<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For fiscal year ended DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 52-1481661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 Taft Court, Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
(301) 294-5140
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock, $0.01 par value The New York Stock
per share. Exchange, Inc.
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 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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of the
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. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 28, 1997: Approximately $593 million.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.<PAGE>
54,677,862 shares of common stock as of February 28, 1997
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Registrant's annual meeting of shareholders
to be held on April 29, 1997 is incorporated by reference into Part III
of this Form 10-K.<PAGE>
<PAGE> 2
FORM 10-K
INDEX
ITEM NO. DISCLOSURE REQUIRED PAGE
PART I
Item 1 Business .............................................. 3
Item 2 Properties ............................................ 14
Item 3 Legal Proceedings ..................................... 14
Item 4 Submission of Matters to a Vote of Security Holders ... 14
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 15
Item 6 Selected Financial Data .............................. 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation ................. 17
Item 8 Financial Statements and Supplementary Data .......... 23
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 44
PART III
Item 10 Directors and Executive Officers of the Registrant ... 45
Item 11 Executive Compensation ............................... 45
Item 12 Security Ownership of Certain Beneficial Owners
and Management ..................................... 45
Item 13 Certain Relationships and Related Transactions ....... 45
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................ 46<PAGE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company for
subsidiaries active in managed health care and other life and health
insurance related activities. MAMSI and its subsidiaries (the
"Company") have developed a broad range of managed health care and
related ancillary products and deliver these services through health
maintenance organizations ("HMOs"), preferred provider organizations
("PPOs"), a life and health insurance company and home health care, home
infusion services and mail order prescription companies. The Company
also has a partnership interest in an outpatient surgery center.
GENERAL DEVELOPMENT OF BUSINESS
MAMSI was incorporated in Delaware in 1986 to serve as a holding company
for MD - Individual Practice Association, Inc. ("M.D. IPA") and
Physicians Health Plan of Maryland, Inc. ("PHP-MD"). MAMSI made an
exchange offer for all of the issued and outstanding shares of common
stock of M.D. IPA and PHP-MD in 1987.
M.D. IPA, a Federally qualified HMO, was organized as a nonstock
corporation in 1979. M.D. IPA operated as a non-profit organization
until 1985 when it amended its articles of incorporation and was
reorganized into a stock corporation.
PHP-MD, an individual practice association ("IPA"), was organized as a
nonstock corporation in 1979 to provide physician and other medical
services to M.D. IPA enrollees. PHP-MD operated as a non-stock
organization until it amended its articles of incorporation and was
reorganized into a stock corporation in 1984.
HEALTH MAINTENANCE ORGANIZATIONS
MAMSI's primary business is the delivery of managed health care through
its HMOs. MAMSI currently offers HMO coverage through four licensed HMO
subsidiaries - M.D. IPA, Optimum Choice, Inc. ("OCI"), Optimum Choice of
the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc. of Pennsylvania
("OCIPA").
M.D. IPA became a licensed HMO in Maryland in 1981 and in Virginia in
1985. M.D. IPA's present service area (which includes all geographic
areas where the HMO has received regulatory approval to provide health
care services) includes the entire state of Maryland, the District of
Columbia and most counties and cities in Virginia including the Northern
Virginia, Richmond/Tidewater and Roanoke areas ("HMO Service Area"). In
addition to serving governmental entities such as the Office of
Personnel Management of the United States Government under the Federal
Employees Health Benefit Plan, M.D. IPA generally provides coverage to
the larger commercial group market.
OCI, a non-Federally qualified HMO, became a licensed HMO in Maryland in
1988, in Virginia in 1990, in Delaware in 1993 and in West Virginia in
1994. OCI generally operates within the small business market segment,
which is comprised of employers with 50 or fewer employees and also
covers Medicaid and Medicare recipients. OCI's present commercial<PAGE>
service area includes the entire states of Maryland and Delaware, the
District of Columbia, most counties and cities in Virginia, and certain
areas of West Virginia. For the Medicare Program, OCI is licensed in
Northern Virginia, Maryland, Delaware and the District of Columbia.
OCCI, a non-Federally qualified HMO, became a licensed HMO in North
Carolina in 1995 and South Carolina in 1996. OCCI operates in both the
small and large group commercial market. OCCI's present service area
includes certain areas of North Carolina and South Carolina.
OCIPA, a non-Federally qualified HMO, became a licensed HMO in
Pennsylvania in 1996. OCIPA operates in both the small and large group
commercial market. OCIPA's present service area includes five counties
in south-central Pennsylvania.<PAGE>
<PAGE> 4
GENERAL
HMOs provide or arrange for the provision of comprehensive medical care
(including physician and hospital care) to enrollees for a fixed,
prepaid premium regardless of the amount of care provided. Enrollees
generally receive care from participating primary care physicians
("PCPs") who, as required, refer enrollees to participating specialists
and hospitals. HMOs require patients to utilize participating
physicians and other participating health care providers. This allows
HMOs to negotiate favorable rates and control utilization to a greater
extent than traditional health insurers, while monitoring and enhancing
the quality of care provided to enrollees.
The goal of an HMO is to combine quality health care with management
controls designed to encourage efficient and economical use of health
care services. Such controls include monitoring physician services,
hospital admissions and lengths of stay and maximizing the use of non-
hospital based medical services. Because an HMO generally receives
fixed monthly premiums from its enrollees regardless of the health care
services provided, an HMO has an incentive to maintain the health of its
enrollees, while carefully monitoring expenses through the
implementation of various cost control strategies and effective
management.
MAMSI's HMO provider network is organized as an IPA. Under the IPA
model, the HMO contracts with a broadly dispersed group of physicians to
provide medical services to enrollees in the physicians' own offices and
in hospitals; the physicians are generally paid on a capitated or a
negotiated fee-for-service basis. Physicians may contract directly with
the HMO or through a designated organization that, in turn, contracts
with the HMO.
MAMSI'S HMO PRODUCTS
MAMSI's HMOs offer a range of benefit plans for providing health care to
enrollees. Generally, enrollees arrange for coverage through their
employer. However, group enrollees can convert their coverage to an
individual contract upon separation from their employer. There is no
assurance that HMO agreements with employers will be renewed annually or
that, within each employer group, the HMO will not experience
disenrollment by individual enrollees. MAMSI's HMOs also offer
individual coverage to the commercial, Medicaid and Medicare markets.
Under traditional HMO coverage, the enrollee selects a PCP from the
HMO's provider network. All medical care provided to the enrollee must
be authorized and coordinated by the PCP. Generally, the enrollee pays
a copayment for all PCP and specialist office visits and may also be
required to pay a copayment for hospital admissions and emergency room
services. Except in emergencies, enrollees are generally required to
utilize only those participating professional and institutional health
care providers that have contracted with the IPA (see further discussion
under "HMO Arrangements with Physician and Institutional Providers").
MAMSI's HMOs, in cooperation with MAMSI Life and Health Insurance
Company ("MAMSI Life"), a wholly owned subsidiary of MAMSI, also offer
point-of-service coverage (the "preferred plan"), which is marketed to
appeal to the following customers:<PAGE>
1. Individuals who will not consider a closed delivery system. These
individuals prefer the flexibility of the traditional indemnity plan but
are also seeking a lower-cost alternative such as an HMO.
2. Small to mid-sized employers who are looking to limit the number of
health care plan options. In this case, the HMO would seek to be
offered as an exclusive health care provider.
In the preferred plan, enrollees have the choice of seeking care from
the PCP or from any physician of their choice (point-of-service option).
Whenever care is provided under the point-of-service option and the
enrollee visits a provider outside of the HMO network, MAMSI Life, which
underwrites this indemnity benefit, generally covers the lesser of 80%
of the bill or 100% of the established fee maximum for the service
provided. The enrollee is responsible for the remainder of the charge.
Additionally, MAMSI offers hybrid products to large employer groups.
These products offer the ability to tailor employee health care
offerings by varying benefit designs, funding methods and insurance
risk. Hybrid products generally compete in the so-called self-funded
employer plan marketplace. A typical MAMSI hybrid product combines the
use of capitated<PAGE>
<PAGE> 5
PCPs to serve as gatekeepers, employer funding of specialist and
institutional claims on an "as paid" basis and MAMSI's underwriting of
risk of loss on a specific and/or aggregate stop loss basis.
OCI offers HMO coverage to recipients of Title XIX Medical Assistance
("Medicaid") in certain states. The Medicaid plan operates in a manner
similar to the traditional HMO plan. The participating states pay a
monthly premium based upon the age, sex and geographic location of the
recipients for which OCI provides comprehensive medical coverage. At
December 31, 1996, MAMSI's Medicaid service area includes Maryland,
certain areas of Virginia, six counties in West Virginia and Mecklenburg
County, North Carolina.
Effective January 1, 1997, OCI withdrew from the mandated Medicaid
Program in the Tidewater area of Virginia which reduced the Company's
membership by approximately 26,000 members. Additionally, OCI has
informed the State of Maryland that it will not be a participant in that
State's new mandated program. It is currently anticipated that OCI's
current Maryland Medicaid membership of approximately 38,000 will be
reassigned to other managed care organizations beginning in July, 1997
and that all of OCI Medicaid membership in the State of Maryland will be
gone by December 31, 1997.
Under all coverage options, enrollees receive the following basic
benefits: primary and specialist physician services; hospital services
such as diagnostic tests, x-rays, drugs, medication, nursing and
maternity services; outpatient diagnostic tests such as laboratory
tests, x-rays, and allergy testing and injections.
OCI also offers health coverage to Title XVIII Medicare recipients.
Under a contractual arrangement with the United States Health Care
Financing Administration ("HCFA"), OCI receives a monthly premium based
upon age, sex, county of residence and enrollment status for which OCI
provides comprehensive medical coverage to those individuals.
Currently, approximately only 4% - 5% of the approximately one million
Medicare recipients in MAMSI's Medicare service area (which includes
Delaware, the District of Columbia, several counties in Northern
Virginia, and most of the State of Maryland) are covered through MAMSI
or other HMOs. In 1996, OCI informed HCFA that it wished to reduce the
size of its Medicare service area. Effective January 1, 1997, 59
counties and cities were eliminated from OCI's Medicare service area.
This reduction in service area reduces its Medicare membership by
approximately 5,000 members.
The Company's total health plan (managed care fully budgeted and hybrid,
ASO and indemnity health insurance) membership in the HMOs and MAMSI
Life grew to approximately 745,000 at December 31, 1996 from 658,000 at
December 31, 1995, an increase of 13%.
The following table sets forth information relevant to MAMSI's HMO and
indemnity health plans as of December 31, 1996:
Employer Groups Served 30,600
Population of Aggregate HMO
Service Area 32,000,000
Service Area Penetration 2.3%
Primary Care Physicians 4,900
Specialist Physicians 12,800<PAGE>
Other Affiliated Health
Care Providers 6,600
Hospitals and Outpatient
Facilities 1,200
Pharmacies 6,700
A significant portion of the Company's premium revenue is derived from
Federal, state and local government agencies including governmental
employees and Medicaid and Medicare recipients. For the years ended
December 31, 1996, 1995 and 1994, approximately 11%, 7% and 9%,
respectively, of premium revenue was derived from Federal government
agencies, and approximately 26%, 21% and 18%, respectively, was derived
from state and local government agencies located in the Company's
service area.
HMO ARRANGEMENTS WITH PHYSICIAN AND INSTITUTIONAL PROVIDERS
M.D. IPA and OCI contract with PHP-MD to provide physician services to
their enrollees while OCCI (North Carolina and South Carolina) and OCIPA
(Pennsylvania) contract directly with providers. The HMOs are
ultimately<PAGE>
<PAGE> 6
responsible for ensuring that an adequate number of physicians and other
health care providers are maintained in order to service enrollees.
The Company contracts with many different kinds of health care
providers, including primary care and specialist physicians, dentists,
social workers, psychologists, physical therapists and podiatrists.
PCPs are paid a monthly capitation payment for each enrollee who has
chosen that PCP. This capitation payment varies according to the age
and sex of the enrollee and according to the primary care designation of
the provider chosen by the enrollee. The primary care designations on
which premiums are based fall into one of two types: (1) family and
general practice, pediatrics and internal medicine, and (2) obstetrics
and gynecology.
PCPs may receive, in addition to capitation payments, fees for specified
procedures and an annual payment that is based on a Quality Review
Reconciliation. This payment generally does not exceed 3% of their
annual capitation payments. The reconciliation evaluates the
physician's practice performance as well as quality issues such as
grievance rates from members, sanctions by a MAMSI HMO, and member
transfer rate. As part of the Quality Review Reconciliation, the
Company provides a quarterly report to each PCP that compares the
physician's practice performance based on outpatient and inpatient
expenses to those of his/her peers and allows the PCP not only to
monitor the number of referrals consistent with quality medical
standards, but also to evaluate the most cost-effective consultants and
facilities within each specialty area.
Prior to July, 1, 1995, specialist providers and participating non-
physician providers were compensated on a discounted fee-for-service
basis. This compensation was limited to an established maximum rate
that reflected the amount that similar providers of a similar service
would typically charge. Effective July 1, 1995, the Company modified
the method used to compensate providers and adopted the Medicare
Resource Based Relative Value Scale methodology of provider
reimbursement. This methodology, which applies generally to specialist
health claims, has resulted in the lowering of some reimbursement
levels, mainly those having to do with office and hospital-based
procedures, while increasing payments for many evaluation and management
tasks. Management believes that this change will allow the Company to
continue to be competitive within its marketplace.
The HMOs have contractual arrangements with a combined total of 1,200
facilities, consisting of 200 hospitals and 1,000 non-hospital
facilities, as of December 31, 1996. These facilities are located in
the Company's HMO Service Area. Contracts with facilities are renewable
annually. These hospitals have provided assurance that, if discharged
enrollees require transfer to another facility, they will transfer such
enrollees to participating providers.
HMO ARRANGEMENTS FOR OTHER SERVICES
The HMOs have contracted with a number of entities to arrange for the
provision of other services:
EMERGENCY CARE - Enrollees may receive urgent care services as an
alternative to hospital emergency room treatment. Enrollees can use
local urgent care centers and any hospital emergency room in emergency<PAGE>
situations.
HOME HEALTH CARE - A number of medical care providers are engaged to
provide health care services (such as nursing, pediatric, neonatal,
orthopedic, psychiatric, geriatric, dialysis treatments, physical
therapy, speech therapy and respiratory therapy) at the home of the
enrollee. MAMSI's home health care subsidiary, HomeCall, Inc.
("HomeCall"), provides these services throughout much of the Company's
service area.
PHARMACEUTICAL ASSISTANCE - The Company has arrangements with
participating pharmacies so that an enrollee is only responsible for the
deductibles and/or copayments that are indicated on his or her
enrollment card. The Company's pharmaceutical company, HomeCall
Pharmaceutical Services, Inc. provides home infusion, delivery of drugs
to physician offices and mail order prescription services to its members
and other payors.
LABORATORY TESTING - The Company has an arrangement with a laboratory
that conducts much of the laboratory work required by HMO providers.
Enrollees in MAMSI's PPO are similarly referred to this laboratory for
testing.<PAGE>
<PAGE> 7
DENTAL - In addition to a dental indemnity product available from MAMSI
Life and subcontracted capitated arrangements with a dental HMO, the
Company has an arrangement with an association of dentists to provide
discounted dental services through a dental PPO.
QUALITY ASSESSMENT/IMPROVEMENT AND COST CONTAINMENT
MAMSI conducts a multidisciplinary approach to its Quality
Assessment/Quality Improvement ("QA/QI") Program, utilizing the
resources of all of its subsidiaries to ensure the provision of quality
health care and services to its HMO enrollees in an appropriate and
cost-efficient manner.
MAMSI recognizes the importance of a Continuous Quality Improvement
Program to determine and allocate appropriate resources that will have
the greatest impact for the members. The QA/QI Program is designed to
meet and serve the needs of employers, members and providers as well as
to monitor the timeliness, appropriateness and effectiveness of services
via ongoing and systematic reviews of key indicators and aspects of
care. The QA/QI Program conducts member satisfaction surveys,
identifies opportunities for improvements in providing care, adopts
strategies to improve outcomes and monitors the improvement to report
progress.
MAMSI's QA/QI Committee, which operates under the auspices of MAMSI's
Board of Directors, includes administrative, clinical and provider
representation. The Committee evaluates numerous quality related issues
and outcomes measuring overall services provided to enrollees.
In addition, MAMSI utilizes several cost control and quality review
mechanisms. Provider applications are reviewed by a Credentials
Committee in order to determine whether the applicant meets MAMSI's
application criteria, including Board Certification or eligibility.
MAMSI maintains a physician review process to determine whether the
needed levels of medical service are being provided in a timely and
efficient manner. The Company conducts medical reviews to monitor the
quality of care provided. The Company also monitors the hospital and
out-of-plan referrals issued by primary care providers.
In most situations, prior authorization must be obtained for non-
emergency hospital admissions. Failure to secure prior authorization
for non-emergency hospital admissions of enrollees may cause claims to
be denied, and in some situations, provider sanctions. Prior to
admission for non-emergency hospital services, MAMSI applies certain
medical criteria to authorize the admission.
After admission of an HMO enrollee, MAMSI monitors the course of
hospital treatment and coordinates discharge planning in the hope of
preventing unneeded use of medical resources. Although the Utilization
Management staff is not permitted to interfere with a physician's
medical judgment regarding the course of treatment, if the physician
decides to extend an enrollee's stay beyond that authorized, the
physician must provide medical justification for the necessity of such
proposed action and obtain specific approval.
As required by Federal and state law, the HMOs have established a
grievance procedure to respond to enrollee and provider complaints.<PAGE>
Enrollees are encouraged to use this procedure before proceeding further
with a complaint. Once this procedure is exhausted, any unresolved
complaint or grievance may be settled by binding arbitration rather than
through the courts. There is a similar grievance procedure for
physician complaints.
In 1993, MAMSI invited the National Committee for Quality Assurance
("NCQA"), a private, non-profit organization, to evaluate the Company's
methodologies in an effort to receive NCQA accreditation. NCQA
accreditation is a voluntary process. The Company did not meet certain
of NCQA's criteria and, therefore, did not receive NCQA accreditation.
MAMSI believes that it has adopted methodologies and programs designed
to respond to concerns and questions raised in NCQA's assessment. The
Company currently believes that, based on its success with large group
sales since the denial of accreditation, the failure to receive NCQA
accreditation has not had a significant adverse effect on its business
or financial condition to date although certain large group customers
have frozen their enrollment in MAMSI until accreditation is obtained.
The Company believes that increasing public awareness of the various
accreditation processes will potentially cause them to have more
significance in the purchase and enrollment decisions which could be<PAGE>
<PAGE> 8
detrimental to the Company if NCQA accreditation is not obtained. The
Company has been reviewed again for accreditation in December of 1996.
Although the Company believes that the likelihood of NCQA accreditation
is good, there can be no assurance that accreditation will be received
or that MAMSI will not experience disenrollment if accreditation is not
ultimately received. The Company has implemented the Health Plan and
Employer Data and Information Set ("HEDIS") 2.5, which represents a core
set of performance measures developed by NCQA to serve the employer as a
purchaser.
The Company's home health care and home infusion subsidiaries underwent
voluntary accreditation review by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO") during 1995. Full accreditation
status was awarded as a result of this process.
COMPETITION AND MARKETING STRATEGY
The health care industry is characterized by intense competition. MAMSI
recognizes the possibility that other firms with greater resources may
enter into competition with MAMSI in the future by either entering its
HMO Service Area or by designing alternative health care delivery
systems. HMOs compete not only with other HMOs and managed care
organizations such as provider sponsored organizations, but also with
insurance companies that offer indemnity insurance products.
MAMSI's HMOs compete with approximately 25 HMOs or other prepaid
alternative health care delivery systems that have a presence in at
least one of the cities or counties in MAMSI's service area. The
following table sets forth MAMSI's best estimate of the HMO enrollment
in 1996 of HMOs operating in its HMO Service Area. Certain of the HMOs
are part of a larger entity and the enrollees estimated herein include
only those in MAMSI's HMO Service Area.
<TABLE>
<CAPTION>
Approximate
Number
HMO Plan Type of Enrollees
------------- --------- ------------
<S> <C> <C>
Mid Atlantic Medical Services, Inc.* .......... IPA 640,000
Kaiser Permanente Health Care Program ......... Group 502,000
NYLCARE of the Mid Atlantic.................... IPA 298,000
FreeState Health Plan** ....................... IPA 234,000
Prudential Healthcare.......................... IPA 230,000
Aetna/U.S. Healthcare.......................... IPA 135,000
Healthkeepers of Virginia***................... IPA 126,000
Optima Health Plan............................. IPA 115,000
George Washington University Health Plan ...... Group 90,000
United Healthcare of the Mid Atlantic ......... IPA 76,000
Southern Health Services (Coventry Corp.) ..... IPA 58,000
Capital Care****............................... IPA 55,000
CIGNA Health Plan of Virginia ................. IPA 48,000
Sentara Health Plan ........................... Staff 48,000
Other HMOs (11) ............................... Various 317,000
</TABLE>
* - Includes individuals covered by the Company's HMOs only.<PAGE>
** - This company is owned by Blue Cross/Blue Shield of Maryland.
*** - This company is owned by Blue Cross/Blue Shield of Virginia.
**** - This company is owned by Blue Cross/Blue Shield of the National
Capital Area.
MAMSI's HMOs compete with other HMOs and insurance companies on the
basis of price, network and range of services offered to enrollees.
PHP-MD competes with the same entities and with other IPAs for physician
services. PHP-MD believes that its capitation payments to PCPs and the
fee for service payments to specialists are competitive with other HMOs.
MAMSI believes that the freedom IPA-model HMOs offer their enrollees in
choosing from a greater number of physicians constitutes a competitive
advantage over group or staff model HMOs. The ability to retain and
attract enrollees will depend, in part, on how present enrollees assess
their benefit packages, quality of service, provider network, rates and
the HMOs' responsiveness to enrollee needs.<PAGE>
<PAGE> 9
MAMSI subsidiaries employed approximately 580 full-time individuals who
provided marketing services for its HMOs as of December 31, 1996.
MAMSI's marketing strategy includes identifying and contacting employers
with more than 50 employees in its HMO Service Area. In addition, the
Company employs prospecting, telemarketing, employer group consultation,
referrals by consultants, and the use of selected brokers to acquire new
accounts. Since 1994, the Company's strategy has included reducing the
use of brokers for new business while increasing its internal sales
force. New members acquired by the Company's dedicated sales force
accounted for 88% of total new members in 1996.
RISK MANAGEMENT
With the exceptions of the large group market and the certain small
group markets, OCI uses underwriting criteria as a part of its risk
management efforts. Underwriting is the process of analyzing the risk
of enrolling employer groups in order to establish an appropriate
premium rate. Utilizing underwriting criteria, OCI seeks to avoid
contracting with employers that are likely to experience an actuarially
higher than expected need for medical care. OCI's use of underwriting
techniques is restricted in certain situations by state small group
reform legislation (see further discussion under "Government
Regulation").
The Company maintains professional, directors and officers, errors and
omissions, general liability and property insurance coverage in amounts
believed to be adequate. The Company requires participating hospitals
to maintain professional liability coverage and physicians to have
malpractice insurance. A professional liability insurance policy
provides coverage in the event that legal action is taken against any
entity as a result of medical malpractice committed by a physician.
In addition, MAMSI's HMOs reduce the financial impact of catastrophic
losses by maintaining reinsurance coverage for hospital costs. The
reinsurer indemnifies 80% of the eligible in and out of service area
medical expenses in excess of $200,000 per enrollee per year up to a
lifetime maximum of $2,000,000 in eligible medical costs.
Through June 30, 1996, PHP-MD generally placed 5% to 15% of the payments
due to participating physicians in a Claims Reserve Risk Pool. The
Claims Reserve Risk Pool constitutes a financial risk-sharing
arrangement among the participating physicians and PHP-MD. Amounts held
in the Claims Reserve Risk Pool may be distributed from time to time by
PHP-MD to participating physicians if, in the judgment of PHP-MD's Board
of Directors, PHP-MD's financial condition permits such distribution.
Effective July 1, 1996, Maryland regulations eliminated the use of such
risk pools by HMOs, therefore, commencing on that date the majority of
PHP-MD payments to physicians are not reduced. Amounts placed in such
risk pools, in jurisdictions where it is still permitted, are expected
to be minor. The following table sets forth information regarding the
portion of the amount in the Claims Reserve Risk Pool that was
distributed to participating physicians in each calendar year.
Percentage
Distributed
Year to Providers<PAGE>
---- ------------
1990 16
1991 5
1992 4
1993 59
1994 58
1995 4
1996 0
GOVERNMENT REGULATION
MAMSI's HMOs are subject to state and, in some instances, Federal
regulation. Among the areas regulated are: (i) premium rate setting;
(ii) benefits provided; (iii) marketing; (iv) provider contracts; (v)
quality assurance and utilization review programs; (vi) adherence to
confidentiality and medical records requirements; (vii) enrollment
requirements; and (viii) financial reserves and other fiscal solvency
requirements.<PAGE>
<PAGE> 10
Under applicable law, HMOs must generally provide services to enrollees
substantially on a fixed, prepaid basis without regard to the actual
degree of utilization of services. The Company generally fixes the
premiums charged to employers for a 12 month period and revises the
premium with each renewal. In setting premiums, the Company forecasts
health care utilization rates based on the relevant demographics and
also considers competitive conditions and the average number of
enrollees in the employer group. In addition to these premiums,
enrollees also make copayments to providers as required.
Although premiums established may vary from account to account through
composite rate factors and special treatment of certain broad classes of
enrollees, Federal regulations generally prohibit Federally qualified
HMOs from traditional experience rating of accounts on a retrospective
basis. Consistent with the practices of other Federally qualified HMOs,
M.D. IPA, in some situations, bases the premiums it charges employers in
part on the age, sex and geographic location of the enrolled employees.
M.D. IPA believes that its premiums are competitive with other HMOs and
health insurers and its health coverage is a better value for members
because of the range of physician and hospital selection and other
benefits provided.
M.D. IPA contracts with the Office of Personnel Management ("OPM") to
provide or arrange health services under the Federal Employees Health
Benefit Program ("FEHBP"). The contract with OPM and applicable
government regulations establish premium rating requirements for the
FEHBP. The premiums established under the OPM contract are subject to
periodic review and audit to determine if they were established in
compliance with the community rating and other requirements under the
program.
MAMSI's HMOs must file periodic reports with, and are subject to
periodic review by, state regulatory authorities. Although MAMSI's HMOs
are not regulated specifically as insurance companies, they must comply
with certain provisions of state insurance laws as well as other laws
specifically enacted to regulate HMOs.
MAMSI Life, the Company's insurance subsidiary, is domiciled in Maryland
and is licensed in over 30 states. MAMSI Life is subject to regulation
by the department of insurance in each state in which it is licensed.
These regulations subject MAMSI Life to extensive review of the terms,
administration and marketing of insurance products offered and minimum
net worth and deposit requirements. In addition, MAMSI Life is required
to file periodic reports and is subject to periodic audits and
continuing oversight. The offering of certain new insurance products
may require the approval of regulatory agencies.
The Company's home health care operations are regulated principally in
four areas: home health care licensing; certification for participation
in private insurance and government reimbursement programs; employee
licensure and training requirements; and Federal occupational safety
guidelines. The Company believes that it is in compliance with all
applicable regulations, which include possessing the required
Certificates of Need in all locations in which such certificates are
required. Additionally, the Company's infusion and mail order
prescription businesses have obtained the necessary licenses and permits
to operate as a full service pharmacy.<PAGE>
MAMSI's customers include employee health benefit plans subject to the
Employee Retirement Income Security Act of 1974 ("ERISA"). To the
extent that the Company has discretionary authority in the operation of
these plans, the Company could be considered a plan fiduciary under
ERISA. Plan fiduciaries are barred from engaging in various prohibited
transactions, including self-dealing. They are also required to conduct
the operations of employee benefit plans in accordance with each plan's
terms.
Due to the continued escalation of health care costs and the inability
of many individuals to obtain health care insurance, numerous proposals
relating to health care reform have been made, and additional proposals
may be introduced, in the United States Congress and the legislatures of
the states in which the Company operates or may seek to operate.
Recently, the "Health Insurance Portability and Accountability Act of
1996, Public Law 104-191", commonly called the Kennedy-Kassebaum Bill
for its primary sponsors, was enacted. This bill establishes certain
Federal requirements for large group, small group, and individual health
benefit plans, and applies not only to insurers and HMOs but also to
ERISA plans.<PAGE>
<PAGE> 11
Kennedy-Kassebaum is intended to make coverage more portable and
available by limiting pre-existing condition requirements; providing
special enrollment periods for employees who lose other coverage or
whose family status changes; prohibiting group plans from denying an
individual coverage or charging a higher premium based on the
individual's health status or history; and by guaranteeing coverage
availability and renewability in certain circumstances in the small
group and individual markets. Kennedy-Kassebaum also allows for the
establishment of Medical Savings Accounts; increases the penalties for
health care fraud and abuse; and calls for standardized health care
information in order to reduce administrative costs.
The effect of Kennedy-Kassebaum will differ from state to state. In the
group market, state laws remain in effect unless they prevent the
application of the new federal requirements, and in the individual
market, state law will govern if the Health and Human Services Secretary
determines that it provides an "acceptable alternative mechanism" to the
federal requirement. This means that in those states, like Maryland,
where state reforms have already been enacted, the legislation may have
little, if any, effect in the small group market, but may have some
effect in the individual market. In other states, the legislation may
have a greater effect. State legislatures and regulators are currently
trying to understand the requirements and implications of the law.
Most of the provision of Kennedy-Kassebaum will take effect on July 1,
1997, but some, like the provisions pertaining to Medical Savings
Accounts, take effect earlier and others, like administrative
simplification, take effect later.
In recent years, state legislatures in the Company's service area have
been active in health care reform legislation targeted at the small
group market, i.e., usually for groups of 2 to 50 employees. This small
group reform is now in place in Maryland, Virginia, Delaware and North
Carolina, but not in Pennsylvania, Washington, D.C. or West Virginia.
Although different in many of the details, this type of legislation
generally requires all HMOs and insurers that offer small group coverage
to accept all small employers who apply for coverage and to guarantee
coverage to their employees seeking coverage regardless of their health
status. The legislation also requires renewal of these small group
employer plans, limits rate renewal increases, mandates adjusted
community rating and eliminates pre-existing condition limitations
either entirely or within a short period of time, usually six months.
The Company believes that the current political environment in which it
operates will result in continued legislative scrutiny of health care
reform and may lead to additional legislative initiatives. The Company
is unable to predict the ultimate impact upon the Company of any Federal
or state restructuring of the health care delivery or health care
financing systems, but such changes could have a material adverse impact
on the operations and financial condition of the Company.
The District of Columbia, which has not previously regulated HMOs,
enacted legislation effective July 1, 1997, providing for regulatory
oversight similar to that currently provided by other states. The
Company does not anticipate any significant negative impact on its
operations because of the new regulatory oversight in the District of
Columbia.<PAGE>
PREFERRED PROVIDER ORGANIZATIONS
MAMSI offers PPO coverage through two subsidiaries: Alliance PPO, Inc.
("Alliance") and Mid Atlantic Psychiatric Services, Inc. ("MAPSI").
PPOs allow enrollees to receive care from participating physicians at
contractually negotiated rates. A PPO is different from an HMO in that
a PPO does not assume any financial risk from medical utilization nor
does it process claims payments to providers. All medical charges are
paid directly by the payor, which can be either a self-funded employer,
a health benefits trust fund or another health insurance company. In
return for access to the PPO's network, the PPO charges the payor either
a per employee rate or a percentage of the savings of actual claims
processed for the services accessed. MAMSI's PPOs provide access to
substantially the same provider network as MAMSI's HMOs.
A PPO operates by being incorporated into an employer's current benefit
program, and offers some or all of the following: access to physician,
hospital and facility services; utilization management and quality
assurance; and claims screening and repricing. The employer determines
the level of the benefits and any applicable copayments.<PAGE>
<PAGE> 12
Alliance is marketed primarily through insurance companies, insurance
brokers, consultants, third party administrators ("TPAs"), self-insured
employers and union trusts. The advantages of a TPA marketing approach
are minimized marketing costs and maximized market coverage through
established TPA-employer relationships. Alliance also works directly
with employers and unions that are self-insured and uses direct
marketing efforts. The major competition comes from other PPOs and
individual insurance carriers. At December 31, 1996, Alliance had
contracts with approximately 19,800 employer groups that had access to
the entire IPA provider network.
The MAPSI PPO is comprised of providers specializing in mental health
and substance abuse care. MAPSI's products are marketed directly to
TPAs, self-insured groups, brokers, indemnity plans, union funds and
consultants. In addition, MAPSI contracts with indemnity insurers that
want to offer groups a managed care mental health product. MAPSI
believes it has a competitive advantage with its unique mental health
screening process that offers the employer the benefit of enhanced
coordinated treatment for employees as well as increased cost savings.
MAPSI's major competitors include CMG Health, Inc., Green Spring Mental
Health and MCC Inc. At December 31, 1996, MAPSI had a provider network
of approximately 3,000 psychiatrists, psychologists, social workers, and
other affiliated licensed mental health providers.
Alliance and MAPSI are most often marketed jointly and the prospective
purchaser usually also purchases the MAPSI PPO if the Alliance PPO is
purchased. The total number of lives covered under one or both of these
PPO products as of December 31, 1996 was approximately 935,000.
PPOs are not subject to HMO regulations by virtue of their business.
However, PPOs are subject to certain state regulations governing the
provision of PPO services such as mandatory state registration. It is
possible that PPOs may be subject to increased regulatory oversight in
the future.
OTHER PRODUCTS
MAMSI Life currently underwrites the indemnity coverage of the HMO's
preferred plans in addition to offering stand-alone indemnity health and
dental insurance, aggregate and specific stop loss insurance for self-
insured groups, and group life, accidental death and short-term
disability policies. In addition, in 1995 MAMSI Life began providing an
administrative services only ("ASO") product to the State of Maryland.
ASO business consists of allowing access to MAMSI's provider network,
without gatekeeper PCPs, and the payment of claims. MAMSI has no
insurance risk on this product. MAMSI Life holds insurance licenses in
over 30 jurisdictions including Maryland, Virginia, the District of
Columbia, West Virginia, Delaware and North Carolina. MAMSI Life also
became licensed in Pennsylvania in 1995.
On October 7, 1994, MAMSI acquired all of the outstanding stock of
HomeCall and its wholly owned subsidiary, FirstCall, Inc. ("FirstCall"),
for approximately $10 million, including direct expenses. HomeCall is a
state licensed, Medicare certified home health agency. The combined
operations of HomeCall and FirstCall include 16 branch locations that
serve virtually all of Maryland, the District of Columbia, Northern
Virginia and the Panhandle area of West Virginia. HomeCall achieved
full accreditation from the Joint Commission of Accreditation of<PAGE>
Healthcare Organizations ("JCAHO"), following its survey of all services
in November, 1995.
Also during the fourth quarter of 1994, the Company formed a home
infusion services company, HomeCall Pharmaceutical Services, Inc.
("HCPS"), which received its pharmacy license in 1994 and its Federal
license from the Drug Enforcement Agency in 1995.
HomeCall, FirstCall and HCPS provide services that are generally lower
cost alternatives to institutional treatment and care. The Company
believes that it will provide better care to its members and reduce its
medical costs by substituting, where medically appropriate, in-home
medical treatment for treatment in an institutional setting.
Medical services provided by HomeCall, FirstCall and HCPS include
skilled nursing, high-tech nursing in support of infusion therapy,
maternal/infant nursing, physical, speech and occupational therapy,
medical social work, nutrition consultation and home health care aides.
Services provided by HCPS include a comprehensive range of in home drug
infusion therapies, the delivery of infusion ready drugs for physician
office based infusion<PAGE>
<PAGE> 13
therapy, mail order pharmacy (as described below) and some hospice (as
described below).
In April, 1996, HCPS started a mail-order pharmacy, HomeCall Mail Rx,
which received its pharmacy license and its Federal license in 1996.
HomeCall Mail Rx fills and delivers prescription oral medications via
common carrier to patients in their homes. Approximately 10,000
prescriptions are filled each month.
In November, 1996, the Company started HomeCall Hospice Services, Inc.
("Hospice"), which received its Maryland state license to operate a
general hospice care program on December 3, 1996. Based in Columbia,
Maryland, Hospice was organized to address the needs of terminally ill
patients and their families. This hospice program will provide services
to individuals in the comfort of their homes.
Hospice currently serves the Baltimore and Washington, D.C. metropolitan
areas. It is the goal of Hospice to extend its service delivery area to
all geographical areas served by MAMSI. The addition of hospice
services complements MAMSI's other home care products by having a full
range of services available to its members.
In addition to providing in-home medical care to the Company's members,
HomeCall, FirstCall and HCPS will continue to provide services to other
payors, including insurance companies, other HMOs and individuals.
The Company also has an equity interest in an ambulatory surgery center
located in Rockville, Maryland. The surgery center conducts outpatient
surgery and services to HMO enrollees and other patients.
A summary of MAMSI's membership enrollment in all product lines is as
follows:
<TABLE>
<CAPTION>
MEMBERSHIP DATA AT DECEMBER 31
---------------------------------
PRODUCT LINE 1994 1995 1996
------------ ---------------------------------
(in thousands)
<S> <C> <C> <C>
Commercial HMO (1) 393.2 430.1 430.8
Hybrid HMO (2) 82.5 94.5 106.7
Medicaid 28.0 91.0 82.5
Medicare .3 6.0 14.4
Indemnity 4.0 23.6 99.2
ASO (3) -- 13.2 11.0
------- ------- --------
508.0 658.4 744.6
PPO (4) 698.0 825.0 935.0
------- ------- --------
Total Membership 1,206.0 1,483.4 1,679.6
======= ======= ========
</TABLE>
(1) Commercial HMO includes traditional HMO and point-of-service
members.<PAGE>
(2) Hybrid HMO includes any business that uses MAMSI's network and
gatekeeper PCPs, utilization management services, claims adjudication
and payment services and that has a self-funded component. Generally,
these products include specific and/or aggregate stop loss provisions.
(3) ASO includes administrative services only business without
gatekeeper PCPs and no assumption of insurance risk by any MAMSI
affiliate.
(4) PPO includes all business whereby access is granted to MAMSI's
provider network. MAMSI assumes no risk and does not provide claims
payment services on this business.
INVESTMENTS
The majority of the Company's investments are held by its state
regulated subsidiaries to provide capital for those subsidiaries'
operations and to satisfy capital, surplus and deposit requirements of
the HMO and insurance laws of the various states in which the Company is
licensed. HMO and insurance laws generally protect consumers of
insurance products with one of the principal focuses being on financial
solvency of the company's underwriting insurance risk. These laws and
regulations limit the types<PAGE>
<PAGE> 14
of investments that can be made by the regulated entities with
appropriate investments being deemed "admitted assets." Admitted assets
are those assets that can be used to fulfill capital and surplus
requirements. The Company's current investment policy generally
prohibits investments that would be "non-admitted" for statutory
reporting purposes. The Company has no investments in derivative
financial instruments and has no current intention of owning such
investments.
EMPLOYEES
As of December 31, 1996, the Company had a total of 2,661 employees,
including 2,094 full-time and 567 part-time employees. MAMSI's home
health care subsidiaries employed 764 of these employees (351 on a full-
time basis and 434 on a part-time basis). None of the Company's
employees are covered by a collective bargaining agreement and the
Company has not experienced any work stoppage since its inception. The
Company believes that it has a good relationship with its employees.
ITEM 2. PROPERTIES
To accommodate the Company's rapid growth, the Company has purchased six
office buildings since 1988. These buildings are all located in
Rockville, Maryland and total approximately 244,000 square feet of
office and warehouse space. The Company's headquarters is located at 4
Taft Court, Rockville, Maryland 20850.
In addition, the Company leases approximately 203,000 square feet of
office space and approximately 5,200 square feet of warehouse space in
various locations within its service areas to support sales and
administrative operations.
ITEM 3. LEGAL PROCEEDINGS
During the fourth quarter of 1996, two shareholders of MAMSI, who own a
total of 800 shares, filed a lawsuit in the Circuit Court of Montgomery
County Maryland against MAMSI and its Chairman, alleging that, during
the period February 29 through August 14, 1996, MAMSI and its Chairman
fraudulently or negligently misrepresented certain matters concerning
the Company's anticipated performance for the year ended December 31,
1996. The plaintiffs seek unspecified compensatory and punitive
damages, pre- and post-judgement interest, attorneys' fees and costs, on
behalf of themselves and a class of persons who purchased MAMSI's common
stock between February 29 and August 14, 1996. MAMSI and its Chairman
have filed a Motion to Dismiss the Complaint in its entirety, which is
currently pending before the Court. The Company is not able to predict
the probability of a favorable outcome or the amount of potential loss,
in the event of an unfavorable outcome. MAMSI believes that even if the
motion to dismiss is denied, it has meritorious defenses to the claims
raised in the complaint and intends to defend the action vigorously.
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 operations.<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for shareholder vote in the fourth
quarter of 1996.<PAGE>
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is currently listed on the New York Stock
Exchange ("NYSE") under the trading symbol MME. The following table sets
forth for the indicated periods the high and low reported sale prices of
the common stock as furnished by the NYSE.
1996 1995
HIGH LOW HIGH LOW
----------------- -----------------
First Quarter $24.38 $20.38 $26.13 $19.75
Second Quarter 24.00 14.25 25.00 16.63
Third Quarter 14.75 11.75 21.00 17.13
Fourth Quarter 13.38 10.13 25.13 17.50
The Company has never paid any cash dividends on its common stock and
presently anticipates that no cash dividends will be declared in the
foreseeable future. Any dividends will depend on future earnings, the
financial condition of the Company and regulatory requirements.
As of February 28, 1997, there were approximately 795 stockholders of
record of the Company's common stock.<PAGE>
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands except share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA
Revenue $1,133,742 $ 954,907 $ 749,898 $ 648,225 $ 582,489
Expense 1,138,677 858,567 663,343 605,779 561,176
Income (loss) before income taxes and cumulative
effect of accounting change (4,935) 96,340 86,555 42,446 21,313
Income (loss) before cumulative effect
of accounting change (2,768) 61,124 54,530 25,496 13,460
Net income (loss) (2,768) 61,124 54,530 24,833 13,460
Earnings per common and common
equivalent share (1):
Income (loss) before cumulative effect of
accounting change (.06) 1.28 1.15 0.57 0.31
Net income (loss) (.06) 1.28 1.15 0.55 0.31
Weighted average common and
common equivalent shares
outstanding (1) 46,988,229 47,908,379 47,370,211 45,109,230 43,067,144
SELECTED BALANCE SHEET DATA (AT DECEMBER 31)
Working capital 118,870 153,668 91,983 39,758 9,722
Total assets 334,719 354,182 268,522 189,561 130,356
Long-term debt 134 194 5,331 5,763 6,416
Stockholders' equity 184,400 217,216 141,326 71,963 40,389
Cash dividends per common share (2) --- --- --- --- ---
KEY RATIOS
Medical loss ratio 92.4% 81.9% 80.8% 86.3% 89.9%
Administrative expense ratio 10.7% 10.5% 9.4% 8.3% 7.4%
Net income margin (.2%) 6.4% 7.3% 3.9% 2.3%
OPERATING DATA
Annualized hospital days per
1,000 enrollees:
All products and health services 331 313 312 321 326
HMO only (3) 203 222 238 251 281
Medicare 2,698 2,531 --- --- ---
Medicaid 454 405 466 --- ---
Annualized hospital admissions per
1,000 enrollees 77 80 76 69 71
HMO, hybrid, ASO and indemnity
health enrollees at year end 745,000 658,000 508,000 440,000 448,000
PPO enrollees at year end 935,000 825,000 698,000 510,000 327,000
Participating providers at year end 24,300 21,077 16,950 15,500 11,900
</TABLE>
Notes
1. Earnings (loss) per common share are computed after giving effect to
dilutive stock options. All per share amounts and weighted average
common and common equivalent shares have been adjusted to reflect all
stock dividends on a retroactive basis. See Note 12 to the
consolidated financial statements.<PAGE>
2. MAMSI has not declared or paid cash dividends on its common stock.
3. Days are presented exclusive of skilled nursing, neonatal intensive
care and psychiatric inpatient care.<PAGE>
<PAGE> 17
ITEM 7. 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.
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.
GENERAL
During the three year period ended December 31, 1996, MAMSI and its
subsidiaries (the "Company") have experienced substantial revenue growth
due to increased HMO and PPO membership. The Company has achieved its
membership growth by expanding its product line, which includes point-
of-service, small group, indemnity health, hybrid products, Medicaid and
Medicare products and through expansion into new geographic markets.
Premium rates during this time have remained at or near competitive
levels for the Company's marketplace. Prior to 1996, operating margins
remained positive due to the control of medical expenses and,
accordingly, profits and earnings per share have increased. During
1996, due to increasing medical utilization and continued downward
competitive pressures on premium rates, the Company's consolidated
operating margin turned slightly negative. The Company currently
anticipates that there will be increases in premium rates during 1997
and that the Company's operating margins will again be positive. This
is a forward-looking statement, and the Company's actual operating
margins may differ from management's current expectation due to risk
factors which may affect either the Company's revenues or expenses. See
"Forward-Looking Information" above for a description of these risk
factors.
The Company generally receives a fixed premium amount per member per
month while the majority of medical expenses are variable and
significantly affected by spontaneous member utilization. Even with
managed care controls, unusual medical conditions can occur, such as an
outbreak of influenza or a higher than normal incidence of high cost<PAGE>
cases (such as premature births, complex surgeries, or rare diseases).
As a result, the Company's quarterly results can be materially effected
and irregular. However, over the longer business cycle, the Company
believes that its managed care control systems, underwriting procedures
(when allowed) and network of providers will result in continued
profitability.
Due to the continued escalation of health care costs and the inability
of many individuals to obtain health care insurance, numerous proposals
relating to health care reform have been made, and additional proposals
may be introduced, in the United States Congress and the legislatures of
the states in which the Company operates or may seek to operate.
Recently, the "Health Insurance Portability and Accountability Act of
1996, Public Law 104-191", commonly called the Kennedy-Kassebaum Bill
for its primary sponsors, was enacted. This bill establishes certain
Federal requirements for large group, small group, and individual health
benefit plans, and applies not only to insurers and HMOs but also to
ERISA plans.
Kennedy-Kassebaum is intended to make coverage more portable and
available by limiting pre-existing condition requirements; providing
special enrollment periods for employees who lose other coverage or
whose family status changes; prohibiting group plans from denying an
individual<PAGE>
<PAGE> 18
coverage or charging a higher premium based on the individual's health
status or history; and by guaranteeing coverage availability and
renewability in certain circumstances in the small group and individual
markets. Kennedy-Kassebaum also allows for the establishment of Medical
Savings Accounts; increases the penalties for health care fraud and
abuse; and calls for standardized health care information in order to
reduce administrative costs.
The effect of Kennedy-Kassebaum will differ from state to state. In the
group market, state laws remain in effect unless they prevent the
application of the new federal requirements, and in the individual
market, state law will govern if the Health and Human Services Secretary
determines that it provides an "acceptable alternative mechanism" to the
federal requirement. This means that in those states like Maryland,
where state reforms have already been enacted, the legislation may have
little, if any, effect in the small group market, but may have some
effect on the individual market. In other states, the legislation may
have a greater effect. State legislatures and regulators are hurriedly
trying to understand the requirements and implications of the law.
Most of the provisions of Kennedy-Kassebaum will take effect on July 1,
1997, but some, like the provisions pertaining to Medical Savings
Accounts, take effect earlier and some, like administrative
simplification, take effect later.
In recent years, state legislatures in the Company's service area have
been active in health care reform legislation targeted at the small
group market, i.e., usually for groups of 2 to 50 employees. This small
group reform is now in place in Maryland, Virginia, Delaware and North
Carolina, but not in Pennsylvania, Washington, D.C. or West Virginia.
Although different in many of the details, this type of legislation
generally requires all HMOs and insurers that offer small group coverage
to accept all small employers who apply for coverage and to guarantee
coverage to their employees seeking coverage regardless of their health
status. The legislation also requires renewal of these small group
employer plans, limits rate renewal increases, mandates adjusted
community rating and eliminates pre-existing condition limitations
either entirely or within a short period of time, usually six months.
The Company believes that the current political environment in which it
operates will result in continued legislative scrutiny of health care
reform and may lead to additional legislative initiatives. The Company
is unable to predict the ultimate impact upon the Company of any Federal
or state restructuring of the health care delivery or health care
financing systems, but such changes could have a material adverse impact
on the operations and financial condition of the Company.
The District of Columbia, which has not previously regulated HMOs,
enacted legislation effective July 1, 1997 providing for regulatory
oversight similar to that currently provided by other states. The
Company does not anticipate any significant negative impact on its
operations because of the new regulatory oversight in the District of
Columbia.
------------------------------------------------------------------------
--THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER
31, 1995
------------------------------------------------------------------------<PAGE>
--
RESULTS OF OPERATIONS
Consolidated net income (loss) of the Company was $(2,768,000) and
$61,124,000 in 1996 and 1995, respectively. Net earnings (loss) per
share was $(.06) in 1996 as compared to $1.28 in 1995. The reduction in
earnings is primarily attributable to a significant increase in the
medical loss ratio for commercial products, continuing losses in the
Company's Medicare product and lower earnings from the Company's
Medicaid products. The medical loss ratio increased principally due to
increased member utilization. The Company has priced its health
products competitively in order to increase its membership base and
thereby enhance its strategic position in its marketplace. 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 year ended December 31, 1996 increased approximately
$178.8 million or 18.7 percent over the year ended December 31, 1995. A
19 percent increase in net average HMO and indemnity enrollment resulted<PAGE>
<PAGE> 19
in an increase of approximately $171.5 million in health premium revenue
while the average monthly premium per enrollee, combined for all
products, remained approximately the same. Management believes that
commercial health premiums should increase over the next twelve months
as new and renewing groups are charged higher premium rates due to
legislatively mandated benefit enhancements and general pricing
increases initiated by the Company. Medicare premiums should increase
due to the Company initiated reduction in certain lower rate Medicare
service areas and the January 1 increase in overall Medicare premiums
paid by the government. This is a forward-looking statement. See
"Forward-Looking Information" above for a description of the risk
factors that may affect health premiums per member.
The Company has implemented increased premium rates across essentially
all of its commercial products which began to take effect in July, 1996.
As the Company's contracts are generally for a one year period,
increased pricing cannot be initiated until a contract reaches its
renewal date. Therefore, price increases cannot be made across the
Company's membership at the same time. Additionally, 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. Management
believes that the commercial premium rate increases will have the effect
of slowing down the Company's future membership growth. In addition,
management reevaluated premium reimbursement rates with regard to its
Medicare and Medicaid participation and reduced or eliminated certain
service areas. Specifically, effective January 1, 1997, 59 counties and
cities were eliminated from the Company's Medicare service area. Also
effective January 1, 1997, the Company no longer participates in the
mandated portion of the Virginia Medicaid program which serves Medicaid
eligibles in the Tidewater area of Virginia. In addition, the Company
has withdrawn from the Maryland Medicaid program due to changes to
premium and benefit levels and other requirements made by the State of
Maryland after it obtained an 1115 waiver and became a mandated state.
As the Company is the largest provider of managed care Medicaid in
Maryland, the Company will continue to provide services in 1997 until an
orderly transition can be accomplished. The Company will be compensated
during the transition period at a rate higher than the mandated program
allows but lower than historical reimbursement. In 1996, the Company
became licensed to serve portions of the Medicaid populations in West
Virginia and North Carolina. 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 and the Medicare program are inadequate which might cause the
Company to voluntarily withdraw from participation.
Service revenue from non-MAMSI affiliated entities earned by the
Company's home health care subsidiaries contributed $20.5 million in
revenue in 1996 as compared to $18.9 million for 1995. This increase is
the result of increasing business volume for these subsidiaries,
particularly in the home infusion area, which is largely offset by an
increasing relative percentage of business conducted for MAMSI HMO and
indemnity members which is eliminated in consolidation. Revenue from
life and short-term disability products contributed $3.2 million in 1996<PAGE>
as compared to $.9 million in 1995.
During the second quarter of 1996, the Company received a letter from
the Health Care Financing Administration ("HCFA") proposing a marketing
sanction in connection with the administration of its Medicare product,
asserting that the Company did not comply with certain HCFA
requirements. The Company contested the assertions made by HCFA and was
informed early in November, 1996 that, after reviewing the Company's
response to the allegations, HCFA will not pursue the imposition of
sanctions as proposed in their initial letter.
In 1993, MAMSI invited the National Committee for Quality Assurance
("NCQA"), a private, non-profit organization, to evaluate the Company's
methodologies in an effort to receive NCQA accreditation. NCQA
accreditation is a voluntary process. The Company did not meet certain
of NCQA's criteria and, therefore, did not receive NCQA accreditation.
MAMSI believes that it has adopted methodologies and programs designed
to respond to concerns and questions raised in NCQA's assessment. The
Company currently believes that, based on its success with large group
sales since the denial of accreditation, the failure to receive NCQA
accreditation has not had a significant adverse effect on its business
or<PAGE>
<PAGE> 20
financial condition to date although certain large group customers have
frozen their enrollment in MAMSI until accreditation is obtained. The
Company believes that increasing public awareness of the various
accreditation processes will potentially cause them to have more
significance in the purchase and enrollment decisions which could be
detrimental to the Company if NCQA accreditation is not obtained. The
Company has been reviewed again for accreditation in December of 1996.
Although the Company believes that the likelihood of NCQA accreditation
is good, there can be no assurance that accreditation will be received
or that MAMSI will not experience disenrollment if accreditation is not
ultimately received. The Company has implemented the Health Plan and
Employer Data and Information Set ("HEDIS") 2.5 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") increased to 92.4 percent in 1996 as compared to 81.9
percent for 1995 and, on a per member per month basis, medical expenses
increased 12.8 percent. This significant increase is due to a
combination of factors including lower commercial premiums charged due
to competitive forces, higher than expected utilization by commercial
members, cost increases due to legislatively mandated benefits and
extremely high medical expenses related to the Company's Medicare
enrollment. The medical cost factor of total medical costs may stabilize
or only increase slightly from the current level over the next twelve
months due to 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 also increased its Medicare 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 control and reduce the
cost of high cost cases which are driving the excessive medical loss
ratio in the Medicare line of business. The overall medical loss ratio
is expected to stabilize and decrease slowly from the current level over
the next twelve months due to the combined effects of expanded
utilization and case management efforts, continuing cost containment
efforts, increases in health premiums, and the continuing analysis of
expansion area and product line profitability. The statements in this
paragraph 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.
The administrative expense ratio for 1996 increased to 10.7 percent as
compared to 10.5 percent for 1995. This increase is due primarily to
increased salaries and expenses in certain administrative areas of the
Company, including utilization management and customer service
departments, as well as additional sales expenses in new expansion areas
in 1996. Management believes that the administrative expense ratio will<PAGE>
exceed the current level over the next year due to the continued
expansion of utilization management 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 increased $2.4 million or 20 percent primarily due to
an increase of $1.5 million in realized gains on sales of marketable
equity securities.
Deferred tax assets are recognized for deductible temporary differences
that, in management's opinion, are more likely than not to be realized
in the current or future periods. The Company's history of operating
revenue and income growth, and expectation of future operating income,
provides strong positive evidence that these deferred tax assets will be
realized. A valuation allowance has been recorded for net operating
loss carry forwards generated by certain subsidiaries that are not
deductible on a consolidated tax return. Management intends to continue
to monitor the realizability of deferred tax assets in light of future
circumstances and assess the reasonableness of the valuation allowance.<PAGE>
<PAGE> 21
The net margin rate decreased from 6.4 percent in 1995 to (.2) percent
in 1996. This decrease is primarily due to the increase in the medical
loss ratio.
------------------------------------------------------------------------
--THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER
31, 1994
------------------------------------------------------------------------
--
RESULTS OF OPERATIONS
Consolidated net income of the Company was $61,124,000 and $54,530,000
in 1995 and 1994, respectively, an increase of 12 percent. Earnings per
share increased 11 percent from $1.15 in 1994 to $1.28 in 1995. The
increase in earnings is primarily attributable to an increase in
membership, increased investment income from higher invested balances
and realized gains, and a reduction in per member per month medical
expenses (principally due to a reduction in the return of physician
withhold), partially offset by a reduction in premiums per enrollee and
an increase in administrative expenses principally due to additions to
the Company's internal sales force, expansion into new geographic
territories and the operations of the home health care subsidiaries that
were purchased in late 1994.
Revenue in 1995 increased 27 percent to $954.9 million from $749.9
million in 1994. A 27 percent increase in net average HMO and indemnity
enrollment resulted in an increase of approximately $197.2 million in
health premium revenue and a 2 percent decrease in average premiums per
HMO and indemnity enrollee reduced health premium revenue by
approximately $18.2 million. Health premiums per enrollee declined due
to the combined effects of an increasing relative percentage of Virginia
Medicaid HMO members with lower per enrollee revenues and the volatility
of revenues from groups with alternative funding arrangements (i.e.,
revenues vary in a more direct way with medical expense) coupled with
management's plan to price its commercial products competitively.
Medical expenses as a percentage of premium revenue ("medical loss
ratio") increased to 81.9 percent in 1995 as compared to 80.8 percent in
1994, principally due to a decrease in average premiums per enrollee and
also higher than anticipated medical expenses in the Company's Medicare
risk product. On a per member per month basis, medical expenses
declined approximately .6 percent over the same period due to a
reduction in the return of physician withhold, the effect of which was
mostly offset by higher member utilization, particularly in the Medicare
product.
Administrative expenses as a percentage of revenue ("administrative
expense ratio") increased to 10.5 percent in 1995 as compared to 9.4
percent in 1994. Administrative expenses increased 42 percent, from
$70.5 million in 1994 to $100.3 million in 1995. The increase in the
administrative expense ratio is primarily attributable to expenses of
the Company's home health care subsidiaries, which were purchased in
late 1994, the Company's territorial expansion into additional service
areas within currently served states as well as into the new states of
North Carolina, South Carolina, and Pennsylvania, the continued
implementation of its plan to significantly increase its employee sales
force and the higher costs of administering the Medicaid product, which<PAGE>
became a more significant line of business for the Company in 1995.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement No. 115"). Statement No. 115
requires that investments in all debt securities and equity securities
with readily determinable fair values be classified into categories,
which then establish the appropriate accounting treatment. At January
1, 1995, the Company's entire short-term investment portfolio was
classified as available-for-sale and, as a result, the net unrealized
gain associated with these securities of $1.1 million, net of tax, was
recorded as a separate component of stockholders' equity. Also on the
same date, the Company's statutory deposits, which consist of
investments held in custodial accounts by state regulatory agencies,
were classified as held-to-maturity and will continue to be carried at
amortized cost.
The net margin rate decreased from 7.3 percent in 1994 to 6.4 percent in
1995. This decrease is primarily due to lower premium rates on certain
products and increased administrative expense.<PAGE>
<PAGE> 22
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 requirements have been met principally from
operating cash flow and it is anticipated that this source, coupled with
the Company's operating line of credit, will be sufficient in the
future.
The Company's cash and short-term investments decreased from $215.6
million at December 31, 1995 to $155.4 million at December 31, 1996,
primarily due to purchases of MAMSI common stock under the Company's
stock repurchase program, the Company's 1996 net loss and the
acceleration of claims payments. Accounts receivable increased from
$61.3 million at December 31, 1995 to $77.0 million at December 31,
1996. This $15.7 million increase is primarily due to the increase in
membership during 1996 combined with a lower than normal balance in
receivables at December 31, 1995 due to a higher relative volume of
payments made by employer groups during the last month of the year.
Prepaid expenses, advances and other current assets increased from $9.0
million at December 31, 1995 to $32.3 million at December 31, 1996,
principally due to estimated tax refunds for net operating loss
carrybacks available for certain MAMSI subsidiaries and other reductions
in estimated tax liabilities related to the net loss for the year plus
certain other tax deductions not related to book income. Statutory
deposits decreased from $10.5 million at December 31, 1995 to $9.1
million at December 31, 1996 due to the release by state regulatory
authorities of certain deposits related to an affiliated HMO that was
merged into M.D. IPA in 1993.
Short-term investments are marked to market at the end of every quarter
and the resulting unrealized gain or loss is reflected in the ending
stockholders' equity balance. Accordingly, stockholders' equity at
December 31, 1996 reflects an unrealized gain of $.3 million, net of
tax, on the Company's short-term investments primarily due to the impact
of falling interest rates on the market value of the Company's debt
securities.
Medical claims payable increased from $108.5 million at December 31,
1995 to $118.6 million at December 31, 1996 primarily due to increased
membership, increased member utilization and related claims accruals.
Additional paid-in capital increased from $40.4 million at December 31,
1995 to $173.3 million at December 31, 1996, principally due to the
establishment of a stock compensation trust. This trust is used to
provide shares of the Company s stock to meet its stock option plan
obligations. Amounts recorded for treasury stock increased in 1996 by
approximately $41.2 million due to stock purchases under the Company's
stock repurchase program.
The Company 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 December 31, 1996, approximately<PAGE>
$2.2 million was drawn against these facilities.
Following is a schedule of the short-term capital resources available to
the Company:
December 31
(in thousands) 1996 1995
------------------
Cash and cash equivalents $ 4,065 $ 10,874
Short-term investments 151,359 204,734
Working capital advances to Maryland
hospitals 6,432 4,053
-------- ---------
Total available liquid assets 161,856 219,661
Credit line availability 21,802 7,880
-------- ---------
Total short-term capital resources $ 183,658 $ 227,541
========= =========<PAGE>
<PAGE> 23
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.
The Company believes that cash generated from operations along with its
current liquidity and borrowing capabilities are adequate for both
current and planned expanded operations. Certain capital expenditures
will be made over the next year to enhance the Company's computer
systems, to establish additional sales offices and to make necessary
improvements to existing administrative offices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Consolidated Balance Sheets as of December 31, 1996 and 1995..... 24
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994............................... 25
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994........... 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994............................... 27
Notes to Consolidated Financial Statements....................... 28
Report of Ernst & Young LLP Independent Auditors................. 42
Selected Quarterly Financial Data for Fiscal Years 1996 and
1995 (Unaudited)............................................... 43<PAGE>
<PAGE> 24
Mid Atlantic Medical Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands except share amounts) 1996 1995
---------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,065 $ 10,874
Short-term investments (Note 2) 151,359 204,734
Accounts receivable, net (Note 3) 77,042 61,263
Prepaid expenses, advances and other 32,323 8,974
Deferred income taxes (Note 8) 4,033 4,379
-------- --------
Total current assets 268,822 290,224
Property and equipment, net (Note 4) 45,210 38,704
Statutory deposits (Note 2) 9,125 10,543
Other assets 10,261 11,373
Deferred income taxes (Note 8) 1,301 3,338
--------- --------
Total assets $ 334,719 $354,182
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Currrent liabilities
Notes payable (Note 5) $ 60 $ 210
Short-term borrowings (Note 5) 1,973 1,651
Accounts payable 18,755 15,075
Medical claims payable, net (Note 6) 118,649 108,490
Deferred premium revenue 10,479 10,125
Deferred income taxes (Note 8) 36 1,005
-------- --------
Total current liabilities 149,952 136,556
Notes payable (Note 5) 134 194
Deferred income taxes (Note 8) 233 216
-------- --------
Total liabilities 150,319 136,966
Stockholders' equity (Notes 11, 12 and 14)
Common stock, $0.01 par, 100,000,000 shares authorized,
56,772,502 issued and 54,677,862 outstanding at
December 31, 1996; 46,631,327 issued and 46,585,387
outstanding at December 31, 1995 567 466
Additional paid-in capital 173,325 40,374
Stock compensation trust (common stock held in trust) (120,652)
Treasury stock, 2,094,640 shares at December 31, 1996; 45,940
shares at December 31, 1995 (41,211) (33)
Unrealized gains and losses on investments, net of tax
of $174 and $1,004 (Note 2) 265 1,535
Retained earnings 172,106 174,874
-------- --------
Total stockholders' equity 184,400 217,216
-------- --------
Total liabilities and stockholders' equity $ 334,719 $354,182
======== ========
/TABLE
<PAGE>
The accompanying notes are an integral part of these consolidated
financial statements.<PAGE>
<PAGE> 25
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands except share amounts) 1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Revenue
Health premium $ 1,079,223 $ 907,694 $ 728,743
Fee and other 16,376 15,334 9,760
Life and short-term disability premium 3,240 961
Home health services 20,519 18,910 4,745
Investment 14,384 12,008 6,650
--------- --------- ---------
Total revenue 1,133,742 954,907 749,898
--------- --------- ---------
Expense
Medical expense
Referral and ancillary care (Notes 9 and 10) 432,487 320,412 271,042
Hospitalization, net of coordination of benefits 349,445 247,870 191,902
Primary care (Notes 9 and 10) 100,692 93,320 70,960
Prescription drugs 115,544 80,438 56,246
Reinsurance premiums, net (Note 7) (600) 1,587 (1,160
--------- --------- --------
997,568 743,627 588,990
--------- --------- --------
Life and short-term disability claims 2,314 934
--------- --------- --------
Home health patient services 17,141 13,684 3,817
--------- --------- --------
Administrative expense
Salaries and benefits 76,627 62,706 42,740
Promotion and advertising 4,182 3,246 4,504
Facilities, maintenance and supplies 23,398 19,134 11,990
Professional services 5,837 3,717 2,701
Other (including interest expense of $691, $1,010 and $1,208) 11,610 11,519 8,601
--------- -------- --------
121,654 100,322 70,536
--------- -------- --------
Total expense 1,138,677 858,567 663,343
--------- -------- --------
Income (loss) before income taxes (4,935) 96,340 86,555
Income tax benefit (expense) (Note 8) 2,167 (35,216) (32,025)
---------- --------- ---------
Net income (loss) $ (2,768) $ 61,124 $ 54,530
========== ========= =========
Earnings (loss) per common and
common equivalent share (Notes 11 and 12):
Net income (loss) $ (.06) $ 1.28 $ 1.15
========= ========= =========
Weighted average common and
common equivalent shares outstanding (Note 12) 46,988,229 47,908,379 47,370,211
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.<PAGE>
<PAGE> 26
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Additional Stock Unrealized
Common Paid-In Compensation Treasury Gains and Retained
(in thousands except share amounts) Stock Capital Trust Stock (Losses) Earnings Total
--------- --------- ------------ --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
--------- --------- ------------ --------- --------- --------- --------
Balance, December 31, 1993 $ 220 $ 12,553 $ (30) $ 59,220 $ 71,963
Adjustment to beginning balance
for change in accounting
method, net of tax of $718
(Note 2) $ 1,099 1,099
Exercise of stock options for
1,520,975 shares of MAMSI
common stock 10 6,127 6,137
Stock option tax benefit 10,973 10,973
100% stock dividend 226 (226)
Change in unrealized gains
and (losses), net of tax
of $2,208 (3,377) (3,377)
Other 4 (3) 1
Net Income 54,530 54,530
--------- --------- ------------ ---------- -------- ------- -------
Balance, December 31, 1994 456 29,431 (33) (2,278) 113,750 141,326
Exercise of stock options for
967,800 shares of MAMSI
common stock 10 4,533 4,543
Change in unrealized gains
and (losses), net of tax of $2,494 3,813 3,813
Net Income 61,124 61,124
---------- --------- ----------- ---------- ------- ------- -------
Balance, December 31, 1995 466 40,374 (33) 1,535 174,874 217,216
Exercise of stock options for
1,011,175 shares of MAMSI
common stock 10 5,682 5,692
Stock option tax benefit 6,162 6,162
Establishment of Stock
Compensation Trust for
9,130,000 shares of MAMSI
common stock 91 130,011 $ (130,102)
Exercise of stock options
for 109,300 shares released from
the Stock Compensation Trust (1,011) 1,557 546
Adjustment to market value
for shares held in Stock
Compensation Trust (7,893) 7,893
Repurchase of 2,048,700 shares of
MAMSI common stock (41,178) (41,178)
Change in unrealized gains<PAGE>
and (losses), net of tax
of $830 (1,270) (1,270)
Net loss (2,768) (2,768)
--------- --------- --------- -------- ------ ------- -------
Balance, December 31, 1996 $ 567 $ 173,325 $ (120,652) $ (41,211) $ 265 $172,106 $184,400
========= ========= ========= ======== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.<PAGE>
<PAGE> 27
Mid Atlantic Medical Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,768) $ 61,124 $ 54,530
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,874 6,026 4,225
Provision for bad debts 1,728 47 370
Provision for deferred income taxes 2,261 4,971 (2,435)
Loss on sale and disposal of assets 13 78 1,126
Changes in operating assets and liabilities, net of effects
of acquisition of subsidiary:
Increase in accounts receivable (17,507) (24,279) (6,575)
Decrease (increase) in prepaid expenses, advances and other (23,349) (3,231) 726
Increase (decrease) in accounts payable 3,680 (2,490) 5,016
(Decrease) in income taxes payable (2,589) (465)
Increase (decrease) in medical claims payable, net 10,159 23,476 (2,346)
Increase (decrease) in deferred premium revenue 354 (3,219) 4,936
--------- --------- ---------
Total adjustments (14,787) (1,210) 4,578
--------- --------- ---------
Net cash provided by (used in) operating activities (17,555) 59,914 59,108
--------- --------- ---------
Cash flows provided by (used in) investing activities:
Purchases of short-term investments (338,943) (426,601) (220,410)
Sales of short-term investments 392,219 365,076 184,826
Purchases of property and equipment (13,469) (10,027) (8,317)
Acquisition of subsidiary (9,958)
Purchases of statutory deposits (2,407) (1,405) (5,219)
Maturities of statutory deposits 1,824 739 23
Purchases of other assets (247) (725) (1,997)
Proceeds from sale of assets 435 946 1,392
---------- ---------- ---------
Net cash provided by (used in) investing activities 39,412 (71,997) (59,660)
---------- ---------- ---------
Cash flows provided by (used in) financing activities:
Proceeds from notes payable 300 200
Principal payments on notes payable (210) (5,953) (677)
Increase in short-term borrowings 322 603
Exercise of stock options 6,238 4,543 6,137
Stock option tax benefit 6,162 6,410 10,973
Purchase of treasury stock (41,178)
--------- ---------- ---------
Net cash provided by (used in) financing activities (28,666) 5,903 16,633
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents (6,809) (6,180) 16,081
Cash and cash equivalents at beginning of year 10,874 17,054 973
--------- --------- ---------
Cash and cash equivalents at end of year $ 4,065 $ 10,874 $ 17,054
========= ========= =========
/TABLE
<PAGE>
The accompanying notes are an integral part of these consolidated
financial statements.<PAGE>
<PAGE> 28
Mid Atlantic Medical Services, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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 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 and home infusion services companies, a hospice
company, a mail order pharmacy, and part ownership in 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.
The following are other significant wholly owned subsidiaries of MAMSI:
Physicians Health Plan of Maryland, Inc. ("PHP-MD") is an individual
practice association ("IPA") that provides physician services to certain
of the Company's HMOs.
Alliance PPO, Inc. ("Alliance") provides a delivery network of
physicians (called a preferred provider organization) to employers and
insurance companies in association with various health plans.
Mid Atlantic Psychiatric Services, Inc. ("MAPSI") provides psychiatric
services to third party payors or self-insured employer groups.
MAMSI Life and Health Insurance Company ("MAMSI Life") develops and
markets indemnity health products and group life, accidental death and
short-term disability insurance.
HomeCall, Inc., FirstCall, Inc. and HomeCall Pharmaceutical Services,
Inc. ("HCPS") provide in-home medical care including skilled nursing,
infusion and therapy to MAMSI's HMO members and other payors. In
addition, HCPS provides mail-order pharmacy services to MAMSI's HMO
members and other payors.
HomeCall Hospice Services, Inc. ("Hospice") began operations in
December, 1996 and provides services to terminally ill patients and
their families.
The significant accounting policies followed by MAMSI and its
subsidiaries are described below.
PRINCIPLES OF CONSOLIDATION<PAGE>
The consolidated financial statements include the accounts of MAMSI and
its subsidiaries. All significant intercompany balances have been
eliminated in consolidation.
MAJOR CUSTOMERS
The Company's operations are conducted within one business segment. A
significant portion of the Company's premium revenue is derived from
federal, state and local government agencies, including governmental
employees and Medicaid and Medicare recipients. For the years ended
December 31, 1996, 1995 and 1994, approximately 11%, 7% and 9%,
respectively, of premium revenue was derived from federal government
agencies, and approximately 26%, 21% and 18%, respectively, was derived
from state and local government agencies.
CASH EQUIVALENTS
Floating rate municipal putable bonds, which possess an insignificant
risk of loss from changes in interest rates, that have been held less
than three months, are classified as cash equivalents.<PAGE>
<PAGE> 29
SHORT-TERM INVESTMENTS
Short-term investments, consisting principally of marketable equity
securities, municipal bonds and tax-free bond funds, are classified as
available-for-sale. These securities are carried at fair market value
plus accrued interest and any unrealized gains and losses are reported
as a separate component of stockholders' equity, net of the related tax
effect. Gains and losses are reported in earnings when realized. Gains
and losses on sales of securities are computed using the specific
identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the property and equipment. Leasehold improvements are
amortized on a straight-line basis over the lesser of the life of the
improvement or the term of the related lease.
STATUTORY DEPOSITS
Statutory deposits, consisting principally of municipal bonds and
treasury notes held in custodial accounts by state regulatory agencies,
are classified as held-to-maturity. These securities are stated at
amortized cost.
GOODWILL
The excess of cost over the fair value of net assets of the acquired
company in the 1994 purchase transaction is recorded as goodwill and is
classified in the consolidated balance sheets as an other asset.
Goodwill is amortized on a straight-line basis over 15 years.
HEALTH PREMIUM
Amounts charged for health care services are recognized as premium
revenue in the month for which enrollees are entitled to receive care.
Included in premium revenue are amounts due from customers that utilize
the Company's capitated primary care physician network, its medical
utilization management services and other services related to health
management and who self-fund, generally up to specified limits, certain
elements of medical costs, such as hospitalization and specialist
physicians. Premium revenue received in advance is recorded as deferred
premium revenue.
FEE AND OTHER
Amounts charged to third party payors solely for use of the Company's
provider network and its discounted fee-for-service rate structure are
recognized as fee revenue. Amounts charged for administrative services
only arrangements entailing only claims payment services and utilization
of the provider network without utilization of the Company's primary
care physician network and utilization management services and under
which the Company bears no insurance risk, are recognized as fee
revenue.
HOME HEALTH SERVICES<PAGE>
Amounts charged to patients, third party payors and others for home
health services are recorded at net realizable amounts, including
retroactive adjustments under cost reimbursement agreements with third
party payors.
MEDICAL EXPENSE
Medical expense consists principally of medical claims and capitation
costs. Medical claims include payments to be made on claims reported as
of the balance sheet date and estimates of health care services incurred
but not reported ("IBNR") to the Company as of the balance sheet date.
The IBNR is estimated using an expense forecasting model that is based
on historical claims incurrence patterns modified to consider current
trends in enrollment, member utilization patterns, timeliness of claims
submissions and other factors. This estimate includes medical costs to
be incurred beyond the premium paying date that are contractually
required.
Capitation costs represent monthly fixed fees to participating
physicians and other medical providers as retainers for providing
continuing medical care.<PAGE>
<PAGE> 30
The Company believes that its IBNR claims reserves are adequate to
satisfy its ultimate claims liabilities; however, the IBNR liability as
established may vary significantly from actual claims amounts, both
negatively or positively, and as such adjustments are deemed necessary,
they are included in current operations. Establishment of IBNR claims
estimates is an inherently uncertain process and there can be no
certainty that currently established reserves will prove adequate to
cover actual ultimate expenses. Subsequent actual experience could
result in reserves being too high or too low which could positively or
negatively impact the Company's earnings in future periods.
COORDINATION OF BENEFITS
Coordination of benefits ("COB") results from the determination that the
Company has paid for medical claims expenses for which an enrollee has
duplicate coverage and for which another insurer is primarily liable.
In the consolidated statements of operations, such identified amounts
are classified as a reduction of hospitalization expense and, in the
consolidated balance sheets, such amounts are classified as a reduction
of medical claims payable.
INCOME TAXES
The income tax provision includes Federal and state income taxes both
currently payable and deferred because of differences between financial
reporting and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common and common equivalent share is based upon the
weighted average number of common and common equivalent shares
outstanding. Shares held in the Company's Stock Compensation Trust (see
Note 12) are excluded from weighted average shares outstanding. Common
equivalent shares result from the assumed exercise of outstanding stock
options that have a dilutive effect when applying the treasury stock
method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments" ("Statement No. 107"), requires
disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents - The carrying amount reported in the
consolidated balance sheets approximates fair value.
Short-term investments - Fair values are based on quoted market prices.
Statutory deposits - Fair values are based on quoted market prices.<PAGE>
Short-term borrowings - The carrying amount reported in the consolidated
balance sheets approximates fair value.
ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates and assumptions could
change in the future as more information becomes known, which could
impact the amounts reported and disclosed herein.
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its stock option plans. Under
APB 25,<PAGE>
<PAGE> 31
because the exercise price of the Company's employee stock options
equals the market value of the underlying stock on the date of grant, no
compensation expense is recognized.
RECLASSIFICATIONS
Certain balances in the 1995 financial statements have been reclassified
to conform to the 1996 presentation.
NOTE 2 - INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement No. 115"). Under this
statement, securities are classified into categories and are valued
based upon this designation. Securities classified as available-for-
sale, which include debt and equity securities that the Company does not
have the positive intent to hold to maturity, are marked to market with
the resulting unrealized gain or loss reflected in stockholders' equity.
Securities classified as held-to-maturity, which are debt securities
that the Company has both the positive intent and ability to hold to
maturity, are carried at amortized cost. During 1996, statutory deposit
investments with an amortized cost of $2,001,000 were released by state
regulatory agencies and transferred to the Company's short-term
investment portfolio. The unrealized gain at the date of transfer was
$28,000.
On January 1, 1994, the Company classified its short-term investments as
available-for-sale. As a result, the Company recorded net unrealized
gains of $1.1 million, net of tax, as a separate component of
stockholders equity. In addition, the Company classified its statutory
deposits as held to maturity with no effect on the recorded value.
Management re-evaluates these designations annually.
The following is a summary of available-for-sale and held-to-maturity
securities at December 31, 1996:
<TABLE>
<CAPTION>
-------------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Obligations of states and political subdivisions $ 98,115 $ 885 $ 107 $ 98,893
Municipal bond funds 8,201 8,201
Other debt securities 1,478 57 1,535
Accrued interest 1,031 1,031
-------- -------- --------- --------
Debt securities 108,825 942 107 109,660
Equity securities 39,183 1,555 1,671 39,067
Mutual funds 2,911 142 421 2,632
-------- -------- --------- --------
Short-term investments $ 150,919 $ 2,639 $ 2,199 $ 151,359
======== ======== ======== ========<PAGE>
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 6,224 $ 100 $ 15 $ 6,309
Obligations of states and political subdivisions 2,003 121 3 2,121
Other investments 898 898
-------- -------- -------- --------
Statutory deposits $ 9,125 $ 221 $ 18 $ 9,328
======== ======== ======== ========
/TABLE
<PAGE>
<PAGE> 32
The following is a summary of available-for-sale and held-to-maturity
securities at December 31, 1995:
<TABLE>
<CAPTION>
------------------------------------------------------
Gross Gross Estimated
(in thousands) Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 20 $ 20
Obligations of states and political subdivisions 98,681 $ 1,306 $ 30 99,957
Municipal bond funds 68,204 68,204
Other debt securities 2,587 94 2,681
Accrued interest 1,163 1,163
-------- ------- -------- --------
Debt securities 170,655 1,400 30 172,025
Equity securities 27,343 2,270 1,112 28,501
Mutual funds 4,197 11 4,208
-------- ------- --------- --------
Short-term investments $ 202,195 $ 3,681 $ 1,142 $ 204,734
======== ======= ========= ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
of U.S. government agencies $ 5,542 $ 167 $ 1 $ 5,708
Obligations of states and political subdivisions 4,103 181 4,284
Other investments 898 898
-------- ------- -------- --------
Statutory deposits $ 10,543 $ 348 $ 1 $ 10,890
======== ======= ======== ========
</TABLE>
For the years ended December 31, 1996 and 1995, marketable equity
available-for-sale securities with a fair value at the date of sale of
$53,037,000 and $30,676,000, respectively, were sold. The gross
realized gains on such sales totaled $8,971,000 and $5,943,000, and the
gross realized losses totaled $3,072,000 and $1,149,000 for each of the
respective periods. Realized gains and losses are included in
investment income. Other sales of short-term investments consisted
principally of redemptions from municipal bond funds.
The amortized cost and estimated fair value of debt and marketable
equity securities at December 31, 1996, by contractual maturity, are
shown below. Actual maturities may differ from contractual maturities
because the issuers of the securities may have the right to prepay
obligations without prepayment penalties.<PAGE>
<PAGE> 33
<TABLE>
<CAPTION>
------------------------
-
Estimated
Fair
(in thousands) Cost Value
------------------------
-
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 16,747 $
16,762
Due after one year through five years 46,687
47,091
Due after five years through ten years 26,221
26,492
Due after ten years 19,170
19,315
--------- --------
-
Debt securities 108,825
109,660
Equity securities 39,183
39,067
Mutual funds 2,911
2,632
--------- --------
-
$ 150,919 $
151,359
=========
=========
HELD-TO-MATURITY
Due in one year or less $ 908 $
908
Due after one year through five years 3,778
3,829
Due after five years through ten years 3,005
3,035
Due after ten years 1,434
1,556
--------- --------
-
$ 9,125 $
9,328
=========
=========
</TABLE>
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
<TABLE>
CAPTION
<PAGE>
------------------------
-
(in thousands) 1996 1995
------------------------
-
<S> <C> <C>
Premium and fee accounts $ 58,756 $
43,737
Home health service accounts 2,677
2,869
Medical recoverables 11,707
10,419
Other 9,268
7,876
Less: allowance for doubtful accounts (5,366)
(3,638)
--------- --------
-
$ 77,042 $
61,263
=========
=========
</TABLE>
Medical recoverables consist of refunds identified on paid claims that
will be collected in the following year. This amount has been recorded
as a reduction of medical expense in the consolidated statements of
operations. Other receivables consist primarily of amounts due for
reinsurance recoveries and pharmacy rebates.<PAGE>
<PAGE> 34
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1996 1995
-------------------------
<S> <C> <C>
Land, buildings and improvements $ 20,906 $ 20,004
Computer equipment and software 30,151 21,823
Office furniture and equipment 15,566 11,673
Leasehold improvements 495 295
--------- ---------
67,118 53,795
Less: accumulated depreciation and
amortization (21,908) (15,091)
--------- ---------
$ 45,210 $ 38,704
========= =========
</TABLE>
NOTE 5 - NOTES PAYABLE
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1996 1995
-------------------------
<S> <C> <C>
Equipment term loan secured by certain
computer equipment with interest due at
9.8%. Principal is paid in equal monthly
installments with interest until maturity
in March 1996 $ 150
Other notes payable $ 194 254
Current portion (60) (210)
--------- ---------
Noncurrent portion $ 134 $ 194
========= =========
</TABLE>
On September 1, 1995, the Company paid off in full, from available cash,
its mortgage note payable amounting to approximately $5.0 million.
The noncurrent portion of notes at December 31, 1996 mature in future
years as follows (in thousands):
1998 $60
1999 60
2000 14
The Company has access to total line-of-credit and letter-of-credit
facilities of $24 million, which are subject to annual renewal.<PAGE>
Borrowings bear interest at a rate based on either the bank's prime rate
or the Federal Funds rate plus .75% and are secured by certain cash
balances and short-term investments. At December 31, 1996,
approximately $1.97 million was outstanding on one of the lines-of-
credit at an interest rate of 7.91% and approximately $225,000 was
outstanding in letters-of-credit.
Interest expense paid in cash during 1996, 1995 and 1994 was
approximately $688,000, $1,541,000 and $708,000, respectively.<PAGE>
<PAGE> 35
NOTE 6 - MEDICAL CLAIMS PAYABLE
Medical claims payable consists of the following at December 31:
<TABLE>
<CAPTION>
-------------------------
(in thousands) 1996 1995
-------------------------
<S> <C> <C>
Medical claims payable $ 123,163 $ 112,362
Coordination of benefits recoverable (4,514) (3,872)
--------- ---------
$ 118,649 $ 108,490
========= =========
</TABLE>
NOTE 7 - REINSURANCE
M.D. IPA, OCI, OCCI, OCIPA and MAMSI Life maintain reinsurance coverage
to provide for reimbursement of claims in excess of certain limits.
Reinsurance for health claims generally covers 80% of all hospital costs
in excess of a deductible amount per enrollee per year (subject to a
$2,000,000 maximum lifetime reinsurance limit per person) but excludes
coverage of costs in excess of certain per diem rates. The deductible
per enrollee was raised from $100,000 to $200,000 effective October 1,
1994. Reinsurance for life and accidental death claims generally covers
all settlements in excess of $50,000 per person subject to a $1,000,000
maximum recovery per person. Reinsurance recoveries for the years ended
December 31, 1996, 1995 and 1994 were approximately $2,288,000,
$128,000 and $3,029,000, respectively. In the consolidated statements
of operations, reinsurance premiums are shown net of the related
recoveries.
NOTE 8 - INCOME TAXES
At December 31, 1996, the Company has net operating loss carryforwards
of approximately $1.3 million for income tax purposes that expire in
various years beginning in the year 2002. Approximately $1.2 million of
these carryforwards relate to HomeCall, Inc. operations prior to MAMSI's
acquisition. The Company's ability to utilize these net operating loss
carryforwards is limited.<PAGE>
<PAGE> 36
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows as of December 31:
<TABLE>
<CAPTION>
--------------------------
(in thousands) 1996 1995
--------------------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation $ 3,558 $ 2,597
Unrealized investment gains 174 1,004
--------- ---------
Total deferred tax liabilities 3,732 3,601
--------- ---------
Deferred tax assets:
Accrued medical expenses 4,510 6,040
Premium revenue adjustments 725 710
Allowance recapture 1,753 1,229
Accrued pension expenses 1,405 1,199
Other 1,166 1,047
--------- ---------
Total deferred tax assets 9,559 10,225
Valuation allowance for deferred tax assets (762) (128)
--------- ---------
Net deferred tax assets 8,797 10,097
--------- ---------
$ 5,065 $ 6,496
========= =========
Included in the consolidated balance sheets:
Current assets - deferred income taxes $ 4,033 $ 4,379
Non-current assets - deferred income taxes 1,301 3,338
Current liabilities - deferred income taxes (36) (1,005)
Non-current liabilities - deferred
income taxes (233) (216)
--------- ---------
Net deferred tax assets $ 5,065 $ 6,496
========= =========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (4,239) $ 32,217 $ 22,924
State (189) 5,844 3,861
--------- --------- --------
Total current (4,428) 38,061 26,785
--------- --------- --------<PAGE>
Deferred:
Federal 1,828 (2,207) 4,286
State 433 (638) 954
--------- --------- --------
Total deferred 2,261 (2,845) 5,240
--------- --------- --------
$ (2,167) $ 35,216 $ 32,025
========= ========= ========
/TABLE
<PAGE>
<PAGE> 37
The Company's tax provision differs from the statutory rate for Federal
income taxes for the years ended December 31 as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Statutory rate (35%) $ (1,727) $ 33,719 $ 30,294
Tax-exempt interest (1,912) (1,872) (1,171)
State income taxes, net of Federal benefit (254) 3,399 3,062
Increase (decrease) in valuation allowance for
deferred tax assets 634 (11) (244)
Other non-deductible items 785 754 251
Other, net 307 (773) (167)
--------- --------- ---------
$ (2,167) $ 35,216 $ 32,025
========= ========= =========
</TABLE>
Total tax deposits made by the Company in 1996, 1995 and 1994 were
approximately $10,320,000, $27,266,000 and $25,191,000, respectively.
NOTE 9 - RISK POOL WITHHOLDINGS
Prior to July 1, 1996, contracts with participating physicians allowed
for withholdings generally ranging from 5% to 15% from primary care
physicians and participating specialists on capitation and fee-for-
service payments. The withheld amounts ultimately paid back to
providers is generally less than the total amount withheld. Withheld
liabilities and related medical expenses were reduced by $14,535,000,
$22,802,000 and $8,719,000 in 1996, 1995 and 1994, respectively, to
reflect amounts not returned to providers. Commencing July 1, 1996, the
Company, pursuant to state law changes, discontinued withholding from
payments in substantially all areas of operations.
NOTE 10 - RELATED PARTIES
For the years ended December 31, 1996, 1995 and 1994, certain members of
the Boards of Directors of MAMSI and subsidiary corporations who are
also participating physicians provided medical services to enrollees
totaling $8,406,000, $9,699,000 and $6,450,000, respectively, which
represents approximately 2% in all years of payments to all physicians.
Board members are remunerated at the same contractual level as all other
participating physicians and are selected by enrollees to render medical
services under the same guidelines as all other participating
physicians.
NOTE 11 - EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a defined contribution 401(k) savings plan covering all
full-time employees. Employees are allowed to contribute up to 10% of
their pre-tax earnings annually and the Company makes a matching
contribution of 50% on the first 4% of contributions made by employees.
Employees vest immediately in the employee contributions and ratably
over six years in the Company contributions. During 1996, 1995 and<PAGE>
1994, the Company's contribution to the 401(k) plan aggregated $540,000,
$433,000 and $231,000, respectively.
Effective December 31, 1994, the Company discontinued its non-
contributory defined benefit pension plan (the "Plan"). Benefits earned
under the Plan, which covered substantially all employees, were fully
vested at that date. The obligation to provide these benefits was
satisfied as of December 31, 1995 through a combination of purchases of
annuity contracts, transfers of vested funds into the 401(k) plan and
cash withdrawals. The Company recognized a gain on the curtailment of
the defined benefit pension plan of approximately $345,000.
The net pension cost for the Plan was approximately $1,095,000 in 1994.
In accordance with a personal service contract negotiated by the
Company, its Chairman is entitled to supplemental pension benefits based
upon years of service and attained salary levels. Expense recognized
related to this plan was $818,000, $1,682,000 and $844,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.<PAGE>
<PAGE> 38
STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"). Statement 123 prescribes
accounting and reporting standards for all stock based compensation
plans. Statement 123 requires that the company either adopt the fair
value method of accounting for its stock option plans or continue to
apply the existing accounting rules but provide supplemental pro forma
disclosures as if the new rules had been adopted. The Company has
elected to follow the existing rules and make the required pro forma
disclosures in its 1996 consolidated financial statements. Although
Statement 123 first became effective in 1996, it requires that the pro
forma disclosures include the effects of all awards granted in fiscal
years beginning after December 15, 1994, the majority of which were
issued under the Company's 1995 and 1996 stock option plans.
Pro forma information regarding net income and earnings per share are
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1996 and 1995, respectively:
risk-free interest rates of 6.3% and 6.7%; volatility factors of the
expected market price of the Company's common stock of .47 and .53 and a
weighted average life of the options of 3 years. The Company
anticipates that it will declare no dividends.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially effect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's pro forma information follows (in thousands except share
amounts):
1996 1995
Pro forma net income (loss) $ (8,409) $58,670
Pro forma earnings (loss) per share ( .18) 1.23
The effects of applying Statement 123 as computed above are not likely
to be representative of the pro forma effects on reported net income in
future years as the above only considers options granted in 1995 and
1996.
In each year 1990 through 1996, MAMSI implemented a non-qualified stock
option plan whereby options for the purchase of shares of common stock
may be granted to directors, officers and employees of the Company.
Shares authorized under the plans total 15,500,000. Options under the
plans generally vest over a three-year period and are exercisable at
100% of the fair market value per share on the date the options are<PAGE>
granted. The Company accounts for these stock option grants in
accordance with APB 25, and, accordingly, recognizes no compensation
expense for these stock option grants. Transactions relating to the
1990 - 1996 plans are summarized as follows:<PAGE>
<PAGE> 39
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- ---------
Outstanding, January 1 7,400,405 $ 14.94 6,425,465 $ 12.51 5,834,650 $ 4.82
Granted 3,122,371 $ 17.72 2,270,100 $ 18.22 2,301,270 $ 26.18
Exercised (1,120,475) $ 5.57 (967,800) $ 4.69 (1,520,975) $ 4.03
Forfeited (538,280) $ 20.67 (327,360) $ 19.92 (189,480) $ 8.47
----------- ---------- ------- -----------
Outstanding, December 31 8,864,021 $ 17.02 7,400,405 $ 14.94 6,425,465 $ 12.51
=========== ========= =========
Available for grant, end of year 1,494,829 1,081,670 24,410
Exercisable, end of year 4,107,450 3,281,405 2,293,375
Option price range for exercised shares $2.58-$22.38
Option price range at end of year $3.29-$28.50
Weighted average fair value of
options granted during year $7.32
</TABLE>
<TABLE>
<CAPTION> Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Range of Outstanding Contractual Exercise at Exercise
Exercise Prices at 12/31/96 Life Price 12/31/96 Price
---------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.58- $5.00 638,550 0.6 $ 3.52 638,550 $ 3.52
$5.00-$10.00 1,349,250 1.5 $ 5.84 1,349,250 $ 5.84
$10.00-$15.00 565,950 4.4 $ 12.56 76,650 $ 13.42
$15.00-$20.00 4,048,421 3.9 $ 18.54 638,800 $ 17.74
$20.00-$25.00 580,630 3.6 $ 22.45 268,520 $ 22.51
$25.00-$28.50 1,681,220 2.3 $ 27.06 1,135,680 $ 27.06
--------- ---------
8,864,021 4,107,450
========= =========
/TABLE
<PAGE>
<PAGE> 40
The Company has an incentive compensation plan whereby officers and key
employees receive bonuses based upon the annual operating results of the
Company. Incentive compensation expense was approximately $3,162,000 in
1994. No management bonus was earned in 1995 or 1996. In addition,
certain individuals receive a cash bonus based upon the achievement of
certain measurable criteria other than the annual operating results of
the Company. These bonus amounts are not significant.
NOTE 12 - COMMON STOCK
On April 17, 1995, the stockholders of MAMSI approved an increase in the
number of authorized shares of common stock from 60,000,000 to
100,000,000.
On June 15, 1994, the Board of Directors declared a 100% stock dividend.
The stock dividend was paid on August 5, 1994 to shareholders of record
on July 5, 1994.
All references in the consolidated financial statements to per share
amounts, number of shares, and weighted average common and common
equivalent shares have been adjusted to reflect the stock dividends on a
retroactive basis.
On August 26, 1996, the Company established the MAMSI Stock Compensation
Trust ("SCT") to fund 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 the consolidated financial statements as additional
paid-in capital. At December 31, 1996, the SCT held 9,020,700 shares of
common stock at a fair market value of approximately $120.7 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 13 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office space under the terms of
noncancellable operating leases that expire at various dates through
2000. Rent expense relating to these operating leases approximated
$3,316,000, $2,593,000 and $984,000 in 1996, 1995 and 1994,
respectively.
Future minimum lease commitments under non-cancelable operating leases
are as follows for the years ended December 31 (in thousands):
1997 $ 3,321<PAGE>
1998 2,513
1999 1,387
2000 403
2001 301
---------
$ 7,925
=========
During the fourth quarter of 1996, two shareholders of MAMSI, who own a
total of 800 shares, filed a lawsuit in the Circuit Court of Montgomery
County Maryland against MAMSI and its Chairman, alleging that, during
the period February 29 through August 14, 1996, MAMSI and its Chairman
fraudulently or negligently misrepresented certain matters concerning
the Company's anticipated performance for the year ended December 31,
1996. The plaintiffs seek unspecified compensatory and punitive
damages, pre- and post-judgement interest, attorneys' fees and costs, on
behalf of themselves and a class of persons who purchased MAMSI's common
stock between February 29 and August 14, 1996. MAMSI and its Chairman
have filed a Motion to Dismiss the Complaint in its entirety, which is
currently pending before the Court. The Company is not able to predict
the probability of a favorable outcome or the amount of potential loss,<PAGE>
<PAGE> 41
in the event of an unfavorable outcome. MAMSI believes that even if the
motion to dismiss is denied, it has meritorious defenses to the claims
raised in the complaint and intends to defend the action vigorously.
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 any ultimate liability that could arise from these
other actions will not materially affect the Company's consolidated
financial position or results of operations.
NOTE 14 - STATUTORY REQUIREMENTS
M.D. IPA, OCI, OCCI and OCIPA are subject to insurance department
regulations in the states in which they are licensed. The state with
the highest requirement obligated M.D. IPA and OCI to each maintain a
statutory net worth of $3.0 million at December 31, 1996 and 1995; at
December 31, 1996 and December 31, 1995, OCCI was required to maintain a
statutory net worth of $1.0 million. At December 31, 1996, OCIPA was
required to maintain a statutory net worth of $1.5 million. The
statutory net worth of M.D. IPA was approximately $27.2 million at
December 31, 1996. The statutory net worth of OCI was approximately
$43.1 million at December 31, 1996. The statutory net worth of OCCI was
approximately $2.7 million at December 31, 1996. The statutory net
worth of OCIPA was approximately $2.6 million at December 31, 1996.
MAMSI Life is subject to insurance department regulations in Maryland,
its state of domicile. At December 31, 1996 and 1995, MAMSI Life was
obligated to maintain statutory capital and surplus funds of $3.8
million. The statutory capital and surplus funds of MAMSI Life totalled
approximately $16.4 million at December 31, 1996.
M.D. IPA, OCI, OCCI, OCIPA and MAMSI Life were in compliance with state
depository rules at December 31, 1996 and 1995. In addition, MAMSI Life
was in compliance with the applicable risk-based capital requirements
for life and health insurance companies at December 31, 1996 and 1995.
These MAMSI subsidiaries must notify state regulators before the payment
of any dividends to MAMSI and, in certain circumstances, must receive
positive affirmation prior to such payment.
NOTE 15 - RISK CONCENTRATIONS
Financial instruments that potentially subject the Company to credit
risk consist primarily of investments in marketable securities
(including money market funds, floating rate municipal putable bonds,
intermediate term municipal bonds, and common stocks) and premiums
receivable. The Company receives advice through or assigns direct
management of short-term investments in marketable securities to
professional investment managers selected for their expertise in various
markets, within guidelines established by the Board of Directors. These
guidelines include broad diversification of investments. Concentrations
of credit risk and business volume with respect to commercial premiums
receivable are generally limited due to the large number of employer
groups comprising the Company's customer base. As of December 31, 1996,
approximately 12% of premium and home health service receivables were
due from federal government agencies. The Company performs ongoing
credit evaluations of customers and generally does not require
collateral.<PAGE>
<PAGE> 42
Report of Independent Auditors
Board of Directors and Stockholders
Mid Atlantic Medical Services, Inc.
We have audited the accompanying consolidated balance sheets of Mid
Atlantic Medical Services, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. 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, as well as 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 Mid Atlantic Medical Services, Inc. and subsidiaries at
December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the financial
statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt
and equity securities in 1994.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Washington, D.C.
February 27, 1997<PAGE>
<PAGE> 43
SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1996 AND 1995 (1)
<TABLE>
<CAPTION>
1996 1996 1996 1996 1995 1995 1995 1995
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(in thousands except share amounts)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $271,558 $281,455 $287,960 $292,769 $220,988 $235,408 $243,104 $255,407
Expense 252,528 292,204 295,170 298,775 193,724 213,368 219,912 231,563
Income (loss) before income taxes 19,030 (10,749) (7,210) (6,006) 27,264 22,040 23,192 23,844
Net income (loss) 11,869 (6,537) (4,711) (3,389) 16,918 13,825 14,399 15,982
Earnings (loss) per common and common
equivalent share (2):
Net income (loss) .25 (.14) (.10) (.07) 0.36 0.29 0.30 0.33
</TABLE>
Notes
1. Certain quarterly revenue and expense amounts are different from the
amounts originally reported due to reclassifications necessary to
conform to the current presentation.
2. Earnings (loss) per common share are computed after giving effect to
dilutive stock options. All per share amounts and weighted average
common and common equivalent shares have been adjusted to reflect all
stock dividends on a retroactive basis. See Note 12 to the consolidated
financial statements.<PAGE>
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.<PAGE>
<PAGE> 45
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
"Directors and Executive Officers" in the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 29, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
"Directors and Executive Officers -- Directors' Compensation" and
"Executive Management Compensation" in the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 29, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
"Stock Owned by Management" and "Principal Stockholders" in the Proxy
Statement for MAMSI's annual meeting of shareholders to be held on April
29, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
"Executive Management Compensation" in the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on April 29, 1997.<PAGE>
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of December 31, 1996 and 1995 ... 24
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 ............................. 25
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 ......... 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ............................. 27
Notes to Consolidated Financial Statements ..................... 28
Report of Ernst & Young LLP Independent Auditors ............... 42
(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
----
II - Valuation and Qualifying Accounts as of December 31,
1996, 1995 and 1994 ..................................... 47
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
omitted because they are not required under the related instructions or
are inapplicable.<PAGE>
<PAGE> 47
Mid Atlantic Medical Services, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at ------------------------------
Beginning Charged to Charged to Balance
of Costs Other Deductions- at End
Description Period and Expenses Accounts Write-Offs of Period
----------- ---------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
DEDUCTED FROM ASSET ACCOUNTS:
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts - accounts receivable
$ 3,066 $ 39 $ 486(2) $ $ 3,591
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 383 $ $ 244 $ 139
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts - accounts receivable
$ 3,591 $ 25 $ 22(1) $ $ 3,638
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 139 $ $ 11 $ 128
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts - accounts receivable
$ 3,638 $ $ 1,756(1) $ (28) $ 5,366
======== ======== ======== ======== ========
Valuation allowance - deferred tax assets
$ 128 $ $ 634 $ $ 762
======== ======== ======== ======== ========
</TABLE>
(1) The additions to the allowance were charged to premium revenue.
(2) Total additions includes $155,000, which represents the allowance
established by an acquired company immediately prior to the acquisition.
The remaining additions were charged to premium revenue.<PAGE>
<PAGE> 48
(a)(3)
EXHIBITS
See the Exhibit Index on pages 45-46 of this Form 10-K.
(b)
REPORTS ON FORM 8-K
None.<PAGE>
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has caused this report to be signed on its behalf by
undersigned thereunto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI")
(Registrant)
By: /s/ George T. Jochum 3/28/97
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President, and Director
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: /s/ Thomas P. Barbera 3/28/97
--------------------------------------------------
Thomas P. Barbera Date
Vice Chairman, Executive Vice President and
Director
By: /s/ Francis C. Bruno, M.D. 3/28/97
---------------------------------------------------
Francis C. Bruno, M.D. Date
Director
By: /s/ John H. Cook, III, M.D. 3/28/97
--------------------------------------------------
John H. Cook, III, M.D. Date
Director
By: /s/ Stanley M. Dahlman, Ph.D. 3/28/97
--------------------------------------------------
Stanley M. Dahlman, Ph.D. Date
Director
By: /s/ Peter L. Flaherty, Jr., M.D. 3/28/97
--------------------------------------------------
Peter L. Flaherty, Jr., M.D. Date
Director
By: /s/ Robert E. Foss 3/28/97
--------------------------------------------------
Robert E. Foss Date
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Walter Girardin 3/28/97
--------------------------------------------------
Walter Girardin Date
Director
By: /s/ Mark D. Groban, M.D. 3/28/97<PAGE>
--------------------------------------------------
Mark D. Groban, M.D. Date
Assistant Medical Director for Mental Health Services
and Director
By: /s/ Donald R. Hammett 3/28/97
--------------------------------------------------
Donald R. Hammett Date
Director
By: /s/ George T. Jochum 3/28/97
--------------------------------------------------
George T. Jochum Date
Chairman, Chief Executive Officer, President and Director
(Principal Executive Officer)
By: /s/ Creighton R. Schneck 3/28/97
--------------------------------------------------
Creighton R. Schneck Date
Director<PAGE>
<PAGE> 50
By: /s/ Mary E. Shocklee 3/28/97
--------------------------------------------------
Mary E. Shocklee Date
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ Stanley F. Smith, R.Ph. 3/28/97
--------------------------------------------------
Stanley F. Smith, R.Ph. Date
Director
By: /s/ Alfred Talamantes 3/28/97
--------------------------------------------------
Alfred Talamantes Date
Executive Vice President,
Chief Operating Officer and Director
By: /s/ James A. Wild 3/28/97
--------------------------------------------------
James A. Wild Date
Director<PAGE>
<PAGE> 51
(a)(3), (b) and (c) List of Exhibits.
<TABLE>
<CAPTION>
EXHIBIT INDEX
Location of
Exhibit
Exhibit in Sequential
Number Description of Document Numbering
System
------- ----------------------- ---------------
----
<S> <C>
3.1 Copy of Certificate of Incorporation of MAMSI dated
October 7, 1986..........................................................(1)
3.2 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated April 23, 1990.......................................(5)
3.3 Amended and Restated By-laws of MAMSI as of May 6, 1996..................(7)
3.4 Copy of Certificate of Amendment of MAMSI Certificate of
Incorporation dated June 2, 1994.........................................(5)
10.5 Copy of Agreement between M.D. IPA and the United States
Secretary of Health and Human Services dated December 20, 1985...........(1)
10.7 Promissory Note signed by Thomas P. Barbera dated November 9, 1993.......(5)
10.20 Copy of Amendments to Agreement between M.D. IPA and the United
States Secretary of Health and Human Services dated December 24, 1987....(4)
10.26 1990 Non-Qualified Stock Option Plan.....................................(5)
10.27 Copy of 1990 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.32 Copy of Contract between George T. Jochum and M.D. IPA for the period
January 1, 1991 through January 1, 1994..................................(5)
10.35 1991 Non-Qualified Stock Option Plan.....................................(5)
10.36 Copy of 1991 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.41 Copy of Agreement between M.D. IPA and Surgical Care Affiliates, Inc.,
dated April 22, 1985.....................................................(5)
10.44 1992 Non-Qualified Stock Option Plan.....................................(5)
10.45 Copy of 1992 Non-Qualified Stock Option Letter sent to Key Employees.....(5)
10.48 Equipment Term Loan Agreement with Signet Bank dated March 25, 1991......(5)
10.50 Amendment to Revolving Loan Agreement with Signet Bank dated
June 19, 1991............................................................(5)
10.53 Amendments to the Stock Option Plans effective May 15, 1991..............(5)
10.54 Summary Plan Description of the Employees Cash or Deferred Profit
Sharing (401k) Plan dated October, 1991..................................(5)
10.55 Defined Benefit Plan Agreement with the Principal Financial Group which
was approved September 12, 1991..........................................(5)
10.57 Mortgage and Loan Agreement with Aid Association for Lutherans dated
October 4, 1990..........................................................(5)
10.60 1993 Non-Qualified Stock Option Plan.....................................(2)
10.61 1993 Non-Qualified Stock Option Letter Sent to Key Employees.............(2)
10.62 1992 Amendment to Employment Agreement Between George T. Jochum and
the Company..............................................................(2)
10.63 Agreement to Purchase MAMSI Life and Health Insurance Company, as
amended..................................................................(2)
10.65 Agreement to Purchase 2301 Research Boulevard dated September 30, 1993...(3)
10.66 1994 Management Bonus Program............................................(4)
10.67 1994 Non-Qualified Stock Option Plan.....................................(4)
10.68 1994 Non-Qualified Stock Option Letter sent to Key Employees.............(4)
10.69 Revolving Loan Agreement with Signet Bank dated September 30, 1993.......(4)
10.71 Agreement between OCI and the State of Maryland governing the Medical<PAGE>
Assistance Program ("Medicaid") dated August 5, 1993.....................(4)
10.72 List of States in which MAMSI Life is Licensed to Operate................(4)
10.73 1995 Management Bonus Program............................................(5)
10.74 1995 Non-Qualified Stock Option Plan.....................................(5)
10.75 1995 Non-Qualified Stock Option Plan letter sent to Key Employees........(5)
10.76 Agreement between OCI and the Commonwealth of Virginia governing the
Medical Assistance Program ("Medicaid") dated May 27, 1994...............(5)
10.77 1995 Amendment to Employment Agreement between George T. Jochum and
the Company..............................................................(6)
10.78 1996 Management Bonus Program............................................(6)
10.79 1996 Non-Qualified Stock Option Plan.....................................(6)
10.80 Form of Agreement between MAMSI and Employees Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................(6)<PAGE>
<PAGE> 52
10.81 Form of Agreement between MAMSI and George T. Jochum Granting Options
under the 1996 Non-Qualified Stock Option Plan...........................(6)
10.82 Form of Agreement between MAMSI and Non-Employee Directors Granting
Options under the 1996 Non-Qualified Stock Option Plan...................(6)
10 Amended and Restated Compensation Trust Agreement dated
December 20, 1996........................................................(8)
10.1 Amended and Restated Common Stock Purchase Agreement dated
December 20, 1996........................................................(8)
10.2 Replacement Promissory Note dated December 20, 1996......................(8)
10.83 1997 Management Bonus Program............................................
21 Subsidiares of the Company...............................................
23 Consent of Independent Auditors..........................................
27 Financial Data Schedule..................................................
</TABLE>
(1) Incorporated by reference to exhibits filed
with the Company's Registration Statement filed
under the Securities Act of 1933 on Form S-4
(Registration No. 33-9803).
(2) Incorporated by reference to exhibits filed
with the Company's Annual Report filed under the
Securities Exchange Act of 1934 on Form 10-K for
the fiscal year ended December 31, 1992.
(3) Incorporated by reference to exhibits filed
with the Company's Quarterly Report filed under the
Securities Exchange Act of 1934 on Form 10-Q for
the Quarterly Period Ended September 30, 1993.
(4) Incorporated by reference to exhibits filed
with the Company's Annual Report filed under the
Securities Exchange Act of 1934 on Form 10-K for
the fiscal year ended December 31, 1993.
(5) Incorporated by reference to exhibits filed
with the Company's Annual Report filed under the
Securities Exchange Act of 1934 on Form 10-K for
the fiscal year ended December 31, 1994.
(6) Incorporated by reference to exhibits filed
with the Company's Annual Report filed under the
Securities Exchange Act of 1934 on Form 10-K for
the fiscal year ended December 31, 1995.
(7) Incorporated by reference to exhibits filed
with the Company's Quarterly Report filed under the
Securities Exchange Act on Form 10-Q for the
Quarterly Period Ended March 31, 1996.
(8) Incorporated by reference to exhibits filed
with the Company's Quarterly Report filed under the
Securities Exchange Act on Form 10-Q/A for the
Quarterly Period Ended September 31, 1996.<PAGE>
1997 MANAGEMENT BONUS PROGRAM
Participants in the 1997 Management Bonus Program shall include all non-
sales positions from Level 10 up to Level 20 and the CEO. Certain
individuals who have Individual Performance Bonus Plans may be allocated
only a portion of the management bonus (generally 50%). Bonuses will be
solely predicated on the consolidated earnings performance of Mid
Atlantic Medical Services, Inc. (MAMSI) as documented by the year end
audited financial statements.
Bonuses shall be paid according to the following guidelines:
1. MINIMUM BONUS - Minimum bonuses shall be paid if the Company
(MAMSI) achieves a profit of $34.4 million before income taxes,
expansion or acquisition costs, and prior to the physicians'
return of withhold and payment of physicians' bonuses.
2. MAXIMUM BONUS - Maximum bonuses shall be paid if the Company
(MAMSI) achieves a profit of $46 million before income taxes,
expansion or acquisition costs, and prior to the physicians'
return of withhold and payment of physcians' bonuses.
3. PRO-RATION - In the event that the Company earns between
$34,400,000 and $46,000,000, bonuses will be pro-rated
accordingly.
4. BONUS BASE - In general, bonus payments will be calculated on
cash payments made during the year for base salary which would
take into account salary increases due to promotion or merit
increases. Pro-rated calculations will be made at each salary
level for the portion of the year that the new salary or level
is in effect. However, with respect to executive officers hired
prior to March 1, 1997, bonus payments will disregard salary and
grade level changes made after March 1, 1997.
5. NEW EMPLOYEES - New full-time employees are eligible to
participate in the plan during their first year of employment.
The bonus payment will be pro-rated accordingly for the portion
of the year that the employee was employed.
6. TERMINATION - No bonus shall be paid to bonus participants who
terminate or are terminated by the Company prior to the year
end. In the event of retirement, disability or death, the
employee or his/her beneficiary will receive a pro-rated
portion of the bonus.
7. TIME OF PAYMENT - Bonus payments shall be distributed
immediately following the receipt of the audited financial
statement(s) for MAMSI for the year 1997.
8. BONUS PERCENTAGES - The distribution of the bonus payments to
the Management personnel shall be limited according to the
following percentage ranges. The allocations will be reviewed
annually and adjusted if necessary.
CEO 25-50%
Executive Staff (Level 18 & above) 12-35%<PAGE>
Senior Staff (Level 17) 11-30%
Level 16 10-28%
Level 15 9-21%
Level 14 8-16%
Levels 12 and 13 7-12%
Levels 10 and 11 5- 7%
9. AMENDMENT- The Board of Directors may amend the 1997 Management
Bonus Plan to materially increase the amounts payable
thereunder to participants, other than executive officers, or
for any other reason.
February 26, 1997<PAGE>
SUBSIDIARIES OF THE COMPANY
AS OF DECEMBER 31, 1996
1. MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI"): MAMSI, a Delaware
corporation, is the holding company for the subsidiaries listed below.
2. ALLIANCE PPO, INC. ("Alliance"): Owned 100 percent by MAMSI (1).
Alliance, a Maryland corporation, provides a delivery network of
physicians (called a preferred provider organization or "PPO") to
employers and insurance companies in association with various health
plans.
3. MAMSI INSURANCE AGENCY OF THE CAROLINAS, INC. ("MIACI"): Owned 100
percent by Alliance (2). MIACI, a North Carolina Corporation, contracts
with marketing representatives to sell MAMSI products in North Carolina
and South Carolina.
4. MAMSI LIFE AND HEALTH INSURANCE COMPANY ("MAMSI Life"): Owned 100
percent by MAMSI(1). MAMSI Life, a Maryland corporation, develops and
markets indemnity health products in addition to life, accidental death
and disability insurance.
5. MD-INDIVIDUAL PRACTICE ASSOCIATION, INC. (M.D. IPA"): Owned 77
percent by PHYSICIANS HEALTH PLAN OF MARYLAND, INC. (11) and 23 percent
by MAMSI (1). M.D. IPA, a Maryland corporation, is a health
maintenance organization ("HMO") providing health care coverage for its
members.
6. MD-IPA SURGICENTER, INC. ("Surgicenter"): Owned 100 percent by M.D.
IPA (5). Surgicenter, a Maryland corporation, is a general partner in a
partnership that in turn is the general partner in a limited partnership
that operates a surgery center.
7. MID ATLANTIC PSYCHIATRIC SERVICES, INC. ("MAPSI"): Owned 100
percent by MAMSI (1). MAPSI, a Maryland corporation, provides
psychiatric services to third party payors or self-insured employer
groups.
8. NATIONAL MANAGED CARE, INC. ("NMCI"): owned 78 percent by MAMSI
(1). NMCI, a Delaware corporation, markets health care services with
individual practice association ("IPA") model HMOs throughout the U.S.
9. OPTIMUM CHOICE, INC. ("OCI"): Owned 100 percent by MAMSI (1). OCI,
a Maryland corporation, is an HMO providing health care coverage for its
members.
10. OPTIMUM CHOICE OF THE CAROLINAS, INC. ("OCCI"): Owned 100 percent
by MAMSI (1). OCCI, a North Carolina corporation, is an HMO providing
health care coverage to members who are in North Carolina and South
Carolina.
11. PHYSICIANS HEALTH PLAN OF MARYLAND, INC. ("PHP-MD"): Owned 100
percent by MAMSI (1). PHP-MD, a Maryland corporation, is an IPA that
provides health care services to certain of MAMSI's HMOs.
12. HOMECALL, INC. ("HomeCall"): Owned 100 percent by MAMSI (1).
HomeCall, a Maryland corporation, provides in-home medical care
including skilled nursing and therapy to MAMSI'S HMO members and other
payors.<PAGE>
13. HOMECALL PHARMACEUTICAL SERVICES, INC. ("HPS"): Owned 100 percent
by MAMSI (1). HPS, a Maryland corporation, providing infusion services
to MAMSI's HMO members and other payors.
14. FIRSTCALL, INC. ("FirstCall"): Owned 100 percent by HomeCall (12)
and a Maryland corporation.
15. HOMECALL HOSPICE SERVICES, INC. ("Hospice"): Owned 100 percent by
MAMSI (1). Hospice, a Maryland corporation, that provides services to
the terminally ill.
16. OPTIMUM CHOICE, INC. OF PENNSYLVANIA ("OCIPA"): Owned 100 percent
by MAMSI (1). OCIPA, a Pennsylvania corporation, is an HMO providing
health care coverage to members in Pennsylvania.
17. MAMSI INSURANCE RESOURCES, INC. ("MIRI"): Owned 100 percent by
Alliance (2). MIRI, a Maryland corporation, provides marketing
personnel.<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Number 33-34868 on Form S-8 dated May 11, 1990, in Registration
Statement Number 33-40975 on Form S-8 dated May 31, 1991, in
Registration Statement Number 33-47593 on Form S-8 dated May 1, 1992, in
Registration Statement Number 33-61896 on Form S-8 dated April 29, 1993,
in Registration Statement Number 33-78258 on Form S-8 dated April 28,
1994, in Registration Statement Number 33-91294 on Form S-8 dated April
17, 1995, and in Registration Statement Number 33-02531 on Form S-8
dated April 16, 1996, of our report dated February 27, 1997, with
respect to the consolidated financial statements and schedule of Mid
Atlantic Medical Services, Inc. and subsidiaries included in the Annual
Report on Form 10-K for the year ended December 31, 1996.
/s/ Ernst & Young LLP
-----------------
Ernst & Young LLP
Washington, D.C.
March 24, 1997 <PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Company
Annual Report on Form 10-K for the year ended December 31, 1996 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> $4,065
<SECURITIES> 151,359
<RECEIVABLES> 77,042
<ALLOWANCES> 5,366
<INVENTORY> 0
<CURRENT-ASSETS> 268,822
<PP&E> 45,210
<DEPRECIATION> 21,908
<TOTAL-ASSETS> $334,719
<CURRENT-LIABILITIES> $149,952
<BONDS> 134
0
0
<COMMON> 567
<OTHER-SE> 183,833
<TOTAL-LIABILITY-AND-EQUITY> $334,719
<SALES> $0
<TOTAL-REVENUES> 1,133,742
<CGS> 0
<TOTAL-COSTS> 1,017,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,728
<INTEREST-EXPENSE> 691
<INCOME-PRETAX> (4,935)
<INCOME-TAX> (2,167)
<INCOME-CONTINUING> (2,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $(2,768)
<EPS-PRIMARY> $(.06)
<EPS-DILUTED> $(.06)
</TABLE>
