<PAGE> 1
-----------------------------------------------------------------------
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 1997, or
[ ] Transition report pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------------------
COMMISSION FILE NUMBER 1-13340
------------------------------
MID ATLANTIC MEDICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
52-1481661
(IRS Employer Identification Number)
4 TAFT COURT, ROCKVILLE, MARYLAND
(Address of principal executive offices)
20850
(Zip code)
(301) 294-5140
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's classes of common stock
was 54,677,862 shares of common stock, par value $.01, outstanding as of June
30, 1997.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Note 1)
(in thousands except share amounts)
<TABLE>
<CAPTION>
(Unaudited) (Note)
June 30, 1997 December 31, 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,203 $ 4,065
Short-term investments 155,209 151,359
Accounts receivable, net of allowance of $5,342 and $5,366 76,260 77,042
Prepaid expenses, advances and other 26,931 32,323
Deferred income taxes 2,071 4,033
----------- -----------
Total current assets 266,674 268,822
Property and equipment, net of accumulated
depreciation of $26,334 and $21,908 48,645 45,210
Statutory deposits 9,114 9,125
Other assets 10,758 10,261
Deferred income taxes 1,088 1,301
---------- -----------
Total assets $ 336,279 $ 334,719
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 60 $ 60
Short-term borrowings 1,793 1,973
Accounts payable 15,530 18,755
Medical claims payable 112,755 118,649
Deferred premium revenue 10,082 10,479
Deferred income taxes 255 36
----------- -----------
Total current liabilities 140,475 149,952
Notes payable 105 134
Deferred income taxes 236 233
----------- -----------
Total liabilities 140,816 150,319
----------- -----------
Stockholders' equity (Notes 2 and 3)
Common stock, $.01 par, 100,000,000 shares authorized; 56,772,502 issued
and 54,677,862 outstanding at June 30, 1997 and December 31, 1996 567 567
Additional paid-in capital 186,031 173,325
Stock compensation trust (common stock held in trust) (127,780) (120,652)
Treasury stock, 2,094,640 shares at June 30, 1997 and December 31, 1996 (41,211) (41,211)
Unrealized gains on investments, net of tax of $1,411 and $174 2,156 265
Retained earnings 175,700 172,106
----------- -----------
Total stockholders' equity 195,463 184,400
----------- -----------
Total liabilities and stockholders' equity $ 336,279 $ 334,719
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1996 has been extracted from the
audited financial statements at that date.
See accompanying notes to these financial statements.
<PAGE> 3
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1997 1996
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 267,992 $ 266,685
Fee and other 4,137 4,229
Life and short-term disability premium 1,274 737
Home health services 5,285 5,382
Investment 3,755 4,422
----------- -----------
Total revenue 282,443 281,455
----------- -----------
Expense
Medical 240,135 256,326
Life and short-term disability claims 517 581
Home health patient services 4,034 3,614
Administrative (including interest expense of $97 and $174) 33,328 31,683
----------- -----------
Total expense 278,014 292,204
----------- -----------
Income (loss) before income taxes 4,429 (10,749)
Provision for income taxes (1,641) 4,212
----------- -----------
Net income (loss) $ 2,788 $ (6,537)
=========== ===========
Income (loss) per common and common equivalent share:
Net income (loss) $ .06 $ (.14)
=========== ===========
Weighted average common and common equivalent shares outstanding 46,937,950 46,830,823
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 4
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1997 1996
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 539,238 $ 526,280
Fee and other 8,658 8,126
Life and short-term disability premium 2,435 1,155
Home health services 10,351 10,007
Investment 4,926 7,445
----------- -----------
Total revenue 565,608 553,013
----------- -----------
Expense
Medical 484,779 477,003
Life and short-term disability claims 1,410 871
Home health patient services 7,721 6,961
Administrative (including interest expense of $204 and $425) 65,960 59,897
----------- -----------
Total expense 559,870 544,732
----------- -----------
Income before income taxes 5,738 8,281
Income tax expense (2,144) (2,949)
----------- -----------
Net income $ 3,594 $ 5,332
=========== ===========
Income per common and common equivalent share:
Net income $ .08 $ .11
=========== ===========
Weighted average common and common equivalent shares outstanding 46,717,668 47,567,844
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 5
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ending
June 30, 1997
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 3,594
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 4,916
Provision for bad debts (24)
Provision for deferred income taxes 373
Loss on sale and disposal of assets 1
Decrease in accounts receivable 806
Decrease in prepaid expenses, advances, and other 5,392
Decrease in accounts payable (3,225)
Decrease in medical claims payable (5,894)
Decrease in deferred premium revenue (397)
-----------
Total adjustments 1,948
-----------
Net cash provided by operating activities 5,542
Cash flows used in investing activities:
Purchases of short-term investments (52,186)
Sales of short-term investments 51,464
Purchases of property and equipment (7,921)
Maturities of statutory deposits 11
Purchases of other assets (178)
Proceeds from sale of assets 37
-----------
Net cash used in investing activities (8,773)
Cash flows provided by financing activities:
Principal payments on notes payable (29)
Decrease in short-term borrowings (180)
Exercise of stock options 3,334
Stock option tax benefit 2,244
-----------
Net cash provided by financing activities 5,369
-----------
Net increase in cash and cash equivalents 2,138
Cash and cash equivalents at beginning of period 4,065
-----------
Cash and cash equivalents at end of period $ 6,203
===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 6
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ending
June 30, 1996
------------
<S> <C> <C>
Cash flows used in operating activities:
Net income $ 5,332
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization $ 3,615
Provision for bad debts 342
Provision for deferred income taxes 214
Loss on sale and disposal of assets 8
Increase in accounts receivable (25,046)
Increase in prepaid expenses, advances, and other (11,754)
Increase in accounts payable 4,171
Increase in medical claims payable 22,352
Decrease in deferred premium revenue (4,519)
-----------
Total adjustments (10,617)
-----------
Net cash used in operating activities (5,285)
Cash flows provided by investing activities:
Purchases of short-term investments (240,429)
Sales of short-term investments 275,610
Purchases of property and equipment (8,874)
Purchases of statutory deposits (2,106)
Maturities of statutory deposits 1,617
Purchases of other assets (146)
Proceeds from sale of assets 233
-----------
Net cash provided by investing activities 25,905
Cash flows used in financing activities:
Principal payments on notes payable (180)
Decrease in short-term borrowings (330)
Exercise of stock options 5,539
Stock option tax benefit 5,768
Purchase of treasury stock (39,918)
-----------
Net cash used in financing activities (29,121)
-----------
Net decrease in cash and cash equivalents (8,501)
Cash and cash equivalents at beginning of period 10,874
-----------
Cash and cash equivalents at end of period $ 2,373
===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 7
MID ATLANTIC MEDICAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
INTRODUCTION
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose
subsidiaries are active in managed health care and other life and health
insurance related activities. MAMSI's principal markets currently include
Maryland, Virginia, the District of Columbia, Delaware, West Virginia, North
Carolina and Pennsylvania. MAMSI and its subsidiaries (collectively referred to
as the "Company") have developed a broad range of managed health care, health
insurance and related ancillary products and deliver these services through
health maintenance organizations ("HMOs"), preferred provider organizations
("PPOs"), a life and health insurance company, home health care companies, a
pharmaceutical company and an outpatient surgery center.
MAMSI delivers managed health care services principally through HMOs. The HMOs,
MD-Individual Practice Association, Inc. ("M.D. IPA"), Optimum Choice, Inc.
("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc.
of Pennsylvania ("OCIPA") arrange for health care services to be provided to an
enrolled population for a predetermined, prepaid fee, regardless of the extent
or nature of services provided to the enrollees. The HMOs offer a full
complement of health benefits, including physician, hospital and prescription
drug services.
Other MAMSI subsidiaries include Alliance PPO, Inc., which provides a PPO
delivery network to employers and insurance companies, and Mid Atlantic
Psychiatric Services, Inc., which provides specialized non-risk mental health
services. MAMSI Life and Health Insurance Company develops and markets indemnity
health products in addition to life and short-term disability insurance.
HomeCall, Inc., FirstCall, Inc., and HomeCall Pharmaceutical Services, Inc.
provide in-home medical care including skilled nursing, infusion and therapy to
both MAMSI's HMO members and other payors.
NOTE 1 - FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of June 30, 1997, the
consolidated statements of operations for the three and six months ended June
30, 1997 and 1996, and the consolidated statements of cash flows for the six
months ended June 30, 1997 and 1996 have been prepared by MAMSI without audit.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
December 31, 1996 audited consolidated financial statements. The results of
operations for the three and six month periods ended June 30 are not necessarily
indicative of the operating results for the full year.
Certain balances in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
NOTE 2 - EARNINGS PER SHARE
The computation of earnings per common and common equivalent share is based upon
the weighted average number of common shares outstanding adjusted for the
dilutive effect of common stock equivalents consisting solely of stock options.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings Per Share" ("Statement 128"), which will require the Company to
change the current method of computing earnings per share and restate all prior
periods. Statement 128 is required to be adopted on December 31, 1997 and
requires, among other things, that the calculation of primary earnings per
common share exclude the dilutive effect of common stock options. The change in
calculation method is not expected to have a material effect on reported
earnings per common share.
<PAGE> 8
NOTE 3 - STOCK COMPENSATION TRUST
On August 26, 1996, the Company established the MAMSI Stock Compensation Trust
("SCT") to fund a portion of its obligations arising from its various stock
compensation plans. MAMSI funded the SCT with 9,130,000 shares of newly issued
MAMSI stock. In exchange, the SCT has delivered a promissory note to MAMSI for
approximately $129.9 million which represents the purchase price of the shares.
Amounts owed by the SCT to MAMSI will be repaid by cash received by the SCT or
will be forgiven by MAMSI, which will result in the SCT releasing shares to
satisfy MAMSI obligations for stock compensation.
For financial reporting purposes, the SCT is consolidated with MAMSI. The fair
market value of the shares held by the SCT is shown as a reduction to
stockholders' equity in the Company's consolidated balance sheet. All
transactions between the SCT and MAMSI are eliminated. The difference between
the cost and fair value of common stock held in the SCT is included in
consolidated additional paid-in capital. At June 30, 1997, the SCT held
8,211,000 shares of common stock at a fair market value of approximately $127.8
million.
Shares held by the SCT are excluded from weighted average shares outstanding
used in the computation of income or loss per common equivalent share.
NOTE 4 - NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130
"Reporting Comprehensive Income" ("Statement 130") and Statement No. 131
"Disclosure About Segments of an Enterprise and Related Information" ("Statement
131"). Statement 130 establishes standards for reporting and display of
comprehensive income in a full set of general purpose financial statements, and
Statement 131 significantly changes the way companies report segment information
in annual financial statements. Each of these statements is effective for
periods beginning after December 15, 1997. The Company is currently evaluating
the effect of these pronouncements on its financial statement presentation and
disclosure.
<PAGE> 9
MID ATLANTIC MEDICAL SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
All forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations is based on
management's current knowledge of factors affecting MAMSI's business. MAMSI's
actual results may differ materially if these assumptions prove invalid.
Significant risk factors, while not all inclusive, are:
1. The possibility of increasing price competition in the Company's market
place.
2. The possibility of state or federal budget related mandates that reduce
premiums for Medicaid or Medicare recipients.
3. The potential for increased medical expenses due to:
- Increased utilization by the Company's membership.
- Inflation of costs in the provider community.
- Federal or state mandates that increase benefits.
- Higher costs for newly developed and/or enhanced pharmaceuticals.
4. The possibility that the Company is not able to expand its service territory
as planned due to regulatory delays and/or inability to contract with
appropriate providers.
5. The possibility that the Company is not able to increase its market
share at the anticipated premium rates.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE THREE MONTHS ENDED JUNE
30, 1996.
Consolidated net income (loss) of the Company was $2,788,000 and ($6,537,000)
for the second quarter of 1997 and 1996, respectively. Net earnings (loss) per
share were $0.06 in the second quarter of 1997 as compared to $(0.14) in the
second quarter of 1996. The increase in earnings is primarily attributable to a
significant decrease in the medical loss ratio for commercial products. The
medical loss ratio decreased due to increased efforts by the Company to control
medical costs through utilization review, case management and enhanced claim
adjudication, as well as increased premiums. The Company prices its health
products competitively with a goal of increasing its membership base, thereby
enhancing its strategic position in its market place. The Company currently has
one of the largest HMO and managed care enrollments and also the largest network
of contract providers of medical care in its service area (which includes the
entire states of Maryland and Delaware, the District of Columbia, most counties
and cities in Virginia and certain areas of West Virginia, North Carolina and
Pennsylvania.)
Revenue for the three months ended June 30, 1997 increased approximately $1.0 or
less than 1 percent over the three months ended June 30, 1996. A 2.7 percent
decrease in net average HMO and indemnity enrollment resulted in a decrease of
approximately $7.2 million in health care premium revenue over the three months
ended June 30, 1996, and a 3.3 percent increase in average premiums per HMO and
indemnity enrollee increased health care premium revenue by $8.5 million over
the three months ended June 30, 1996. Management believes that commercial health
premiums should continue to increase slightly over the next six months as the
Company continues to increase its commercial membership and as new and renewing
groups are charged higher premium rates due to legislatively mandated benefit
enhancements and general price increases initiated by the Company. Medicare
premiums should remain relatively stable and Medicaid premiums should begin to
show an overall decrease during the second half of 1997 as the State of
Maryland, effective July 1, 1997, reassigned the Company's Maryland Medicaid
membership to other managed care organizations. The statements in the preceding
paragraphs relating to increasing or decreasing premiums are forward-looking
statements. See "Forward Looking Information" above for a description of the
risk factors that may effect health premiums per member.
<PAGE> 10
The Company began implementing increased premium rates across essentially all of
its commercial products in July of 1996. Since most of the Company's contracts
are for a one year period, increased pricing generally cannot be initiated until
a contract reaches its renewal date. Therefore, price increases are not made
across the Company's membership at the same time. Management believes that the
commercial premium rate increases will have the effect of slowing down the
Company's future membership growth. In addition, the Company received an
approximate 2.5 percent premium rate increase in its Virginia Medicaid program
and an approximate 4 percent increase in its Maryland Medicaid program both
effective July 1, 1996. Effective January 1, 1997, the Company received an
average premium increase of 5 percent related to its Medicare membership.
The Company's future membership growth depends on several factors such as
relative premium prices and product availability, future increases or decreases
in the Company's service area, increased competition in the Company's service
area and changes in state mandated enrollment in Medicaid HMO programs in which
the Company participates. Enrollment may also decrease if the Company determines
that premium reimbursement rates related to certain state Medicaid programs are
inadequate, which would cause the Company to voluntarily withdraw from
participation, as was the case with the State of Maryland Medicaid Program.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries contributed $5.3 million in revenue in the second
quarter of 1997 as compared to $5.4 million for the same period in 1996. These
subsidiaries had increased business volume particularly in the home infusion and
mail order pharmacy areas, and an increased relative percentage of business
conducted for MAMSI HMO and indemnity members which revenues are eliminated in
consolidation, thereby resulting in the slight decrease in reported revenues.
Revenue from group life and group short-term disability products contributed
$1.3 million in revenues for the second quarter of 1997 as compared to $.7
million for the same period in 1996.
In 1993, MAMSI invited the National Committee for Quality Assurance ("NCQA"), a
private, non-profit organization, to evaluate the Company's methodologies in an
effort to receive NCQA accreditation. NCQA accreditation evaluates how well a
health plan manages all parts of its delivery system including physicians,
hospitals, other providers and administrative services in order to continuously
improve health care for its members. NCQA accreditation is a voluntary process.
In the 1993 review, the Company did not meet certain of NCQA's criteria and,
therefore, did not receive NCQA accreditation. In response, MAMSI adopted
methodologies and programs designed to respond to concerns and questions raised
in NCQA's assessment. The Company requested the NCQA to perform another
accreditation review which took place in December of 1996. In May 1997, NCQA
informed the Company that two of its HMOs received One-Year Accreditation. The
One-Year Accreditation indicates the plans have well-established quality
improvement programs and meet most NCQA standards. The NCQA Standards for
Accreditation are purposely set high to encourage health plans to continuously
enhance their quality. No comparable evaluation exists for fee-for-service
health care. The Company has implemented the Health Plan and Employer Data and
Information Set ("HEDIS") 3.0 which represents a core set of performance
measures developed by NCQA to serve the employer as a purchaser.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased to 89.6 percent for the second quarter of 1997 as compared to
96.1 percent for the comparable period of 1996 and, on a per member per month
basis, medical expenses decreased 3.7 percent. This decrease is due to a
combination of factors including continuing efforts by the Company to implement
product specific cost containment controls, expanded activity in specialized
subrogation areas and claims review for dual health coverage, the adoption of
regionalized and product specific fee maximums for health services, and the
identification and possible termination of certain providers and specialists
from the delivery network following a continuing intensified peer review
analysis. Additionally, the Company has greatly expanded its initial health
assessments of new Medicare members after they have enrolled and has also
increased its case management personnel. The Company has also reduced the
service area in which it offers its Medicare risk plan. This reduction in
service area, effective January 1, 1997, primarily targets those areas where the
current Medicare reimbursement is insufficient to support the Company's
participation. These initiatives should help to continue to control the
Company's medical loss ratio. The overall medical loss ratio is expected to
stabilize and decrease slowly from the current level over the next six months
due to the combined effects of increased premiums, and expanded
<PAGE> 11
utilization and case management efforts. The statements in the preceding
paragraphs regarding future utilization rates, cost containment initiatives,
total medical costs and future increases in health premiums per member are
forward-looking statements. See "Forward-Looking Information" above for a
description of risk factors that may affect medical expenses per member and the
medical loss ratio.
Administrative expenses as a percentage of revenue ("administrative expense
ratio") increased to 11.8 percent for the second quarter of 1997 as compared to
11.3 percent for the same period in 1996. This increase is primarily due to
increased salaries and expenses in certain administrative areas of the Company,
including utilization management and customer service departments, as well as
additional sales expenses in new expansion areas. Management believes that the
administrative expense ratio will exceed the current level over the next six
months due to the continued expansion of utilization management, claims audit
and other personnel. Management's expectations concerning the administrative
expense ratio are forward-looking statements. The administrative expense ratio
is affected by changes in health premiums per member, development of the
Company's expansion areas and increased administrative activity related to
business volume.
Investment income decreased $.7 million primarily due to a decrease in realized
gains on sales of marketable equity securities.
The net margin rate increased from (2.3) percent in the second quarter of 1996
to 1 percent in the current quarter. This increase is primarily due to decreased
medical expenses and increased premiums.
THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1996
The Company's consolidated net income for the six months ended June 30, 1997
decreased to $3,594,000 from $5,332,000 for the six months ended June 30, 1996.
Earnings per share on net income decreased from $.11 in the first six months of
1996 to $.08 for the same period in 1997. The reduction in earnings is primarily
attributable to decreased investment earnings and increased administrative
expense.
Revenue for the six months ended June 30, 1997 increased approximately $12.6
million or 2.3 percent over the six months ended June 30, 1996. A 2.3 percent
increase in average premiums per HMO and indemnity enrollee increased health
premium revenue by approximately $13.0 million. Revenue from life and short-term
disability products contributed $2.4 million in for the first six months of 1997
as compared to $1.2 million for the same period in 1996.
The medical loss ratio decreased to 89.9 percent for six months ended June 30,
1997 as compared to 90.6 percent for the comparable period in 1996. The reasons
for this decrease are consistent with the items discussed in the quarterly
analysis and additionally, during the first quarter of 1997, the Company
identified certain claims which were overpaid. These overpayments were caused,
in large part, by a combination of factors including the ever increasing
complexity of the claims paying process as well as providers enhancing their
ability to maximize charges. In connection with these overpayments, in the first
quarter of 1997 the Company recorded, as a reduction of medical expenses,
approximately $5 million relating to claims paid in 1996 which has been or will
be collected during 1997. The Company believes that it has taken the appropriate
action and implemented the appropriate controls to insure that future claims are
paid at the appropriate amount.
The administrative expense ratio for the first six months of 1997 increased to
11.7 percent as compared to 10.8 percent for the same period in 1996. The
reasons for this increase are consistent with the items discussed in the
quarterly analysis.
The net margin rate was approximately 1.0 percent for the first six months of
both 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive and the majority of the
Company's expenses are payments to health care providers, which generally vary
in direct proportion to the health premium revenues received by the Company.
Although medical utilization rates vary by season, the payments for such
expenses lag behind cash inflow from premiums because of the lag in provider
billing procedures. In the past, the Company's cash
<PAGE> 12
requirements have been met principally from operating cash flow and it is
anticipated that this source will continue to be sufficient in the future.
Prepaid expenses, advances and other decreased from $32.3 million at December
31, 1996 to $26.9 million at June 30, 1997, principally due to tax refunds
received related to 1996. Property and equipment increased from $45.2 million at
December 31, 1996 to $48.6 million at June 30, 1997 principally due to the
Company's ongoing enhancements to its electronic data processing equipment as
well as renovations of certain portions of the Company's office buildings.
Medical claims payable decreased from $118.6 million at December 31, 1996 to
$112.8 million at June 30, 1997 due to reduced levels of medical expense
partially offset by the timing of payment to medical providers.
The Company currently has access to total revolving credit facilities of $24.0
million, which is used to provide short-term capital resources for routine cash
flow fluctuations. At June 30, 1997, approximately $1.8 million was drawn
against these credit facilities.
Following is a schedule of the short-term capital resources available to the
Company (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 6,203 $ 4,065
Short-term investments 155,209 151,359
Working capital advances to Maryland hospitals 6,432 6,432
----------- -----------
Total available liquid assets 167,844 161,856
Credit line availability 22,207 21,802
----------- -----------
Total short-term capital resources $ 190,051 $ 183,658
=========== ===========
</TABLE>
The Company believes that the cash flow generated from operations along with its
current liquidity and borrowing capabilities are adequate for both current and
planned expanded operations. Certain MAMSI subsidiaries that are subject to
regulation by state insurance departments must notify state regulators before
the payment of any dividends to MAMSI and, in certain circumstances, must
receive positive affirmation prior to such payment. The Company does not
perceive these requirements to be a significant restriction on the subsidiaries'
ability to pay appropriate future dividends to the parent company.
The Company does not anticipate any adverse impact on future liquidity due to
medical malpractice issues because the Company carries substantial professional
liability insurance.
Certain capital expenditures will be made over the next six months to enhance
the Company's computer systems, to establish additional sales offices and to
make necessary improvements to existing administrative offices. The Company has
entered into an agreement to purchase, for approximately $8.1 million,
additional office space for operational purposes. In July, 1997 the Company made
additional working capital advances to Maryland hospitals in the amount of $2.8
million.
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as the defendant in a suit filed by certain medical
providers on March 26, 1997 in the Circuit Court for Anne Arundel County,
Maryland, which alleges that the Company improperly reduced payments to
participating providers in the form of "withhold". It is the plaintiff's
allegation that certain payments should not have been reduced in this manner and
seek unspecified damages. This matter has been filed as a class action against
the Company.
At this time the Company believes that the action is premature as the contract
mandates that contract disputes be submitted to arbitration. Furthermore, the
Company believes that it has meritorious defenses. Although no amount has been
specified in the complaint, the Company believes that the ultimate resolution of
this matter will not have a material adverse effect on its financial statements.
The Company is involved in other various legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes that any
ultimate liability that could arise from these other actions will not materially
affect the Company's consolidated financial position or results of operation.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the stockholders of MAMSI was held on April 29, 1997. The
following matters were submitted to a vote of the stockholders during the annual
meeting:
(1) The following individuals were elected to the Board of Directors for a three
year term with the indicated votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Mark D. Groban, M.D. 43,222,513 2,581,224 None
John P. Mamana, M.D. 43,677,506 2,126,231 None
William M. Mayer, M.D. 43,729,097 2,074,640 None
Gretchen P. Murdza 43,643,413 2,160,324 None
</TABLE>
Board members whose term of office continued after the meeting are as follows:
Thomas P. Barbera
Francis C. Bruno, M.D.
Stanley M. Dahlman, Ph.D.
Peter L. Flaherty, Jr., M.D.
Walter Girardin
George T. Jochum
Creighton R. Schneck
Alfred Talamantes
James A. Wild
(2) The adoption of the 1997 Bonus Plan was ratified by a count of 37,283,174
affirmative votes, 8,097,413 negative votes and 423,150 abstentions.
There we no broker non-votes with respect to the election of directors or
adoption of the 1997 Bonus Plan.
ITEM 5. OTHER INFORMATION
None
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index on page 16 of the Form 10-Q.
(b) There were no reports filed on Form 8-K during the quarter ended June
30, 1997.
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by undersigned
thereto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC.
--------------------------------------------
(Registrant)
Date: August 14, 1997 /s/ Robert E. Foss
----------------------------
Robert E. Foss
Executive Vice President
and
Chief Financial Officer
<PAGE> 16
6(a) List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
10.85 Agreement of Purchase of Real Property
by Mid Atlantic Medical Services, Inc.. . . . . .
27 Financial Data Schedule for the Six
Months Ended June 30, 1997. . . . . . . . . . . .
<PAGE> 1
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT OF PURCHASE AND SALE (the "Agreement") is made this 12th day of
May , 1997, by and between STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a
body corporate of the State of Illinois, (hereinafter "Seller") and MID ATLANTIC
MEDICAL SERVICES, INC., or assigns ("Purchaser").
RECITALS
R-1. WHEREAS, Seller is the owner of record and in fact, legally and
beneficially, of certain land, buildings, improvements and certain personal
property thereon, located at 800 Oak Street, Frederick, Maryland, also known as
The State Farm Building, containing approximately 208,812 square feet on 26.05
acres of land, more or less.
R-2. WHEREAS, Seller desires to sell the described property to Purchaser
and Purchaser desires to purchase the described property from Seller at the
price and upon the terms and conditions hereinafter set forth.
WITNESSETH:
That in consideration of the mutual covenants of the parties hereto and for
other good and valuable consideration, the receipt, sufficiency and adequacy of
which are hereby acknowledged, the parties hereto, intending legally to be
bound, hereby agree as follows:
1. RECITALS. The foregoing Recitals to this Agreement are incorporated
herein and made a part of this Agreement.
2. SALE AND PURCHASE. Seller agrees to sell, assign, transfer and convey in
fee simple to Purchaser and Purchaser agrees to purchase from Seller, under the
terms and conditions set forth in this Agreement, the following (all of which is
collectively referred to hereafter as the "Property").
A. Real Property. That certain real property located at 800 Oak Street,
Frederick County, Maryland, and more specifically described on "Exhibit A",
attached hereto and incorporated herein by reference ("Real Property") and all
appurtenances, rights, privileges, and easements and development rights
benefiting, belonging or pertaining thereto, and any right, title and interest
of Seller in and to any land lying in the bed of any street, road or highway or
other right-of-way, whether existing or proposed, in front of or adjoining the
Real Property;
B. Improvements. All improvements and fixtures located on the Real
Property, including without limitation all buildings and structures presently
located on the Real Property and all machinery, apparatus, equipment, fittings
and fixtures presently located in or upon the Real Property or any part thereof
and used or usable in connection with any present or future operations of the
Real Property. The foregoing
<PAGE> 2
property includes all ordinary building heating, lighting and incinerating
equipment, pipes, pumps, tanks, motors, conduits, plumbing, lifting, fire
prevention, fire extinguishing, refrigerating, ventilating apparatus, air
cooling and air conditioning apparatus, all of which are free and clear of any
title retention or security agreement. The assets listing in this subparagraph
are hereinafter referred to as the "Improvements".
C. Personal Property. All personal property of Seller located on or in or
used in connection with the Real Property and Improvements and described in
"Exhibit B", attached hereto and incorporated herein by reference ("Personal
Property").
D. Plans and Specifications. All construction plans and specifications for
the Property, in the possession of Seller ("Plans and Specifications"). All
documents shall be delivered by Seller to Purchaser without warranty or
liability.
3. PURCHASE PRICE.
A. Purchase Price. The total purchase price for the Property is Eight
Million Six Hundred Thousand and no/100 Dollars ($8,100,000.00) ("Purchase
Price").
B. Payment Terms. The Purchase Price shall be payable as follows:
(1) Deposit. Contemporaneous with the execution of this Agreement by both
parties, Purchaser shall deliver a deposit in the amount of Five Hundred
Thousand Dollars Dollars ($500,000.00) to Shoemaker, Horman & Clapp, P.A. and
Richard H. Tanenbaum, Esq. as co-escrow agents ("Co-Escrow Agents") to be held
in escrow subject to the terms of this Agreement. The deposit shall be in the
form of a promissory note ("Note") payable to the order of Seller and shall
conform to the promissory note attached hereto as "Exhibit C" and incorporated
herein by reference. Upon the expiration of the review period described in
paragraph 8 below, Purchaser shall replace the Note with a cash deposit in the
same amount ("Deposit") and the Note shall be cancelled and returned to
Purchaser. The Deposit shall be maintained in a high-yield interest-bearing
account, with the interest accruing for the benefit of the Purchaser in the
event of settlement. In the event of Purchaser's default hereunder, all accrued
interest shall become part of the Deposit and shall follow the Deposit as
hereinafter provided.
19
<PAGE> 3
(2) Cash at Settlement. At settlement, Purchaser shall pay the sum of Eight
Million Six Hundred Thousand Dollars ($8,100,000.00), of which sum the Deposit
shall be a part, by cash, cashier's check, certified check or wire transfer.
4. SETTLEMENT.
(A) Time and Place. Settlement hereunder shall be held within seven (7)
business days after the expiration of the contingencies and/or conditions of
Purchaser's obligation to proceed to settlement ("Settlement Date"), as
described in this Agreement, including,but not limited, to the provisions of
paragraph 8C below, at the offices of Richard H. Tanenbaum, Esq., 7315 Wisconsin
Avenue, Suite 775 North, Bethesda, Maryland ("Settlement") and shall be
conducted by Richard H. Tanenbaum, Esquire ("Settlement Attorney"). If for any
reason Seller has not completed its work contemplated in paragraph 8C below or
otherwise is not in a position to close on or before September 1, 1997, then
Seller, in its sole discretion, may extend Settlement upon written notice until
November 1, 1997.
B. Adjustments. The following items, except as herein otherwise expressly
indicated, shall be adjusted and apportioned between Seller and Purchaser as of
12:01 a.m. on the date of Settlement:
(1) Real estate and personal property taxes for the tax year in which
Settlement is held, but assessments for improvements, if any, completed prior to
the date of Settlement, whether assessment therefor has been levied or not,
shall be paid by Seller or allowance made therefor at the time of Settlement.
If, at the time of Settlement, the Property or any part thereof shall be or
shall have been affected by assessments which are or may become payable in
annual installments or are then a charge or lien, then for the purposes of this
Agreement all the unpaid installments of such assessments, including those which
are to become due and payable and to be liens upon the Property, shall be paid
and discharged by Seller at Settlement;
(2) Utilities (including water, sewer, gas, electricity and all other
utilities) shall be read on the morning of the date of Settlement and the bills
to such date paid by Seller, or an escrow shall be established by the Settlement
Attorney for payment of same;
(3) All other income and expenses of operation from
20
<PAGE> 4
the Property, except as otherwise expressly set forth herein, shall be adjusted
in accordance with the customs in effect in the jurisdiction in which the
Property is located as of the date of this Agreement.
C. Settlement Charges.
(1) The cost of recordation and transfer taxes in connection with the sale
and purchase of the Property shall be divided equally between Seller and
Purchaser. All other costs and expenses attendant to Settlement hereunder,
including costs for preparation of the deed, normal and usual title company
charges, title insurance premiums, title examination, survey costs and notary
fees shall be at the cost of Purchaser; provided, however, that if upon
examination, title to the Property should be found defective (uninsurable under
standard American Land Title Association (ALTA) owner's title insurance policy
without incurring an additional premium), Seller shall pay the title examination
and survey charges and Purchaser shall have the right, pursuant to paragraph 15
hereof, to terminate this Agreement and recover the Deposit, whereupon all
parties shall be released from any further liability or obligation hereunder.
(2) At Settlement, Seller shall be credited with the following: (a)
assignable tax and utility company deposits, if any; (b) fuel, if any, at last
invoice price and based upon the supplier's measurement; (c) inventories and
supplies, at Seller's cost; and (d) real estate tax escrows, if any.
5. SELLER'S OBLIGATIONS AT SETTLEMENT. At Settlement, Seller shall deliver
to Purchaser:
A. Special Warranty Deed. A good and sufficient special warranty deed to
the Real Property and Improvements in recordable form, drafted by the Settlement
Attorney and approved by Seller and duly executed and acknowledged by Seller and
all other persons required by Purchaser's title insurer.
B. Bill of Sale. A Bill of Sale drafted by the Settlement Attorney and duly
executed and acknowledged by Seller, which shall convey good title with full
warranty thereof to the Personal Property to Purchaser, free and clear of all
liens, encumbrances, security interests and adverse claims.
C. Assignment of Leases, Rents, and Deposits. INTENTIONALLY OMITTED.
21
<PAGE> 5
D. Leases. INTENTIONALLY OMITTED.
E. Tenant Estoppel Letters. INTENTIONALLY OMITTED.
F. Contracts. Originals, or, if not available, copies of all service
contracts, maintenance contracts, and other contracts or agreements related to
the Property to be assumed by Purchaser and continued after Settlement, if any.
G. Licenses/Permits. All licenses, building permits and governmental
approvals related to the Property and certificates of occupancy for the
Improvements and all tenant-occupied space included within the Improvements,
actually in Seller's possession.
H. Legal Opinion. An opinion from counsel to Seller, in form satisfactory
to counsel for Purchaser, that Seller is a corporation in good standing and
authorized to do business in the State of Maryland, the individuals signing on
behalf of the Seller, have the requisite legal authority to take all actions
contemplated by this Agreement and that all steps necessary to authorize such
actions have been duly taken.
I. Plans and Specifications. The Plans and Specifications referred to
in paragraph 2 above.
J. Miscellaneous. Such other documents and actions as are necessary, in the
reasonable opinion of the Settlement Attorney, to effectuate the terms and
conditions of this Agreement.
6. PURCHASER'S OBLIGATIONS AT SETTLEMENT. A. At Settlement hereunder,
Purchaser shall pay the balance of the Purchase Price and take such other
actions as are necessary in the reasonable opinion of the Settlement Attorney to
effectuate the terms and conditions of this Agreement.
B. Purchaser acknowledges that Purchaser shall have, prior to Settlement,
thoroughly inspected, and unconditionally and irrevocably approved, all elements
comprising the Property, and all factors related to their use and operation,
including without limitation, utilities, physical and functional aspects of the
Property, the construction and condition of the Property, all matters affecting
and relating to title, and municipal and other legal requirements such as taxes,
assessments and bonds, zoning use permits, business permits, licenses, and
similar entitlements. Purchaser further acknowledges that on Settlement
Purchaser will acquire the Property in "AS IS" and "WHERE IS, WITH ALL FAULTS"
condition, and solely in reliance on Purchaser's own inspection and examination
without
22
<PAGE> 6
recourse to Seller, except as to Seller's representations and warranties
contained herein.
7. TENDER OF PERFORMANCE. It shall be a good and sufficient tender of
performance of the terms hereof relating to Settlement if Seller shall deposit
with the Settlement Attorney fully executed originals of each of the documents
listed in paragraph 5 hereof, and in the case of Purchaser, tenders the balance
of the Purchase Price and takes such other actions as are reasonably required by
the Settlement Attorney pursuant to this Agreement.
8. CONDITIONS OF PURCHASER'S OBLIGATION TO SETTLE. The following shall be
conditions of Purchaser's obligation to make Settlement hereunder, which
Purchaser, in its discretion, may waive in whole or in part:
A. Representations and Warranties. The representations and warranties made
by Seller in this Agreement shall be true and correct on and as of the date of
Settlement as fully as if made at that time, otherwise, Purchaser may terminate
this Agreement and/or exercise the remedies described in paragraph 15 hereof.
B. Review Period.
(1) Immediately upon execution of this Agreement, Seller shall provide or
make available to Purchaser an accurate survey of the Property and the Plans and
Specifications for the Property currently in Seller's possession. Purchaser
shall, within twenty-five (25) days of the Effective Date hereof, cause, at
Purchaser's sole cost and expense, such structural, economic, engineering,
environmental, and/or mechanical tests, investigations and studies as Purchaser
may determine to be made of the Property. Purchaser shall have the right, at its
own risk, cost and expense, at any reasonable time or times prior to Settlement,
upon reasonable notice to Seller, to enter, or cause its agents or
representatives to enter upon the Property for the purpose of making tests,
investigations and/or studies, and Seller shall furnish to Purchaser during such
period all information in the possession of or available to Seller concerning
the Property which Purchaser may request. Purchaser agrees to restore the
Property to its present condition and further agrees to save harmless Seller
from any claim or demand made by Purchaser or any third party against Seller
resulting from Purchaser's access to the Property. Notwithstanding anything
contained in this Agreement to the contrary, Purchaser's obligations hereunder
shall survive closing or termination of this Agreement.
(2) In the event that any such review, tests, inspections,
23
<PAGE> 7
investigations, documents and/or studies indicate, in Purchaser's sole
discretion, that Purchaser's intended purchase and use of the Property would not
be economically or otherwise feasible, then in such event, Purchaser shall have
the absolute right, at its option, to terminate this Agreement without further
liability by giving written notice to Seller on or before twenty-five (25) days
from the Effective Date, and the Deposit shall be returned to Purchaser. In the
event Purchaser elects to terminate this Agreement, Purchaser shall immediately
deliver to the Seller the results of any and all tests and/or studies and return
all plans and specifications provided by Seller.
(3) In the event that Purchaser does not terminate this Agreement on or
before the end of the Review Period set forth above, the Five Hundred Thousand
Dollar ($500,000.00) Deposit shall become non-refundable, except for Seller's
breach hereunder.
C. Asbestos Removal. Seller shall contract licensed, permitted and
appropriately insured asbestos abatement contractor to remove all asbestos
containing material from the Property, except as hereinafter agreed between the
parties hereto, at Seller's expense upon expiration of the Review Period and
Purchaser being obligated under the Agreement. The asbestos removal shall
include all asbestos containing material identified in the report dated March
27, 1997, by Hygenetics Environmental Services (the "Report"). As for asbestos
materials under permanent fixtures, Seller will, at Purchaser's option, (i)
remove the fixture and the asbestos tile, but will not replace the fixture, or
(ii) not remove the fixture nor the asbestos containing tile. At the option of
the Seller, removed asbestos-containing floor tiles will not be replaced with
another material, but at Seller's expense, the ceiling tiles will be replaced
with Armstrong Tile 755, and with regard to any asbestos materials that went in
place with insulation (i.e. around piping) said areas will be reinsulated. Any
other items not being replaced will be identified in writing to Purchaser. Upon
completion, Seller shall provide copies of all asbestos abatement reports,
including disposal documentation, to Purchaser. Also, proof of contractor
payment shall be provided to Purchaser. The removal process is estimated to take
60-75 days, but, in any event, Seller agrees to use its best efforts and to
diligently pursue completion of the process immediately upon expiration of the
Review Period. Notwithstanding anything contained herein to the contrary,
Settlement shall take place within ten (10) days following delivery of the
satisfactory asbestos removal report by the consultant to the Purchaser and said
date shall become the Settlement Date, but in no event after November 1, 1997,
unless extended by mutual consent of Purchaser and Seller.
9. REPRESENTATIONS AND WARRANTIES OF SELLER. To the best
24
<PAGE> 8
of Seller's knowledge, each of the following representations and warranties by
Seller is true and correct, shall be true and correct on the date of Settlement,
and shall survive settlement and recordation of the deed conveying the Property
to Purchaser and not be merged therein:
A. Power and Authority to Sell. Seller is a validly existing legal entity
in good standing, has full power, authority and legal right to enter into this
Agreement and to transfer and convey to Purchaser full legal and beneficial
ownership of the Property and the person or persons executing this Agreement and
documents at Settlement on behalf of Seller have executed and delivered this
Agreement and other documents under full authority duly given to them by the
proper representatives of Seller.
B. Property Condition. The Property is in good operating condition and
repair, subject only to ordinary wear and tear. There are no existing structural
defects in the Improvements and all elevators, plumbing, mechanical, heating,
ventilating, air conditioning, electric wiring and fixtures, and water and
sewage equipment and systems presently in the Property are in good working order
and condition and there are no existing conditions requiring special maintenance
or repair. Except for the presence of asbestos containing material, the Property
is free from hazardous waste, toxic gases, and any other environmental
conditions which violate federal, state, or local rule, law, or regulations.
C. Mechanics' Liens. All bills and claims for labor performed and materials
furnished to or for the benefit of the Property during the period preceding the
date of Settlement have been (or will prior to Settlement be) paid in full, and
there shall be no mechanics' or materialmens' liens pending or threatened as of
the date of Settlement.
D. Tenant Leases.
(1) There are no leases with tenants of the Property and no prior tenant of
the property has any right to or claim against the Property or Seller as a
result of any prior tenancy.
(2) No controversy, complaint, proceeding, suit or litigation relating to
any prior lease, tenancy or rent of the Property or any part thereof is
threatened or pending in any Court or administrative agency or before any
arbitrator or arbitration forum.
(3) The Property is conveyed free and clear of any obligations to any
person, firm, partnership or corporation in connection with the management
thereof or
25
<PAGE> 9
with regard to the procurement of leases thereon, and no management or leasing
commission is due or owing in connection with any tenant leases or on account of
any tenancy or occupancy of the Property on the date of Settlement.
E. Personal Property. Seller has good and marketable title to all of the
Personal Property listed on "Exhibit B", subject only to those liens or
encumbrances listed thereon. Those items of Personal Property held by Seller
pursuant to leases, conditional sales contracts or security agreements are
assignable to Purchaser without the consent of the lessor or the holder of any
security interest therein. Each of such leases, conditional sales contracts and
security agreements is in full force and effect and no party is in default
thereunder.
F. Operating Statements. "Exhibit F" contains Seller's statement of real
estate taxes paid, maintenance and improvement expenditures and utility
expenditures with respect to the Property for the years ending December 31, 1995
and 1996 (the "Operating Statements"). The Operating Statements (1) reflect
accurately (and contain all relevant financial information relating to) the
operation of the Property for the respective periods covered thereby; (2) are in
accordance with Seller's books and records; and (3) have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods indicated. Since December 31, 1995 there has been no
material adverse change in the operations of the Property from that shown on the
Operating Statements.
G. Zoning. If Seller has knowledge of any special exceptions or other
zoning matters with regard to the Property, Seller shall, upon execution of this
Agreement, provide Purchaser with complete information with regard to same.
Seller knows of no judicial, quasi-judicial, administrative or other proceedings
pending or threatened which might adversely affect the validity of the
Property's zoning, use or development. Seller knows of no facts, nor has Seller
failed to disclose any facts, which would prevent Purchaser from using and
operating the Property after the Settlement to the fullest extent permitted
under existing zoning regulations.
H. Access. The Real Property and Improvements have full and free access to
and from validly dedicated and accepted public highways, streets and roads and
Seller has no knowledge of any pending or threatened governmental proceeding or
any other fact or condition which would limit or result in the termination of
such access.
I. Compliance with Other Instruments, Etc. Neither the entering into of
this Agreement nor the consummation of the transactions contemplated hereby will
26
<PAGE> 10
constitute or result in a violation or breach by Seller of any contract or
instrument to which it is a party, or to which it is subject, or by which it or
any of its assets or properties may be bound, except as herein disclosed.
J. Special Assessments. No portion of the Property is subject to or is
affected by any special assessments, whether or not presently a lien thereon,
and to the best of Seller's knowledge, no such assessments nor improvements
which would result in an assessment have been proposed.
K. Compliance with Laws, Etc. Neither the entering into of this Agreement
nor the consummation of the transactions contemplated hereby will constitute or
result in a violation or breach by Seller of any judgment, order, writ,
injunction or decree issued against or imposed upon it, or will result in a
violation of any applicable law, order, rule or regulation of any governmental
authority. There is no action, suit, proceeding or investigation pending which
would prevent any action contemplated by this Agreement, which would become a
cloud on the title to the Property or any portion thereof, except for insurance
claim-related judgments, or which questions the validity or enforceability of
the transaction contemplated by this Agreement or any action taken pursuant
hereto before any Court or before or by the federal, district, county or
municipal department, commission, board, bureau, agency, or other governmental
instrumentality. No approval, consent, order or authorization of, or
designation, registration or filing (other than for recording purposes) with any
governmental authority is required in connection with the due and valid
execution and delivery of this Agreement and compliance with the provisions
hereof and the consummation of the transactions contemplated hereby. There are
no notices of violations of law or municipal ordinances, orders or requirements
noted in or issued by any federal, state or municipal department or other
department having jurisdiction over or affecting the Property which have not
been satisfactorily corrected by the Seller.
L. Condemnation. Neither the whole nor any portion of the Property is
subject to temporary requisition or use by any governmental authority, nor is
there pending any condemnation, requisition or similar proceeding affecting the
Property or any portion thereof. Seller has received no notice nor has any
knowledge that any such proceeding is contemplated.
M. Other Agreements. At Settlement, there shall be no contracts, leases,
management, leasing, service, operating or other agreements in existence and
affecting the Property which may not be terminated upon thirty (30) days notice
without penalty, cost or charge, except for the agreements described in "Exhibit
D".
27
<PAGE> 11
N. Management, Agreements and Service Contracts. Seller has furnished
Purchaser with true and correct copies of each real estate management, leasing,
maintenance, security and service contract, and all other agreements in force
with respect to the Property and a complete list of all such agreements is
contained in "Exhibit D". Seller agrees to cancel any contracts listed on
"Exhibit D" at Settlement upon Purchaser's written request, if cancellation is
permitted by the terms thereof.
O. Fire Insurance Requirements. Seller does not know of any outstanding
requirements or recommendations by fire underwriters or rating boards, or any
insurance companies, requiring or recommending any repairs or work to be done
with reference to the Property or any part thereof. P. Utilities. All utilities,
including without limitation, sewage, water, electricity, gas and telephone,
required for the operation of the Property are present, all of said utilities
are installed and operating, all initial installation and connection charges and
current operating charges have been paid for in full, and, to the knowledge of
the Seller, all such utilities have been installed and are operating pursuant to
the customary and usual contracts and practices of the respective utility
companies. If utility lines, including sewer and water lines, servicing the
Property cross the property retained by Seller and improved by Seller's claims
office, Seller will execute appropriate width easements to Purchaser for said
utility lines. In addition, Seller will retain easements over the Property for
any utility lines which service the property retained by Seller as its claims
office.
Q. Compliance with Covenants, Etc. Seller is not in default or breach of
any covenants, conditions, restrictions, rights-of-way or easements affecting
the Property or any portion thereof.
R. Title. Seller is the owner of record and in fact, legally and
beneficially, of the Property and has the right to sell and assign, without the
agreement of any other person, fee simple title to the property that is good and
marketable, and insurable under a full coverage ALTA owner's title insurance
policy at standard rates. The Property shall be conveyed free of liens and
encumbrances, except as otherwise set forth herein. Purchaser shall, after
execution of this Agreement by the Seller, cause an examination of title to the
Property to be made and shall, within twenty-five (25) days from the Effective
Date, notify Seller in writing of Purchaser's acceptance, if any, of the title
as shown on such title examination report or of all title defects disclosed on
such title examination report which adversely affect title and which are not
acceptable to Purchaser.
If the defect or title objection complained of can be discharged or removed
28
<PAGE> 12
by payment of a determinable sum of money not to exceed Ten Thousand Dollars
($10,000.00), Seller shall be obligated to discharge or remove same at Seller's
expense. Otherwise, Purchaser shall have the right to elect by written notice
(i) to proceed to Settlement with the title in its defective condition, or (ii)
to terminate this Agreement, in which event Seller shall refund the Deposit to
Purchaser and thereupon the parties shall be released from any further
obligations and liabilities hereunder.
Seller shall have thirty (30) days after receipt of such notice to correct such
title defects. If Seller is unwilling or unable to correct such title defects
within such time period, Purchaser shall have the right (i) to waive such title
defects, or (ii) to terminate this Agreement, in which event Seller shall refund
the Deposit to Purchaser.
S. Licenses and Permits. The Property and its uses are in conformance with
all laws, ordinances and regulations. All licenses and permits necessary or
required under applicable laws, ordinance, rules and regulations for the
occupancy and use of the Improvements or other facilities of the Property have
been obtained and paid for by Seller, will be in effect and valid on the date of
Settlement, and if permitted by local law will, at the time of Settlement
hereunder, be transferred to Purchaser without payment therefor.
T. Litigation. There is no pending action, suit, proceeding or claim
affecting Seller or the Property or any portion thereof relating to or arising
out of the ownership, operation, use and occupancy of the Property and there is
no such threatened action, suit, proceeding or claim. Seller shall give
Purchaser prompt notice of any such litigation instituted prior to Settlement.
U. Manufacturers' Warranties. "Exhibit E" is a true and correct list of all
warranties of manufacturers, suppliers and/or installers relating to the
Property, or any part thereof, known to Seller. No treatment has been undertaken
with respect to termite infestation, fungi or dry rot on the Property other than
normal periodic service.
V. Flood Conditions. The Property does not lie within a flood plain and, to
the best of Seller's knowledge, has not suffered any damage or required any
extraordinary repairs due to flooding or inadequate drainage.
10. INDEMNIFICATION. Seller hereby agrees to indemnify and hold harmless
Purchaser from and against any and all claims, demands, liabilities, costs,
expenses, penalties, damages and losses, including, without limitation,
reasonable attorneys' fees, resulting from any misrepresentations or breach of
warranty or breach of covenant made by
29
<PAGE> 13
Seller in this Agreement.
11. CASUALTY LOSS AND CONDEMNATION. In the event that the Property or any
part thereof is damaged or destroyed by fire or other casualty, or in the event
condemnation or eminent domain proceedings (or private purchase in lieu thereof)
shall be commenced by any public or quasi-public authority having jurisdiction
against all or any part of the Property, then Seller shall promptly notify
Purchaser. Purchaser may, at its option, by giving written notice to Seller
within thirty (30) days after receipt of notice of such casualty or condemnation
proceedings, terminate this Agreement and the Deposit shall be returned to
Purchaser. In the event Purchaser does not elect to terminate this Agreement,
then all insurance proceeds and/or any awards in condemnation, as the case may
be, as well as all unpaid claims and rights in connection with such casualty or
condemnation, as the case may be, shall be assigned to purchaser at Settlement,
or, if paid to Seller prior thereto, shall be credited against the unpaid
balance of the Purchase Price due at Settlement. Seller shall not adjust or
settle any insurance claims or condemnation awards whatsoever without the prior
written approval of Purchaser; further, Purchaser and its counsel shall have the
right prior to Settlement to participate in all negotiations relating to any
such insurance claims or condemnation awards.
12. MAINTENANCE OF THE PROPERTY BEFORE SETTLEMENT. It shall be the
obligation of Seller to maintain the Property and to keep it in its present
condition and repair between the date hereof and the date of Settlement,
reasonable wear and tear excepted. During the period between the Effective Date
of this Agreement and the date of Settlement, Seller shall (1) manage and
operate the Property in a good and businesslike manner; (2) operate the Property
only in the ordinary and usual manner and not enter into any new lease or any
renewal or amendment of any tenant lease without the prior written consent of
Purchaser; (3) not become a party to any service contract or similar agreement
with respect to or affecting the Property without the prior written consent of
Purchaser; (4) maintain at its expense all existing fire and extended coverage
policies covering the Property; and (5) not mortgage or encumber the Property or
any part thereof. The consent of Purchaser to the above-referenced matters shall
not be unreasonably withheld or delayed by Purchaser.
13. RISK OF LOSS. The risk of loss by reason of fire or other casualty
between the date hereof and the date of recordation of the deed to the Property
to Purchaser shall be borne by Seller. Shoemaker, Horman & Clapp, P.A. shall
receive the fully- executed deed at the time of settlement and shall record said
deed among the Land Records of Frederick County, Maryland and will provide
Settlement Attorney with proof of recordation.
30
<PAGE> 14
14. POSSESSION. Seller shall give full possession of the Property to
Purchaser on the date of Settlement, and shall permit Purchaser to have
reasonable access thereto prior to Settlement.
15. SELLER'S DEFAULT. If Seller shall fail to perform its obligation to
make full Settlement in accordance with the terms hereof, or if Seller makes any
misrepresentation in this Agreement, or if Seller otherwise breaches this
Agreement, Purchaser may, at its sole option, require Seller to return the
Deposit to Purchaser and Purchaser may avail itself of any legal or equitable
rights including, without limitation, the right of specific performance and the
right to recover its costs, damages and all attorneys' fees.
16. PURCHASER'S DEFAULT. If Purchaser shall be obligated to proceed to
Settlement under the provisions of this Agreement and shall fail to do so
without justification, the Deposit shall be paid to Seller as agreed, as
liquidated damages, since actual damages are difficult to ascertain, whereupon
this Agreement shall terminate and the parties hereto shall be released from any
further liability or obligation to each other, it being expressly understood
that the payment of Purchaser's Deposit to Seller shall be the sole and
exclusive right and remedy of Seller.
17. CONSENT TO NEW CONTRACTS. Seller shall not, after the date of this
Agreement, enter into any contract or agreement relative to this Property or
modification or extension thereof, without the prior written consent of the
Purchaser.
18. BROKERS. Seller and Purchaser acknowledge that Seller has retained
Cushman & Wakefield and McShea & Company, Inc. ("Cushman") as its agents and
Purchaser has retained HBW Properties, Inc. d/b/a HBW Group ("HBW") as its
agent. Seller is only responsible to pay a 5% commission on the total sale price
as a result of this transaction. Seller and Purchaser each represents and
warrants to the other that no other agent, broker or finder has acted for it in
connection with this transaction and each hereby agrees to indemnify and hold
the other harmless from any loss, liability or damage (including attorneys' fees
and court costs) that may result from any brokerage claims or other similar
claims made in contradiction of said representation and warranty.
19. NOTICES. Any and all notices, requests or other communications required
or permitted hereunder shall be deemed to have been duly given if in writing and
if transmitted by hand delivery, or by registered or certified mail, return
receipt requested, and first-class postage prepaid, as follows:
31
<PAGE> 15
To Seller: State Farm Mutual Automobile Insurance Company
Attention: Gene Schmidt
One State Farm Plaza (D-4)
Bloomington, Illinois 61710-0001
with a copies to: State Farm Mutual Automobile Insurance Company
Attention: Patrick E. Dunagan, Esq.
One State Farm Plaza (E-7)
Bloomington, Illinois
State Farm Mutual Automobile Insurance Company
Attention: Randy Garrett
Vice President - Operations
One State Farm Drive
Frederick, Maryland 21709
Russell T. Horman, Esq.
Shoemaker, Horman & Clapp, P.A.
124 North Court Street
Frederick, Maryland 21701
To Purchaser: Mid Atlantic Medical Services, Inc.
Attn: Steve Mauk, Assistant Secretary
4 Taft Court
Rockville, Maryland 20852
with a copy to: Richard H. Tanenbaum, Esq.
7315 Wisconsin Avenue
Suite 775N
Bethesda, Maryland 20814
32
<PAGE> 16
or such other address as either party may furnish to the other by notice in
accordance with this paragraph. Notice shall be deemed effective when received.
20. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the jurisdiction where the Property is located.
21. HEADINGS. The captions and headings herein are for convenience and
reference only and in no way define or limit the scope or content of this
Agreement or in any way affect its provisions.
22. EXHIBITS. The Exhibits are attached to and are hereby made a part of
this Agreement as fully as if set forth in this text of this Agreement. If any
Exhibits are not attached as aforesaid, and if there is no time period specified
in this Agreement for attaching, such Exhibit shall be attached hereto within
ten (10) working days from the date hereof.
23. EFFECTIVE DATE. This Agreement shall be effective as of the last date
upon which the parties hereto have executed this Agreement, as demonstrated by
the date beside the signatures on the signature page ("Effective Date");
provided, however, and notwithstanding the foregoing, if Seller shall not have
executed this Agreement and returned the executed copy to Purchaser within five
(5) days after the date of Purchaser's execution of this Agreement, this
Agreement shall be of no force or effect, at Purchaser's option.
24. COUNTERPART COPIES. This Agreement may be executed in two or more
counterpart copies, all of which counterparts shall have the same force and
effect as if all parties hereto had executed a single copy of this Agreement.
25. ASSIGNMENT. This Agreement is assignable by Purchaser with Seller's
consent, which consent will not be unreasonably denied. This Agreement may not
be assigned by Seller. Any reference to Purchaser in this Agreement shall
benefit, bind and likewise refer to any assignee of Purchaser.
26. RECORDATION. Seller and Purchaser agree that this Agreement shall not
be recorded in the land records of Frederick County or any other jurisdiction
without the consent of both parties to this Agreement.
27. SURVIVAL OF PROVISIONS. The provisions of this Agreement and the
representations and warranties of the Seller herein shall survive Settlement
hereunder and the execution and delivery of the deed of conveyance of the
Property and shall not be merged
33
<PAGE> 17
therein.
28. BINDING EFFECT. This Agreement shall be binding upon, and inure to the
benefit of the parties hereto and their respective legal representatives, heirs,
executors, administrators, successors and assigns.
29. ENTIRE AGREEMENT. This Agreement and the Exhibits attached hereto
contain the final and entire agreement between the parties hereto with respect
to the sale and purchase of the Property and are intended to be an integration
of all prior negotiations and understandings. Purchaser, Seller and their agents
shall not be bound by any terms, conditions, statements, warranties or
representations, oral or written, not contained herein. No change or
modification of this Agreement shall be valid unless the same is in writing and
signed by the parties hereto. No waiver of any of the provisions of this
Agreement shall be valid unless the same is in writing and is signed by the
party against which it is sought to be enforced.
30. TIME OF ESSENCE. Time is of the essence to this Agreement.
31. OPTION CONSIDERATION. Purchaser and Seller hereby acknowledge that
certain real estate contracts in form similar to this Agreement have been
construed to be option contracts. Accordingly, simultaneous with the execution
of this Agreement, Purchaser has paid to Seller the sum of Fifty Dollars
($50.00) as consideration to Seller for the granting of any and all options to
Purchaser as contained in this Agreement, the receipt, sufficiency and adequacy
of which is hereby acknowledged. Said option consideration is separate and apart
from the Purchase Price for the Property and in no event will be returned to
Purchaser.
32. MONTGOMERY COUNTY; NOTICE OF AVAILABILITY OF SEWAGE DISPOSAL SYSTEM
(Required by Sec. 40-10A of the Montgomery County Code, 1981 Cumulative
Supplement) INTENTIONALLY OMITTED.
33. MONTGOMERY COUNTY; NOTICE OF RIGHT TO REVIEW APPLICABLE MASTER PLANS OR
THE GENERAL PLANS. INTENTIONALLY OMITTED.
34. GROUND RENT NOTICE. The Property is not subject to an annual ground
rent.
34
<PAGE> 18
35. AGRICULTURAL TRANSFER TAX NOTICE REQUIRED BY ARTICLE 81, SECTION 278F
OF THE MARYLAND CODE. Purchaser acknowledges that it has been notified by Seller
that the Property has not been assessed for farm or agricultural use under the
provisions of Article 81, Section 19(b) of the Maryland Code and that the land
being transferred is not subject to the Agricultural Transfer Tax imposed by
Article 81, Section 278F of the Maryland Code. Seller shall pay any Agricultural
Transfer Tax which may be payable with respect to the Property. The provisions
of this paragraph shall survive Settlement and the delivery of the deed to the
Property.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal on the day and year set forth below.
ATTEST: SELLER:
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY
/S/ BARBARA J. LAY /S/ JAMES E. RUTROUGH
- ------------------- -----------------------
Assistant Secretary Senior Vice President
Date: 5/12/97
ATTEST: PURCHASER:
MID ATLANTIC MEDICAL SERVICES,
Inc.
/S/ JOE L. GUARRIELLO /S/ STEPHEN L. MAUK
- ---------------------- --------------------
Date: 5/7/97
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,203
<SECURITIES> 155,209
<RECEIVABLES> 76,260
<ALLOWANCES> 5,342
<INVENTORY> 0
<CURRENT-ASSETS> 266,674
<PP&E> 48,645
<DEPRECIATION> 26,334
<TOTAL-ASSETS> 336,279
<CURRENT-LIABILITIES> 140,475
<BONDS> 105
0
0
<COMMON> 567
<OTHER-SE> 194,896
<TOTAL-LIABILITY-AND-EQUITY> 336,279
<SALES> 0
<TOTAL-REVENUES> 565,608
<CGS> 0
<TOTAL-COSTS> 493,910
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 204
<INCOME-PRETAX> 5,738
<INCOME-TAX> 2,144
<INCOME-CONTINUING> 3,594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,594
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
