stock Purchase Agreement between The Medical Society of New Jersey and The MIIX Group, Incorporated (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 2.3 Amendment No. 1 to Stock Purchase Agreement between The Medical Society of New Jersey and The MIIX Group, Incorporated, dated as of September 20, 1998 (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 51 2.4 Amendment No. 2 to Stock Purchase Agreement between The Medical Society of New Jersey and The MIIX Group, Incorporated, dated as of December 21, 1998 (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 2.5 Resolution of the Medical Inter-Insurance Exchange of New Jersey Board of Governors amending the Plan of Reorganization (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 3.1 Restated Certificate of Incorporation of The MIIX Group, Incorporated (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 3.2 Amended and Restated By-Laws of The MIIX Group, Incorporated, amended June 12, 2002. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 001-14593)). 4.1 Rights Agreement dated as of June 27, 2001 (incorporated by reference to the exhibit filed with the registrant's Form 8-K/A dated June 28, 2001 and filed with the Securities and Exchange Commission on July 11, 2001 (file no. 001-14593)). 4.2 Certificate of Designation, Preferences and Rights (incorporated by reference to the exhibit filed with the registrant's Form 8-K dated June 27, 2001 and filed with the Securities and Exchange Commission on June 28, 2001 (file no. 001-14593)). 10.4 Specific Excess Reinsurance Contract, effective January 1, 1997, among Medical Inter-Insurance Exchange of New Jersey and Swiss Reinsurance Company; Hannover Ruckversicherungs; Underwriters Reinsurance Company; Kemper Reinsurance Company; and London Life and Casualty Reinsurance Corporation (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.5 Specific Excess Reinsurance Contract, effective January 1, 1997, between Medical Inter-Insurance Exchange of New Jersey and American Re-Insurance Company (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.6 Combined Quota Share, Aggregate and Specific Excess of Loss Reinsurance Treaty, effective November 1, 1996, among Medical Inter-Insurance Exchange of New Jersey and Hannover Reinsurance (Ireland) Ltd.,; E&S Reinsurance (Ireland) Ltd.; Underwriters Reinsurance Company (Barbados) Inc.; London Life and Reinsurance Corporation; and Lawrenceville Re, Ltd. (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.7 Specific Excess Reinsurance Contract, effective January 1, 1996 and terminated December 31, 1996, among Medical Inter-Insurance Exchange of New Jersey and Swiss Reinsurance Company; Hannover Ruckversicherungs; Underwriters Reinsurance Company; American Re-Insurance Company; Kemper Reinsurance Company; and London Life and Casualty Reinsurance Corporation (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.8 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance Treaty, effective January 1, 1996 among Medical Inter-Insurance Exchange of New Jersey and Hannover Reinsurance (Ireland) Ltd.; Eisen und Stahl Reinsurance (Ireland) Ltd.; London Life and Casualty Reinsurance Corporation; and Scandinavian Reinsurance Company, Ltd.; and Lawrenceville Re, Ltd. (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 52 10.9 Specific Excess Reinsurance Contract, effective January 1, 1995 and terminated December 31, 1995 among Medical Inter-Insurance Exchange of New Jersey and Swiss Reinsurance Company; Hannover Ruckversicherungs; Underwriters Reinsurance Company; and PMA Reinsurance Corporation (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.10 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance Treaty, effective January 1, 1995 among Medical Inter-Insurance Exchange of New Jersey and Hanover Reinsurance (Ireland) Ltd.; Eisen und Stahl Reinsurance (Ireland) Ltd.; London Life and Casualty Reinsurance Corporation; and Scandinavian Reinsurance Company Ltd. (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.11 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance Treaty, effective January 1, 1994 among Medical Inter-Insurance Exchange of New Jersey and Scandinavian Reinsurance Company Ltd.; Hannover Reinsurance (Ireland) Ltd.; and Eisen und Stahl Reinsurance (Ireland) Ltd. (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.12 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance Treaty, effective January 1, 1993 among Medical Inter-Insurance Exchange of New Jersey and Scandinavian Reinsurance Company Ltd.; Hannover Reinsurance (Ireland) Ltd.; and Eisen und Stahl Reinsurance (Ireland) Ltd. (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.13 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance Treaty, effective December 15, 1992 among Medical Inter-Insurance Exchange of New Jersey and Hannover Reinsurance (Ireland) Ltd.; and Eisen und Stahl Reinsurance (Ireland) Ltd. (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.14* Amended and Restated 1998 Long Term Incentive Equity Plan of The MIIX Group, Incorporated (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as filed with the Securities and Exchange Commission on March 30, 2000 (file no. 001-14593)). 10.17* Employment Agreement among The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and Edward M. Grab (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as filed with the Securities and Exchange Commission on March 30, 2000 (file no. 001-14593)). 10.22* Stock Purchase and Loan Agreement by and between The MIIX Group, Incorporated and Daniel Goldberg (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.23* Stock Purchase and Loan Agreement by and between The MIIX Group, Incorporated and Kenneth Koreyva (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as filed with the Securities and Exchange Commission on March 30, 2000 (file no. 001-14593)). 10.26* Stock Purchase and Loan Agreement by and between The MIIX Group, Incorporated and Joseph Hudson (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 10.29* Stock Purchase and Loan Agreement by and between The MIIX Group, Incorporated and Daniel G. Smereck (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 53 10.41 Addendum No. 2 to the Combined Quota Share, Aggregate and Specific Excess of Loss Reinsurance Treaty, effective November 1, 1998, among Medical Inter-Insurance Exchange of New Jersey and Hannover Reinsurance (Ireland) Ltd.; E&S Reinsurance (Ireland) Ltd.; Underwriters Reinsurance Company (Barbados) Inc.; London Life and Casualty Reinsurance Corporation; Lawrenceville Re, Ltd.; and European Reinsurance Company of Zurich (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 as filed with the Securities and Exchange Commission on November 15, 1999 (file no. 001-14593)). 10.42 Addendum No. 3 to the Combined Quota Share, Aggregate and Specific Excess of Loss Reinsurance Treaty, effective January 1, 1999, among Medical Inter-Insurance Exchange of New Jersey and Hannover Reinsurance (Ireland) Ltd; E&S Reinsurance (Ireland) Ltd.; Underwriters Reinsurance Company (Barbados) Inc.; and European Reinsurance Company of Zurich (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 as filed with the Securities and Exchange Commission on November 15, 1999 (file no. 001-14593)). 10.43 Addendum No. 4 to the Combined Quota Share, Aggregate and Specific Excess of Loss Reinsurance Treaty, effective January 1, 1999, among Medical Inter-Insurance Exchange of New Jersey and Hannover Reinsurance (Ireland) Ltd; E&S Reinsurance (Ireland) Ltd.; Underwriters Reinsurance Company (Barbados) Inc.; and European Reinsurance Company of Zurich (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 as filed with the Securities and Exchange Commission on November 15, 1999 (file no. 001-14593)). 10.44 Excess Cession and Event Reinsurance Contract, effective January 1, 1999, among Medical Inter-Insurance Exchange and Hannover Ruckversicherungs-Aktiengesellschaft; and Swiss Reinsurance Company (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 as filed with the Securities and Exchange Commission on November 15, 1999 (file no. 001-14593)). 10.45 Excess Cession and Event Reinsurance Contract, effective January 1, 1999, between Medical Inter-Insurance Exchange and American Re-Insurance Company (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 as filed with the Securities and Exchange Commission on November 15, 1999 (file no. 001-14593)). 10.46 Endorsement No. 1, effective January 1, 2000, to the Excess Cession and Event Reinsurance Contract between Medical Inter-Insurance Exchange and Hannover Ruckversicherungs-Aktiengesellschaft (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission on April 2, 2001 (file no. 001-14593)). 10.47 Endorsement No. 1, effective January 1, 2000, to the Excess Cession and Event Reinsurance Contract between Medical Inter-Insurance Exchange and Swiss Reinsurance Company (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission on April 2, 2001 (file no. 001-14593)). 10.48 Endorsement No. 1, effective January 1, 2000, to the Excess Cession and Event Reinsurance Contract between Medical Inter-Insurance Exchange and American Re-insurance Company (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission on April 2, 2001 (file no. 001-14593)). 10.49 Combined Quota Share and Aggregate Reinsurance Treaty, effective November 1, 1999 between MIIX Insurance Company and Hannover Reinsurance (Ireland) Ltd. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission on April 2, 2001 (file no. 001-14593)). 54 10.50 Combined Quota Share and Aggregate Reinsurance Treaty, effective November 1, 1999 between MIIX Insurance Company and E+S Reinsurance (Ireland) Ltd. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission on April 2, 2001 (file no. 001-14593)). 10.51 Combined Quota Share and Aggregate Reinsurance Treaty, effective November 1, 1999 between MIIX Insurance Company and Swiss Reinsurance Company. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission on April 2, 2001 (file no. 001-14593)). 10.53 Combined Quota Share And Aggregate Excess Of Loss Reinsurance Agreement, effective November 1, 2000, and dated as of July 30, 2001, between MIIX Insurance Company and Hannover Reinsurance (Ireland) Limited/E + S Reinsurance (Ireland) Limited (incorporated by reference to Exhibit 10.53 filed with the registrant's Form 10-Q for the period ended June 30, 2001 and filed with the Securities and Exchange Commission on August 13, 2001(file no. 001-14593)). 10.55* Employment Agreement among The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and Catherine E. Williams, dated October 31, 2001 (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 31, 2002 (file no. 001-14593)). 10.56* Employment Agreement among The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and Patricia A. Costante, dated December 19, 2001 (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 31, 2002 (file no. 001-14593)). 10.58* Non-Qualified Deferred Compensation Agreement by and between The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and Catherine E. Williams, entered into and effective October 31, 2001 (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 31, 2002 (file no. 001-14593)). 10.62* The MIIX Group, Incorporated and New Jersey State Medical Underwriters, Inc. Employee Retention Incentive Plan. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 001-14593)). 10.63* First Amendment and Allonge to Note between The MIIX Group, Incorporated and Patricia A. Costante, entered into March 5, 2002 (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 31, 2002 (file no. 001-14593)). 10.64* First Amendment and Allonge to Note between The MIIX Group, Incorporated and Edward M. Grab, entered into March 5, 2002 (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 31, 2002 (file no. 001-14593)). 10.65* Stock Loan Repayment Agreement by and between Patricia A. Costante and The MIIX Group, Incorporated, entered into March 5, 2002 (incorporated by reference to the exhibit filed with the registrant's Annual Report on 55 Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 31, 2002 (file no. 001-14593)). 10.66* Stock Loan Repayment Agreement by and between Edward M. Grab and The MIIX Group, Incorporated, entered into May 5, 2002 (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 31, 2002 (file no. 001-14593)). 10.67* Employment Agreement among The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and William G. Davis, Jr., dated March 19, 2002 (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 as filed with the Securities and Exchange Commission on May 15, 2002 (file no. 001-14593)). 10.68* Employment Agreement among The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and Verice M. Mason, dated March 19, 2002 (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 as filed with the Securities and Exchange Commission on May 15, 2002 (file no. 001-14593)). 10.69* Non-Qualified Deferred Compensation Agreement by and between The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and William G. Davis, Jr., entered into and effective March 19, 2002 (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 as filed with the Securities and Exchange Commission on May 15, 2002 (file no. 001-14593)). 10.70* Non-Qualified Deferred Compensation Agreement by and between The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and Verice M. Mason, entered into and effective March 19, 2002 (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 as filed with the Securities and Exchange Commission on May 15, 2002 (file no. 001-14593)). 10.72 Combined Quota Share and Aggregate Excess of Loss Reinsurance Agreement made and entered into by and between MIIX Insurance Company and Hannover Reinsurance (Ireland) Limited/ E + S Reinsurance (Ireland) Limited (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 as filed with the Securities and Exchange Commission on November 14, 2002 (file no. 001-14593)). 10.73 Commutation and Release Agreement by and between Health Care Indemnity, Inc. and Lawrenceville Property & Casualty Company and MIIX Insurance Company (incorporated by reference to the exhibit filed with the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 as filed with the Securities and Exchange Commission on November 14, 2002 (file no. 001-14593)). 10.74 Employment Agreement between and among The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and Allen G. Sugerman dated July 17, 2003 (incorporated by reference to the exhibit filed with the registrant's Form 8-K as filed with the Securities and Exchange Commission on July 22, 2003 (file no. 001-14593)). 10.75* Employment Agreement among The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc., and James P. Roynan, dated December 18, 2002. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 001-14593)). 10.76* Non-Qualified Deferred Compensation Agreement by and between The MIIX Group, Incorporated, New Jersey State Medical Underwriters, Inc. and 56 James P. Roynan (incorporated by reference to the Exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 00L-14593)). 10.77 Trust Agreement among MIIX Insurance Company, Eisen Und Stahl Reinsurance and Mellon Bank, N.A., entered into May 13, 2002. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 001-14593)). 10.78 Trust Agreement among MIIX Insurance Company, Underwriters Reinsurance Company (Barbados) Inc., and Mellon Bank, N.A., entered into May 7, 2002. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 001-14593)). 10.79 Trust Agreement among MIIX Insurance Company, London Life and Casualty Reinsurance Corporation, and Mellon Bank, N.A., entered into May 7, 2002. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 001-14593)). 10.80 Trust Agreement among MIIX Insurance Company, Hannover Reinsurance (Ireland) Ltd., and Mellon Bank, N.A., entered into May 7, 2002. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 001-14593)). 10.81 Trust Agreement among MIIX Insurance Company, Swiss Reinsurance America Corporation, and Mellon Bank, N.A., entered into May 7, 2002. (incorporated by reference to the exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 001-14593)). 10.82 Management Services Agreement, dated as of August 28, 2002 by and among The MIIX Group, Inc., New Jersey State Medical Underwriters, Inc., MIIX Advantage Holdings, Inc. and MIIX Advantage Insurance Company of New Jersey (incorporated by reference to Exhibit 99.1 to the registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on September 12, 2002 (file no. 001-14593)). 10.83 Non-Competition and Renewal Rights Agreement, dated as of August 28, 2002 by and among The MIIX Group, Inc., MIIX Insurance Company, New Jersey State Medical Underwriters, Inc., MIIX Advantage Holdings, Inc. and MIIX Advantage Insurance Company of New Jersey (incorporated by reference to Exhibit 99.2 to the registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on September 12, 2002 (file no. 001-14593)). 10.84 Intellectual Property License Agreement, dated as of August 28, 2002 by and among New Jersey State Medical Underwriters, Inc., MIIX Advantage Holdings, Inc. and MIIX Advantage Insurance Company of New Jersey (incorporated by reference to Exhibit 99.3 to the registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on September 12, 2002 (file no. 001-14593)). 10.85 Reimbursement Agreement dated as of August 28, 2002 by and among MIIX Advantage Insurance Company of New Jersey, MIIX Advantage Holdings, Inc. and MIIX Insurance Company (incorporated by reference to the Exhibit filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (file no. 001-14593)). 57 10.86 + Lease Agreement, dated as of November 25, 2003 by and between New Jersey State Medical Underwriters, Inc. and Gordon Lawrenceville Realty Associates, L.L.C. 10.87 + Amendment to Lease, dated as of June 22, 2004 by and between New Jersey State Medical Underwriters, Inc. and Gordon Lawrenceville Realty Associates, L.L.C. 10.88 + Second Amendment to Lease, dated as of October 1, 2004 by and between New Jersey State Medical Underwriters, Inc. and Gordon Lawrenceville Realty Associates, L.L.C. 11 No statement regarding the computation of per share earnings is required to be filed because the computations can be clearly determined from the materials contained herein. 21.1 Subsidiaries of The MIIX Group, Incorporated (incorporated by reference to the exhibit filed with the registrant's registration statement on Form S-1 (Reg. No. 333-59371)). 23.1 + Consent of Independent Auditors. 31.1 + Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 + Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 + Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 + Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. * Represents a management contract or compensatory plan or arrangement. + Filed herewith. (b) Reports on Form 8-K A current report on Form 8-K, dated October 30, 2003, was filed by the Company to furnish the text of a press release issued on October 29, 2003, announcing third quarter 2003 financial results of operations. A current report on Form 8-K, dated November 17, 2003, was filed by the Company to provide a current Financial Supplement. A current report on Form 8-K, dated January 27, 2004, was filed by the Company to announce the departure of William G. Davis, Senior Vice President, Claims and James P. Roynan, Senior Vice President, Information Systems, effective January 26, 2004. A current report on Form 8-K, dated February 5, 2004, was filed by the Company to furnish the text of a press release issued on February 5, 2004, announcing it has advised the New Jersey Department of Banking and Insurance of the need to increase its loss and allocated loss adjustment expense reserves based on the progress of the annual audit to date. A current report on Form 8-K, dated March 18, 2004, was filed by the Company to furnish the text of a press release issued March 17, 2004, announcing that the loss and allocated loss adjustment expense reserve adjustment required continues to be under review. A current report on Form 8-K, dated March 31, 2004, was filed by the Company to furnish the text of a press release issued March 31, 2004, announcing that the Company filed notice with the Securities and Exchange Commission on Form 12b-25 to extend the period in which it intends to file its Annual Report on Form 10-K. 58 A current report on form 8-K, dated April 14, 2004, was filed by the company to furnish the text of a press release issued April 14, 2004, announcing the continuing review of financials and delay of filing annual report on Form 10-K. A current report on Form 8-K, dated May 14, 2004, was filed by the Company to furnish the text of a press release issued May 14, 2004, announcing an acquisition offer, extension on filing of statutory statements and appointment of administrative supervisor. A current report on Form 8-K, dated July 8, 2004, was filed by the Company to furnish the text of a press release issued July 8, 2004, announcing that it has received a preliminary memorandum of terms for the acquisition of MIIX Insurance Company, New Jersey State Medical Underwriters, Inc. and certain other subsidiaries. A current report on Form 8-K, dated August 4, 2004, was filed by the Company to furnish the text of a press release issued August 4, 2004, announcing that MIIX Insurance Company has obtained a further extension of the filing date for its 2003 annual audited financial report with the New Jersey Department of Banking and Insurance and substantial reserve adjustment. A current report on Form 8-K, dated August 24, 2004, was filed by the Company to furnish the text of a press release issued August 24, 2004, announcing that the New Jersey Department of Banking and Insurance has filed an application for an Order to Show Cause seeking to place one of its insurance subsidiaries, MIIX Insurance Company, in rehabilitation. A current report on Form 8-K, dated September 30, 2004, was filed by the Company to furnish the text of a press release issued September 30, 2004, announcing that that the Superior Court of New Jersey entered an Order on September 28, 2004, placing MIIX Insurance Company, a subsidiary of The MIIX Group, Inc., into rehabilitation and naming the Commissioner of the New Jersey Department of Banking and Insurance as Rehabilitator with immediate and exclusive control over the business and property of MIIX Insurance. A current report on Form 8-K, dated November 15, 2004, was filed by the Company to furnish the text of a press release issued November 15, 2004, announcing that Scott L. Barbee resigned from the Board of Directors effective October 13, 2004. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MIIX GROUP, INCORPORATED By: /s/ PATRICIA A. COSTANTE ------------------------------------ Patricia A. Costante Chairman and Chief Executive Officer November 15, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ PATRICIA A. COSTANTE Chairman and Chief Executive - --------------------------- Officer Patricia A. Costante (principal executive officer) November 15, 2004 /s/ ALLEN G. SUGERMAN - ---------------------------- Chief Financial Officer Allen G. Sugerman (principal financial and accounting officer) November 15, 2004 /s/ ANGELO S. AGRO Director - ---------------------------- Angelo S. Agro, M.D. November 15, 2004 /s/ HARRY M. CARNES Director - ---------------------------- Harry M. Carnes, M.D. November 15, 2004 /s/ DOMINICK D'AGOSTA Director - ---------------------------- Dominick D'Agosta November 15, 2004 /s/ PAUL J. HIRSCH Director - ---------------------------- Paul J. Hirsch, M.D. November 15, 2004 /s/ MARTIN L. SORGER Director - ---------------------------- Martin L. Sorger, M.D. November 15, 2004 /s/ BESSIE M. SULLIVAN Director - ---------------------------- Bessie M. Sullivan, M.D. November 15, 2004
60 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE ---- Report of Independent Registered Public Accounting Firm.....................F- 2 Consolidated Balance Sheets as of December 31, 2003 and 2002................F- 3 Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001..........................................F- 4 Consolidated Statements of Stockholders' Equity (Deficiency)for the three years ended December 31, 2003, 2002 and 2001....................F- 5 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001..........................................F- 6 Notes to Consolidated Financial Statements..................................F- 7 Schedule I -- Summary of Investments -- Other than Investments in Related Parties............................................F-29 Schedule II -- Condensed Financial Information of Registrant................F-30 (ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE ACCOUNTING REGULATION OF THE SECURITIES AND EXCHANGE COMMISSION ARE OMITTED FOR THE REASON THAT THEY ARE NOT APPLICABLE OR THE INFORMATION IS OTHERWISE CONTAINED IN THE FINANCIAL STATEMENTS). F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors The MIIX Group, Incorporated We have audited the accompanying consolidated balance sheets of The MIIX Group, Incorporated and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules referred to at Item 15 (a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The MIIX Group, Incorporated and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. The Company has prepared the accompanying financial statements assuming the Company will continue as a going concern. As more fully described in Notes 3, 9 and 17, as a result of significant increases reported by MIIX Insurance Company, a wholly-owned subsidiary of the Company, in the liability for unpaid losses and loss adjustment expenses, the Company reported a deficiency in stockholders' equity as of December 31, 2003. This increase in the liability for unpaid losses and loss adjustment expenses reported by MIIX Insurance Company resulted in the State of New Jersey entering, on September 28, 2004, an Order of Rehabilitation of MIIX Insurance Company. Pursuant to the Order of Rehabilitation the immediate and exclusive control over the business and property of MIIX Insurance Company was placed with the New Jersey Department of Banking and Insurance. As a result of these actions, the Company is attempting the wind-down of its business activities. The potential consequences of these conditions and those described in Note 1 raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not reflect any adjustments that might result from the outcome of this uncertainty. As discussed in Note 2 to the financial statements, during 2002 the Company changed its method of accounting for goodwill, and during 2001 the Company changed its method of accounting for certain investments. /s/ Ernst & Young LLP Philadelphia, Pennsylvania November 15, 2004 F-2
THE MIIX GROUP, INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) DECEMBER 31, ------------------------------- 2003 2002 ----------- ----------- ASSETS Securities available-for-sale: Fixed maturity investments, at fair value (amortized cost: 2003 - $680,797; 2002 - $771,414) ................................. $ 695,735 $ 788,580 Equity investments, at fair value (cost: 2003 - $2,781; 2002 - $4,804) .................................................... 3,226 5,187 Short-term investments, at cost, which approximates fair value ............................................................. 56,468 262,537 ----------- ----------- Total investments ................................................ 755,429 1,056,304 Cash ................................................................... 18,081 4,667 Accrued investment income .............................................. 6,520 8,339 Premium receivable, net ................................................ 708 7,602 Prepaid reinsurance premiums ........................................... 0 3,053 Reinsurance recoverable on unpaid losses ............................... 425,785 457,005 Reinsurance recoverable on paid losses, net ............................ 31,874 31,822 Deferred policy acquisition costs ...................................... 0 1,016 Other assets ........................................................... 40,242 47,055 ----------- ----------- Total assets ..................................................... $ 1,278,639 $ 1,616,863 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) LIABILITIES Unpaid losses and loss adjustment expenses ............................. $ 1,218,957 $ 1,151,635 Unearned premiums ...................................................... 0 25,262 Premium deposits ....................................................... 0 209 Funds held under reinsurance treaties .................................. 292,126 332,741 Other liabilities ...................................................... 46,077 65,750 ----------- ----------- Total liabilities ................................................ 1,557,160 1,575,597 ----------- ----------- Commitments and Contingent Liabilities STOCKHOLDERS' EQUITY (DEFICIENCY) Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding ........................ 0 0 Common stock, $0.01 par value, 100,000,000 shares authorized, 16,538,005 shares issued,(2003 - 14,497,536 shares outstanding; 2002 - 13,382,173 shares outstanding) ........... 166 166 Additional paid-in capital ............................................. 40,270 53,909 Retained earnings (deficit) ............................................ (301,402) 13,323 Treasury stock, at cost (2003 - 2,040,469 shares; 2002 - 3,155,832 shares) ........................................... (25,115) (40,199) Stock purchase loans and unearned stock compensation ................... (2,617) (3,662) Accumulated other comprehensive income ................................. 10,177 17,729 ----------- ----------- Total stockholders' equity (deficiency) .......................... (278,521) 41,266 ----------- ----------- Total liabilities and stockholders' equity (deficiency) $ 1,278,639 $ 1,616,863 =========== =========== See accompanying notes F-3
THE MIIX GROUP, INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) YEARS ENDED DECEMBER 31, --------------------------------------------- 2003 2002 2001 --------- --------- --------- REVENUES Net premiums earned ................................ $ (26,078) $ 100,220 $ 146,852 Net investment income .............................. 35,930 60,838 80,193 Realized investment losses ......................... (1,597) (3,521) (2,184) Other revenue ...................................... 7,126 7,439 8,439 --------- --------- --------- Total revenues ........................... 15,381 164,976 233,300 --------- --------- --------- EXPENSES Losses and loss adjustment expenses ................ 270,939 196,487 250,768 Underwriting expenses .............................. 22,249 33,125 47,121 Funds held charges ................................. 42,996 54,209 42,476 Other expenses ..................................... 691 3,454 3,404 Restructuring charge ............................... 0 2,552 0 --------- --------- --------- Total expenses ........................... 336,875 289,827 343,769 --------- --------- --------- Loss before income taxes and cumulative effect of an accounting change ............................. (321,494) (124,851) (110,469) Income tax provision (benefit) ..................... (6,769) (11,240) 41,892 --------- --------- --------- Net loss before cumulative effect of an accounting change ........................... (314,725) (113,611) (152,361) Cumulative effect of an accounting change, net of tax .................................. 0 (2,373) (5,283) --------- --------- --------- Net loss ................................. $(314,725) $(115,984) $(157,644) ========= ========= ========= Basic and diluted loss per share before cumulative effect of an accounting change ................ $ (23.42) $ (8.49) $ (11.27) Cumulative effect of an accounting change .......... 0.00 (0.18) (0.39) --------- --------- --------- Basic and diluted loss per share of common stock ... $ (23.42) $ (8.67) $ (11.66) ========= ========= ========= Dividend per share of common stock ................. $ 0.00 $ 0.00 $ 0.20 ========= ========= ========= See accompanying notes F-4
THE MIIX GROUP, INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) For the Three Years Ended December 31, 2003 (In thousands, except share amounts) Stock Accum- Purchase ulated Number Loans Other of and Compre- Total Shares Additional Retained Unearned hensive Stock-holders' Out- Common Paid-In Earnings Treasury Stock Income Equity standing Stock Capital (Deficit) Stock Compensation (Loss) (Deficiency) ------------ --------- ----------- ----------- ---------- ------------ ---------- -------------- Balance at January 1, 2001.... 13,563,938 $166 $53,716 $289,655 $(38,897) $(5,929) $(9,270) $289,441 Net loss.................... (157,644) (157,644) Other comprehensive income (loss), net of tax....... Net unrealized appreciation on securities available- for-sale, net of deferred taxes......... 2,431 2,431 Stock purchase and loan agreement activities..... (86,049) (66) (840) 454 (452) Stock compensation.......... 1,440 222 101 31 354 Treasury stock activity, net...................... 431 55 5 60 Cash dividends to stockholders............. (2,704) (2,704) ------------ --------- ----------- ----------- ---------- ------------ ---------- -------------- Balance at December 31, 2001.. 13,479,760 166 53,927 129,307 (39,631) (5,444) (6,839) 131,486 Net loss.................... (115,984) (115,984) Other comprehensive income (loss), net of tax....... Net unrealized appreciation on securities available- for-sale, net of deferred taxes......... 24,568 24,568 Stock purchase and loan agreement activities..... (110,061) (729) 1,782 1,053 Stock compensation and treasury stock activity.. 12,474 (18) 161 143 ------------ --------- ----------- ----------- ---------- ------------ ---------- -------------- Balance at December 31, 2002.. 13,382,173 166 53,909 13,323 (40,199) (3,662) 17,729 41,266 Net loss.................... (314,725) (314,725) Other comprehensive income (loss), net of tax....... Net unrealized depreciation on securities available- for-sale, net of deferred taxes......... (7,552) (7,552) Stock purchase and loan agreement activities... (75,529) (85) 2,285 2,200 Stock compensation and treasury stock activity............... 1,190,892 (13,639) 15,169 (1,240) 290 ------------ --------- ----------- ----------- ---------- ------------ ---------- -------------- Balance at December 31, 2003. 14,497,536 $166 $40,270 $(301,402) $(25,115) $(2,617) $10,177 $(278,521) ============ ========= =========== =========== ========== ============ ========== ============== See accompanying notes F-5
THE MIIX GROUP, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) YEARS ENDED DECEMBER 31, --------------------------------------------- 2003 2002 2001 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ......................................... $(314,725) $(115,984) $(157,644) Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative effect of an accounting change, net of tax .................................... 0 2,373 5,283 Stock based compensation ..................... 2,161 50 (50) Unpaid losses and loss adjustment expenses ... 67,322 (45,363) 54,468 Unearned premiums ............................ (25,262) (63,336) 17,565 Premium deposits ............................. (209) (18,719) 3,310 Premium receivable, net ...................... 6,894 12,944 (10,781) Reinsurance balances, net .................... (6,394) (2,321) (3,085) Deferred policy acquisition costs ............ 1,016 3,400 (1,390) Realized investment losses ................... 1,597 3,521 2,184 Depreciation, accretion and amortization ..... 3,628 (1,134) (2,482) Accrued investment income .................... 1,819 4,922 2,813 Net investment in direct financing leases .... 0 32,101 (5,104) Other assets ................................. 1,429 15,044 53,467 Other liabilities ............................ (19,673) (9,247) 17,110 --------- --------- --------- Net cash used in operating activities ............ (280,397) (181,749) (24,336) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from fixed maturity investment sales .... 660,831 859,469 503,153 Proceeds from fixed maturity investments matured, called or prepaid .............................. 209,005 157,157 115,121 Proceeds from equity investment sales ............ 2,028 2,484 2,132 Cost of investments acquired ..................... (784,450) (729,135) (505,880) Change in short-term investments, net ............ 206,068 (96,036) (84,210) --------- --------- --------- Net cash provided by investing activities ........ 293,482 193,939 30,316 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable and other borrowings . 0 0 3,199 Repayment of notes payable and other borrowings .. 0 (10,699) (7,232) Employee stock purchase loan repayment ........... 414 1,877 747 Purchase of treasury stock ....................... (85) (730) 0 Cash dividends to stockholders ................... 0 0 (2,704) Subordinated loan certificates redeemed .......... 0 0 (152) --------- --------- --------- Net cash used in financing activities ............ 329 (9,552) (6,142) --------- --------- --------- Net change in cash ............................... 13,414 2,638 (162) Cash, January 1 .................................. 4,667 2,029 2,191 --------- --------- --------- Cash, December 31 ................................ $ 18,081 $ 4,667 $ 2,029 ========= ========= ========= See accompanying notes F-6
THE MIIX GROUP, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND RELATED MATTERS The accompanying consolidated financial statements include the accounts and operations of The MIIX Group, Incorporated ("The MIIX Group") and its wholly-owned subsidiaries, MIIX Insurance Company ("MIIX"), and its subsidiaries Lawrenceville Holdings, Inc. ("LHI") and MIIX Insurance Company of New York ("MIIX New York"), and New Jersey State Medical Underwriters, Inc. and its wholly-owned subsidiaries (the "Underwriter"), collectively (the "Company"). Until September 1, 2002, the Company provided a wide range of insurance products to the medical profession and health care institutions. The primary business of the Company prior to September 1, 2002, was medical professional liability insurance and it issued claims-made, modified claims-made with prepaid extended reporting endorsements and occurrence basis policies. As a result of unexpected and unprecedented increases in loss and Loss Adjustment Expense ("LAE") reserves during the past three years, the Company has been subjected to a number of adverse developments. As a result of significant adjustments to loss and LAE reserves, the Company's capitalization has significantly weakened and the Company has, among other things: o Ceased writing insurance in 2002 in all states and placed the insurance operations of MIIX into solvent runoff; o Sold renewal rights in 2002 to certain of its business and licensed the "MIIX" name and certain trademarks to a New Jersey insurance company, MIIX Advantage Insurance Company of New Jersey ("MIIX Advantage"); o MIIX, the primary insurance subsidiary of the Company, entered into an Order with the New Jersey Department of Banking and Insurance ("New Jersey Department") in 2003 that set forth the framework for the regulatory monitoring of MIIX and established certain operating limitations on MIIX. The significant increases in loss and LAE reserves ultimately led, on September 28, 2004, to the Superior Court of New Jersey entering an Order placing MIIX into rehabilitation and naming the Commissioner of the New Jersey Department as Rehabilitator with immediate and exclusive control over the business and property of MIIX. See Note 17. Prior to the Order of Rehabilitation, the Company's principal sources of funds were dividends and other permissible payments from its subsidiaries and revenues from its non-insurance operations. Subsequent to the Order of Rehabilitation, the Company's principal source of funds is derived from the management contract with MIIX Advantage. The Company does not believe that its cash flow will be sufficient to allow it to continue to operate. Accordingly, the Company continues the wind-down of its business activities. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP"). The significant accounting policies followed by the Company that materially affect financial reporting are summarized below: Principles of Consolidation The accompanying consolidated financial statements include the accounts and operations of The MIIX Group and its wholly-owned subsidiaries, MIIX and the Underwriter. MIIX owns 100% of LHI, a property and casualty insurance holding company, which owns 100% of MIIX New York. The Underwriter's principal wholly-owned subsidiaries include Medical Brokers, Inc., an insurance agency, Reinsurance Services, Inc. (formerly Pegasus Advisors, Inc.), an inactive reinsurance intermediary, MIIX Healthcare Group, an inactive healthcare consulting firm, and Lawrenceville Re, Ltd. ("Lawrenceville Re"), a Bermuda-domiciled reinsurance company. Effective April 30, 2002, the Company sold substantially all the assets of F-7 Administrative and Information Management Services, Inc. (formerly Hamilton National Leasing Corporation). On December 31, 2003, MIIX completed the merger of Lawrenceville Property and Casualty Company ("LP&C") into MIIX. All significant intercompany transactions and balances have been eliminated in the consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. Investments The Company has designated its entire investment portfolio as available-for-sale. As such, all investments are carried at their fair values. The Company has no securities classified as "trading" or "held-to-maturity." Investments are recorded on the trade date. Temporary changes in fair values of available-for-sale securities, after adjustment of deferred income taxes, are reported as unrealized appreciation or depreciation directly in equity as a component of other comprehensive income. On April 1, 2001, the Company adopted the provisions of EITF No. 99-20, "Recognition of Interest Income and Impairment of Purchased and Retained Beneficial Interests in Securitized Financial Assets." This standard established new guidelines for recognition of income and other-than-temporary decline for interests in securitized assets (loan-backed and asset-backed securities), unless they met certain exception criteria. EITF 99-20 requires the Company to recognize an other-than-temporary decline if the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent, prior, estimation date. The difference between the book value of the security and its fair value must be recognized as an other-than-temporary decline and the security's yield is adjusted to market yield. This guidance also adopts the prospective method for adjusting the yield used to recognize interest income for changes in estimated future cash flows since the last quarterly evaluation date. On April 1, 2001, the Company recognized $5.3 million of other-than-temporary declines, net of tax ($0.39 per diluted share) as the cumulative effect of a change in accounting principle. Expected cash flow assumptions are obtained from both proprietary and broker/dealer estimates and are consistent with the current interest rate and economic environment. Premiums and discounts on investments (other than loan-backed and asset-backed bonds) are amortized/accreted to investment income using the interest method over the contractual lives of the investments. Realized investment gains and losses are included as a component of revenues based on a specific identification of the investment sold. Short-term investments include investments maturing within one-year and other cash and cash equivalent balances earning interest. The Company regularly evaluates the carrying value of its investments based on current economic conditions, past credit loss experience, the length of time and the extent to which the fair value has been less than book value and other circumstances. A decline in fair value that is other-than-temporary is recognized by an adjustment to carrying value treated as a realized investment loss and a reduction in the cost basis of the investment in the period when such a determination is made. Deferred Policy Acquisition Costs Policy acquisition costs (primarily commissions and premium tax expenses), that vary with and are directly related to the production of business, are capitalized and amortized over the effective period of the related policies. Intangible Assets Intangible assets consist primarily of $1.0 million of goodwill, resulting from the acquisition of subsidiaries. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is no longer F-8 amortized as an expense, but instead is reviewed and tested for impairment under a fair value approach at least annually, or more frequently as a result of an event or change in circumstances that would indicate impairment may be necessary. On January 1, 2002, the Company recorded a $2.4 million impairment related to goodwill, net of $0 tax ($0.18 per diluted share). The Company completed its annual assessment of goodwill during the fourth quarter of 2003, which resulted in an impairment of $1.8 million. Due to the Company's current financial condition, management considered recent third-party purchase offers made for the assets associated with the goodwill and deemed the write-down to be appropriate based on these offers. Software Development Costs Costs incurred in the development of software used for Company operations are capitalized and amortized over a useful life ranging from three to five years. Losses and Loss Adjustment Expenses Estimates for unpaid losses and LAE are based on the Company's evaluation of reported claims and actuarial analyses of the Company's operations since its inception, including assumptions regarding expected ultimate losses and reporting patterns, and estimates of future trends in claim severity and frequency. The Company's philosophy is to have a disciplined process consistently applied in setting and adjusting loss and LAE reserves. Although variability is inherent in such estimates, recorded loss and LAE reserves represent management's best estimate of the remaining costs of settling all incurred claims. Changes in the Company's estimate of ultimate claim costs are recognized in the period in which the Company's estimate of those ultimate costs is changed. These estimates are reviewed regularly and any adjustments to prior year reserves are reflected in current year operating results. See Note 3 for the discussion of loss and LAE reserves. The Company offered pure occurrence coverage from 1977 through 1986 and a form of occurrence coverage, "modified claims-made," from 1987 to August 31, 2002 through its Permanent Protection Plan ("PPP") policy. The PPP policy provides coverage for claims reported during the policy period as well as, under the extended reporting endorsement, claims reported after the termination of the policy (for any reason), and thus is reserved on an occurrence basis. The Company also offered traditional claims-made and occurrence coverages, which are reserved on a claims-made or occurrence basis, as appropriate. Premiums Premiums are recorded as earned over the period the policies to which they apply are in force. Premium deposits represent amounts received prior to the effective date of the new or renewal policy period. The reserve for unearned premiums is determined on a monthly pro-rata basis. Gross premiums include both direct and assumed premiums earned. Reinsurance Reinsurance premiums, losses and LAE are accounted for on a basis consistent with the accounting for the original policies issued and the terms of the reinsurance contracts. Premium deposits, unearned premiums and unpaid losses and LAE are reported gross of reinsurance amounts. All reinsurance contracts are accounted for in accordance with the provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," which provides the criteria for determining whether the contracts should be accounted for utilizing reinsurance accounting or deposit accounting. Income Taxes The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred income taxes arise as a result of applying enacted statutory tax rates to the temporary differences between the financial statement carrying value and the tax basis of assets and liabilities. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized. F-9 Reclassification Certain prior year amounts in the Company's financial statements have been reclassified to conform to the 2003 financial statement presentation. Cash Flow Reporting For purposes of reporting cash flows, cash consists of amounts held at banks, cash in money market accounts and time deposits with original maturities of three months or less. Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees and board members with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the dates of grant, no compensation expense is recognized. Earnings (Loss) Per Share Basic and diluted earnings (loss) per share are calculated on the weighted-average number of common shares and common share equivalents outstanding. Segment Information The Company's operations are classified into one reportable segment: providing professional liability and related insurance coverages to the healthcare industry. In connection therewith, the Company generally offered, through August 31, 2002, three products: occurrence policies, claims-made policies with prepaid tail coverage and claims-made policies, varying by market. The Company distributed its products both directly to the insureds and through intermediaries. Recent Accounting Pronouncements In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based compensation -- Transition and Disclosure." This Statement, which amends Statement No. 123, "Accounting for Stock-Based Compensation," provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, it requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. These additional disclosures are in Note 14 of Notes to Consolidated Financial Statements. F-10 3. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the liability for unpaid losses and LAEs is summarized as follows:
Years Ended December 31, ---------------------------------------------- 2003 2002 2001 ---------- ---------- ---------- (In thousands) Balance as of January 1, net of reinsurance recoverable of $457.0 million, $463.3 million and $432.0 million, respectively .... $ 694,630 $ 733,723 $ 710,484 Incurred related to: Current year ................................ 33,582 146,619 203,975 Prior years ................................. 237,357 49,868 46,793 ---------- ---------- ---------- Total incurred ................................ 270,939 196,487 250,768 ---------- ---------- ---------- Paid related to: Current year ................................ 350 2,648 2,571 Prior years ................................. 172,047 232,932 224,958 ---------- ---------- ---------- Total paid .................................... 172,397 235,580 227,529 ---------- ---------- ---------- Balance as of December 31, net of reinsurance recoverable ................................. 793,172 694,630 733,723 Reinsurance recoverable ....................... 425,785 457,005 463,275 ---------- ---------- ---------- Balance as of December 31, gross of reinsurance $1,218,957 $1,151,635 $1,196,998 ========== ========== ==========
2001, 2002, 2003 ADJUSTMENTS. In 2001 and 2002, prior year gross loss and LAE reserves were adjusted by $117.9 million ($46.8 million net of reinsurance) and $161.2 million ($49.9 million net of reinsurance), respectively, to reflect adverse development on several lines of business including New Jersey and other states' physicians, Pennsylvania hospitals and hospital excess. The adjustments were related to increases in severity and frequency. Specific factors noted in management's actuarial analysis that gave rise to the coverage year reserve development in 2001 included the following: overall reserves across all coverage years were adjusted significantly to reflect increased loss severity seen during 2001. Claims were adjudicated or settled at higher values than the Company had previously experienced. This increase in severity was seen primarily in the Company's Pennsylvania institutions' book, and, to a lesser degree, in the Company's core New Jersey physician book, as well as in the physician business in many other states, including, most particularly, Pennsylvania, Texas and Ohio. Development in prior coverage years through 1996 primarily reflects this severity trend in Pennsylvania and New Jersey. Development on coverage years 1997 through 2000 was primarily composed of increases to Pennsylvania physician and institutional reserves as well as increases to reserves on physician business in states outside of New Jersey and Pennsylvania. The increases to reserves held on business outside of New Jersey and Pennsylvania reflected increased severity as well as, to a lesser extent, greater than previously anticipated loss frequency. Specific factors in management's actuarial analysis that give rise to the coverage year development in 2002 were increased loss severity, re-underwriting initiatives undertaken by the Company since 1999 and the acceleration of claim reporting, settlement and payments experienced by the Company during 2002. The continued increase in severity of claims was particularly noted in the physician book in Texas, Ohio and New Jersey, and in the hospital book in Pennsylvania and all other markets in 2002. The majority of the adverse development in all markets was observed in coverage years prior to 2000. A significant acceleration of claim reporting was observed in the first half of 2002 in Pennsylvania attributable to a rush to file suits ahead of pending tort reform legislation in this state. The Pennsylvania book also showed indications of acceleration of the claim settlement process, which the Company believes is attributable to its runoff status, lifting of stays that had delayed many cases and general efforts by the Pennsylvania court system to clear the backlog of cases. The New Jersey physician book showed significant acceleration in the claim settlement process in the latter half of 2002 with claim settlement rates in some of the older coverage years (1998 and prior) F-11 100% or more above expected levels. The Company believes the acceleration in New Jersey is attributable to its runoff status, as well as the continued effects of the "Best Practices" initiative mandated by the New Jersey Supreme Court in September 2000. These trends continued in 2003 and were complicated by acceleration in the claims process attributable to tort and judicial reform in Pennsylvania and New Jersey and the impact on the internal claim process of the Company entering voluntary solvent runoff in 2002. After extensive analyses, the Company's prior year gross loss and LAE reserves were adjusted by $353.0 million ($237.4 million net of reinsurance) at December 31, 2003. The increase was primarily attributable to adverse development and increased severity in New Jersey and Pennsylvania physician lines of business and the hospital excess lines in all jurisdictions. The 2003 adjustments were established as a result of an extensive process, which included an internal actuarial review of data valued at September 30, 2003, December 31, 2003, March 31, 2004 and June 30, 2004, an external opining actuarial review of data valued at September 30, 2003, December 31, 2003 and June 30, 2004 and an external actuarial review performed in conjunction with filing MIIX's Annual Audited Statutory Financial Statements. The reason for the extensive actuarial analyses on multiple quarters of data was to determine how much of the development in the loss experience of the Company from quarter to quarter was attributable to acceleration in the claim handling process and environment as opposed to adverse development in terms of increased severity. Management and 2 external actuarial analyses concur that there is acceleration in the development of the Company's data; however, determining what portion is acceleration and what portion is adversity is extremely difficult. Management sought out multiple actuarial reviews over four successive quarters of development data to evaluate the volatile data. The extreme uncertainty in the data and analyses has been the result of several factors. The Company's entry into runoff in 2002 resulted in a continuous decline of policies in force during 2003, with no policies remaining in force as of December 31, 2003. This caused a significant and continuing decrease in new claim reports as well as an overall significant decrease in total pending claims. The decreased pending claims and especially the decreased new claim reports, which consumed disproportionately longer time to initially set up, have allowed greatly increased time for each claim handler to work on existing claims. This has resulted in an acceleration in the setting up of case reserves, departing significantly from the historic patterns the Company has relied upon to estimate future development and claims incurred but not reported. Simultaneously, significant changes in the litigation environment in New Jersey, which represents approximately 50% of the Company's reserves, resulted in faster processing of claims and a corresponding acceleration in case reserving. The court system in New Jersey instituted its "Best Practices" initiative in September 2000 which was intended to speed cases through the courts. This initiative has substantially speeded up trials in New Jersey and thus has affected the entire claims management process. In June 2003, the courts issued a public report stating that the court system in New Jersey had reached its lowest level of backlogged cases since 1980. 4. RELATED PARTY TRANSACTIONS The Underwriter leased 47,000 square feet for its home office from the Medical Society of New Jersey ("MSNJ") pursuant to a lease agreement dated June 29, 1981 and extended on July 7, 1999. The lease agreement expired on September 30, 2003, and was extended at current terms until the sale of the building was completed in April 2004. Annual lease payments were $782,846 in 2003, $777,735 in 2002 and $760,512 in 2001. A majority of the members of the Company's Board of Directors (the "Board") were also policyholders of MIIX and acquired shares in connection with the Company's initial public offering. Such directors may experience claims requiring coverage under their respective policies with MIIX. As of December 31, 2003, eight of the Company's ten Directors were directors of MIIX Advantage Holdings, Inc. ("MIIX Holdings") and MIIX Advantage. MIIX Advantage F-12 currently provides medical malpractice insurance coverage to its Board's directors. As of December 31, 2003, seven Executive Officers of the Company also served, without additional compensation, as Executive Officers of MIIX Holdings and MIIX Advantage. On August 28, 2002, the Company and certain of its affiliates entered into a series of contracts with MIIX Holdings and MIIX Advantage, relating to, among other things, the transfer of insurance policy renewal rights to MIIX Advantage and the use of the "MIIX" name and associated marks by MIIX Holdings and MIIX Advantage. In connection with the transaction, the Company also agreed to provide certain management services to MIIX Advantage. The material contracts involved in the transaction include a: (a) Management Services Agreement, (b) Non-Competition and Renewal Rights Agreement and (c) Intellectual Property License Agreement (together, the "Agreements"). On July 17, 2002, the Company entered into an agreement with Altila Corporation ("Altila") under which Altila provides a leased employee to serve as Chief Financial Officer and Treasurer of the Company. Under the agreement, the Company pays Altila $302,000 per year for his service, plus reimbursement of reasonable out of pocket expenses. During 2003 and 2002, the Company paid Altila $423,879 and $180,619, respectively, under this agreement and an additional $220,689 under a separate agreement, for services prior to July 17, 2002. The Company's Chief Financial Officer and Treasurer is a principal owner of Altila. The Company believes that the terms of the transactions described above were negotiated at arms length and are fair to the Company. 5. INVESTMENTS The Company's investment strategy focuses primarily on the purchase of intermediate-term, investment-grade securities. At December 31, 2003, and 2002, the average credit quality of the fixed income portfolio was AA. The actual or amortized cost and estimated market value of the Company's available-for-sale securities as of December 31, 2003 and 2002 were as follows:
GROSS UNREALIZED ESTIMATED AMORTIZED ----------------- MARKET COST GAINS LOSSES VALUE ---------- ------- ------- ---------- (In thousands) 2003 U.S. Treasury securities and obligations of U.S. government corporations and agencies..... $ 99,778 $ 620 $ 387 $ 100,011 Obligations of states and political subdivisions.................................. 7,795 10 110 7,695 Corporate securities............................ 218,666 10,800 198 229,268 Mortgage-backed and other asset-backed securities.................................... 354,558 5,381 1,178 358,761 ---------- ------- ------- ---------- Total fixed maturity investments................ 680,797 16,811 1,873 695,735 Equity investments.............................. 2,781 447 2 3,226 ---------- ------- ------- ---------- Total investments (excluding short-term)........................ $ 683,578 $17,258 $ 1,875 $ 698,961 ========== ======= ======= ========== 2002 U.S. Treasury securities and obligations of U.S. government corporations and agencies..... $ 108,725 $ 3,774 $ 0 $ 112,499 Foreign securities - U.S. dollar denominated.... 6,946 405 0 7,351 Corporate securities............................ 280,152 13,150 8,119 285,183 Mortgage-backed and other asset-backed securities.................................... 375,591 12,654 4,698 383,547 ---------- ------- ------- ---------- Total fixed maturity investments................ 771,414 29,983 12,817 788,580 Equity investments.............................. 4,804 383 0 5,187 ---------- ------- ------- ---------- Total investments (excluding short-term)........................ $ 776,218 $30,366 $12,817 $ 793,767 ========== ======= ======= ==========
The fair values for fixed maturity investments are based on quoted market prices, where available. For fixed maturity investments not actively traded, fair values are estimated using values obtained from independent pricing services. The fair values for equity securities are based on quoted market prices. F-13 The amortized cost and estimated fair value of fixed maturity investments at December 31, 2003 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. ESTIMATED AMORTIZED FAIR COST VALUE ---------- --------- (In thousands) Due in one year or less............................... $ 15,071 $ 15,400 Due after one year through five years................. 183,973 187,039 Due after five years through ten years................ 102,697 109,292 Due after ten years................................... 24,498 25,243 Mortgage-backed and other asset-backed securities..... 354,558 358,761 ---------- ---------- Total fixed maturity investments............ $ 680,797 $ 695,735 ========== ========== Major categories of the Company's net investment income are summarized as follows: YEARS ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 ------- ------- ------- (In thousands) Fixed maturity investments....................... $35,181 $59,120 $75,675 Equity investments............................... 28 84 195 Short-term investments........................... 2,012 3,534 5,455 Other............................................ 261 314 669 ------- ------- ------- Subtotal............................... 37,482 63,052 81,994 Investment expenses.............................. 1,552 2,214 1,801 ------- ------- ------- Net investment income............................ $35,930 $60,838 $80,193 ======= ======= ======= The Company held fixed maturity investments of $4.3 million and $7.7 million at December 31, 2003 and 2002, respectively, that were non-income producing. Realized gains and losses from sales and other-than-temporary declines in fair values of investments, excluding the cumulative effect of an accounting change, are summarized as follows: YEARS ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 ------- ------- ------- (In thousands) Fixed maturity investments Gross realized gains........................... $20,703 $23,362 $22,489 Gross realized losses.......................... (22,305) (26,493) (23,819) Net realized gains (losses) on fixed maturity ------- ------- ------- investments.................................... (1,602) (3,131) (1,330) ------- ------- ------- Equity investments Gross realized gains........................... 5 143 0 Gross realized losses.......................... 0 (533) (854) ------- ------- ------- Net realized gains (losses) on equity investments.................................... 5 (390) (854) ------- ------- ------- Net realized gains (losses) on investments....... $(1,597) $(3,521) $(2,184) ======= ======= ======= Realized investment losses include $19.4 million, $16.9 million and $21.8 million related to securities that have experienced an other-than-temporary decline in value in 2003, 2002 and 2001, respectively. The change in the Company's unrealized appreciation (depreciation) on fixed maturity investments was $(2.2) million, $23.7 million and $6.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. The corresponding amounts for equity investments were $62,000, $841,000 and $585,000, respectively. F-14 At December 31, 2003 and 2002, investments in fixed maturity investments with a carrying amount of approximately $6.3 million and $5.3 million, respectively, were on deposit with state insurance departments to satisfy regulatory requirements. For total traded and private securities held by the Company at December 31, 2003 that are in unrealized loss status, the fair value, amortized cost, unrealized loss and total time period that the security has been in an unrealized loss position are presented in the table below (In thousands):
% Fair Amortized % Amortized Unrealized % Unrealized Fair Value Value Cost Cost Loss Loss ---------- ------- ---------- ----------- ---------- ------------ less than 90 days $ 108,184 79.5% $ 109,014 79.0% $ (830) 44.3% 91 days - 180 days 27,854 20.5% 28,897 21.0% (1,043) 55.7% ---------- ------ ---------- ------ ---------- ------ Totals $ 136,038 100.0% $ 137,911 100.0% $ (1,873) 100.0% ---------- ------ ---------- ------ ---------- ------
Securities available-for-sale, deemed to have declines in fair value that are other than temporary, are written down to fair value and a realized loss recorded in operations. The fixed maturity securities to which these write-downs apply are generally of investment grade quality at the time of purchase but, are subsequently down graded by rating agencies to "below-investment grade." Factors considered by the Company in determining whether declines in the fair value of fixed maturity securities are other than temporary include: (1) the significance of the decline, (2) the Company's ability and intent to retain the investment for a sufficient period of time for it to recover, (3) the time period during which there has been a significant decline in value, and (4) fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer. Based upon these factors, securities that have indications of potential impairment are subject to review. Where such analysis results in a conclusion that declines in fair values are other than temporary, the security is written down to fair value. As the discussion above indicates, there are risks and uncertainties associated with determining whether declines in the fair value of investments are other than temporary. These include subsequent significant changes in general overall economic conditions as well as specific business conditions affecting particular issuers, future financial market effects such as interest rate spreads, stability of foreign governments and economies, future ratings agency actions and significant accounting, fraud or corporate governance issues that may adversely affect certain investments. In addition, there are often significant estimates and assumptions required by the Company to estimate the fair values of securities, including projections of expected future cash flows and pricing of private securities. The Company is routinely monitoring developments and updating underlying assumptions and financial models based upon new information. 6. REINSURANCE Certain premiums, losses and allocated loss adjustment expenses are ceded to other insurance companies under various reinsurance agreements. These reinsurance agreements allow the Company to write or retain insurance risks in amounts in excess of what would otherwise be desirous. The Company has both excess of loss and quota share reinsurance treaties. The effect of assumed and ceded reinsurance on premiums is summarized in the following table (In thousands):
2003 2002 2001 -------------------- ---------------------- --------------------- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED -------- -------- --------- --------- --------- -------- Direct............... $ (633) $ 24,629 $ 96,209 $159,545 $231,550 $213,944 Assumed.............. 0 0 0 0 396 437 Ceded................ (47,654) (50,707) (59,868) (59,325) (67,131) (67,529) -------- -------- --------- -------- -------- -------- Net premiums......... $(48,287) $(26,078) $ 36,341 $100,220 $164,815 $146,852 ======== ======== ========= ======== ======== ========
F-15 During 2003, 2002 and 2001, approximately $115.6 million, $115.3 million and $97.5 million, respectively, of losses and LAE were ceded to reinsurers. The Company remains liable in the event that amounts recoverable from reinsurers are uncollectible. To minimize its exposure to losses from reinsurer insolvencies, the Company enters into reinsurance arrangements with carriers rated "A" or better by A.M. Best. At December 31, 2003 and 2002, the Company held collateral under related reinsurance agreements for all unpaid losses and LAE ceded in the form of funds withheld of $292.1 million and $332.7 million, respectively, and letters of credit of $161.2 million. The Company was a reinsurer on a large excess of loss reinsurance contract providing medical professional liability coverage on an institutional account from January 1, 1999 to December 31, 2000. The commutation of this treaty in 2002 had no impact on the Company's financial condition or results of operations. During 2002, the Company partially commuted several ceded reinsurance treaties with certain reinsurers. The Company recognized the amounts received from reinsurers as a reduction to losses and LAE paid of $35.1 million, increased its loss and LAE reserves by $36.9 million and recognized a reduction of funds held charges of $0.9 million. The net effect of the commutations resulted in a net loss of $0.9 million. There were no commutations during 2003 or 2001. In June 2004, MIIX commuted its 1995 aggregate excess reinsurance treaty. The commutation agreement provided for the release of applicable funds held balances and trust fund assets. The reduction to earnings as a result of the commutation was $3.3 million in 2004. In accordance with the provisions of various aggregate excess reinsurance contracts, the funds withheld are credited with interest at contractual rates ranging from 6.0% to 8.6%, which is recorded as a period expense in the year incurred. Each aggregate excess reinsurance contract contains an adjustable provision that may result in changes to ceded premium and related funds held charges based on loss experience under the contract. Each of the aggregate excess reinsurance contracts also contains a provision allowing reinsurers to offer additional reinsurance coverage that MIIX is obligated to accept. For contract years beginning November 1, 2000 and forward, the contracts require that the funds withheld balance on a particular contract year be below $500,000 before reinsurers may offer the additional coverage. For contract years prior to November 1, 2000, the contracts provide no funds withheld threshold amount, although the reinsurance intermediary has confirmed in writing that the intention of the parties was that the additional coverage would be offered only if and when the funds withheld balance was in a loss position. As of December 31, 2003, 2002 and 2001, no funds withheld balances are below $500,000 or in a loss position. However, in September and October 2004, the reinsurers initiated requests for additional premiums from MIIX in accordance with provisions of the contracts. Reinsurers are prohibited from canceling current reinsurance agreements or making additional premium charges to MIIX under the September 28, 2004 Order of Rehabilitation. Each of the aggregate excess reinsurance contracts also contains a provision requiring that the funds withheld be placed in trust should the A.M. Best rating assigned to MIIX fall below B+. On March 22, 2002, A.M. Best lowered the rating of MIIX to C+ and MIIX withdrew from the interactive rating process with A.M. Best. As a result of the downgrade, reinsurers requested that assets supporting the funds withheld account be placed in trust. MIIX established the required trust accounts in accordance with contract provisions. 7. RETIREMENT PLANS The Company has a contributory 401(k) Retirement Savings Plan which covers substantially all employees. The Company currently contributes 50% of the first 6% of compensation contributed by participants. Employer contributions for the years ended December 31, 2003, 2002 and 2001 totaled $166,742, $294,060 and $327,448, respectively. The Company also provides a noncontributory defined benefit Pension Plan covering substantially all its employees. The plan was amended effective April 1, 2000, subject to approval by the Internal Revenue Service and provides each covered employee with a notional account balance. On September 29, 2004, the Board of Directors of the Underwriter (a) authorized, effective November 15, 2004, the freezing of benefit accruals and participation under the Underwriters Pension Plan; and (b) approved, effective November 15, 2004, an amendment to the Pension Plan to provide for the same. The net periodic pension expense consists of the following components: F-16 YEARS ENDED DECEMBER 31, ---------------------------- 2003 2002 2001 ------ ------ ------ (In thousands) Service cost.................................... $ 308 $ 412 $ 341 Interest cost................................... 764 743 607 Expected return on plan assets.................. (900) (961) (1,006) Amortization of: Transition asset............................. (22) (22) (22) Prior service cost(1)........................ 75 93 (45) Actuarial gain............................... 0 (97) (336) Settlement/curtailment expense.................. 0 139 0 ------- ------ ------ Net periodic pension expense (benefit). ........ $ 225 $ 307 $ (461) ======= ====== ====== (1) Prior service cost is amortized under an alternate method where the period is equal to the average future working lifetime of an active population. The following table sets forth the funding status of the plan: YEARS ENDED DECEMBER 31, ----------------------- 2003 2002 ------- ------- (In thousands) CHANGE IN BENEFIT OBLIGATION Net benefit obligation at January 1................... $11,529 $ 9,605 Service cost.......................................... 308 412 Interest cost......................................... 764 743 Amendments(2)......................................... 0 1,053 Actuarial loss........................................ 1,259 24 Gross benefits paid................................... (254) (215) Settlement/Curtailment................................ 0 (93) ------- ------- Net benefit obligation at December 31................. $13,606 $11,529 ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at January 1................ $10,327 $11,464 Actual return on plan assets.......................... 1,940 (922) Gross benefits paid................................... (254) (215) ------- ------- Fair value of plan assets at December 31.............. $12,013 $10,327 ======= ======= Funded status......................................... $(1,592) $(1,202) Unrecognized actuarial gain........................... 464 245 Unamortized prior service cost........................ 425 500 Unrecognized net transition asset..................... (4) (25) ------- ------- Accrued pension expense............................... $ (707) $ (482) ======= ======= (2) Effective January 1, 2002, the plan was amended to grandfather 11 additional employees under the pre-April 1, 2000 Pension Plan provisions. A minimum pension liability is required when the actuarial present value of accumulated benefits exceeds plan assets and accrued pension liabilities. The minimum liability adjustment, less allowance for intangible assets, net of tax benefit, is reported as an expense in the statement of operations. Amounts recognized in the statement of operations consists of Accrued benefit liability......................... $ (976) $ (626) Intangible asset.................................. 269 144 ------- ------- Accrued pension expense............................... $ (707) $ (482) ======= ======= F-17 YEARS ENDED DECEMBER 31, --------------------------- 2003 2002 2001 ------ ------ ------ Weighted-average assumptions Discount rate................................... 6.00% 6.75% 7.25% Expected return on plan assets.................. 9.00% 9.00% 9.00% Rate of compensation increase................... 4.00% 4.00% 4.00% 8. COMMITMENTS, CONTINGENCIES AND OFF BALANCE SHEET RISK The Company has employment contracts with certain officers which commit the Company to various salary and fringe benefit obligations as specified in the individual agreements. The Company leases office space and office equipment. Rent expense for 2003, 2002 and 2001 were $1.3 million, $3.1 million and $2.6 million, respectively, including rent paid to MSNJ of $782,846, $777,735 and $760,512 in 2003, 2002 and 2001, respectively. Minimum future rental obligations for leases currently in effect are as follows (In thousands): 2004 $463 2005 477 2006 465 Thereafter 733 --- Total $2,138 ====== The Company currently purchases annuities without recourse on a competitive basis to fund settlements of indemnity losses. The nature and terms of the annuities vary according to settlements. The current value of annuities purchased in prior years from other insurance companies, but with recourse to the Company, are reflected as an other asset and an other liability in the consolidated balance sheets, totaled $22.1 million and $22.9 million as of December 31, 2003 and 2002, respectively. The Company becomes liable only in the event that an insurance company cannot meet its obligations under existing agreements and state guaranty funds are not available. To minimize its exposure to such losses, the Company primarily utilizes insurance companies with an A.M. Best rating of "A+" or better. GLASSER V. THE MIIX GROUP, INC. ET AL. On February 5, 2003, a shareholder of the Company instituted a putative class action in the United States District Court for the District of New Jersey against the Company, present and former directors and officers of the Company, the Medical Society of New Jersey ("MSNJ") and Fox-Pitt Kelton, Inc. ("FPK"), which acted as financial advisor to the Company. The complaint alleges that the Company and its directors and officers engaged in securities fraud, breaches of fiduciary duty and violations of New Jersey antitrust laws in connection with the MIIX Advantage contracts and alleged misrepresentations and omissions of material fact in various SEC filings by the Company. On May 13, 2003, another shareholder of the Company instituted a separate putative class action in the United States District Court for the District of New Jersey (WASSERSTRUM V. THE MIIX GROUP, INC., ET AL.) against the Company and certain of its officers alleging securities fraud. The law firms representing plaintiffs in the two actions agreed to consolidate the plaintiffs' claim against the Company. On August 12, 2003, a Consolidated Amended Complaint (the "Complaint") was filed by the plaintiffs against the Company, present and former directors and officers of the Company and MSNJ alleging securities fraud based on alleged misrepresentations and omissions of material fact in various SEC filings by the Company concerning the Company's financial condition, its statement of reserves, the pricing of its policies, the MIIX Advantage contracts and other matters. The Complaint seeks certification of a plaintiff class of the Company's shareholders from July 30, 1999 to September 12, 2002 and unspecified damages, pre- and post-judgment interest, attorneys' fees and costs. On October 21, 2003, the Company filed a motion to dismiss the Complaint, which is currently pending. On December 11, 2003, the Court ordered that the case be submitted to mediation and stayed all proceedings pending mediation. The parties are engaging in mediation discussions. F-18 FOX-PITT KELTON V. THE MIIX GROUP, INC. On February 10, 2003, FPK, which had been engaged as financial advisor to the Company, instituted suit against the Company in the Supreme Court of New York to recover fees allegedly due from the Company as a result of the investment banking services it rendered in connection with the Company's efforts to dispose of assets or obtain capital and the agreements entered into between the Company and MIIX Advantage. FPK filed a motion for summary judgment in its favor, which was denied by the Court. On April 28, 2004, the suit was dismissed with prejudice. WEISFELD V. THE MIIX GROUP, INC., ET AL. On November 20, 2002, a former executive of MSNJ filed suit in the Superior Court of New Jersey against MSNJ and certain of its officers, including MSNJ officers who were also MIIX Group board members, alleging wrongful discharge and defamation. On March 19, 2003, plaintiff filed pleadings amending the Complaint to include The MIIX Group as a defendant, alleging that The MIIX Group tortiously interfered with his employment relationship and that its alleged influence over MSNJ was a causative factor in his discharge. Motions to dismiss plaintiff's Amended Complaint were filed by all defendants. By order dated August 19, 2003, the Court granted the defendants' motions to dismiss and the entire Complaint was dismissed with prejudice. On October 2, 2003, plaintiffs filed a notice of appeal of the dismissal of the Complaint with the Superior Court of New Jersey, Appellate Division. Oral argument in the Appellate Division was held on October 25, 2004. The parties are awaiting the Court's decision. Given the Company's current financial condition, any negative outcome of the litigation requiring the payment of damages could have a material adverse effect on the Company. The Company may also be a party to litigation from time to time in the ordinary course of business. 9. STATUTORY ACCOUNTING PRACTICES MIIX, domiciled in New Jersey, MIIX New York, domiciled in New York, and Lawrenceville Re, domiciled in Bermuda, prepare statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the New Jersey Department, the New York State Insurance Department and the Bermuda Registrar of Companies, respectively. "Prescribed" statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ("NAIC"). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC adopted codified statutory accounting principles ("Codification"), which was effective for the reporting periods beginning after January 1, 2001. Adoption of Codification did not have a material impact to the statutory basis financial statements of MIIX or MIIX New York. Combined policyholders' surplus and net income prepared in accordance with the domiciliary insurance departments or permitted statutory accounting practices for these companies, which differs as described below from the statutory surplus and net income that would have been reported had NAIC statutory accounting practices been followed, are summarized as follows: YEARS ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 -------- -------- -------- (In thousands) Statutory net loss for the year............ $(325,682) $ (55,565) $(87,172) Statutory surplus (deficiency) at December 31.............................. $(252,098) $ 75,812 $125,485 MIIX received permission in 2003 to begin discounting loss and LAE reserves as of December 31, 2002, at a rate of 3%. As of December 31, 2003 and 2002, the discount amounted to $49.8 million and $53.6 million, respectively. Additionally, MIIX completed the merger of LP&C into MIIX on December 31, 2003. The merger resulted in the combination of the statutory surplus of MIIX and LP&C for purposes of determining MIIX's Risk Based Capital ("RBC"). MIIX's RBC level is not impacted by the ability to discount loss and LAE reserves as the NAIC standards do not permit discounting of loss and LAE reserves to be taken into account in the determination of RBC. At December 31, 2003, MIIX's RBC was below the Mandatory Control Level and continues at this level. F-19 During 2003, MIIX entered into an Order with the New Jersey Department that set forth the framework for the regulatory monitoring of MIIX and established operating limitations. On September 28, 2004, the Superior Court of New Jersey entered an Order placing MIIX into rehabilitation and naming the Commissioner of the New Jersey Department as Rehabilitator with immediate and exclusive control over the business and property of MIIX. See Note 17. 10. RESTRUCTURING CHARGE The Company undertook a restructuring during the first quarter of 2002 which includes a charge of approximately $2.6 million composed primarily of severance and the write-off of remaining lease commitments associated with the closure of the Company's offices in Dallas and Indianapolis, and the decision to put LP&C into runoff. The Company communicated these initiatives during the first quarter of 2002. During 2003 and 2002, the Company paid approximately $0.5 million and $2.1 million, respectively, related to this restructuring. 11. INCOME TAXES For federal income tax purposes, the Company files a consolidated return with its subsidiaries. The components of the income tax (benefit) provision in the accompanying statements of income, before the cumulative effect of an accounting change, are summarized as follows: YEARS ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 ------- ------- ------- (In thousands) Current income tax (benefit)................. $ (1,902) $(11,157) $(14,977) Deferred income tax (benefit)................ (4,867) (83) 56,869 -------- -------- -------- Total income tax expense (benefit)........... $ (6,769) $(11,240) $ 41,892 ======== ======== ======== A reconciliation of income tax (benefit) computed at the federal statutory tax rate to total income tax expense (benefit) before the cumulative effect of an accounting change is as follows: YEARS ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 ------- ------- ------- (In thousands) Expected annual effective federal income tax benefit at 35%............................. $(112,523) $(43,698) $(38,664) Increase (decrease) in taxes resulting from: Establishment of valuation allowance, net of reduction of tax contingency reserves................................ 110,095 32,389 82,297 Tax-exempt interest........................ 0 (444) (1,695) Other...................................... (4,341) 513 (46) --------- -------- -------- Total income tax expense (benefit). $ (6,769) $(11,240) $ 41,892 ========= ======== ======== The tax benefit in 2003 primarily reflects the change in the deferred tax valuation allowance resulting from the reduction in deferred taxes on unrealized portfolio gains. The deferred tax benefit recorded in operations is offset by an equal amount charged to other comprehensive income. F-20 Significant components of the Company's deferred tax assets and liabilities are summarized as follows: DECEMBER 31, ------------------- 2003 2002 -------- -------- (In thousands) Deferred tax assets: Net operating loss carryforwards.......................... $174,863 $ 63,681 Discounting of loss reserves.............................. 44,714 47,597 Unearned premium reserve.................................. 0 1,965 Unrealized losses and other-than-temporary declines on investments........................................ 15,104 10,060 Other..................................................... 2,475 3,549 -------- -------- Total deferred tax assets......................... 237,156 126,852 Less valuation allowance................................. 233,710 124,828 -------- -------- Deferred tax asset after valuation allowance..... 3,446 2,024 Deferred tax liabilities-Other.............................. 3,446 1,536 -------- -------- Net deferred tax assets..................................... $ 0 $ 488 ======== ======== At December 31, 2003 and 2002 the Company established a valuation allowance of $233.7 million and $124.8 million, respectively, to reduce its net deferred tax asset to $0 and $488,000 at December 31, 2003 and 2002, respectively. The deferred tax assets primarily relate to net operating loss carryforwards which expire in 20 years, and the different tax and book treatment of discounting of loss reserves, unrealized losses and other-than-temporary declines on the available-for-sale securities and unearned premium reserve. The Company evaluates a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS No. 109, "Accounting for Income Taxes," including the Company's earnings history, the number of years the Company's operating loss and tax credit can be carried forward and expected future taxable income. Due to the Company's cumulative loss position in recent years, a valuation allowance has been provided for the full value of the deferred tax assets at December 31, 2003, and substantially the full value of the deferred tax assets at December 31, 2002. At December 31, 2003 and 2002, the Company had $0 and $1.8 million, respectively, of income taxes payable included in other liabilities. The Company did not pay federal income taxes in 2003 or 2002 and the $1.8 million income tax payable at December 31, 2002 was reversed in 2003. 12. DEFERRED POLICY ACQUISITION COSTS The following represents the components of deferred policy acquisition costs and the amounts that were charged to expense for the years ended December 31, 2003, 2002 and 2001. 2003 2002 2001 -------- -------- -------- (In thousands) Balance at January 1........................ $ 1,016 $ 4,416 $ 3,026 Cost deferred during the year............... 563 4,920 15,086 Amortization expense........................ 1,579 (8,320) (13,696) -------- -------- -------- Balance at December 31...................... $ 0 $ 1,016 $ 4,416 ======== ======== ======== F-21 13. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss), net of related tax, for the years ended December 31, 2003, 2002 and 2001 were as follows: 2003 2002 2001 --------- --------- --------- (In thousands) Net loss....................................... $(314,725) $(115,984) $(157,644) Other comprehensive income (loss): Unrealized holding appreciation (depreciation) arising during period (net of tax) .............................. (9,149) 21,047 (4,272) Reclassification adjustment for losses realized in net income (loss) (net of tax) ...................................... 1,597 3,521 6,703 --------- --------- --------- Net unrealized appreciation (depreciation) arising during the period at December 31, (net of tax).................. (7,552) 24,568 2,431 --------- --------- --------- Comprehensive loss............................. $(322,277) $ (91,416) $(155,213) ========= ========= ========= 14. STOCK BASED COMPENSATION Pursuant to stock purchase and loan agreements, the Company, upon Board approval, made loans to certain officers of the Company, which the officers used to purchase unregistered shares of The MIIX Group common stock at the Offering Price. The Company had loans outstanding to certain officers of the Company of $1.3 million and $3.6 million as of December 31, 2003 and 2002, respectively. The loans, three of which are with former officers of the Company, bear interest rates ranging from 5.37% to 6.21% and provide for full recourse against the borrowers. Pursuant to a former CEO's separation agreement during 2001, the outstanding stock purchase and loan balance was reduced by approximately $0.7 million. As part of the separation agreement, the Company also issued 221,591 phantom stock options, which are stock appreciation rights, with prices ranging from $7.40 to $13.50, all of which were immediately exercisable and expire April 13, 2006. During 2002, certain current and former officers tendered 110,061 shares of The MIIX Group common stock and exercised 101,591 stock appreciation rights, which are designated as phantom stock options in the respective agreement. These tenders and additional loan repayments reduced the stock purchase and loan balances by approximately $1.8 million. All transactions were recorded at the fair market value of the Company common stock on the effective date of the respective transactions. The Company, upon Board approval, grants restricted shares of the Company's common stock to certain officers of the Company. The Company had 708,612 and 10,000 non-vested restricted shares outstanding as of December 31, 2003 and 2002, respectively. During 2001, the Company granted an additional 40,000 shares of restricted shares of The MIIX Group common stock, of which 10,000 shares were immediately vested, and 28,560 shares were forfeited. During 2002, 10,000 restricted shares of The MIIX Group common stock were granted, having a per share market value of $2.88 and 166,746 options to purchase shares of The MIIX Group common stock at exercise prices ranging from $1.26 to $1.80 were granted, of which 65,496 shares were immediately exercisable. During the 12 months ended December 31, 2002, 171,379 options and 10,000 shares of non-vested restricted stock were cancelled and 12,474 options were exercised with exercise prices ranging from $7.45 to $11.91. During the 12 months ended December 31, 2003, 50,005 options were cancelled and no options were exercised. The aggregate number of options for common shares issued and issuable under the Plan is currently limited to 2,250,000. All options granted have ten year terms and vest over various future periods. Options outstanding at December 31, 2003 have exercise prices ranging from $1.26 to $16.06. F-22 A summary of the Company's stock option activity and related information follows:
2003 2002 ---------------------------- ---------------------------- Weighted- Weighted- Number of Average Number of Average Options Exercise Price Options Exercise Price ----------- -------------- ----------- -------------- Options outstanding at beginning of year............................. 811,462 $8.47 828,569 $10.13 Granted during year.................... 0 0.00 166,746 1.69 Exercised during year.................. 0 0.00 12,474 11.47 Forfeited during the year.............. 3,388 7.88 80,086 9.41 Expired during the year................ 46,617 10.78 91,293 12.46 ------- ------- Options outstanding at end of year..... 761,457 $8.33 811,462 $8.47 ======= ===== ======= ===== Options exercisable.................... 661,250 $8.84 550,825 $9.38 ======= ===== ======= =====
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation to Stock-Based Employee Compensation for the years Ended December 31."
2003 2002 2001 --------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net loss, as reported $(314,725) $(115,984) $(157,644) Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 3 (301) (194) --------- ---------- --------- Pro forma net loss $(314,722) $(116,285) $(157,838) ========= ========== ========= Basic/diluted loss per share: As reported $(23.42) $(8.67) $(11.66) Pro forma (23.42) (8.69) (11.67) Estimated weighted average of the fair value of options granted $ 0.00 $ 0.49 $ 2.36
The per share weighted-average fair value of stock options was estimated at each date of grant using a Black-Scholes option pricing model using the following assumptions: risk-free interest rates ranging from 1.7% to 6.8%; dividend yields ranging from 0% to 2.7%; volatility factors of the expected market price of the Company's common stock ranging from 33.6% to 36.4%; and a three-year weighted average expected life of the options. 15. EARNINGS (LOSS) PER SHARE Basic and diluted earnings (loss) per share are calculated in accordance with SFAS Statement No. 128, "Earnings per Share." Basic and diluted loss per share for the years ended December 31, 2003, 2002 and 2001 is computed using the weighted-average number of common shares outstanding during these periods of 13,436,586, 13,385,124 and 13,524,959, respectively. The following table sets forth the computation of basic and diluted loss per share: F-23
YEARS ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 --------- --------- --------- (In thousands) Numerator for basic and diluted loss per share of common stock: Net loss before cumulative effect of an accounting change...................................... $(314,725) $(113,611) $(152,361) Cumulative effect of an accounting change, net of tax............................................. 0 (2,373) (5,283) --------- --------- --------- Net loss................................................. $(314,725) $(115,984) $(157,644) ========= ========= ========= Denominator: Denominator for basic loss per share of common stock - weighted-average shares outstanding........ 13,437 13,385 13,525 Effect of dilutive securities: Stock options and non-vested restricted stock........... 0 25 81 --------- --------- --------- Denominator for diluted loss per share of common stock adjusted - weighted-average shares outstanding............................................. 13,437 13,410 13,606 ========= ========= ========= Basic and diluted loss per share of common stock before cumulative effect of an accounting change......... $(23.42) $(8.49) $(11.27) Cumulative effect of an accounting change................... 0.00 (0.18) (0.39) --------- --------- --------- Basic and diluted loss per share of common stock............ $(23.42) $(8.67) $(11.66) ========= ========= =========
16. PREFERRED STOCK PURCHASE RIGHTS On June 27, 2001 the Company's Board adopted a Stockholder Rights Plan (the "Rights Plan") and declared a dividend of one Right for every outstanding share of common stock, par value $0.01, per share, to be distributed on July 10, 2001 to stockholders of record as of the close of business on that date. The Rights will expire on June 27, 2011 or upon the earlier redemption of the Rights, and they are not exercisable until a distribution date on the occurrence of certain specified events as defined below. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, $0.01 par value at a price of $35.00 per one-thousandth of a share, subject to adjustments. The Rights will, on the distribution date, become exercisable ten (10) days after a public announcement that a party has acquired at least 15% or commenced a tender or exchange offer that would result in any party or group owning 15% or more of the Company's outstanding shares of common stock and the acquiring party is determined by a majority of the Company's directors to be an "Adverse Person" as defined in the Rights Plan. Each holder of a Right, other than the "Acquiring Person," as defined in the Rights Plan, or "Adverse person," will in such event have the right to receive shares of the Company common stock having a market value of two times the exercise price of the Right. In the event that the Company is acquired in a merger or other business combination, or if more than 50% of the Company's assets or earning power is sold or transferred, each holder of a Right would have the right to receive common stock of the acquiring company with a market value of two times the Purchase Price of the Right. Following the occurrence of any of these "Triggering Events," any rights that are beneficially owned by an acquiring person will immediately become null and void. The Company may redeem the Rights for $0.001 per Right at any time until ten (10) days following the stock acquisition date. F-24 17. SUBSEQUENT EVENTS On September 28, 2004, the Superior Court of New Jersey entered an Order placing MIIX into rehabilitation and naming the Commissioner of the New Jersey Department as Rehabilitator with immediate and exclusive control over the business and property of MIIX. The Order provides that The MIIX Group and the Underwriter will continue to provide administrative services to MIIX pursuant to the current Management Services Agreement until terminated by the New Jersey Department after appropriate notice. The Order does not stay payment of claims for any litigation currently pending against MIIX or its insureds and does not bar claimants from filing new actions against MIIX insureds. The Order, however, prohibits persons from filing any new action or new claim directly against MIIX without permission of the Court. The Order also requires notice to and consent of the Rehabilitator for the assignment of any contract to which MIIX is a party. Reinsurers are prohibited from canceling current reinsurance agreements or making additional premium charges to MIIX under the September 28, 2004 Order of Rehabilitation. As a result of the Company no longer having control of MIIX at September 30, 2004, MIIX will be no longer be consolidated with the Company in the financial statements. The consolidated financial statements subsequent to September 28, 2004 will include The MIIX Group and its wholly owned subsidiary the Underwriter and its subsidiaries Medical Brokers, Inc., an insurance agency, Reinsurance Services, Inc. (formerly Pegasus Advisors, Inc.), an inactive reinsurance intermediary, MIIX Healthcare Group, an inactive healthcare consulting firm, and Lawrenceville Re, Ltd. ("Lawrenceville Re"), a Bermuda-domiciled reinsurance company. New Jersey insurance regulation provides that when an insurance company is deemed in a hazardous financial condition, the State may step in and assume control of all operations of the insurance company, including a provision for any shortfall in funds to pay claims. The New Jersey Department has assumed control of the operations of MIIX in rehabilitation. Because MIIX has no continuing legal obligation, the Company has made no provision for the excess of liabilities over assets of MIIX as of September 30, 2004. Accordingly, as of September 30, 2004, the Company began using the equity method of accounting for its investment in MIIX and has recorded the investment at $-0-, and the deficiency in equity of ($280.1) million that existed as of December 31, 2003, will be reversed and recognized as a gain on deconsolidation as of and for the period ended September 30, 2004. The Company has not reported the operations of MIIX as discontinued operations because the Company continues to have significant continuing involvement in the operations of MIIX through November 2004. MIIX employees continue to service, process and adjudicate claims and perform administrative services subsequent to the September 28, 2004 Order of Rehabilitation. Therefore, the Company will not record MIIX as a discontinued operation until this activity diminishes significantly. The table below provides an unaudited pro forma as if the Company deconsolidated MIIX and its wholly owned subsidiaries as of and for the year ended December 31, 2003. F-25
THE MIIX GROUP, INCORPORATED CONSOLIDATED BALANCE SHEET DECEMBER 31, 2003 (In thousands) As Reported Pro Forma ----------- --------- (unaudited) ASSETS Total investments........................................... $ 755,429 $ 5,532 Cash........................................................ 18,081 28 Reinsurance recoverable on unpaid losses.................... 425,785 0 Reinsurance recoverable on paid losses, net................. 31,874 0 Other assets................................................ 47,470 4,149 ---------- ---------- Total assets.......................................... $1,278,639 $ 9,709 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) LIABILITIES Unpaid losses and loss adjustment expenses.................. $1,218,957 $ 1,625 Funds held under reinsurance treaties....................... 292,126 0 Other liabilities........................................... 46,077 6,468 ---------- ---------- Total liabilities..................................... 1,557,160 8,093 ---------- ---------- STOCKHOLDERS' EQUITY (DEFICIENCY) Common stock................................................ 166 166 Additional paid-in capital.................................. 40,270 40,270 Retained earnings (deficit)................................. (301,402) (11,283) Treasury stock.............................................. (25,115) (25,115) Stock purchase loans and unearned stock compensation........ (2,617) (2,617) Accumulated other comprehensive income...................... 10,177 195 ---------- ---------- Total stockholders' equity (deficiency)............... (278,521) 1,616 ---------- ---------- Total liabilities and stockholders' equity (deficiency) $1,278,639 $ 9,709 ========== ========== F-26
THE MIIX GROUP, INCORPORATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 (In thousands) As Reported Pro Forma ----------- --------- (unaudited) REVENUES Net premiums earned...................................$ (26,078) $ 119 Net investment income................................. 35,930 247 Realized investment losses............................ (1,597) 0 Other revenue......................................... 7,126 11,555 --------- --------- Total revenues.............................. 15,381 11,921 --------- --------- EXPENSES Losses and loss adjustment expenses................... 270,939 (305) Underwriting and other expenses....................... 22,940 12,069 Funds held charges.................................... 42,996 2 --------- --------- Total expenses.............................. 336,875 11,766 --------- --------- Loss before income taxes.............................. (321,494) 155 Income tax benefit.................................... (6,769) (731) --------- --------- Net loss.........................................$(314,725) $ 886 ========= ========= F-27 18. UNAUDITED QUARTERLY FINANCIAL DATA The following is a summary of unaudited quarterly results of operations for 2003 and 2002:
2003 ----------------------------------------- 1ST 2ND 3RD 4TH -------- ------- ------- ------- (In thousands) Total written premiums......................... $ (1,136) $ 218 $ 256 $ 29 Net premiums earned............................ 19,860 7,277 1,989 (55,204) Net investment income.......................... 10,945 8,915 7,839 8,231 Realized investment gains (losses)............. (2,004) 4,359 2,595 (6,547) Losses and loss adjustment expenses............ 16,963 4,600 (3,844) 253,220 Net income (loss).............................. 5,240 9,419 7,034 (336,418) (1) Basic and diluted earnings (loss) per share..... $ 0.39 $ 0.70 $ 0.52 $ (25.03) ======== ======== ======== ========= Dividend per share of common stock.............. $ 0.00 $ 0.00 $ 0.00 $ 0.00 ======== ======== ======== ========= 2002 ----------------------------------------- 1ST 2ND 3RD 4TH -------- ------- ------- ------- (In thousands) Total written premiums.......................... $ 95,526 $ 6,510 $ (2,311) $ (3,516) Net premiums earned............................. 37,153 49,083 23,727 (9,743) Net investment income........................... 18,249 16,158 13,710 12,721 Realized investment gains (losses).............. (1,503) 222 (591) (1,649) Losses and loss adjustment expenses............. 81,804 54,497 21,219 38,967 Net income (loss)............................... (45,366) (6,120) 885 (65,383) Basic and diluted earnings (loss) per share..... $ (3.38) $ (0.45) $ 0.07 $ (4.89) ======== ======== ======== ========= Dividend per share of common stock.............. $ 0.00 $ 0.00 $ 0.00 $ 0.00 ======== ======== ======== =========
(1) The net loss in the fourth quarter of 2003 is due to the reserve adjustments discussed in Part I, Item 1 of this Form 10-K. F-28 SCHEDULE I SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2003 The MIIX Group, Incorporated (In thousands) AMORTIZED AMOUNT ON COST FAIR VALUE BALANCE SHEET --------- ---------- ------------- Fixed maturities: Bonds: United States government and government agencies and authorities.. $ 292,899 $ 295,788 $ 295,788 Obligations of state and political subdivisions......................... 7,795 7,695 7,695 All other corporate bonds............... 380,103 392,252 392,252 --------- ---------- ------------- Total fixed maturities............... 680,797 695,735 695,735 --------- ---------- ------------- Equity securities: Common stock: Banks, trusts and insurance companies.......................... 170 258 258 All other corporate stock............ 2,611 2,968 2,968 --------- ---------- ------------- Total equity securities.............. 2,781 3,226 3,226 --------- ---------- ------------- Short-term investments.................... 56,470 56,468 56,468 --------- ---------- ------------- Total investments......................... $ 740,048 $ 755,429 $ 755,429 ========== ========== ============= F-29 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT The MIIX Group, Incorporated Condensed Balance Sheets (In thousands, except share amounts) DECEMBER 31, ---------------------- 2003 2002 ---------- ---------- ASSETS Investments Short-term investments, at cost which approximates fair value.......................................... $ 304 $ 1,327 Investment (loss in excess of investment) in subsidiaries........................................ (271,833) 50,447 ---------- ---------- Total investments................................... (271,529) 51,774 Cash (overdraft)...................................... (73) 8 Other assets.......................................... 1,341 837 ---------- ---------- Total assets....................................... $(270,261) $ 52,619 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) LIABILITIES Due to subsidiaries................................... $ 7,626 $ 10,276 Other liabilities..................................... 634 1,077 ---------- ---------- Total liabilities.................................. 8,260 11,353 ---------- ---------- STOCKHOLDERS' EQUITY (DEFICIENCY) Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding........ 0 0 Common stock, $0.01 par per share, 100,000,000 shares authorized, 16,538,005 shares issued (2003 - 14,497,536 shares outstanding; 2002 - 13,382,173 shares outstanding) ................................ 166 166 Additional paid-in capital............................ 40,270 53,909 Retained earnings (deficiency)........................ (301,402) 13,323 Treasury stock, at cost (2003 - 2,040,469 shares; 2002 - 3,155,832 shares)............................ (25,115) (40,199) Stock purchase loans and unearned stock compensation.. (2,617) (3,662) Accumulated other comprehensive income................ 10,177 17,729 ---------- ---------- Total stockholders' equity (deficiency)............ (278,521) 41,266 ---------- ---------- Total liabilities and stockholders' equity (deficiency)..................................... $(270,261) $ 52,619 ========== ========= F-30 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) The MIIX Group, Incorporated Condensed Statements of Operations YEARS ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 --------- --------- --------- (In thousands) Net investment income....................... $ 171 $ 2,205 $ 285 Other income................................ 2,951 267 10 Realized investment losses.................. 0 (518) 0 Other expenses.............................. (3,930) (2,506) (2,371) --------- --------- --------- Loss before federal income taxes and equity in income of subsidiaries.......... (808) (552) (2,076) Tax provision (benefit)..................... (811) (3,394) 1,556 --------- --------- --------- Earnings (loss) before equity in income of subsidiaries........................... 3 2,842 (3,632) Equity in loss of subsidiaries.............. (314,728) (118,826) (154,012) --------- --------- --------- Net loss............................ $(314,725) $(115,984) $(157,644) ========= ========= ========= F-31
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) The MIIX Group, Incorporated Condensed Statements of Cash Flows YEARS ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 --------- --------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net loss.......................................... $(314,725) $(115,984) $(157,644) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Other stock based compensation.................. 2,161 50 (50) Realized investment losses...................... 0 518 0 Change in payable to subsidiaries............... (2,650) 5,863 2,035 Net change in other assets and liabilities...... (947) (2,238) 2,713 Equity in loss of subsidiaries.................. 314,728 118,826 153,315 --------- --------- -------- Net cash (used in) provided by operating activities........................... (1,433) 7,035 369 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Cash dividends received from subsidiary........... 0 2,100 0 Change in short-term investments, net............. 1,023 (1,219) 23 --------- --------- -------- Net cash provided by investing activities............................ 1,023 881 23 --------- --------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Employee stock purchase loan repayments........... 414 1,877 747 Purchase of treasury stock........................ (85) (730) 0 Cash dividends paid to stockholders............... 0 0 (2,704) Notes payable and other borrowings................ 0 (9,050) 1,550 --------- --------- -------- Net cash provided by (used in) financing activities........................... 329 (7,903) (407) --------- --------- -------- Net change in cash................................ (81) 13 (15) Cash (overdraft), January 1....................... 8 (5) 10 --------- --------- -------- Cash (overdraft), December 31..................... $ (73) $ 8 $ (5) ========= ========= ======== F-32
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) The MIIX Group, Incorporated Notes to Condensed Financial Statements December 31, 2003 1. BASIS OF PRESENTATION In The MIIX Group's condensed financial statements, investment in subsidiaries is stated at cost plus equity or loss in undistributed earnings of subsidiaries since the date of acquisition. The MIIX Group's condensed financial statements should be read in conjunction with the consolidated financial statements, in particular see Notes 4, 9 and 17. F-33 EX-10.86 2 tex10_86-3883.txt EX-10.86 LEASE AGREEMENT BETWEEN LANDLORD: GORDON LAWRENCEVILLE REALTY ASSOCIATES, L.L.C., a New Jersey Limited Liability Company 1436 East Elizabeth Avenue Linden, N.J. 07036 TENANT: NEW JERSEY STATE MEDICAL UNDERWRITERS, INC., a New Jersey corporation Two Princess Road Lawrenceville, NJ 08648 DATED: November 25, 2003 PREMISES: Suite No. 2 consisting of approximately 33,432 s.f. of net leasable office space on the first and second floors and approximately 1,568 s.f. of warehouse space (the "Premises") located at the 71,733 +- s.f. office building (the "Building") on the premises located in the Township of Lawrence, County of Mercer, State of New Jersey, described as Lot 1 in Block 3901 on the Tax Map of the Township of Lawrence (the "Property"). The Property and the Building are hereinafter collectively referred to as the "Project". The Premises shall expressly exclude any and all rights to use any space which is located within any other tenant's premises. ATTACHMENTS AS FOLLOWS: 1. Exhibit A - Building Plan Indicating Tenant's Premises 2. Exhibit B - Intentionally Deleted 3. Exhibit C - Landlord/Tenant Work Letter 4. Exhibit D - Floor Load Rendering 5. Exhibit E - Hazardous Substances Used, Generated, Released, Processed, Transported, Handled, Treated, Stored or Disposed of by Tenant. 6. Exhibit F- Intentionally Deleted 7. Exhibit G- Intentionally Deleted 8. Exhibit H- Parking Plan and Pylon Sign Detail THIS LEASE AGREEMENT (THE "LEASE"), made as of this ____ day of ________, 2003, by and between GORDON LAWRENCEVILLE REALTY ASSOCIATES, L.L.C., a New Jersey limited liability company, having an address at 1436 East Elizabeth Avenue, Linden, New Jersey 07036 (the "Landlord"); and NEW JERSEY STATE MEDICAL UNDERWRITERS, INC., a New Jersey corporation, having an address at Two Princess Road, Lawrenceville, New Jersey 08648 (the "Tenant"). The Effective Date of this Lease shall be the date of the Closing on Landlord's purchase of all the right, title and interest in and to the Property and delivery of the deed to the Property to Landlord. PARAGRAPH 1ST - PREMISES The Landlord does hereby lease to Tenant and the Tenant does hereby rent from Landlord, Suite No. 2, consisting of approximately 33,432 s.f. of net leasable office space on the first and second floors, and 1,568 s.f. of warehouse space (the "Premises") in the Building located on the Property. The Premises shall be measured by the Landlord's architect in accordance with Paragraph 50 of this Lease. Until such time as the Landlord's Work described in the Landlord/Tenant Work Letter is completed, it is understood that Tenant may remain in the space which it occupied at the time of execution of this Lease; PROVIDED, HOWEVER, that all rent is paid in accordance with this Lease and the insurance and indemnity provisions in this Lease shall apply. In addition, Tenant shall cooperate to the fullest extent possible to complete a transition into occupancy of the Premises only within seven (7) to fourteen (14) days of the issuance of any required Certificate of Occupancy for the Premises or any part thereof. Tenant shall have access to the Premises 24 hours a day, 7 days a week; however, Tenant understands that access may be limited due to the initial construction. Landlord shall not be responsible for any limitation of access for reasons out of its control, including, but not limited to, off-site limitations or bad weather. PARAGRAPH 2ND - TERM The term of the Lease shall be five (5) years (the "Lease Term"), commencing on the Effective Date (the "Commencement Date") and terminating on that date which is the fifth anniversary of the Commencement Date (the "Termination Date"). PARAGRAPH 3RD - USE The Premises are to be used and occupied only and for no other purpose than a business office and limited warehouse, in the specified square footage, subject to the restrictions specified in Paragraph 49th of this Lease. The Landlord represents that the Tenant's use as an office is permitted under the Township of Lawrence Zoning Code. The Tenant understands and acknowledges that it is the Landlord's intent to establish the Property and the Building thereon in the future as a medical office building, and the Landlord will undertake any such requirements in conjunction with such conversion. Landlord acknowledges that Tenant will be utilizing the conference rooms and cafeteria that are located in the space of the Medical Society of New Jersey pursuant to a separate written agreement to be entered into between Tenant and the Medical Society of New Jersey, which rights shall not run with this Lease but for Permitted Assignees and Sublessees, and pursuant to which, Landlord shall not in any way be bound, obligated or responsible, and to or upon which this Lease shall not be subject or conditioned. PARAGRAPH 4TH PAYMENT OF RENT The Tenant agrees to pay the basic rent set forth immediately hereinbelow (the "Basic Rent"). It is understood that the annual and monthly net rental amounts are estimated and that the actual amounts are a function of the measurement results conducted pursuant to Paragraph 50th. The Basic Rent shall be due and payable monthly, in advance, on the first (1st) day of each month of the Lease Term, as specified below, subject to no setoff or deduction of any kind or nature whatsoever in addition to all other obligations hereinafter provided. YEAR RENT ANNUAL MONTHLY RENTAL PER S.F. NET RENTAL NET RENTAL - ------ -------- ---------- ---------- 1st Year $15.00*(subject to the stated decrease adjustment set forth below) $ 7.00 $ 10,976 $ 914.66 2nd Year $15.00 $501,480 $41,790.00 $ 7.00 $ 10,976 $ 914.66 3rd Year $15.00 $501,480 $41,790.00 $ 7.00 $ 10,976 $ 914.66 4th Year $15.00 $501,480 $41,790.00 $ 7.00 $ 10,976 $ 914.66 5th Year $15.00 $501,480 $41,790.00 $ 7.00 $ 10,976 $ 914.66 The Basic Rent shall be $13.50 per square foot for office space and $7.00 per square foot for warehouse space from the Commencement Date until that date which is six (6) months after the Effective Date (the "First Stage"). The Basic Rent shall be $14.50 per square foot for office space and $7.00 per square foot for warehouse space from the first day after the end of the First Stage until such time as each item of Landlord's Work as listed on the Landlord/Tenant Work Letter attached hereto and made a part hereof is certified by Landlord's Architect as being substantially complete (the "Second Stage"). The First Stage and the Second Stage, collectively, shall not exceed one (1) year, such that commencing on a date not later than the first day of the second year of this Lease, the Base Rent shall be $15.00 per square foot for office space and $7.00 per square foot for warehouse space. If the Landlord's Architect does not issue a certificate that the Landlord's Work in the Landlord/Tenant Work Letter is substantially complete in the aggregate, then the Basic Rent will remain at $14.50 per square foot, and not increase to $15.00 per square foot for each day that the Landlord's Architect is unable to issue a certificate as to substantial completion. It is the purpose and intent of Landlord and Tenant that the net rental shall be absolutely net to Landlord so that the Lease shall yield, net to Landlord, the net rent herein specified in each year during the Lease Term, free of any charges, assessments or impositions of any kind charged, assessed, or imposed on or against the Project, and without abatement, deduction, or setoff by Tenant, except as specifically otherwise provided, and Landlord shall not be expected or required to pay any such charge, assessment or imposition, or be under any obligation or liability except as herein expressly set forth, and that all costs, expenses and obligations of any kind relating to the maintenance and operation of the Project, including all alterations, repairs and replacements as hereinafter provided, which may arise or become due during the Lease Term, shall be paid by Tenant, and Landlord shall be indemnified and held harmless by Tenant from and against such costs, expenses and obligations, except as may be herein provided. If the Commencement Date occurs on a day other than the first day of a calendar month, the rent for such calendar month shall be pro-rated for such partial month. PARAGRAPH 5TH - OPTION TO EXTEND TERM Tenant shall have the option to extend this Lease beyond the Termination Date on the following terms and conditions: (a) Provided Tenant has fully and faithfully performed all of the terms and conditions of this Lease, Tenant may extend the term of this Lease for one (1) five (5) year term (the "Renewal Term"). The Renewal Term shall begin on the day immediately following the Termination Date. However, if, on the Termination Date, the Tenant is in default beyond any grace period provided in this Lease or in the performance of any of the terms or provisions of this Lease, the option to exercise the Renewal Term shall be null and void. All the terms, covenants, and provisions of the Lease Term shall apply to the Renewal Term, except that the monthly rental rate shall be determined as hereinafter provided. (b) Tenant may exercise its option for the Renewal Term by giving Landlord notice of its intention to do so not later than one hundred twenty (120) days prior to the Termination Date, and not sooner than one hundred eighty (180) days prior to the Termination Date. To constitute effective notice of an intention to exercise the Renewal Term, the notice must be sent by Certified or Registered Mail, or by reputable overnight carrier to Landlord, at the address provided hereinabove and must be postmarked no later than the latest date provided in this Paragraph 5th for Tenant's exercise of the Renewal Term. PARAGRAPH 6TH - DETERMINATION OF MONTHLY RENTAL FOR RENEWAL TERM The monthly rental rate for each year of the Renewal Term shall be as set forth below. It is understood that the annual and monthly net rental amounts are estimated and that the actual amounts are a function of the measurement results pursuant to Paragraph 50th. FIRST RENEWAL RENT ANNUAL MONTHLY TERM PER S.F. NET RENTAL NET RENTAL - ---- -------- ---------- ---------- 6th Year $16.25 $543,270.00 $45,272.50 $ 7.00 $ 10,976.00 $ 914.00 7th Year $16.25 $543,270.00 $45,272.50 $ 7.00 $ 10,976.00 $ 914.66 8th Year $16.25 $543,270.00 $45,272.50 $ 7.00 $ 10,976.00 $ 914.66 9th Year $16.25 $543,270.00 $45,272.50 $ 7.00 $ 10,976.00 $ 914.66 10th Year $16.25 $543,270.00 $45,272.50 If the beginning of the Renewal Term occurs on a day other than the first (1st) day of a calendar month, then the rent for such calendar month shall be pro-rated for such partial month. PARAGRAPH 7TH - REPAIRS AND CARE Tenant shall take good care of the Premises and, except as expressly provided in this paragraph below, shall make, at Tenant's sole cost and expense, all maintenance repairs, including, but not limited to, painting and decorating, and will maintain the Premises in good condition and state of repair, and on the Termination Date, expiration of the Renewal Term or other expiration of the Lease, shall deliver the Premises in good order and condition, except for reasonable wear and tear, casualty and damage by the elements, not resulting from the neglect or fault of the Tenant. Tenant shall neither encumber nor obstruct the sidewalks, driveways, yards, entrances, hallways or stairs of the Project. Tenant shall be responsible, at its own cost and expense, for any cleaning or janitorial services for the Premises. Tenant shall also be responsible, at its own cost and expense, for the care and maintenance of the elevator between the first and second floors of the Premises, which shall include keeping in effect a maintenance contract for such elevator. Tenant represents that, to its knowledge, the elevator is currently in good working order and has no knowledge of any repairs being required during its occupancy pursuant to its lease with the Medical Society of New Jersey other than ordinary maintenance, and has no knowledge or belief that the elevator is in any state of disrepair at the time of execution of this Lease. Landlord represents to Tenant that, to Landlord's knowledge, the elevator is in good working order on the Effective Date of this Lease. In case of the destruction of or any damage to the glass in the Premises, or the destruction of or damage of any kind whatsoever to the Premises, caused by the carelessness, negligence or improper conduct on the part of Tenant or Tenant's agents, employees, guests, licensees, invitees, subtenants, assignees or successors, Tenant shall repair the said damage or replace or restore any destroyed parts of the Premises, as speedily as possible, at the Tenant's sole cost and expense. Landlord shall be responsible for structural, gutters, downspouts and roof maintenance repairs for the Building and all electrical system, plumbing system, HVAC system and fire sprinkler repairs throughout the Building during the Lease Term and the Renewal Term, except that (1) Tenant shall be responsible for the cost of such repairs if damage is caused by Tenant's officers, agents, servants, employees, invitees or licensees, and (2) Tenant shall be responsible for making, at its own expense, electrical and plumbing maintenance and repairs within the Premises. The Landlord shall also make any repairs necessitated by water seepage or by other causes not under Tenant's control. Landlord shall also be responsible for the maintenance of the common areas, including exterior elements, which shall be maintained consistent with a first class office building. Notwithstanding anything herein to the contrary, Tenant shall be exclusively responsible for any damage or repairs to the cooling system or apparatus located on the roof, which services Tenant's computer room, and for any damage to any portion of the Building that may result from the malfunctioning or disrepair of said cooling unit. PARAGRAPH 8TH - COMPLIANCE WITH LAWS, ETC. Landlord represents to Tenant that, at the Commencement Date, except with respect to work that may be included within the Landlord/Tenant Work Letter, the Premises is in material compliance with all requirements of all applicable governmental laws, order, rules, regulations, ordinances or other directives or applicable codes of any nature of all federal, state, county and municipal authorities and Board of Fire Underwriters.. Likewise, Tenant represents to Landlord that, at the date of execution of this Lease, Tenant has no knowledge or belief that there are any material violations of any of the aforesaid standards with respect to the Premises. The Landlord shall make any necessary repairs or changes to cause the Project to comply with applicable governmental and insurance requirements. Except for those items for which Landlord is responsible as expressly set forth in the Landlord/Tenant Work Letter, the Tenant shall make all repairs and changes necessary to comply with applicable laws, ordinances, orders or regulations of any federal, state, county or municipal authority now or hereafter in effect, with all requirements of the Board of Fire Underwriters or similar authority, and with all requirements of any insurance companies which have issued or are about to issue policies insuring the Premises, if such repairs or changes are made necessary by the nature of the Tenant's use of the Premises and/or by any work described in the Landlord/Tenant Work Letter. The Landlord represents that Landlord's Work and its impact upon the Premises shall comply with all applicable laws; Landlord makes no representations regarding compliance with respect to any work performed by or to be performed by Tenant or that which is Tenant's responsibility under this Lease. PARAGRAPH 9TH - FIRE AND OTHER CASUALTY In case of fire or other casualty, the Tenant shall give immediate notice to Landlord. If the Premises are partially damaged by fire, the elements or other casualty, the Landlord shall repair same as speedily as practicable, but the Tenant's obligation to pay rent hereunder will not cease; PROVIDED, HOWEVER, that the Tenant is practicably able to continue using the Premises until said repairs are complete. If, in the reasonable opinion of Landlord, the Premises, or any portion thereof, are so extensively and substantially damaged so as to render same untenantable, then the payment of rent will be abated in proportion to the extent that Tenant is unable to use such damaged portion of the Premises for a business office or warehouse space, as the case may be, until such time as the Premises are made tenantable by the Landlord. However, if, in the reasonable opinion of the Landlord, the Premises are totally destroyed or so extensively and substantially damaged as to require practically a rebuilding of same, then the rent will be paid up to the time of such destruction and from that point forward this Lease shall be terminated. In no event, however, shall the preceding three (3) sentences become effective or applicable if the fire or other casualty and damage are as a result of the carelessness, negligence or improper conduct of the Tenant or Tenant's agents, employees, guests, licensees, subtenants, assignees or successors. In such case, the Tenant's liability for the payment of rent and the Tenant's obligation to perform all of the covenants, conditions and terms of this Lease shall continue and the Tenant will be liable to the Landlord for the damage and loss suffered by Landlord to the extent that Landlord is not covered under any insurance policy for such damage or loss. If the Tenant was insured against any of the risks covered herein, then the proceeds of such insurance shall be paid over to the Landlord to the extent of the Landlord's costs and expenses to make the repairs hereunder, and such insurance carriers will have no recourse against the Tenant for reimbursement to the extent such provisions do not void or effect such coverage. If within one (1) year prior to the expiration of the Lease Term or the Renewal Term, as applicable, more than fifty (50%) percent of the Premises shall be damaged or destroyed by fire or other casualty of any kind or nature, foreseen or unforeseen, then Tenant or Landlord may terminate this Lease by providing written notice to the other party within thirty (30) days of any fire or other casualty. In the event of a fire or other casualty, the time for such repairs or restoration shall not exceed one hundred fifty (150) days after such fire or other casualty. Rent and all other charges shall abate from the date of such damage until such time as the Landlord has substantially restored or repaired the Premises and the Tenant can reasonably resume its business operations and the Premises shall have a Certificate of Occupancy. If the time for such repairs or restoration exceeds one hundred fifty (150) days, then in that event, Tenant shall have the right to terminate this Lease by providing sixty (60) days advance written notice to Landlord. PARAGRAPH 10TH - INSTALLATION OF ALTERATIONS/IMPROVEMENTS BY TENANT Tenant may make non-structural alterations, additions or improvements to the Premises that Tenant deems necessary or desirable. All such alterations, additions or improvements shall be in accordance with Paragraph 33rd of this Lease. Any structural alterations, additions or improvements shall be made only with Landlord's prior written consent. Said alterations are to be performed by Tenant at Tenant's expense. Notwithstanding subparagraph 33(g) below, if Landlord requires Tenant to do so, Tenant shall restore the Premises to the condition existing prior to such alterations, additions or improvements, reasonable wear and tear excepted. Should Tenant wish to have Landlord waive such restoration requirement with respect to any specific alteration, addition or improvement, Tenant shall request, in writing, Landlord's waiver prior to performing any such alteration, addition or improvement, which waiver may be withheld in Landlord's sole discretion. Notwithstanding anything contained to the contrary herein, Landlord shall not unreasonably withhold, delay or condition its consent for any alterations proposed and done by Tenant. Landlord consents to the alterations and improvements set forth in the Landlord/Tenant Work Letter attached to this Lease as Exhibit "C" as well as the initial construction of a large conference room within the Premises, and Landlord waives such restoration requirement with respect to such work. PARAGRAPH 11TH - INSPECTION AND REPAIR The Tenant agrees that the Landlord and the Landlord's agents, employees or other representatives, shall have the right to enter into and upon the Premises or any part thereof, at all reasonable hours, for the purpose of examining the same or making such repairs or alterations therein as may be necessary for the safety and preservation thereof. The preceding sentence shall not be deemed to be a covenant by the Landlord nor be construed to create an obligation on the part of the Landlord to make such inspection or repairs, and no liability shall arise from the failure of Landlord to inspect. Except in the case of emergencies, the Landlord shall provide the Tenant with forty eight (48) hours prior notice, during reasonable business hours of the Tenant, of said inspection or repairs. Said inspection or repairs shall not unreasonably interfere with Tenant's business operations. PARAGRAPH 12TH - RIGHT TO EXHIBIT The Tenant agrees to permit the Landlord and the Landlord's agents, employees or other representatives to show the Premises to persons wishing to rent same, and the Tenant agrees that on or after six (6) months prior to the expiration of the Lease Term or the Renewal Term, as applicable, the Landlord or the Landlord's agents, employees or other representatives shall have the right to place notices on the front of the Premises or any part of the Project offering the Premises for rent, and the Tenant hereby agrees to permit such notice to remain thereon without hindrance or molestation, provided such notice does not obstruct Tenant's signage or access to the Premises. Notwithstanding anything contained to the contrary herein, the Landlord shall not place any sign or notice on the Premises or any part thereof while the Tenant remains in possession of the Premises, provided Tenant is not in default of any of its obligations pursuant to the terms of this Lease. PARAGRAPH 13TH - SIGNS Landlord shall use its best efforts to obtain all required approvals for the installation, at its own cost and expense, of one (1) free-standing pylon sign identifying the Building as per Exhibit H annexed hereto. Identification of Tenant on such sign shall be permitted as set forth on Exhibit H attached hereto. Landlord will relocate the one existing sign above the entrance to Tenant's existing leased premises, at Landlord's expense, to above the relocated main entrance to the Premises, subject to obtaining any approvals that may be required from the Township of Lawrence. Landlord shall have the right to amend the signage at its sole discretion, provided that it does not obstruct Tenant's signage. In addition, in accordance with the building standard established by Landlord, Landlord shall install, at its own cost and expense, building directories in any common lobby and on each floor within the Building on which more than one tenant is located, which specifically identify the Tenant's and other tenants' locations within the Building, and shall install a sign outside of the Premises, within the Building, identifying Tenant. At Tenant's sole expense, Tenant may install additional signs within the Building only (but NOT at any other tenant's exclusive entrance or lobby area), provided that such signage shall not cause damage to the Premises within the Building. Prior to any installation, Tenant shall provide Landlord with detailed drawings of such sign installation for approval by Landlord. If the Landlord or the Landlord's agents, employees or representatives deem it necessary to remove any such signs in order to paint or make any repairs, alterations or improvements in or upon the Premises or any part thereof, the signs may be removed by Landlord, but will be replaced, at the Landlord's sole cost and expense, when the said repairs, alterations or improvements are completed. Tenant shall remove such additional signs, if any, at the expiration of the Lease Term, or a Renewal Term, as applicable, and shall restore the Premises to its original condition. Tenant shall indemnify and hold Landlord harmless with respect to any claims for damaged persons or property arising out of the installation and maintenance of signs installed by Tenant. PARAGRAPH 14TH - NON-LIABILITY OF LANDLORD Landlord shall have no responsibility or liability to the Tenant for any damage to the contents of the Premises for any reason whatsoever and in the event the Tenant elects to obtain insurance on the contents of the Premises said insurance is to provide for a Waiver of Subrogation as to the Landlord. Landlord shall not be liable for any damage or injury which may be sustained by the Tenant or any other person, as a consequence of the failure, breakage, leakage or obstruction of the water, plumbing, steam, sewer, waste or soil pipes, roof, drains, leaders, gutters, valleys, down-spouts or the like or of the electrical, gas, power, conveyor, refrigeration, sprinkler, air-conditioning or heating systems, elevators or hoisting equipment; or by reason of the elements; or resulting from the carelessness, negligence or improper conduct on the part of any other tenant, the Landlord, or the Landlord's, Tenant's or any other tenants' agents, employees, guests, licensees, invitees, subtenants, assignees or successors; or attributable to any interference with, interruption of or failure, beyond the control of the Landlord, or any services to be furnished or supplied by the Landlord, except if caused solely by the gross negligence or willful misconduct of the Landlord. Notwithstanding anything contained to the contrary in this Lease, the Landlord shall be liable for any damage or injury resulting from the gross negligence or intentional acts of Landlord. Tenant acknowledges that Landlord shall have no responsibility whatsoever with respect to any responsibilities or obligations of the landlord under the lease made by and between Tenant and the Medical Society of New Jersey dated as of October 1, 2000, as amended, and hereby expressly releases Landlord from any and all responsibility with respect to Article 20 thereunder. PARAGRAPH 15TH - MORTGAGE PRIORITY This Lease will not be a lien against the Project with respect to any mortgages that may hereafter be placed upon the Project. The recording of such mortgage or mortgages will have preference and precedence and be superior and prior in lien to this Lease, irrespective of the date of recording and the Tenant agrees to execute any instruments, without cost, which may be deemed necessary or desirable, to further effect the subordination of this Lease to any such mortgage or mortgages. A refusal by the Tenant to execute such instruments will give the Landlord the option to terminate this Lease, and the Lease Term and the Renewal Term are expressly limited accordingly. Tenant's obligation to subordinate to financing is conditioned upon the Landlord's mortgagee's agreement, in a commercially reasonable form, not to disturb the leasehold. PARAGRAPH 16TH - SECURITY DEPOSIT On the Effective Date of this Lease simultaneously with the Closing, Tenant shall deposit in good funds with the Landlord the sum equal to six (6) months rent as security for the payment of rent hereunder and the full and faithful performance by the Tenant of the covenants and conditions of the Tenant under this Lease. Said sum will be returned to the Tenant, without interest, after the expiration of the Lease Term or Renewal Term, as applicable, provided that Tenant has fully and faithfully performed all of the covenants and conditions of the Lease and is not in arrears in the payment of rent. During the Lease Term and the Renewal Term, if applicable, the Landlord may, if Landlord so elects, have recourse to such security, to make good any uncured default by the Tenant, in which event Tenant shall, on demand, promptly restore said security to its original amount. Liability to repay said security to Tenant will run with the reversion and title to the Project, whether any change in ownership thereof be by voluntary alienation or as the result of judicial sale, foreclosure or other proceedings, or the exercise of a right of taking or entry by any mortgagee. Landlord will assign or transfer said security, for the benefit of Tenant, to any subsequent owner or holder of the reversion or title to the Project, in which case the assignee will become liable for the repayment thereof as herein provided, and the assignor will be deemed to be released by Tenant from all liability to return such security. This provision will be applicable to every alienation or change in title and will not be deemed to permit Landlord to retain the security after termination of the Landlord's ownership of the reversion of title. Tenant may not mortgage, encumber or assign said security without the advance written consent of Landlord, which may be withheld in Landlord's absolute discretion. In the event that Tenant effectively exercises its right to renew pursuant to Paragraph 5th of this Lease, Landlord agrees to reduce the security deposit to that sum which is equal to three (3) months rent for the Renewal Term. In the event that all or any portion of the Security Deposit is due to Tenant either at the expiration of the Lease Term or Renewal Term, as the case may be, Landlord will return that portion of the Security Deposit which is due to Tenant within thirty (30) days of the expiration of the Lease Term or Renewal Term, as the case may be; however, in the event Tenant believes that any amount due to Tenant remains unpaid after said thirty-day period, Tenant shall give prompt written notice to Landlord of same, and Landlord shall have ten (10) days from receipt of Tenant's written notice to return any portion of the Security Deposit which is due to Tenant. The failure of Tenant to provide such notice to Landlord shall not be a waiver of Tenant's right to receive any refund which is due to Tenant under this provision. PARAGRAPH 17TH - REAL ESTATE TAXES As additional rent, Tenant shall pay to Landlord its Proportionate Share (as defined in Paragraph 19th) of real estate taxes and assessments with respect to the Property which are assessed by the Township of Lawrence or such other governmental entity, as the case may be ("Real Estate Taxes"). Tenant shall pay to Landlord on the first day of each and every month of the Lease Term or Renewal Term, together with the Base Rent, that amount which is one-twelfth of Tenant's Proportionate Share of the annual Real Estate Taxes. The amount of Tenant's monthly payment for Real Estate Taxes for the ensuing year shall be adjusted annually as of January 1st of such year using as a base the preliminary tax bill for such year and projecting said amount over that full year. Within ninety (90) days after the end of each calendar year, Landlord shall furnish to Tenant a statement showing a reconciliation of the previous year's Real Estate Taxes billing and Tenant's payments. In the event that the total amount of Real Estate Taxes paid by Tenant for the previous calendar year was deficient, then Tenant shall pay the amount of such deficiency to Landlord on the due date of the next monthly rental installment which shall not be less than thirty (30) days after receipt by Tenant of such written statement from Landlord. In the event the estimated monthly payments are in excess of actual Real Estate Taxes due and payable for said period, then the amount of such overpayment shall be credited to the next monthly installment or installments of Tenant's Proportionate Share of Real Estate Taxes until fully exhausted. If the amount paid is in excess of the Real Estate Taxes payment due from Tenant through the end of the term of the Lease, Landlord will reimburse Tenant for the excess within thirty (30) days of the expiration of the term of the Lease. Subject to the aforesaid proportionate payment by Tenant to Landlord pursuant to this Paragraph 17th, Landlord shall pay to the taxing authority all Real Estate Taxes relative to the Project. PARAGRAPH 18TH - INSURANCE COVERAGE AND AMOUNT (a) Tenant covenants and agrees to pay Landlord as additional rent during the Lease Term and the Renewal Term, as applicable, its pro rata share, to be calculated pursuant to Paragraph 19th, of premiums for insurance to be procured in the first instance by Landlord, insuring Landlord, the coverage to be as follows: (1) Insurance on the Building and Building equipment, fixtures, and appurtenances, against all loss and damage, including, but not limited to, coverage by an all risk form of insurance policy with agreed amount endorsement and replacement cost endorsement, in an amount no less than one hundred (100%) percent of the full replacement value thereof (exclusive of cost of foundation, excavation and land) from time to time; (2) Rent insurance covering the risks described in Sub-paragraph (1) above in an amount equal to the Basic Rent and additional rent payable for one year; (3) Provide, keep and maintain in force, if and when obtainable, at reasonable costs and on reasonable terms, and generally carried on buildings of the type to be leased hereunder, war risks and nuclear damage, as well as flood and earthquake insurance for the full replacement value of the Building if such insurance is required by any institutional/commercial first mortgagee of the Project; (4) Provide any additional insurance coverages as may be reasonably required from time to time by any institutional first mortgagee of the Project; and (5) Comprehensive general public liability insurance against claims arising out of ownership, operation and control of the Project as to liability of the Landlord in limits not less than ten million ($10,000,000.00) dollars combined single limit arising out of one occurrence. The Landlord may insure its liability under its blanket comprehensive general liability policy and umbrella liability policy, and the Tenant will reimburse the Landlord for the Tenant's pro rata share of the premium. (b) Tenant's pro rata share of insurance premiums shall be calculated in accordance with Paragraph 19th of this Lease. In addition to the premiums to be paid as aforesaid by Tenant, in the event of loss as a result of an insured casualty, any deductible amount on the policy coverage in question shall be paid by Tenant to the extent of its pro rata share of the premium responsibility calculated as aforesaid.. Landlord agrees that the deductible amount for any policy shall not exceed five thousand ($5,000.00) dollars. Tenant shall not be responsible for any deductible if Tenant has no liability for the insured casualty. (c) On an annual basis, and one additional time per year if requested by Tenant in writing, Landlord shall furnish to Tenant statements with calculations of the actual premiums paid by the Landlord for the coverage aforesaid, and the pro rata share thereof which is Tenant's responsibility under this Lease. (d) INSURANCE PROCURED BY TENANT. (1) Tenant covenants and agrees to provide on or before the earlier of (i) the Commencement Date; or (ii) Tenant's entering upon the Premises for the purpose of doing all or any part of Tenant's work, and to keep in force during the Lease Term and the Renewal Term, as applicable, comprehensive general liability insurance relating to the Premises and its appurtenances on an occurrence basis, including, but not limited to, contractual liability in connection with Tenant's indemnity of Landlord herein, with minimum limits of liability in the amount of one million ($1,000,000.00) dollars in respect of bodily injury or death and/or property damage combined. (2) Tenant covenants and agrees to provide insurance coverage of any and all trade fixtures and personal property (including, but not limited to any furniture, machinery, goods or supplies) of Tenant, which Tenant may have upon or within the Premises. (3) Tenant covenants and agrees that the aforesaid liability insurance coverage shall be issued in the name of Tenant and shall be written by one or more responsible insurance companies reasonably satisfactory to Landlord and satisfactory to Landlord's mortgagee(s), in form reasonably satisfactory to Landlord and satisfactory to Landlord's mortgagee(s); all such insurance may be carried under a blanket policy covering the Premises or any other of Tenant's facilities. The minimum limits of such insurance shall in no way limit or diminish Tenant's liability pursuant to Paragraph 33rd of this Lease, and Tenant shall deliver to Landlord a Certificate of Insurance, naming Landlord as an additional insured, to show compliance with its obligations hereunder prior to the Commencement Date and thereafter at least thirty (30) days prior to the expiration of each policy, together with reasonably satisfactory evidence of the payment of premiums thereof. (e) The limits of all insurance contemplated in this Lease shall be subject to change at any time and from time to time after the Commencement Date, upon ten (10) days advance written notice to Tenant, as any mortgagee holding a security interest in the Property may deem the same reasonably necessary for adequate protection. If the percentage increase is in excess of fifty (50%) percent, Tenant shall have the right to terminate this Lease upon one hundred twenty (120) days notice to Landlord, but within said notice period, shall obtain and maintain such insurance as may be required by Landlord or its mortgagee(s). (f) Tenant agrees, at its own cost and expense, to comply with all reasonable requirements of the insurance carriers providing the insurance coverage in force pursuant to the provisions hereof and to the applicable sections of the "National Fire Codes" as published by the National Fire Protective Association. If, at any time, and from time to time, as a result of or in connection with any failure by Tenant to comply with the foregoing sentence or any act of omission or commission by Tenant, its employees, agents, contractors or licensees, or as a result of or in connection with the use to which the Premises are put (notwithstanding that such use may be for the purposes herein permitted or that such use may have been consented to by Landlord) the fire insurance premium(s) applicable to the Premises, or the Building in which same are located, or to any other premises in the Building (including rent insurance relating thereto) shall be increased as a result of such act, use, or occupancy, Tenant agrees that it will pay to Landlord, on demand, as additional rent, such portions of the premiums for all fire insurance policies in force with respect to the Building of the Landlord of which the Premises are a part (including rent insurance relating thereto) as shall be attributable to such act, use or occupancy. (g) Landlord shall not be liable for any damage by fire or other peril in the coverage afforded by the Standard All Risk Policy (whether or not such coverage is in effect), no matter how caused, it being understood that the Tenant will look solely to its insurer for reimbursement. Tenant shall not be liable for any damage by fire or other peril included in the coverage afforded by the Standard All Risk Policy (whether or not such coverage is in effect), no matter how caused, it being understood the Landlord will look solely to its insurer for reimbursement, except as set forth in Paragraph 9th. Each party, as applicable, shall obtain a Waiver of Subrogation Endorsement, if necessary, to permit the Waiver of Subrogation and mutual release as set forth herein in connection with any applicable insurance policy carried by it. PARAGRAPH 19TH - OBLIGATION OF TENANT FOR COMMON OPERATING AND MAINTENANCE EXPENSES In addition to all other obligations imposed upon Tenant under the terms of this Lease, Tenant shall be responsible for Tenant's pro rata share of all common operating and maintenance expenses for the Project in which the Premises are located during the Lease Term and the Renewal Term, as applicable, including, but not limited to, the following ("Common Area Maintenance Charges"); Site lighting, including cost of electricity in the parking lot and other common areas; maintenance and repairs and replacements of fixtures and bulbs in the parking lot and other common areas; insurance premiums for insurance coverage, as specified in Paragraph 18th of this Lease, maintained by Landlord, including, but not limited to, public liability, property damage, fire insurance with extended coverage and vandalism and rental loss; landscaping, gardening, grass cutting, leaf removal, planting, and maintenance replanting shrubbery, trees and other landscape improvements at the Property; stand-by sprinkler charges; elevator service for common elevator(s) and maintenance charges therefor; paving maintenance, repairs and striping; trash and refuse removal (except medical waste); recycling charges; common water charges (unless billed separately to each Tenant); sewer charges (unless billed separately to each Tenant); painting and decorating in common areas; policing and regulating automobile and pedestrian traffic; sanitary control; extermination; security, if any, for the Project; all utilities, including heating, ventilating and air-conditioning relating to common areas, janitorial service and maintenance relating to common area; cost of personnel relating to maintenance and operation of common areas, including salaries, fringe benefits, taxes, and workmen's compensation insurance; management fees; all HVAC system service, maintenance and repair charges; and all other costs relating to the maintenance and operation of the common areas, but not including debt service. In the event there are capital costs for such items as parking lot re-paving, and/or HVAC equipment replacement, and said costs exceed Twenty-Five Thousand ($25,000.00) dollars in any one (1) year, the costs for same shall be included in the common operating and maintenance expenses but said costs shall be amortized and charged over a seven (7) year period. Common operating and maintenance costs to which this provision may be applicable shall not include leasing commissions, structural repairs for which the Landlord is responsible, depreciation interest, points and fees on and amortization of mortgages, franchise, income and other such taxes based upon the income of Landlord, provided the same shall not have been levied as a substitute for real property taxes and shall not include any items otherwise constituting such expense to the extent payment therefor is received from or payable by another tenant of the Building, or any costs associated with preparing, improving or altering space for any leasing or re-leasing of any space within the Building, costs incurred by Landlord for the repair or damage to the Building to the extent that Landlord is reimbursed by insurance proceeds, attorney's fees in connection with the negotiation and preparation of leases with prospective tenants or other occupants of the Building, costs incurred by Landlord due to a violation by any other tenant of the terms and conditions of its lease, utility costs for which any tenant directly pays, costs for which Landlord has been compensated, taxes or other penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments when due, and costs incurred curing a violation of environmental laws regarding the storage, use or disposal of hazardous materials or substances unless such violation or environmental laws are caused by Tenant. Notwithstanding anything contained to the contrary provided herein, however, it is agreed that Tenant will not be charged for any maintenance and repairs to the extent the same are covered by written guarantees or written warranties covering new construction and new equipment. Within ninety (90) days after the end of each calendar year, Landlord shall furnish to Tenant a written statement (the "CAM Statement") showing in reasonable detail the relevant information concerning the calculation and determination of Landlord's operating and maintenance expenses as hereinabove defined during such period. Landlord agrees to provide Tenant with back-up documentation, if requested by Tenant. In the event the total amount of the estimated operating and maintenance expenses, paid by Tenant, during the preceding calendar year is deficient, then Tenant shall pay to Landlord the amount of such deficiency on the due date of the next monthly rental installment which shall not be less than thirty (30) days after receipt by Tenant of such written statement from Landlord. In the event the amount of such estimated payments is in excess of the actual operating and maintenance expenses, then the amount of such overpayment shall be credited to the next monthly installment or installments of Tenant's rent until fully exhausted. If the amount paid is in excess of the payment due through the end of the term of the Lease, Landlord will reimburse Tenant for the excess within thirty (30) days of the expiration of the term of the Lease. Tenant shall have thirty (30) days after receipt of the CAM Statement to notify Landlord that it disputes the correctness thereof; however, such dispute shall not relieve Tenant of the responsibility of making timely payment of all such amounts as noticed to Tenant in the CAM Statement. Unless resolved by the parties, such dispute shall be determined by arbitration in accordance with the then prevailing rules of the American Arbitration Association. If the arbitration proceedings result in a determination that the CAM Statement contains in the aggregate a discrepancy greater than eight (8%) percent, Landlord shall bear the cost of the arbitrators; otherwise, Tenant shall bear all costs of the arbitration. Tenant, for a period of thirty (30) days after receipt of the CAM Statement in each calendar year and upon written notice to Landlord, shall have reasonable access, at Landlord's office, during normal business hours, to only the CAM records of Landlord for the purpose of verifying the common operating and maintenance expenses. Should Tenant pursue this review, it shall constitute one annual request for insurance statements as permitted in subparagraph 18th (c). During the period commencing with the Commencement Date of the Lease Term and continuing until the end of the first full calendar year of the Lease Term, Tenant shall pay to Landlord the estimated sum of Eleven Thousand Six Hundred Sixty-Six and 66/100 ($11,666.66) dollars per month, which has been computed based upon an estimated rate of $4.00 per square foot of the after-construction 77,175+- s.f. Building for a twelve (12) month period. Notwithstanding anything herein to the contrary, CAM Charges shall not be in excess of $4.00 per square foot for the first and second years of this Lease. Within ninety (90) days after the end of the first full calendar year of the Lease Term, Landlord shall furnish to Tenant a written statement as above set forth showing the operating and maintenance expenses for the Building, and in the event of any deficiency or excess payments, the same shall be adjusted in the manner described above. Subject to the limitation with respect to the maximum CAM Charges to be charged to Tenant for years one and two of this Lease, Landlord may adjust annually the estimated rate per square foot and Tenant's monthly payment for common operating and maintenance expenses at Landlord's reasonable discretion. All adjustments shall be made as of the beginning of the new calendar year as soon as the computation becomes available, and any deficiency for such new calendar year shall be due and payable with the next monthly installment of rent, which shall not be less than thirty (30) days after receipt of Landlord's notice. In the event the estimated monthly payments are in excess of the amount reflected on the subject year's CAM Statement, then the amount of such overpayment shall be credited to the next monthly installment or installments of Tenant's Proportionate Share of CAM Charges until fully exhausted. If the amount paid is in excess of the payment due through the end of the Lease Term or Renewal Term, the Landlord will reimburse Tenant for the excess within thirty (30) days of the expiration of the term of the Lease. In the event the Tenant's Lease Term or the Renewal Term, as applicable, commences or terminates within a calendar year, then the Tenant's obligation shall be proportionately adjusted for the fraction of the calendar year involved. For purposes of this Lease, the Tenant's pro rata share is hereby fixed at Forty-Seven and 71/100 (47.71%) percent from the Commencement Date through the last day of the Second Stage (as defined in Paragraph 4th), and thereafter the Tenant's pro rata share shall be fixed at Forty-Four and 35/100 (44.35%) percent ("Tenant's Proportionate Share") for purposes of billing the CAM Charges of the Project (subject to adjustment after measurement in accordance with Paragraph 50 of this Lease). The following utility related costs are not included in the aforesaid Common Area Maintenance Charges and shall be billed to and paid by Tenant, as additional rent within ten (10) days of invoicing: 1. ELECTRIC SERVICE. Electric service shall be separately metered for the Premises and Tenant shall pay the utility company directly; however, until such time as all of Tenant's electric services is on a separate meter or meters billed to Tenant directly, any such service provided on a meter shared with another tenant or tenants shall be shared in proportion to the tenant's respective square footage, unless any tenant's usage is of a greater intensity than another tenant on the same meter (e.g. Tenant's computer room). The hot water heater for the Premises shall be connected to Tenant's electric service. 2. HVAC. Landlord shall bill Tenant and Tenant shall pay for HVAC costs as specified in Paragraph 47th of this Lease. 3. SEWERAGE. Landlord shall bill the Tenant and Tenant shall pay for its sewerage costs as reasonably determined by Landlord at regular intervals as established by Landlord or as billed by the Township of Lawrence. For information, Lawrence Township bills for sewer twice a year and that bill is based upon water usage that registers on the meter at the Building; the first half invoice billed in 2003 was for $1,134.60 and the second half invoice billed in 2003 was for $991.32. Any such invoices shall be billed by Landlord to Tenant in its proportionate share based on square footage of the Premises. 4. SNOW AND ICE REMOVAL. Landlord shall bill Tenant and Tenant shall pay to Landlord Tenant's Proportionate Share of all charges for snow and ice removal for the Project ("Snow and Ice Removal Charges"). Tenant acknowledges and understands that these charges can only be estimated at this time and on an annual basis hereafter. Therefore, Tenant shall pay to Landlord on the first day of each and every month of the Lease Term or Renewal Term, together with the Base Rent, that amount which is one-twelfth of Tenant's Proportionate Share of the annual estimated Snow and Ice Removal Charges. The amount of Tenant's monthly payment for Snow and Ice Removal Charges for the ensuing year may be adjusted annually as of January 1st of such year, in the reasonable discretion of Landlord. Within ninety (90) days after the end of each calendar year, Landlord shall furnish to Tenant a statement showing a reconciliation of the previous year's Snow and Ice Removal Charges and Tenant's payments. In the event that the total amount of Snow and Ice Removal Charges paid by Tenant for the previous calendar year was deficient, then Tenant shall pay the amount of such deficiency to Landlord on the due date of the next monthly rental installment which shall not be less than thirty (30) days after receipt by Tenant of such written statement from Landlord. In the event the estimated monthly payments are in excess of actual Snow and Ice Removal Charges paid for said period, then the amount of such overpayment shall be credited to the next monthly installment or installments of Tenant's Proportionate Share of Snow and Ice Removal Charges until fully exhausted. If the amount paid is in excess of the payment due through the expiration of the term of the Lease, Landlord will reimburse Tenant for the excess within thirty (30) days of the expiration of the term of the Lease. Tenant understands and acknowledges that the Snow and Ice Removal Charges for which it is responsible shall be its proportionate share of the actual costs and not subject to any limitation during any year of this Lease. PARAGRAPH 20TH - CONDEMNATION AND EMINENT DOMAIN If the Premises, the Project of which the Premises are a part, or any portion thereof, are taken under eminent domain or condemnation proceedings, or if suit or other action is instituted for the taking or condemnation thereof, or if in lieu of any formal condemnation proceedings or actions, the Landlord grants an option to purchase and/or sells and conveys the Premises, the Project of which the Premises are a part, or any portion thereof, to the governmental or other public authority, agency, body or public utility seeking to take the said Premises, Project or any portion thereof, then this Lease, at the option of the Landlord, will terminate and the Lease Term or the Renewal Term, as applicable, will end as of the date Landlord fixes by notice in writing, unless the taking involves less than twenty (20%) percent of the Property or ten (10%) of the Building, in which case the Landlord shall have the option to continue the Lease; and the Tenant shall have no claim or right to claim or be entitled to any portion of any amount which may be awarded as damages or paid as a result of such condemnation proceedings or paid as the purchase price for such option, sale or conveyance in lieu of formal condemnation proceedings; and all rights of the Tenant to damages, if any, are hereby assigned to the Landlord. Should the square footage of the Premises be reduced pursuant to this Paragraph 20th, then the applicable rent shall abate accordingly therefor for the remainder of the Lease Term or Renewal Term, as the case may be. In the event of a taking for which Landlord has the right to terminate this Lease, such right to terminate shall not be effective, if Tenant elects to continue this Lease by giving written notice to that effect to Landlord within ten (10) days of Landlord's giving the aforesaid notice to Tenant; however, such election to continue shall not be effective if Tenant's continued occupancy of the Premises will be in violation of applicable laws or ordinances. In addition, if Tenant elects to continue the Lease, any costs involved in restoring the Premises to a tenantable space shall be borne by Tenant. Tenant agrees to execute and deliver any reasonable instruments, at the expense of the Landlord, as may be deemed necessary or required to expedite any condemnation proceedings or to effectuate a proper transfer of title to such governmental or other public authority, agency, body or public utility seeking to take or acquire the Premises, the Project of which the Premises are a part, or any portion thereof. Tenant covenants and agrees to vacate the Premises, remove all of Tenant's personal property therefrom and deliver up peaceable possession thereof to Landlord or to such other party designated by the Landlord in the aforementioned notice. Failure by Tenant to comply with any provision of this clause will subject Tenant to such costs, expenses, damages and losses as the Landlord may incur by reason of Tenant's breach hereof. Notwithstanding anything contained to the contrary herein, Tenant shall be entitled to any separate award for moving expenses and for fixtures installed by Tenant at its own cost and expense which do not become part of the Building. PARAGRAPH 21ST - REMEDIES UPON TENANT'S DEFAULT If any default on the part of Tenant in the performance of any conditions and covenants contained in this Lease occurs, or if during the Lease Term or the Renewal Term, as applicable, the Premises or any part thereof are abandoned or deserted, vacated or vacant, or should Tenant be evicted by summary proceedings or otherwise, the Landlord, in addition to any other remedies contained herein or as may be permitted by law, may, either by force or otherwise, without being liable for prosecution therefor, or for damages, re-enter the Premises and the same have and again possess and enjoy; and as agent for Tenant or otherwise, re-let the Premises and receive the rents therefor and apply the same, first to the payment of such expenses, reasonable attorney fees and costs, as Landlord may have been expended in re-entering and repossessing the same and in making such repairs and alterations as may be necessary; and second to the payment of the rents due hereunder. Tenant shall remain liable for any rents as may be in arrears and for any rents which may accrue subsequent to Landlord's re-entry of the Premises, to the extent of the difference between the rents reserved hereunder and the rents, if any, received by Landlord during the remainder of the unexpired Lease Term or the Renewal Term, as applicable, after deducting the aforementioned expenses, fees and costs; the same to be paid as such deficiencies arise and are ascertained each month. Landlord shall use its best reasonable efforts to mitigate its damages. With respect to any monetary payment requirements of Tenant pursuant to this Lease, if such payment remains outstanding, then Tenant shall be deemed to be in default five (5) days after any such payment is due; no notice of monetary default from Landlord shall be required. With respect to non-monetary performance requirements, Landlord agrees to provide Tenant with notice of such non-performance and an opportunity to cure such non-performance; however, if Tenant has not cured such non-performance within thirty (30) days of the receipt of such notice, then Tenant shall be deemed to be in default under this Lease. If such non-performance is of a nature that the same cannot in good faith and with due diligence be cured within said thirty (30) day period, and if Tenant has commenced to cure and diligently proceeded to cure, such non-performance to completion, then Tenant shall have a reasonable period beyond said thirty (30) days to complete the required cure, and shall provide Landlord with timely status updates regarding its efforts to cure the noticed default. PARAGRAPH 22ND - TERMINATION ON DEFAULT Upon the occurrence of any of the contingencies set forth in Paragraph 21st of this Lease, or if Tenant is adjudicated bankrupt, insolvent or placed in a receivership, or if proceedings are instituted by or against Tenant for bankruptcy, insolvency, receivership, agreement of composition or assignment for the benefit of creditors, or if this Lease or the estate of Tenant hereunder passes to another by virtue of any court proceedings, writ of execution, levy, sale or by operation of law, not cured within said thirty (30) days, Landlord may, if the Landlord so elects, at any time thereafter, terminate this Lease, upon giving Tenant or any trustee, receiver, assignee or other person in charge of or acting as custodian of the assets or property of Tenant, five (5) days prior written notice of the Landlord's intention to do so. Upon the giving of such notice, this Lease will terminate on the date set forth in such notice as if the said date was the Termination Date or expiration date of the Renewal Term, as applicable; and the Landlord shall have the right to remove all persons, goods, fixtures and chattels therefrom, by force or otherwise, without liability for damages. PARAGRAPH 23RD - REMOVAL OF TENANT'S PROPERTY Any equipment, fixtures, goods or other property of Tenant not removed by Tenant upon the termination of this Lease, or upon any quitting, vacating or abandonment of the Premises by Tenant, or upon Tenant's eviction, will be considered as abandoned and the Landlord shall have the right, without any notice to Tenant, to sell or otherwise dispose of the same, at the expense of Tenant, and will not be accountable to Tenant for any part of the proceeds of such sale, if any. Tenant shall have thirty (30) days to remove Tenant's property. PARAGRAPH 24TH - REIMBURSEMENT OF LANDLORD If Tenant fails or refuses to comply with and perform all of the terms and conditions of this Lease, the Landlord may, if the Landlord so elects after giving notice and an opportunity to cure to Tenant pursuant to Paragraph 21st of this Lease, carry out and perform such terms and conditions, at the sole cost and expense of Tenant, and the said cost and expense shall be payable upon demand or, at the option of the Landlord, shall be added to the installment of rent due immediately thereafter, but in no case later than one (1) month after such demand, whichever occurs sooner, and shall be due and payable as such. This remedy shall be in addition to such other remedies as the Landlord may have hereunder by reason of the breach by Tenant of any of the terms and conditions of this Lease. PARAGRAPH 25TH - NON-PERFORMANCE BY LANDLORD This Lease and the obligation of Tenant to pay the rent hereunder and to comply with the terms and conditions hereof, shall not be affected, curtailed, impaired or excused as a result of the Landlord's inability to supply any service or material called for herein, by reason of any rule, order, regulation or preemption by any governmental entity, authority, department, agency or subdivision or for any delay which may arise by reason of negotiations for the adjustment of any fire or other casualty loss or because of strikes or other labor trouble or for any cause beyond the control of the Landlord, provided Tenant's operations can be conducted. Notwithstanding the foregoing, Tenant shall have the right to perform the obligations of Landlord and obtain reimbursements from Landlord for the reasonable cost of same, provided Tenant gives Landlord ten (10) days prior written notice of Tenant's intent to exercise said right. If Tenant actually performs, or causes to be performed, at Tenant's expense, any such obligation of Landlord, then Tenant shall promptly provide to Landlord all documentation and invoices relating to such undertaking and its written request for such reimbursement to which Tenant believes it is entitled. If Tenant does not submit its written request to Landlord within sixty (60) days of its performance of such item that it alleges is Landlord's responsibility, then Tenant shall waive its right to any reimbursement under this provision. If the parties are unable to agree to a resolution of this item within sixty (60) days of Landlord's receipt of Tenant's notice accompanied by the required documentation and invoices, then Tenant may submit the matter to arbitration and such dispute shall be determined in accordance with the then-prevailing rules of the American Arbitration Association. The fees of the arbitrators shall be paid by Tenant and/or Landlord in proportion to allocated responsibility of the disputed cost. PARAGRAPH 26TH - CONSTRUCTION OF IMPROVEMENTS BY LANDLORD Landlord intends to renovate the existing 71,733+/- s.f. two-story building, including parking lot and related improvements, suitable for use as a professional medical office building. The Premises shall be reconfigured in substantial accordance with the specifications as set forth on Exhibit A annexed hereto. Landlord's Work with respect to the Project shall be constructed or performed by Landlord, at Landlord's cost, in substantial conformance with the Landlord/Tenant Work Letter attached hereto and made a part hereof as Exhibit "C," which shall be performed in compliance with all laws applicable to the Project. Any sitework shall be constructed in accordance with the Site Plans approved the by Township of Lawrence Planning Board. Tenant Work with respect to the Premises shall be constructed by Tenant in substantial accordance with Landlord/Tenant Work Letter as set forth on Exhibit "C" attached hereto and made a part hereof, which, together with any other work within the Premises that is not Landlord's Work described in the Landlord/Tenant Work Letter, shall be the exclusive responsibility of Tenant. Landlord and Tenant each represent to the other that they will commence construction as soon as practical after receipt of any required approvals and/or permits to perform the Landlord Work or the Tenant Work, respectively, and will diligently pursue same. On the Commencement Date and upon Landlord's receipt of full payment of the Security Deposit and the first month's rent hereunder, Landlord shall pay to Tenant the sum of $50,000.00 as its full and complete contribution to Tenant's Work upon or within the Premises. Regarding the square footage designated on Exhibit "A" as "Proposed File Storage Space" and those noted areas particularly described in the Landlord/Tenant Work Letter, as well as other areas generally depicted on the second floor of the Premises shown on the Floor Load Rendering attached to and made a part of this Lease as Exhibit "D", due to structural specifications, floor load weight limitations shall be implemented with respect to Tenant's use of these areas. Engineering work has revealed the appropriate limitations as set forth on the Floor Load Rendering. Landlord covenants to Tenant as to the structural soundness of such Areas and the maximum floor load noted relative thereto. Tenant covenants and agrees to comply with such floor load specifications and not to exceed the floor load limitations specified in the Floor Load Rendering. Such Areas shall be subject to inspection by Landlord during normal business hours throughout the term of this Lease. PARAGRAPH 27TH - LATE CHARGES In the event that the rent is not received on or before the expiration of fifteen (15) days after the rental due dates set forth herein, then in addition to any other measures set forth herein, there shall be an added late charge of five (5%) percent of the monthly rent payment per month of delinquency. PARAGRAPH 28TH - HOLDOVER /FAILURE TO SURRENDER POSSESSION (a) If Tenant holds over and continues in possession of the Premises after the Termination Date or expiration of the Renewal Term, as applicable, Tenant shall be deemed to be occupying the Premises on the basis of a month-to-month tenancy, subject to all terms and conditions of this Lease. (b) The parties recognize and agree that the damage to Landlord resulting from any failure by Tenant to timely surrender possession of the Premises shall be substantial, shall exceed the amount of the monthly installments of the rent payable hereunder, and shall be impossible to measure accurately. (c) Tenant therefore agrees that if possession of the Premises is not surrendered to Landlord upon the Termination Date or expiration of the Renewal Term, as applicable, or sooner termination of the Lease, in addition to any other rights or remedies Landlord may have hereunder or at law, Tenant shall pay to Landlord, as liquidated damages, for each month and for each portion of any month during which Tenant holds over in the Premises, after the Termination Date or expiration of the Renewal Term, as applicable, or sooner termination of this Lease, a sum equal to One Hundred Fifty (150%) percent of the monthly rent in effect at the Termination Date or expiration of the Renewal Term, as applicable, or prior month in the event of earlier termination, plus any additional rental obligations. (d) Nothing herein contained shall be deemed to permit Tenant to retain possession of the Premises after the Termination Date or expiration of the Renewal Term, as applicable, or sooner termination of the Lease. (e) The provisions of this Paragraph 28th shall survive the Termination Date or expiration of the Renewal Term, as applicable, or sooner termination of this Lease. PARAGRAPH 29TH - ASSIGNMENT OF LEASE OR SUBLET BY TENANT Landlord agrees, only after the last day of the Second Stage as described in Paragraph 4th of this Lease, not to unreasonably withhold or delay its consent to the assignment of this Lease or sublet a portion of the Premises as described in a written advance notice sent by Tenant to the Landlord, to be accompanied by a detailed term sheet, including, but not limited to, a drawing of the exact location and square footage to be the subject of the assignment or sublet, the rental amounts and the amounts of any and all costs for which Tenant may be seeking to apply against any Excess Rent, at least forty-five (45) days prior to the contemplated effective date of such assignment or sublet; PROVIDED, HOWEVER, unless expressly released in writing, no assignment shall relieve Tenant of any present or future obligation or liability under this Lease; and FURTHER PROVIDED that the assignee or sublessee shall, in writing, accept the assignment or sublet of this Lease and agree to be bound by the terms hereof; and FURTHER PROVIDED that the area within the Premises contemplated for assignment or sublet shall be configured and located within the Premises consistent with proper safety, security and access standards for any potential tenant of Landlord should Landlord exercise its recapture option; and further PROVIDED, HOWEVER, that no such assignment or subletting shall be made to any tenant who shall occupy the Building for any purpose which may be deemed disreputable, which would not be consistent with the nature of the building as a medical office building, which would violate any covenants by Landlord to other tenants in the Building regarding primary use restrictions, or which would, in any way, violate the applicable ordinances, rules and regulations of applicable governmental boards and bureaus having jurisdiction thereof, or of the carrier of the fire insurance to be provided as hereinabove set forth. Landlord covenants to ensure that Tenant's leasehold shall be secure notwithstanding any sale of the Project, provided that Tenant is not at that time in default of any provision of this Lease. Landlord agrees to respond to Tenant's request for assignment or sublease within fifteen (15) days of receipt by Landlord of Tenant's request, together with all information and references as required herein or reasonably requested by Landlord with respect to the assignee or sublessee. Provided that Landlord's mortgagee does not withhold its consent, Tenant shall be relieved of any future liability, under the Lease, and the security deposit shall be returned, in the event of an assignment to a Tenant that is creditworthy in the reasonable judgment of Landlord and Landlord's mortgagee. A fully executed copy of any assignment or sublet shall be provided to Landlord by Tenant at least ten (10) days prior to any occupancy by any assignee or sublessee. Any assignment or sublet is subject to Landlord's right to recapture any rent charged by Tenant to the assignee or sublessee for any portion of the Premises which is in excess of that rent charged by Landlord to Tenant pursuant to this Lease ("Excess Rent"). Tenant shall pay to Landlord all Excess Rent by the fifth day of each period that any rent is paid by the assignee or sublessee to Tenant. Tenant may retain from the Excess Rent paid to Tenant by the assignee or sublessee, any reasonable real estate commission paid by Tenant to procure such assignee or sublessee. However, if any assignment of this Lease is such that Tenant is relieved of any future liability under this Lease, then Tenant shall bear all of its costs to obtain such assignee. If a default should occur while the Premises, or any part thereof, are assigned or sublet, Landlord, in addition to any other remedies available to it, may, at its option, collect all payments due directly from such assignee or sublessee and credit any such collections against any sums due to Landlord by Tenant hereunder. Tenant hereby authorizes and directs any such assignee or sublessee to pay such rent directly to Landlord upon receipt from Landlord of a demand therefor. No direct collection by Landlord from any such assignee or sublessee shall be construed to constitute a novation or a release of Tenant from the further performance of its obligations hereunder. After the Second Stage as described in Paragraph 4th of this Lease, the prohibition against assignment of this Lease and subletting of any portion of the Premises shall not be construed to prohibit any change or series of changes in the controlling interest of the Tenant, whether that change be effected by operation of law, acquisition, merger, consolidation, change of controlling interest of stock or partnership interests, or otherwise ("Permitted Assignment or Sublet"). Provided that at effective date of any contemplated assignment or sublet, Tenant has a contractual relationship with one or both of the Companies, a Permitted Assignment or Sublet shall also include an assignment or sublet to the following Companies: (i) MIIX Advantage Holdings, Inc., and (ii) MIIX Advantage Insurance Company of New Jersey (collectively, the "Companies"); provided that (i) the use will remain substantially the same; (ii) the number of employees will remain substantially the same; and (iii) the manner in which the assignee or sublessee conducts its business will remain substantially the same as Tenant's business. All Permitted Assignments or Sublets shall be subject to timely notice and Landlord's receipt of all required or requested information with respect to such assignee or sublessee, as well as a true copy of the executed assignment or sublease document at least ten (10) days prior to such assignee's or sublessee's taking occupancy, but is not subject to the express written consent of Landlord; however, if a Permitted Assignment or Sublet occurs prior to the expiration of the Lease Term, then the Security Deposit as set forth in Paragraph 26th of this Lease shall not be reduced as provided herein. Notwithstanding anything in this Paragraph 29th to the contrary, in the event that Tenant gives notice to Landlord of a contemplated assignment or sublet of all or a portion of the Premises, which assignment or sublet is not a Permitted Assignment or Sublet, then in that event, the Landlord shall have a right of first refusal to recapture that portion of the Premises which is the subject of the contemplated assignment or sublet. Landlord shall have fifteen (15) days from receipt of Tenant's notice to accept Tenant's offer in writing, and if no acceptance is forthcoming within said fifteen-day period, then Landlord shall be deemed to have rejected such right of first refusal to recapture. Landlord's right of first refusal to recapture shall be a continuing right throughout the entire term of this Lease. To the extent that Landlord elects to recapture that portion of the Premises which is the subject of the contemplated assignment or sublet and remove same from Tenant's Premises, then this Lease shall be modified by a written amendment made by and between Landlord and Tenant, and upon execution thereof, this Lease and Tenant's obligations hereunder shall be thereby modified accordingly. PARAGRAPH 30TH - BROKERS COMMISSIONS The parties acknowledge to each other that they have not dealt with any realtor/broker to whom a commission may be due in connection with the negotiation and consummation of this Lease. The parties agree that in the event any realtor/broker claims a commission as a result of dealings with either party to this Lease, then such party having such dealings shall hold the other party harmless and indemnify such party against such claim and shall be responsible for all expenses of litigation related to such claim, including legal fees and costs of suit. PARAGRAPH 31ST - TENANT'S RESPONSIBILITY REGARDING HAZARDOUS MATERIALS (a) DEFINITIONS. As used herein, the following terms shall have the following meanings: (1) "Hazardous Material" includes any pollutant, dangerous substance, toxic substances, flammables, explosives, radioactive materials, asbestos, chemicals known to cause cancer or reproductive toxicity, petroleum, petroleum products, any hazardous pollutant, hazardous waste or any similar term as defined in or pursuant to the Comprehensive Environmental Response Compensation and Liability Act of 1980, 42 U.S.C. 9601 ET SEQ., ("CERCLA"); the Industrial Site Recovery Act, N.J.S.A. 13:1K-6 ET SEQ., ("ISRA"); the New Jersey Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 ET SEQ., ("Spill Act"); the Solid Waste Management Act , N.J.S.A. 13:1E-1 ET SEQ., "SWMA"); the Resource Conservation and Recovery Act, 42 U.S.C. 6901 ET SEQ., ("RCRA"); the New Jersey Underground Storage of Hazardous Substances Act, N.J.S.A. 58:10A-21 ET SEQ., ("USTA"), the Clean Air Act, 42 U.S.C. Section 7401 ET SEQ., ("CAA"); the Air Pollution Control Act, N.J.S.A. 26:2C-1 ET SEQ., ("APCA"); the New Jersey Water Pollution Control Act, N.J.S.A. 58:10A-1 ET SEQ., ("WPCA"); the Toxic Substance Control Act, 15 U.S.C. 2601 ET SEQ., ("TSCA") and any rules or regulations promulgated thereunder or in any other applicable federal, state or local law, rule or regulation pertaining to environmental protection. It is understood and agreed that the provisions contained in this Lease shall be applicable notwithstanding whether any substance shall not have been deemed to be a hazardous material at the time of its use or Release but shall thereafter be deemed to be a Hazardous Material. (2) "Release" means spilling, leaking, disposing, pumping, pouring, discharging, emitting, emptying, ejecting, depositing, injecting, leaching, escaping or dumping however defined, and whether intentional or unintentional, of any Hazardous Material. (3) "Notice" means any summons, citation, directive, order, claim, litigation, investigation, proceeding, judgment, letter or other communication, written or oral, actual or threatened, from the New Jersey Department of Environmental Protection ("NJDEP"), the United States Environmental Protection Agency ("USEPA"), the United States Occupational Safety and Health Administration ("OSHA") or other federal, state or local agency or authority, or any other entity or any individual, concerning any act or omission resulting or which may result in the Releasing of Hazardous Materials into the waters or onto the lands of the State of New Jersey, or into the environment. (4) "Environmental Laws" means any and all present or future federal, state or local laws, statutes, ordinances, regulations and executive orders in any way related to the protection of human health or the environment including but not limited to (i) CERCLA; (ii) RCRA; (iii) ISRA; (iv) Spill Act; (v) USTA; (vi) WPCA; (vii) APCA; (viii) SWMA; (ix) CAA; and (x) TSCA. (b) TENANT'S RESTRICTIONS. Tenant shall not cause or permit to occur at or from the Premises, Project or thereabouts by its agents, employees or invitees: (1) Any violation of any Environmental Laws, ordinances or regulations now or hereafter enacted, related to environmental conditions on, under, migrating from or about the Premises, or arising from Tenant's use or occupancy of the Premises, including but not limited to soil and ground water conditions; or (2) The existence, use, generation, release, manufacture, refining, production, processing, transport, handling, treatment, storage, or disposal of any Hazardous Materials on, under, migrating from, or about the Project or Premises or the transportation to or from the Project or Premises of any Hazardous Materials, except for de minimis amounts of oils, greases, office products, and cleaning products providing same is in conformance with all Environmental Laws or as specifically disclosed on Exhibit E annexed hereto. (c) TENANT'S ENVIRONMENTAL REQUIREMENTS. (1) The term "Environmental Requirements" means all applicable present and future Environmental Laws, statutes, regulations, ordinances, rules, codes, judgments, permits, authorizations, orders, policies or other similar requirements of any governmental authority, agency or court regulating or relating to health, safety or environmental conditions on, under or about the Premises or the environment, including, without limitation, the following: CERCLA, RCRA, ISRA, The Spill Act, USTA, WPCA, APCA, SWMA, CAA and TSCA and all state and local counterparts thereto, and any common or civil law obligations, including, without limitation, nuisance or trespass, and any other requirements of this Lease. For the purposes of Environmental Requirements, to the extent authorized by law, Tenant is and shall be deemed to be the responsible party, including, without limitation, the "owner" and "operator" of Tenant's "facility" and the "owner" of all Hazardous Materials brought on the Premises by Tenant, its agents, employees, contractors or invitees, and the wastes, by-products or residues generated, resulting, or produced therefrom. (2) Tenant shall, at Tenant's own expense, comply with all laws regulating the use, generation, storage, transportation or disposal of Hazardous Materials. (3) Tenant, at its sole cost and expense, shall operate its business at the Premises in strict compliance with all Environmental Requirements and Environmental Laws as well as all requirements of this Lease. Tenant shall complete and certify to disclosure statements as requested by Landlord from time to time relating to Tenant's transportation, storage, use, generation, manufacture, or release of Hazardous Materials on the Premises, and Tenant shall promptly deliver to Landlord a copy of any notice of violation relating to the Premises or Project of any Environmental Requirement. (4) Tenant, at its sole cost and expense, shall remove all Hazardous Materials stored, disposed of or otherwise released by Tenant, its assignees, subtenants, agents, employees, contractors or invitees onto or from the Project or Premises, in a manner and to a level satisfactory to Landlord in its sole reasonable discretion, but in no event to a level and in a manner less than that which complies with all Environmental Requirements and Environmental Laws and does not limit any future uses of the Project or Premises or require the recording of any deed restriction or notice regarding the Project or Premises. Tenant shall perform such work at any time during the period of the Lease upon written request by Landlord or, in the absence of a specific request by Landlord, before Tenant's right to possession of the Premises terminates or expires. If Tenant fails to perform such work within the time period specified by Landlord or before Tenant's right to possession terminates or expires (whichever is earlier), Landlord may at its discretion, and without waiving any other remedy available under this Lease or at law or equity (including without limitation an action to compel Tenant to perform such work), perform such work at Tenant's cost. Tenant shall pay all costs incurred by Landlord in performing such work within ten (10) days after Landlord's request therefore. Such work performed by Landlord is on behalf of Tenant and Tenant remains the owner, generator, operator, transporter, and/or arranger of the Hazardous Materials for purposes of Environmental Requirements. Tenant agrees not to enter into any agreement with any person, including without limitation any governmental authority, regarding the removal of Hazardous Materials that have been disposed of or otherwise released onto or from the Project or Premises without the written approval of the Landlord. (5) Landlord shall have access to, and a right to perform inspections and tests of, the Premises to determine Tenant's compliance with Environmental Laws and Environmental Requirements, its obligations under this Paragraph 31st, or the environmental condition of the Premises. Access shall be granted to Landlord upon Landlord's prior notice to Tenant and at such times so as to minimize, so far as may be reasonable under the circumstances, any disturbance to Tenant's operations. Such inspections and tests shall be conducted at Landlord's expense, unless such inspections or tests reveal that Tenant has not complied with any Environmental Requirement or Environmental Law, in which case Tenant shall reimburse Landlord for the reasonable cost of such inspection and tests. Landlord's receipt of or satisfaction with any environmental assessment in no way waives any rights that Landlord holds against Tenant. Tenant shall promptly notify Landlord of any communication or report that Tenant makes to any governmental authority regarding any possible violation of Environmental Laws or Environmental Requirements or release or threat of release of any Hazardous Materials onto or from the Premises or Project. Tenant shall, within five (5) days of receipt thereof, provide Landlord with a copy of any documents or correspondence received from any governmental agency or other party relating to a possible violation of Environmental Laws or Environmental requirements or claim or liability associated with the release or threat of release of any Hazardous Materials onto or from the Premises or Project. (6) If applicable, prior to termination of the lease of the Premises it shall be the obligation of Tenant to deactivate any identification number, permit, license, etc. issued by the USEPA, the NJDEP or any other federal, state or local entity dealing with generation, treatment, storage or disposal of regulated hazardous or solid waste or Hazardous Materials related to Tenant and comply with any concomitant notification requirements pursuant to RCRA, the Spill Act, the SWMA and any rules or regulations promulgated thereunder or in any other applicable federal, state or local law, rule or regulation dealing with hazardous waste, Hazardous Materials, solid waste or environmental protection related to Tenant. (7) In the event there shall be filed a lien against the Premises or the Property arising out of the claim(s) by the NJDEP pursuant to the provisions of the Spill Act or by the USEPA pursuant to the provisions of CERCLA due to an alleged act of Tenant, Tenant shall immediately (which shall be within thirty (30) days of the date Tenant first receives notice of such lien) notify Landlord of the lien and either: (i) pay the claim and remove the lien from the Premises or the Property; or (ii) furnish a bond, cash receipt or other security satisfactory to the Landlord sufficient to discharge the claim out of which the lien arises. (8) In addition to all other rights and remedies available to the Landlord under this Lease or otherwise, Landlord may, in the event of a breach of the requirements of this Paragraph 31st and Paragraph 32nd that is not cured within thirty (30) days following notice of such breach to Landlord, require Tenant to provide financial assurance (such as insurance, escrow of funds or third party guarantee) in an amount and form satisfactory to Landlord. The requirements of this Paragraph 31st and Paragraph 32nd are in addition to and not in lieu of any other provision in the Lease. (9) Tenant's obligations and liabilities under this Sub-paragraph (c) shall survive the expiration of this Lease. (10) Tenant shall have no responsibility for the clean-up of any environmental conditions (i) existing on the Property prior to taking occupancy of the Premises or any portion thereof, whether such occupancy takes place in accordance with this Lease or pursuant to Tenant's prior lease with the prior owner of record, (ii) caused by Landlord, its, agents, employees, invitees or licensees, and not in any way caused by Tenant, or (iii) caused by any other tenant or occupant of the Building, and not in any way caused by Tenant. (d) ENVIRONMENTAL CLEANUP. (1) Tenant shall, at Tenant's own expense, make all submissions to, provide all information required by, and comply with all requirements of all governmental authorities (the "Governmental Authority") under all applicable Environmental Laws and Environmental Requirements pertaining to Tenant's occupancy and/or operations at the Premises. (2) Should any Governmental Authority or any third party demand that a cleanup plan be prepared and that a cleanup plan be undertaken because of any deposit, spill, discharge, or other release of Hazardous Materials that occurs during the term of this Lease at or from the Premises, or from the Project emanating from the Premises, or which arises at any time from Tenant's use or occupancy of the Premises, then Tenant shall, at Tenant's sole expense, prepare and submit the required plans and all related agreements, documents, bonds and other financial assurances, and Tenant shall carry out all such cleanup plans. (3) Tenant shall promptly provide all information regarding the use, generation, storage, transportation, disposal, release, spill or discharge of Hazardous Materials that is reasonably requested by Landlord. If Tenant fails to fulfill any duty imposed under this Sub-paragraph (d) within the time provided or specified by any Governmental Authority or third party or within the time period specified by Landlord, or before Tenant's right to possession terminates or expires (whichever is earlier), Landlord may, at its sole discretion, do so at Tenant's cost; and in such case, Tenant shall cooperate with Landlord in order to prepare all documents Landlord deems reasonably necessary or appropriate to determine the applicability of the Environmental Laws and Environmental Requirements to the Premises and Tenant's use thereof, and for compliance therewith, and Tenant shall execute all documents promptly upon Landlord's request. No such action by Landlord and no attempt made by Landlord to mitigate damages under any Environmental Laws shall constitute a waiver of any of Tenant's obligations under this Sub-paragraph (d) or any other remedy available at law or equity (including without limitation an action to compel Tenant to perform such work). (4) In no event shall Tenant agree to effectuate or engage in any cleanup or remediation that shall involve the installation or construction of any monitoring well, building, structure or equipment that shall, in the reasonable judgment of Landlord, interfere with the operations of other tenants at the Project or render the Project or Premises unavailable or unfit for its intended use. To the extent that any investigation or remediation conducted by Tenant shall render either the Premises, the Project or any part thereof unavailable for the uses for which it is intended, Tenant shall be liable for the payment of rent for whatever portion of the Premises or Project are rendered unfit for their intended use. (5) In no event shall Tenant agree to any remediation, investigations, etc. that would result in the imposition of a Deed Notice, Classification Exception Area, or any other similar instrument or notice or that would involve an institutional or engineering control without the express approval of the Landlord. (6) Tenant's obligations and liabilities under this Sub-paragraph (d) shall survive the expiration of this Lease. (7) In no event shall Tenant be responsible for any clean-up, or costs of Landlord or another tenant associated with such cleanup, of an environmental condition due to events or actions not caused by Tenant, its agents, employees, contractors, subtenants, assignees or invitees. (e) TENANT'S INDEMNITY. (1) Tenant shall indemnify, defend, and hold harmless Landlord, Landlord's mortgagee, the manager of the Project or Property, and their respective officers, directors, members, beneficiaries, shareholders, partners, agents and employees from all fines, suits, procedures, claims, and actions of every kind, and all costs associated therewith, including, but not limited to, reasonable attorneys' and consultants' fees, arising out of or in any way connected with any deposit, spill, discharge, or other release of Hazardous Materials or substances that occurs during the term of this Lease (or any prior lease with any previous record owner of the Property), at or from the Premises, or from the Project emanating from the Premises, or which arises at any time from Tenant's use or occupancy of the Premises by Tenant, its agents, employees, contractors, subtenants, assignees or invitees; or from Tenant's failure to provide any information, make all submissions, and take all steps required by all Governmental Authorities under Environmental Laws and Environmental Requirements applicable to Tenant; or from Tenant's failure to comply with ISRA (as required herein); or from Tenant's failure to comply with all applicable Environmental Laws and Environmental Requirements; or which arise from any breach of the requirements under this Paragraph 31st or Paragraph 32nd by Tenant, its agents, employees, contractors, subtenants, assignees or invitees. (2) Tenant's obligations and liabilities under this Sub-paragraph (d) shall survive the expiration of this Lease. (f) LANDLORD'S INDEMNITY. (1) Landlord shall indemnify, defend and hold harmless Tenant and Tenant's respective officers, directors, members, beneficiaries, shareholders, partners, agents, and employees (i) from all fines, suits, procedures claims, and actions of any kind, and all costs associated therewith, including, but not limited to, reasonable attorneys' and consultants' fees, arising out of or in any way connected with any deposit, spill, discharge, or other release of Hazardous Materials or substances that may have occured at or from the Project prior to the commencement of this Lease of the Premises, but this provision shall in no way apply with respect to any deposit, spill, discharge, or other release of Hazardous Materials or sustances which occurred during Tenant's occupancy of all or any portion of the Premises prior to the Commencement Date which was caused by the act or omission of Tenant, or(ii) due to the act or omission of Landlord, its agents, employees, licensees or invitees, resulting in the failure to take all steps required by all Governmental Authorities under Environmental Laws and Environmental Requirements. Notwithstanding the aforesaid, Landlord's indemnity shall expressly exclude any surviving obligations (i) of the prior record owner of the Property as landlord to indemnify Tenant in such circumstances, and (ii) of Tenant to indemnify the prior record owner in accordance with the lease. (2) Landlord's obligations and liabilities under this Sub-paragraph (f) shall survive the expiration of this Lease. PARAGRAPH 32ND - ISRA COMPLIANCE (a) If Tenant's operations on the Premises now or hereafter constitute an "Industrial Establishment" as that term is defined in ISRA then prior to (i) closing operations or transferring ownership or operations of Tenant at the Premises (as defined under ISRA), (ii) the expiration or sooner termination of the Lease, (iii) any assignment of the Lease or any subletting of any portion of the Premises, or (iv) any event caused by Tenant occurs which may trigger ISRA; Tenant shall at its sole cost and expense, comply with all requirements of ISRA pertaining thereto. Should the NJDEP determine that a cleanup plan be prepared and that cleanup be undertaken because of any spills or discharges of Hazardous Materials or substances at the Premises or Project which such discharges occurred during Tenant's occupancy of any portion of the Premises, the Lease Term or Renewal Term and which were caused by Tenant, Tenant shall, at Tenant's sole expense, prepare and submit the required plans and financial assurances, and carry out the approved plans. Without limitation of the foregoing, Tenant's obligations shall include (i) the proper filing, with the NJDEP, of an initial notice under N.J.S.A. 13:1K-9(a) and (ii) the performance of all remediation and other requirements of ISRA, including without limitation all requirements of N.J.S.A. 13:1K-9(b) through and including (l). Tenant's obligation to pay rent shall continue until such time as Tenant obtains and delivers to the Landlord a Negative Declaration or No Further Action Letter and Covenant Not to Sue as defined by ISRA, or such other proof, reasonably satisfactory to the Landlord, that the Premises may be sold and/or comply without violation of ISRA. (1) The parties acknowledge and agree that pursuant to the provisions of ISRA, after the Commencement Date, Tenant shall be, and is hereby, designated the party responsible to comply with the requirements of ISRA with respect to the Premises and conditions at the Premises caused by Tenant, its employees and/or agents. In addition, any failure of Tenant to provide any information and submission as required under ISRA shall constitute a default under this Lease. Any assignee or subtenant of Tenant shall be deemed to have, and by entering into such assignment or sublease, and/or by entering into possession of the Premises, does hereby acknowledge that they shall be the party responsible, jointly and severally, with Tenant under the provisions of this Lease. (b) In the event Tenant is not obligated to comply with the requirements of ISRA, then prior to the Termination Date, expiration of the Renewal Term or sooner termination of the Lease or any subletting of any portion of the Premises, Tenant shall, at Tenant's expense, and at Landlord's option, obtain from the NJDEP a "Non-Applicability Letter" confirming that the proposed termination, assignment or subletting shall not be subject to the requirements of ISRA. Any representation or certification made by Tenant in connection with the Non-Applicability Letter request shall constitute a representation and warranty by Tenant in favor of Landlord and any misrepresentation or breach of warranty contained in Tenant's request shall constitute a default under this Lease. (c) In no event shall Tenant agree to effectuate or engage in any cleanup or remediation that shall involve the installation or construction of any monitoring well, building, structure or equipment that shall, in the reasonable judgment of Landlord, interfere with the operations of other tenants at the Project or render the Project or Premises unavailable or unfit for its intended use. To the extent that any investigation or remediation conducted by Tenant shall render either the Premises, the Project or any part thereof unavailable for the uses for which it is intended, Tenant shall be liable for the payment of rent for whatever portion of the Premises or Project are rendered unfit for their intended use. (d) In no event shall Tenant agree to any remediation, investigation, etc. that would result in the imposition of a Deed Notice, Classification Exception Area, or any other similar instrument or notice or that would involve an institutional or engineering control without the express approval of the Landlord. (e) In the event of Tenant's failure to comply in full with the foregoing provisions, Landlord may, at its option, upon prior written notice to Tenant and providing Tenant with an opportunity to cure of not less than ten (10) days, perform any and all of Tenant's obligations as aforesaid and all reasonable costs and expenses incurred by Landlord in the exercise of this right shall be deemed to be additional rent payable on demand and with interest until payment. Such costs and expenses include but are not limited to state agency fees, engineering fees, cleanup costs, filing fees and financial assurance expenses. (f) Tenant shall promptly provide Landlord with copies of all correspondence, reports, notices, orders, findings, declarations and other materials pertinent to Tenant's compliance and the NJDEP's requirements under ISRA as they are issued or received by Tenant. (g) Tenant's obligations and liabilities under this Paragraph 32nd shall survive the expiration of this Lease. PARAGRAPH 33RD - CONSTRUCTION OF OTHER WORK, CONDITIONS AS TO REPAIRS, ALTERATIONS OR OTHER WORK Whenever any repairs, alterations, changes or other work in, on, to or about the Premises shall be made by either Landlord or Tenant, as provided in this Lease. (a) The work shall be done in a good and workmanlike manner in compliance with all applicable laws, ordinances and codes, and all applicable governmental rules, regulations and requirements, and in accordance with the standards, if any, of the Board of Fire Underwriters, or other organizations exercising the functions of a board of fire underwriters whose jurisdiction includes the Project; (b) All materials and workmanship shall be of good quality, and in case of repairs, restoration, changes, additions, alterations or improvements, shall be at least equal to the original; (c) All said work shall be paid for as promptly as practicable and consistent with good business practices under the then existing circumstances; (d) Such work shall be done as promptly as is possible and practicable under the existing circumstances; (e) The comprehensive general liability insurance provided for in Paragraph 18th shall be extended by Tenant or Landlord (as applicable), if necessary, to apply to the work being done, and evidence thereof shall be delivered to the Landlord or Tenant, respectively, prior to commencement of such work; (f) The party doing or having the work done shall carry or cause its contractors, if any, to carry workman's compensation insurance, as required by law in connection with such work, and evidence thereof shall be delivered to the other party prior to commencement of such work; (g) Title to all buildings, building fixtures and improvements erected and installed by Tenant (but not Tenant's trade fixtures, however the same may be attached to the realty) shall become the property of Landlord upon the expiration or earlier termination of this Lease; (h) The contractor or other party performing the work shall obtain an official Certificate of Occupancy (the "Certificate(s)") or an amended Certificate upon completion of the work in each instance, if under local practice such Certificates are issued or required in connection with such work. The party performing the work shall also obtain the Certificate from the Board of Fire Underwriters, or other organization exercising the same functions, whose jurisdiction includes the Project in each instance, certifying that the electric work has been properly completed whenever the work done involves any electrical work for which such a Certificate is issued under local practice. If under local practice official Certificates are not issued or required by a governmental officer or department, or if the Board of Fire Underwriters or other such organization does not issue Certificates on proper completion of electrical work, this covenant shall be satisfied upon issuance of such certifications by an architect or engineer licensed in the state in which the Project is located; and, (i) Landlord agrees to join in the application for all permits and authorizations whenever necessary. PARAGRAPH 34TH - MECHANIC'S LIENS Tenant shall not suffer any mechanic's liens to be filed against the Project by reason of work, labor, services or materials performed or furnished to Tenant or to anyone holding the Premises, or any part thereof, through or under Tenant. If any mechanic's lien or any notice of intention to file a mechanic's lien shall at any time be filed against the Project (unless the labor or materials were actually performed for or furnished to Landlord in connection with its obligations under this Lease), Tenant shall, at Tenant's cost, within thirty (30) days after knowledge or notice of the filing of any mechanic's lien, cause the same to be removed or discharged of record by payment, bond, order of a court of competent jurisdiction, or otherwise. PARAGRAPH 35TH - INDEMNIFICATION OF LANDLORD Tenant agrees to indemnify and save Landlord harmless from and against all liability, and all loss, cost and expense, including reasonable attorneys' fees, arising out of Tenant's operation, maintenance, management and control of the Premises or in connection with (a) any loss, injury or damage whatsoever caused by Tenant, its employees or agents; (b) any breach of this Lease by Tenant; (c) any act or omission of Tenant occurring in, on or about the Project or on the sidewalks adjoining the same; or (d) any contest or proceeding brought by Tenant as provided for herein. However, notwithstanding anything contained to the contrary herein, Tenant shall not be obligated or required hereunder, to hold harmless or indemnify Landlord from or against any liability, loss, cost expense, or claim to the extent arising from any act, omission or negligence of Landlord or its agents, servants, employees or contractors. The provisions hereof are not intended to abrogate the provisions regarding the Waiver of Subrogation by the parties to this Lease. PARAGRAPH 36TH - LEASE NOT TO BE RECORDED Tenant agrees not to record this Lease and any violation thereof shall be considered a default on the part of Tenant, and in addition thereto, at the option of the Landlord, it may render this Lease null and void and of no effect. In any event, a recording in violation of this covenant shall be ineffective and shall not be construed as a cloud on or a condition of title. Upon written request of Tenant, Landlord agrees to execute a Memorandum of Lease for filing provided said Memorandum is in a form acceptable to Landlord and Tenant pays all of Landlord's reasonable attorneys' fees and expenses in connection with the filing of said Memorandum of Lease. PARAGRAPH 37TH - PARKING AREAS (a) Each Tenant and its officers, agents, and employees shall utilize parking stalls as reasonably designated by the Landlord, which Landlord will endeavor to designate in closest proximity to Tenant's main entrance. Tenant's employees shall park at such locations as designated by the Landlord from time to time. A sketch of the Parking Plan is attached hereto as Exhibit H. (b) Tenant shall be responsible to require the use by Tenant and its officers, agents, and employees of such designated parking stalls for their use, and shall direct its employees not to use any other parking area of the Project. Tenant shall be responsible for the enforcement of these provisions. (c) Suppliers, invitees and customers of all tenants at the Building shall utilize parking stalls designated by Landlord, in Landlord's sole discretion from time to time, on a first come first serve basis for vehicular parking under the terms and conditions set forth hereinbelow. This right is nonexclusive and is shared in common and on the same terms with the other tenants in the Building. (d) Vehicles may be parked only in spaces designated by Landlord as parking spaces, either by painted lines or otherwise, as Landlord deems fit. (e) Landlord shall maintain the parking lot and be responsible for snow and ice removal at Tenant's sole cost and expense as provided in Paragraph 19th hereof. PARAGRAPH 38TH - EFFECTIVE DATE The Effective Date is defined as stated in the preamble to this Lease. In the event that (I) the Contract between the Medical Society of New Jersey and Landlord is terminated at any time before October 31, 2004, or (ii) the Closing does not occur on or prior to October 31, 2004, then either Landlord or Tenant shall have the right to terminate this Lease in writing by notice to the other party, and thereafter, this Lease shall be deemed cancelled and of no force or effect, and neither party shall have any obligation or liability to the other hereunder. However, prior to any such termination becoming effective, the party wishing to terminate this Lease shall give the other party and Tenant's current landlord at least a thirty (30) day written notice of such party's intent to terminate this Lease. PARAGRAPH 39TH - SORTING AND SEPARATION OF REFUSE AND TRASH (a) COMPLIANCE BY TENANT. Tenant covenants and agrees, at its sole cost and expense, to comply with all present and future laws, orders, and regulations of all state, federal, municipal, and local governments, departments, commissions, and boards regarding the collection, sorting, separation, and recycling of waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse, and trash into such categories as provided by law. Each separately sorted category of waste products, garbage, refuse, and trash shall be placed in separate receptacles reasonably approved by Landlord. Such separate receptacles may, at Landlord's option, be removed from the Project in accordance with a collection schedule prescribed by law. (b) LANDLORD'S RIGHTS IN EVENT OF NONCOMPLIANCE. Landlord reserves the right to refuse to collect or accept from Tenant any waste products, garbage, refuse, or trash that is not separated and sorted as required by law, and to require Tenant to arrange for such collection at Tenant's sole cost and expense, utilizing a contractor satisfactory to Landlord. Tenant shall pay all costs, expenses, fines, penalties, or damages that may be imposed on Landlord or Tenant by reason of Tenant's failure to comply with the provisions of this Paragraph 39th, and, at Tenant's sole cost and expense, shall indemnify, defend and hold Landlord harmless (including reasonable legal fees and expenses) from and against any actions, claims, and suits arising from such noncompliance, utilizing counsel reasonably satisfactory to Landlord. PARAGRAPH 40TH - REMOVAL OF GARBAGE AND DEBRIS (a) Tenant agrees to remove all garbage and debris from Tenant's Premises and transport the same to the receptacle (dumpster or compactor) provided by Landlord. Tenant shall not permit its garbage or debris to be placed or remain outside the Building, except as designated by the Landlord. (b) For purposes of this Paragraph 40th, garbage and debris shall refer to waste generated by office facilities, except for any Hazardous Materials as defined in Paragraph 31st of this Lease or any medical related hazardous substances. (c) Removal of all such garbage and debris, except for any Hazardous Materials as defined in Paragraph 31st of this Lease or any medical related hazardous substances, shall be at Tenant's expense in accordance with Paragraph 19th of this Lease. (d) In the event Tenant is specifically permitted to use, generate, release, manufacture, refine, produce, process, transport, handle, treat, store, or dispose of any Hazardous Materials in accordance with the provisions of Paragraph 31st of this Lease or any medical related hazardous substances. Tenant shall not dispose of said Hazardous Materials in the common garbage receptacles and/or containers provided by Landlord for Tenants. Tenant shall dispose of said Hazardous Materials in accordance with all applicable laws at Tenant's own cost and expense. (e) In the event Tenant produces garbage and debris for disposal in the common garbage receptacles and/or containers provided by Landlord for Tenant, that is in excess of Tenant's pro rata share, as defined in Paragraph 19th of this Lease, of the aggregate garbage and debris for the Project, Landlord may assess Tenant and Tenant shall be responsible for the excess disposal costs. PARAGRAPH 41ST - ROOF SPACE In the event that Tenant desires to utilize roof space for purposes of the installation of communication equipment for Tenant's use only, Landlord shall not unreasonably withhold or delay its consent; provided, however, that same is not prohibited by any local, state, federal, or other governmental authority and Tenant utilizes contractors approved by Landlord and pays for all costs in connection with the installation of said communications equipment. Landlord acknowledges and consents to Tenant's prior installation of a Liebert cooling system on the roof of the Building which is used to cool Tenant's computer room in the Premises approximately to some degree beneath the location of the cooling system. Tenant shall be responsible for any and all repairs and/or replacements of the said cooling system as may be required by Tenant, all at its own risk, cost and expense. In addition, Tenant shall be responsible for any and all damage that may result to the Building as a result of any malfunctioning of the cooling system or any work performed thereon. Tenant, its contractors and agents shall have access to that portion of the roof upon which the cooling system is installed, and shall indemnify, defend and hold the Landlord harmless from and against any and all losses and damages resulting from or arising out of any claims or causes of action made or filed by or on behalf of any injured or damaged party in connection with the cooling system and its existence on the roof. PARAGRAPH 42ND - REMOVAL OF SNOW AND ICE Notwithstanding anything contained to the contrary herein, it shall be the Landlord's responsibility for removal of snow and ice, although the Landlord shall incur no liability whatsoever to Tenant for failure to immediately remove the same. Removal of snow and ice shall be at Tenant's expense in accordance with Paragraph 19th of this Lease (billed separately, not included with CAM charges). PARAGRAPH 43RD - DESTRUCTION OR CONDEMNATION Notwithstanding anything provided to the contrary in Paragraphs 9th and 20th of this Lease, in the event of damage, destruction, taking or condemnation of the Building, or any portion thereof, with respect to which the reasonable cost of repairing, restoring, replacing or reconstructing the Building to its condition immediately prior to such event equals or exceeds one million ($1,000,000.00) dollars. Landlord reserves the right to terminate this Lease upon thirty (30) days written notice to Tenant after the occurrence of such event regardless of whether any repairs, restoration, replacement, or reconstruction is required to the Premises. PARAGRAPH 44TH - PAYMENT OF TAXES, ASSESSMENTS, ETC. Nothing contained in this Lease shall require Tenant to pay any franchise, estate, inheritance, succession, capital levy or transfer tax of Landlord, or any income, excess profits or revenue tax or any other tax, assessment, charge or levy upon the net rent payable by Tenant under this Lease. PARAGRAPH 45TH - ESTOPPEL CERTIFICATE Tenant agrees at any time and from time to time, upon not less than ten (10) days' prior written request by Landlord, to execute, acknowledge and deliver to Landlord, and Landlord agrees at any time and from time to time, upon not less than ten (10) days' prior written request by Tenant, to execute, acknowledge and deliver to Tenant a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications), and the dates to which the net and additional rent and other charges have been paid in advance, if any, and whether or not there is any existing default by Tenant or notice of default served by Landlord, it being intended that any such statement delivered pursuant to this Paragraph 45th may be relied upon by any prospective purchaser of the fee or leasehold by any prospective mortgagee or assignee of any mortgage upon the fee of the Project. PARAGRAPH 46TH - INTENTIONALLY DELETED PARAGRAPH 47TH - HVAC UTILITY COSTS Tenant shall pay as additional rent, the utility costs (gas and electric) associated with the HVAC for the Premises. Until such time as the Premises is equipped with an HVAC system servicing only Tenant's Premises within the Building, the HVAC utility costs for HVAC use on weekdays from 7:30 AM to 8:00 PM and on Saturdays from 9:00 AM to 1:00 PM, shall be pro rated with the other tenants, as reasonably determined by Landlord and Landlord's HVAC Engineer. For HVAC usage for time periods other than weekdays from 7:30 AM to 8:00 PM and on Saturdays from 9:00 AM to 1:00 PM, Tenant shall be billed at an hourly rate set by Landlord based upon the estimate by Landlord's HVAC Engineer of HVAC operating costs for the Building, which shall be $50.00 per hour unless otherwise reasonably adjusted by Landlord. Tenant shall be billed on a monthly basis for such HVAC operating costs by Landlord and said Tenant shall pay same within ten (10) days of such billings. At such time as the Premises is equipped with an HVAC system servicing only Tenant's Premises, then henceforth Tenant shall pay all charges for HVAC service and maintenance. PARAGRAPH 48TH - INTENTIONALLY DELETED PARAGRAPH 49TH - LIMITATIONS ON USE Tenant acknowledges and agrees that Landlord shall enter into certain leases that prohibit certain uses by tenants within the Building. Tenant shall use the Premises for the Permitted Use only and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord. Tenant agrees, upon written notice from Landlord, to immediately refrain from any use of the Premises which violates such Exclusives. Any breach of this Paragraph 49th shall constitute an event of default by Tenant of its Lease obligations. Tenant further acknowledges that Landlord has granted exclusives (the "Exclusives") to other tenants within the Building as follows: 1. OB-GYN Physician Services, Infertility Services, Midwifery and Acupuncture 2. Per future amendment to Lease. Tenant further agrees not to seek consent from the Landlord for an assignment or sublease of Tenant's Premises for any of the following uses: 1. OB-GYN Physician Services, Infertility Services, Midwifery and Acupuncture 2. Per future amendment to Lease. Landlord reserves the right to add additional exclusivity rights for additional physician Tenants as and when it deems necessary as Landlord adds or replaces tenants occupying the Building. Tenant agrees to cooperate with Landlord in this regard and to execute an amendment to this Lease to add such additional exclusivity provision, which amendment shall be prepared by Landlord at its expense. PARAGRAPH 50TH - AMENDMENTS TO NET LEASABLE AREA, RENT & CAMS In the event Tenant's net leasable space is different than as specified in this Lease, Tenant's Premises net leasable area, rent, Real Estate Taxes, Common Area Maintenance Charges, and Snow and Ice Removal Charges shall be amended accordingly. The Building's Architect of Record shall do all such measurements of the Building and the Premises in accordance with the guidelines set forth in the Building Owners & Managers Association Guidelines. Landlord shall provide Tenant with the measurements and calculations of the Building's Architect of Record within sixty (60) days of the Commencement Date, or such later date that is within sixty (60) days of the completion of the work referred to in Paragraph 26th of this Lease. It is anticipated that the ultimate square footage to be determined will not deviate from 500 square feet more than or less than the estimated square footage set forth in Paragraph 1st of this Lease. PARAGRAPH 51ST - VALIDITY OF LEASE The terms, conditions, covenants and provisions of this Lease shall be deemed to be severable. If any clause or provision contained herein is adjudicated to be invalid or unenforceable by a court of competent jurisdiction or by operation of any applicable law, it will not affect the validity of any other clause or provision herein, but such other clauses or provisions shall remain in full force and effect. PARAGRAPH 52ND - NON-WAIVER The various rights, remedies, options and elections of the Landlord expressed herein are cumulative and the failure of the Landlord to enforce strict performance by Tenant of the terms and conditions of this Lease or to exercise any election or option or to resort or have recourse to any remedy herein conferred or the acceptance by the Landlord of any installment of rent after any breach by Tenant, in any one or more instances, shall not be construed or deemed to be a waiver or relinquishment for the future by the Landlord of any such terms and conditions, options, elections or remedies, but the same shall continue in full force and effect. No waiver by the Tenant of any violation or breach of condition by the Landlord shall constitute or be construed as a waiver of any other violation or breach of condition. PARAGRAPH 53RD - NOTICES All notices, demands, consents, approvals and other communications which are required or desired to be given hereunder must be in writing and shall be sent by United States certified mail, postage prepaid, return receipt requested or by private mail courier guaranteeing next day delivery, addressed as follows: If to the Tenant: New Jersey State Medical Underwriters, Inc. Two Princess Road Lawrenceville, NJ 08648 Attention: Catherine E. Williams, Senior Vice President/Corp. Secretary Attention: Verice M. Mason, Senior Vice President/Corp. Counsel FAX: (609) 896-8150 FAX: (609) 896-1712 With a Copy to: Randi Schillinger, Esquire Saiber Schlesinger Satz & Goldstein, LLC One Gateway Center Newark, NJ 07102-5311 FAX: (973)622-3349 If to the Landlord: Gordon Lawrenceville Realty Associates, L.L.C. 1436 East Elizabeth Avenue Linden, NJ 07036 Attention: Victor Angeline, III, Esquire FAX: (908) 925-1140 With a Copy to: Lynn Blessing McDougall, Esquire 2357 Route 33, Suite 2 Robbinsville, NJ 08691 FAX: (609) 208-9511 or such other person or place as either party hereto may designate by notice given as aforesaid. Notice or other correspondence given by personal delivery shall be deemed effectively given and received immediately upon such delivery, and any of the same given by overnight courier in the foregoing manner shall be deemed effectively given and received one (1) business day after delivery to the courier, and any of the same given by mail in the foregoing manner shall be deemed effectively given and received two (2) business days after mailing. Notice may be given by electronically-confirmed fax, by a party's attorney to the other party's attorney. Notice by fax will be effective upon electronically-confirmed receipt. Any and all notices required hereunder may be exchanged between the attorneys for Landlord and Tenant. PARAGRAPH 54TH - TITLE AND QUIET ENJOYMENT The Landlord covenants and represents that the Landlord is the owner of the Project and the Premises located therein and has the right and authority to enter into, execute and deliver this Lease; and does further covenant that Tenant on paying the rent and performing the conditions and covenants contained in this Lease shall and may peaceably and quietly have, hold and enjoy the Premises for the Lease Term and the Renewal Term, as applicable. PARAGRAPH 55TH - ENTIRE AGREEMENT This Lease contains the entire agreement between the parties. No representative, agent or employee of the Landlord has been authorized to make any representations or promises with respect to the leasing of the Premises or to vary, alter or modify the terms hereof. No additions, changes or modifications, renewals or extensions hereof will be binding unless reduced to writing and executed by both the Landlord and Tenant. PARAGRAPH 56TH - CONFORMITY WITH LAWS AND REGULATIONS Landlord may pursue the relief or remedy sought in any invalid clause or provision of this Lease, by conforming the said clause or provision with the provisions of the statutes or regulations of any governmental agency in such case made and provided as if the particular provisions of the applicable statutes or regulations were set forth herein at length. PARAGRAPH 57TH - NUMBER AND GENDER In all references herein to any parties, persons or entities, the use of any particular gender or the plural or singular number is intended to include the appropriate gender or number as the text of the within instrument may require. All the terms, covenants and conditions herein contained shall be for and shall inure to the benefit of and shall bind the respective parties hereto, and their heirs, executors, administrators, personal or legal representatives, successors and assigns. PARAGRAPH 58TH - CHOICE OF LAW This Lease and all matters relating to same shall be governed and construed in accordance with the laws of the State of New Jersey. IN WITNESS WHEREOF, the parties hereto have executed this Lease on the day and year first written above. WITNESS: GORDON LAWRENCEVILLE REALTY ASSOCIATES, L.L.C., a New Jersey Limited Liability Company, Landlord BY: - -------------------------- BARRY GORDON, MANAGER WITNESS: NEW JERSEY STATE MEDICAL UNDERWRITERS, INC., a New Jersey corporation Tenant BY: - -------------------------- PATRICIA A. COSTANTE CHAIRMAN AND CHIEF EXECUTIVE OFFICER EXHIBIT A BUILDING PLAN INDICATING TENANT'S PREMISES EXHIBIT B INTENTIONALLY DELETED EXHIBIT C LANDLORD/TENANT WORK LETTER EXHIBIT D FLOOR LOAD EXHIBIT E HAZARDOUS SUBSTANCES USED, GENERATED, RELEASED, PROCESSED, TRANSPORTED, HANDLED, TREATED, STORED OF DISPOSED OF BY TENANT ONLY ORDINARY OFFICE SUPPLIES. EXHIBIT F INTENTIONALLY DELETED EXHIBIT G INTENTIONALLY DELETED EXHIBIT H PARKING PLAN AND PYLON SIGN DETAIL AMENDMENT TO LEASE THIS AMENDMENT TO LEASE (THIS "AMENDMENT"), made as of the 22nd day of June, 2004, by and between GORDON LAWRENCEVILLE REALTY ASSOCIATES, L.L.C., a New Jersey limited liability company, having an address at 1436 East Elizabeth Avenue, Linden, New Jersey 07036 (the "Landlord"); and NEW JERSEY STATE MEDICAL UNDERWRITERS, INC., a New Jersey corporation, having an address at 2 Princess Drive, Lawrenceville, New Jersey 08648 (the "Tenant"). WHEREAS, the parties entered into a Lease for the Premises (as described in said Lease) at 2 Princess Road, Lawrence Township, Mercer County, New Jersey (the "Property"), as of November 25, 2003; and WHEREAS, Landlord has entered into a lease with East Windsor Pediatric Group, P.A., a New Jersey professional corporation, dated June 22, 2004, for space at the Property, which contains an exclusivity provision for the medical practice of pediatrics; and WHEREAS, Paragraph 49th of Landlord's Lease with Tenant requires Tenant to observe use restrictions as Landlord enters into leases with additional physician tenants and to amend its Lease accordingly; and WHEREAS, the parties wish to amend the Lease and hereby make this Amendment to Lease; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and promises hereinbelow contained, the sum of One ($1.00) Dollar in hand paid by each party hereto to the other, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party hereto to the other, the parties hereto, intending to be legally bound hereby, agree and do hereby amend the Lease as follows: 1. Paragraph 49th of the Lease is hereby modified to include "pediatric medical services" within the uses that are protected by exclusivity provisions in other tenants' leases covering certain premises leased at the Property and as such are prohibited uses to Tenant. 2. All other terms of the Lease as amended are hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. Witness: NEW JERSEY STATE MEDICAL UNDERWRITERS, INC., A New Jersey corporation _____________________________ By:________________________________ Patricia A. Constante, Chairman and Chief Executive Officer Witness: GORDON LAWRENCEVILLE REALTY ASSOCIATES, L.L.C.,a New Jersey limited liability company _____________________________ By:________________________________ Barry Gordon, Manager SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE (THIS "AMENDMENT"), made as of the 1st day of October, 2004, by and between GORDON LAWRENCEVILLE REALTY ASSOCIATES, L.L.C., a New Jersey limited liability company, having an address at 1436 East Elizabeth Avenue, Linden, New Jersey 07036 (the "Landlord"); and NEW JERSEY STATE MEDICAL UNDERWRITERS, INC., a New Jersey corporation, having an address at 2 Princess Road, Suite 2, Lawrenceville, New Jersey 08648 (the "Tenant"). WHEREAS, the parties entered into a Lease for the Premises (as described in said Lease) at 2 Princess Road, Lawrence Township, Mercer County, New Jersey (the "Property"), as of November 25, 2003, with an Effective Date of April 27, 2004; and WHEREAS, the parties entered into an Amendment to Lease dated as of June 22, 2004, modifying the exclusivity provision (the Lease and this amendment are collectively hereinafter referred to as the "Lease"); and WHEREAS, the Tenant has requested that the Landlord recapture a portion of the Premises; and WHEREAS, the parties wish to amend the Lease and hereby make this Second Amendment to Lease; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and promises hereinbelow contained, the sum of One ($1.00) Dollar in hand paid by each party hereto to the other, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party hereto to the other, the parties hereto, intending to be legally bound hereby, agree and do hereby amend the Lease as follows: 1. Paragraph 1st of the Lease and Exhibit "A" attached to and made a part of the Lease describe the Premises as approximately 33,432 s.f. of net leasable space on the first and second floors, and 1,568 s.f. of warehouse space. Subject to the terms and conditions of this Second Amendment, Landlord and Tenant agree that, effective as of October 1, 2004, the Premises shall consist of 5,014 s.f. of net leasable space on the first floor, 18,700 s.f. of net leasable space on the second floor, and 1,568 s.f. of warehouse space, and the Premises shall thereafter be so defined. Exhibit "A" shall be deleted and the new Exhibit "A" attached to and made a part of this Second Amendment shall be substituted in its place. Notwithstanding the substitution of a new Exhibit "A" which sets forth Phase I proposed recovered square footage and Phase II proposed recovered square footage, nothing herein shall obligate Landlord to recapture any Phase II proposed square footage unless and until an additional amendment to the Lease is entered into by and between the parties. To the extent that Tenant is physically occupying the space identified as Phase I proposed recovered square footage, Tenant shall vacate and surrender said Phase I square footage prior to October 15, 2004, provided however, Tenant shall not be in default of this Lease, if it has not fully vacated the space identified as Phase I proposed recovered square footage, provided that Tenant does not interfere with any other tenant's space or tenant or visitors to such space and further provided that Tenant diligently pursues vacating the space and has, in fact, vacated said space by November 12, 2004. 2. Paragraph 4th of the Lease shall be modified such that, effective as of October 1, 2004, Tenant shall commence the payment to Landlord of basic rent at the rate of $14.50 per square foot for office space and $7.00 per square foot for warehouse space, for a total basic rent of $354,829 per year and $29,569.08 per month. Paragraph 4th shall be further modified to delete the table of basic rent therein and substitute the following revised table: YEAR RENT ANNUAL MONTHLY RENTAL PER S.F. NET RENTAL NET RENTAL 1st Year $15.00* (subject to the stated decrease adjustment as modified) $ 7.00 $ 10,976 $ 914.66 2nd Year $ 15.00 $ 355,710 $29,642.50 $ 7.00 $ 10,976 $ 914.66 3rd Year $ 15.00 $ 355,710 $29,642.50 $ 7.00 $ 10,976 $ 914.66 4th Year $ 15.00 $ 355,710 $29,642.50 $ 7.00 $ 10,976 $ 914.66 5th Year $ 15.00 $ 355,710 $29,642.50 $ 7.00 $ 10,976 $ 914.66 3. Paragraph 6th Renewal Term Rent shall be modified as follows: FIRST RENEWAL RENT ANNUAL MONTHLY TERM PER S.F. NET RENTAL NET RENTAL 6th Year $ 16.25 $385,352.50 $32,112.71 $ 7.00 $ 10,976.00 $ 914.66 7th Year $ 16.25 $385,352.50 $32,112.71 $ 7.00 $ 10,976.00 $ 914.66 8th Year $ 16.25 $385,352.50 $32,112.71 $ 7.00 $ 10,976.00 $ 914.66 9th Year $ 16.25 $385,352.50 $32,112.71 $ 7.00 $ 10,976.00 $ 914.66 10th Year $ 16.25 $385,352.50 $32,112.71 $ 7.00 $ 10,976.00 $ 914.66 4. Paragraph 7th Repairs and Care shall be modified to delete the sentence "Tenant shall also be responsible, at its own cost and expense, for the care and maintenance of the elevator between the first and second floors of the Premises, which shall include keeping in effect a maintenance contract for such elevator." As of October 1, 2004, the said care and maintenance of the elevator, including the maintenance contract, shall fall within the Common Area Maintenance Charges to be paid for on a prorata basis by the tenants using such elevator. The elevator maintenance contract shall be assigned by Tenant to Landlord. 5. Paragraph 16th Security Deposit shall be modified to provide that, as a condition of Landlord's agreement to recapture the Phase I recovered square footage, Landlord and Tenant agree that Tenant shall pay to Landlord from the Security Deposit, and release all rights thereto, that amount which represents the difference in the original square footage of office space included in the Premises and the square footage of the Premises after giving effect to the recapture of the Phase I recovered square footage multiplied by three (3) months. Paragraph 26th of the Lease is modified to provide that of the $50,000 previously paid by Landlord to Tenant for Tenant's Work, the amount of $12,188.92 shall be returned to Landlord from the Security Deposit. The amount paid over to Landlord is $48,631.42 ($36,442.50 + $12,188.92) and the remaining Security Deposit is $207,596.54. In the event that Tenant does not remain as a Tenant at the Premises for the full initial five-year term of the Lease, then, in addition to any other remedies that may be available to Landlord, if any, an amount equal to three (3) months' rent on the Phase I recovered square footage (i.e. $36,442.50) shall be due and payable to Landlord as consideration for the above-noted recapture. 6. Paragraph 19th of the Lease is modified to provide that, effective as of October 1, 2004, Tenant's Proportionate Share shall be 35.245% percent from October 1, 2004, through the last day of the Second Stage, and thereafter shall be fixed at 32.759% percent for purposes of billing the CAM Charges of the Project (subject to adjustment after measurement in accordance with Paragraph 50 of the Lease). Effective October 1, 2004, the revised monthly amount payable by Tenant for CAM Charges is $8,427.33 7. Paragraph 26th of the Lease incorporating Exhibit "C" into the Lease is hereby amended to include a revised Exhibit "C" showing (by line crossouts) items noted thereon to either be completed or no longer required as a result of the recapture of the Phase I recovered square footage. The new Exhibit "C" is attached hereto and made a part hereof. 8. All other terms of the Lease as amended are hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. Witness: NEW JERSEY STATE MEDICAL UNDERWRITERS, INC., A New Jersey corporation _____________________________ By:________________________________ Patricia A. Constante, Chairman and Chief Executive Officer Witness: GORDON LAWRENCEVILLE REALTY ASSOCIATES, L.L.C., a New Jersey limited liability company _____________________________ By:________________________________ Barry Gordon, Manager EX-31.1 3 tex31_1-3883.txt EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER I, Patricia A. Costante, certify that: 1. I have reviewed this annual report on Form 10-K of The MIIX Group, Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 15, 2004 /s/ Patricia A. Costante ----------------------------------- Chairman and Chief Executive Officer EX-31.2 4 tex31_2-3883.txt EX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER I, Allen G. Sugerman, certify that: 1. I have reviewed this annual report on Form 10-K of The MIIX Group, Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 15, 2004 /s/ Allen G. Sugerman --------------------------------- Chief Financial Officer EX-32.1 5 tex32_1-3883.txt EX-32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 I, Patricia A. Costante, Chief Executive Officer of The MIIX Group, Incorporated (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that (1) the Form 10-K of the Company for the annual period ended December 31, 2003 (the "Form 10-K"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 15, 2004 /s/ Patricia A. Costante - -------------------------------------- Name: Patricia A. Costante Title: Chief Executive Officer EX-32.2 6 tex32_2-3883.txt EX-32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 I, Allen G. Sugerman, Chief Financial Officer of The MIIX Group, Incorporated (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that (1) the Form 10-K of the Company for the annual period ended December 31, 2003 (the "Form 10-K"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 15, 2004 /s/ Allen G. Sugerman - ------------------------------------ Name: Allen G. Sugerman Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----