<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended SEPTEMBER 30, 1997, or
[ ] Transition report pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------------------
COMMISSION FILE NUMBER 1-13340
------------------------------
MID ATLANTIC MEDICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
52-1481661
(IRS Employer Identification Number)
4 TAFT COURT, ROCKVILLE, MARYLAND
(Address of principal executive offices)
20850
(Zip code)
(301) 294-5140
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's classes of common stock
was 54,677,862 shares of common stock, par value $.01, outstanding as of
September 30, 1997.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Note 1)
(in thousands except share amounts)
<TABLE>
<CAPTION>
(Unaudited) (Note)
September 30, 1997 December 31, 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,468 $ 4,065
Short-term investments 160,060 151,359
Accounts receivable, net of allowance of $5,401 and $5,366 72,881 77,042
Prepaid expenses, advances and other 17,684 32,323
Deferred income taxes 4,033
----------- -----------
Total current assets 260,093 268,822
Property and equipment, net of accumulated
depreciation of $28,610 and $21,908 56,871 45,210
Statutory deposits 9,115 9,125
Other assets 10,653 10,261
Deferred income taxes 1,301
---------- -----------
Total assets $ 336,732 $ 334,719
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 60 $ 60
Short-term borrowings 2,292 1,973
Accounts payable 18,894 18,755
Medical claims payable 96,844 118,649
Deferred premium revenue 10,228 10,479
Deferred income taxes 3,206 36
----------- -----------
Total current liabilities 131,524 149,952
Notes payable 90 134
Deferred income taxes 1,504 233
----------- -----------
Total liabilities 133,118 150,319
----------- -----------
Stockholders' equity (Notes 2 and 3)
Common stock, $.01 par, 100,000,000 shares authorized; 56,772,502 issued
and 54,677,862 outstanding at September 30, 1997 and December 31, 1996 567 567
Additional paid-in capital 188,452 173,325
Stock compensation trust (common stock held in trust) (128,494) (120,652)
Treasury stock, 2,094,640 shares at September 30, 1997 and December 31, 1996 (41,211) (41,211)
Unrealized gains on investments, net of tax of $2,534 and $174 3,874 265
Retained earnings 180,426 172,106
----------- -----------
Total stockholders' equity 203,614 184,400
----------- -----------
Total liabilities and stockholders' equity $ 336,732 $ 334,719
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1996 has been extracted from the
audited financial statements at that date.
See accompanying notes to these financial statements.
<PAGE> 3
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending
September 30, September 30,
1997 1996
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 253,297 $ 275,147
Fee and other 4,631 4,159
Life and short-term disability premium 1,421 948
Home health services 5,233 5,539
Investment 5,293 2,167
----------- -----------
Total revenue 269,875 287,960
----------- -----------
Expense
Medical 225,328 259,811
Life and short-term disability claims 640 810
Home health patient services 4,769 4,940
Administrative (including interest expense of $106 and $167) 31,948 29,609
----------- -----------
Total expense 262,685 295,170
----------- -----------
Income (loss) before income taxes 7,190 (7,210)
Provision for income taxes (2,464) 2,499
----------- -----------
Net income (loss) $ 4,726 $ (4,711)
=========== ===========
Income (loss) per common and common equivalent share:
Net income (loss) $ .10 $ (.10)
=========== ===========
Weighted average common and common equivalent shares outstanding 47,111,926 46,394,158
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 4
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ending
September 30, September 30,
1997 1996
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 792,535 $ 801,427
Fee and other 13,289 12,285
Life and short-term disability premium 3,856 2,103
Home health services 15,584 15,546
Investment 10,219 9,612
----------- -----------
Total revenue 835,483 840,973
----------- -----------
Expense
Medical 710,107 736,814
Life and short-term disability claims 2,050 1,681
Home health patient services 12,490 11,901
Administrative (including interest expense of $310 and $592) 97,908 89,506
----------- -----------
Total expense 822,555 839,902
----------- -----------
Income before income taxes 12,928 1,071
Income tax expense (4,608) (450)
----------- -----------
Net income $ 8,320 $ 621
=========== ===========
Income per common and common equivalent share:
Net income $ .18 $ .01
=========== ===========
Weighted average common and common equivalent shares outstanding 46,849,087 47,176,616
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 5
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ending
September 30, 1997
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 8,320
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 7,430
Provision for bad debts 35
Provision for deferred income taxes 6,628
Loss on sale and disposal of assets 1
Decrease in accounts receivable 4,126
Decrease in prepaid expenses, advances, and other 14,639
Increase in accounts payable 139
Decrease in medical claims payable (21,805)
Decrease in deferred premium revenue (251)
-----------
Total adjustments 10,942
-----------
Net cash provided by operating activities 19,262
Cash flows used in investing activities:
Purchases of short-term investments (84,426)
Sales of short-term investments 81,694
Purchases of property and equipment (18,430)
Purchases of statutory deposits (15)
Maturities of statutory deposits 25
Purchases of other assets (332)
Proceeds from sale of assets 65
-----------
Net cash used in investing activities (21,419)
Cash flows provided by financing activities:
Principal payments on notes payable (44)
Increase in short-term borrowings 319
Exercise of stock options 3,900
Stock option tax benefit 3,385
-----------
Net cash provided by financing activities 7,560
-----------
Net increase in cash and cash equivalents 5,403
Cash and cash equivalents at beginning of period 4,065
-----------
Cash and cash equivalents at end of period $ 9,468
===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 6
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ending
September 30, 1996
------------
<S> <C> <C>
Cash flows used in operating activities:
Net income $ 621
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization $ 5,630
Provision for bad debts 926
Provision for deferred income taxes 27
Loss on sale and disposal of assets 8
Increase in accounts receivable (16,993)
Increase in prepaid expenses, advances, and other (18,155)
Increase in accounts payable 5,257
Increase in medical claims payable 14,824
Decrease in deferred premium revenue (3,966)
-----------
Total adjustments (12,442)
-----------
Net cash used in operating activities (11,821)
Cash flows provided by investing activities:
Purchases of short-term investments (291,978)
Sales of short-term investments 336,175
Purchases of property and equipment (10,836)
Purchases of statutory deposits (2,407)
Maturities of statutory deposits 1,820
Purchases of other assets (234)
Proceeds from sale of assets 319
-----------
Net cash provided by investing activities 32,859
Cash flows used in financing activities:
Principal payments on notes payable (195)
Increase in short-term borrowings 101
Exercise of stock options 5,866
Stock option tax benefit 6,017
Purchase of treasury stock (41,178)
-----------
Net cash used in financing activities (29,389)
-----------
Net decrease in cash and cash equivalents (8,351)
Cash and cash equivalents at beginning of period 10,874
-----------
Cash and cash equivalents at end of period $ 2,523
===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 7
MID ATLANTIC MEDICAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
INTRODUCTION
Mid Atlantic Medical Services, Inc. ("MAMSI") is a holding company whose
subsidiaries are active in managed health care and other life and health
insurance related activities. MAMSI's principal markets currently include
Maryland, Virginia, the District of Columbia, Delaware, West Virginia, North
Carolina and Pennsylvania. MAMSI and its subsidiaries (collectively referred to
as the "Company") have developed a broad range of managed health care, health
insurance and related ancillary products and deliver these services through
health maintenance organizations ("HMOs"), preferred provider organizations
("PPOs"), a life and health insurance company, home health care companies, a
pharmaceutical company and an outpatient surgery center.
MAMSI delivers managed health care services principally through HMOs. The
HMOs, MD-Individual Practice Association, Inc. ("M.D. IPA"), Optimum
Choice, Inc. ("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and
Optimum Choice, Inc. of Pennsylvania ("OCIPA") arrange for health care
services to be provided to a voluntarily enrolled population for a
predetermined, prepaid fee, regardless of the extent or nature of services
provided to the enrollees. The HMOs offer a full complement of health
benefits, including physician, hospital and prescription drug services.
Other MAMSI subsidiaries include Alliance PPO, Inc., which provides a PPO
delivery network to employers and insurance companies, and Mid Atlantic
Psychiatric Services, Inc., which provides specialized non-risk mental health
services. MAMSI Life and Health Insurance Company develops and markets indemnity
health products in addition to life and short-term disability insurance.
HomeCall, Inc., FirstCall, Inc., and HomeCall Pharmaceutical Services, Inc.
provide in-home medical care including skilled nursing, infusion and therapy to
both MAMSI's HMO members and other payors.
NOTE 1 - FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of September 30, 1997, the
consolidated statements of operations for the three and nine months ended
September 30, 1997 and 1996, and the consolidated statements of cash flows for
the nine months ended September 30, 1997 and 1996 have been prepared by MAMSI
without audit. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
December 31, 1996 audited consolidated financial statements. The results of
operations for the three and nine month periods ended September 30 are not
necessarily indicative of the operating results for the full year.
Certain balances in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
NOTE 2 - EARNINGS PER SHARE
The computation of earnings per common and common equivalent share is based upon
the weighted average number of common shares outstanding adjusted for the
dilutive effect of common stock equivalents consisting solely of stock options.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings Per Share", which will require the Company to change the current
method of computing earnings per share and restate all prior periods. Statement
No. 128 is required to be adopted on December 31, 1997 and requires, among other
things, that the calculation of primary earnings per common share exclude the
dilutive effect of common stock options. The change in calculation method is not
expected to have a material effect on reported earnings per common share.
<PAGE> 8
NOTE 3 - STOCK COMPENSATION TRUST
On August 26, 1996, the Company established the MAMSI Stock Compensation Trust
("SCT") to fund a portion of its obligations arising from its various stock
compensation plans. MAMSI funded the SCT with 9.13 million shares of newly
issued MAMSI stock. In exchange, the SCT has delivered a promissory note to
MAMSI for approximately $129.9 million which represents the purchase price of
the shares. Amounts owed by the SCT to MAMSI will be repaid by cash received by
the SCT or will be forgiven by MAMSI, which will result in the SCT releasing
shares to satisfy MAMSI obligations for stock compensation.
For financial reporting purposes, the SCT is consolidated with MAMSI. The fair
market value of the shares held by the SCT is shown as a reduction to
stockholders' equity in the Company's consolidated balance sheet. All
transactions between the SCT and MAMSI are eliminated. The difference between
the cost and fair value of common stock held in the SCT is included in
consolidated additional paid-in capital. At September 30, 1997, the SCT held
8.13 million shares of common stock at a fair market value of approximately
$128.5 million.
Shares held by the SCT are excluded from weighted average shares outstanding
used in the computation of income or loss per common equivalent share.
NOTE 4 - NEW ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board issued Statement No. 130
"Reporting Comprehensive Income" ("Statement 130") and Statement No. 131
"Disclosure About Segments of an Enterprise and Related Information" ("Statement
131"). Statement 130 establishes standards for reporting and display of
comprehensive income in a full set of general purpose financial statements, and
Statement 131 significantly changes the way companies report segment information
in annual financial statements. Because Statement 131 concerns itself only with
how supplemental financial statement information is disclosed in annual and
interim reports, the adoption will not have a material impact on the Company's
consolidated financial statements. The Company is currently evaluating the
effect of Statement 130 on its financial statements. Each of these statements is
effective for periods beginning after December 15, 1997.
<PAGE> 9
MID ATLANTIC MEDICAL SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
All forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations is based on
management's current knowledge of factors affecting MAMSI's business. MAMSI's
actual results may differ materially if these assumptions prove invalid.
Significant risk factors, while not all inclusive, are:
1. The possibility of increasing price competition in the Company's market
place.
2. The possibility of state or federal budget related mandates that reduce
premiums for Medicaid or Medicare recipients.
3. The potential for increased medical expenses due to: - Increased utilization
by the Company's membership. - Inflation in provider and pharmaceutical
costs. - 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.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1996
Consolidated net income (loss) of the Company was $4,726,000 and ($4,711,000)
for the third quarter of 1997 and 1996, respectively. Net earnings (loss) per
share were $.10 in the third quarter of 1997 as compared to $(0.10) in the third
quarter of 1996. The increase in earnings is primarily attributable to a
decrease in the medical loss ratio for commercial products which was slightly
offset by an increase in the administrative expense ratio. The medical loss
ratio decreased principally due to increased efforts by the Company to control
medical costs through utilization review, case management, enhanced claim
adjudication, and increased claims audit and claims reversal activity. The
Company has priced its health products competitively in order to increase its
membership base and thereby enhance its strategic position in its market place.
The Company currently has one of the largest HMO and managed care enrollments
and also the largest network of contract providers of medical care in its
service area (which includes the entire states of Maryland and Delaware, the
District of Columbia, most counties and cities in Virginia and certain areas of
West Virginia, North Carolina and Pennsylvania.)
Revenue for the three months ended September 30, 1997 decreased approximately
$18.1 or 6.3 percent over the three months ended September 30, 1996. A 8.8
percent decrease in net average HMO and indemnity enrollment resulted in a
decrease of approximately $24.1 million in health care premium revenue over the
three months ended September 30, 1996, and a .9 percent increase in average
premiums per HMO and indemnity enrollee increased health care premium revenue by
$2.3 million over the three months ended September 30, 1996. The net decrease in
revenue is mainly related to the Company's withdrawal from the Maryland Medicaid
program and from certain areas of the Virginia Medicaid program due to
inadequate premiums paid by the states. Management believes that commercial
health premiums should increase over the next twelve months as the Company
increases its commercial membership and as new and renewing groups are charged
higher premium rates due to legislatively mandated benefit enhancements and
general price increases initiated by the Company. Effective January 1, 1998, the
Company has modified its Medicare product offering. This modification has the
potential to significantly reduce the Company's Medicare membership and related
premium revenue. This is a forward-looking statement. See "Forward Looking
Information" above for a description of the risk factors that may effect health
premiums per member.
<PAGE> 10
The Company increased premium rates across essentially all of its commercial
products beginning in July of 1996. Since most of the Company's contracts are
for a one year period, increased pricing generally cannot be initiated until a
contract reaches its renewal date. Therefore, price increases are not made
across the Company's membership at the same time. Management believes that the
commercial premium rate increases will continue to have the effect of slowing
down the Company's membership growth. In addition, the Company received an
approximate 2.5 percent premium rate increase in its Virginia Medicaid program
effective July 1, 1996 and a 5 percent increase effective July 1, 1997.
Effective January 1, 1997, the Company received an average premium increase of 5
percent related to its Medicare membership and anticipates a 2 percent increase
effective January 1, 1998.
The Company's future membership growth depends on several factors such as
relative premium prices and product availability, future increases or decreases
in the Company's service area, increased competition in the Company's service
area and changes in state mandated enrollment in Medicaid HMO programs in which
the Company participates. Enrollment may also decrease if the Company determines
that premium reimbursement rates related to certain state Medicaid programs are
inadequate, which would cause the Company to voluntarily withdraw from
participation. As previously described, this determination was made in
connection with the Maryland Medicaid program and part of the Virginia Medicaid
program.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries contributed $5.2 million in revenue in the third
quarter of 1997 as compared to $5.5 million for the same period in 1996. This
decrease is the result of increasing business volume for these subsidiaries,
particularly in the home infusion and mail order pharmacy areas, which is more
than offset by an increasing relative percentage of business conducted for MAMSI
HMO and indemnity members which revenues are eliminated in consolidation.
Revenue from group life and group short-term disability products contributed
$1.4 million in revenues in the third quarter of 1997 as compared to $.9 million
for the same period in 1996.
In 1993, MAMSI invited the National Committee for Quality Assurance ("NCQA"), a
private, non-profit organization, to evaluate the Company's methodologies in an
effort to receive NCQA accreditation. NCQA accreditation is a voluntary process.
In the 1993 review, the Company did not meet certain of NCQA's criteria and,
therefore, did not receive NCQA accreditation. In response, MAMSI adopted
methodologies and programs designed to respond to concerns and questions raised
in NCQA's assessment. The Company requested the NCQA to perform another
accreditation review which took place in December of 1996. In May, 1997, NCQA
informed the Company that its flagship HMOs received one year accreditation. The
Company has implemented the Health Plan and Employer Data and Information Set
("HEDIS") 3.0 which represents a core set of performance measures developed by
NCQA to serve the employer as a purchaser. In addition, in October, 1997 the
Maryland Health Care Access and Cost Commission released the results of
Maryland's first ever statewide HMO report card. MAMSI's Maryland HMOs exceeded
the state wide average in overall satisfaction, accessibility and quality. In
another survey of member satisfaction taken by the U.S. Office of Personnel
Management, federal employees expressed satisfaction with the Company's
federally qualified HMO.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased to 89.0 percent for the third quarter of 1997 as compared to
94.4 percent for the comparable period of 1996 and, on a per member per month
basis, medical expenses decreased 4.9 percent. This decrease is due to a
combination of factors including continuing efforts by the Company to implement
product specific cost containment controls, expanded activity in specialized
subrogation areas and claims review for dual health coverage, the adoption of
regionalized and product specific fee maximums for health services, and the
identification and possible termination of certain providers and specialists
from the delivery network following a continuing intensified peer review
analysis. In addition, during the first quarter of 1997, the Company identified
certain claims which had been overpaid and recorded an estimate of amounts
recoverable therefrom. Subsequent actual collection rates have exceeded the
Company's original estimates. Based upon this experience, the Company recorded
in the third quarter of 1997, as a reduction of medical expenses, approximately
$7 million relating to claims incurred and paid in 1996. The Company continues
to believe that it has taken the appropriate action and implemented appropriate
controls to ensure that future claims are paid
<PAGE> 11
at the appropriate amounts although the complexity of paying claims and the
increasing sophistication of providers requires constant evaluation of
historical payment patterns which might indicate improper payments.
Additionally, the Company has greatly expanded its initial health assessments of
new Medicare members after they have enrolled and has also increased its case
management personnel. The Company has also reduced the service area in which it
offers its Medicare risk plan. This reduction in service area, effective January
1, 1997, primarily targets those areas where the current Medicare reimbursement
is insufficient to support the Company's participation. These initiatives should
help to control the Company's medical loss ratio. The statements in the
preceding paragraphs regarding future utilization rates, cost containment
initiatives, total medical costs and future increases in health premiums per
member are forward-looking statements. See "Forward-Looking Information" above
for a description of risk factors that may affect medical expenses per member
and the medical loss ratio.
Administrative expenses as a percentage of revenue ("administrative expense
ratio") increased to 11.8 percent for the third quarter of 1997 as compared to
10.3 percent for the same period in 1996. This increase is primarily due to
increased salaries and expenses in certain administrative areas of the Company,
including utilization management, claims audit and customer service departments
and reduced revenue. Management believes that the administrative expense ratio
will remain at the current level in the near term. 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 $3.1 million primarily due to an increase in
realized gains on sales of marketable equity securities.
The net margin rate increased from (1.6) percent in the third quarter of 1996 to
1.8 percent in the current quarter. This increase is primarily due to decreased
medical expenses, increased premiums on a per member per month basis and
increased investment income.
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
The Company's consolidated net income for the nine months ended September 30,
1997 increased to $8,320,000 from $621,000 for the nine months ended September
30, 1996. Earnings per share on net income increased from $.01 in the first nine
months of 1996 to $.18 for the same period in 1997. The increase in earnings is
primarily attributable to a decrease in the medical loss ratio for commercial
products.
Revenue for the nine months ended September 30, 1997 decreased approximately
$5.5 million or .7 percent over the nine months ended September 30, 1996. A 1.9
percent increase in average premiums per HMO and indemnity enrollee increased
health premium revenue by approximately $14.5 million and a 2.9 decrease in net
average HMO and indemnity enrollment resulted in a decrease of approximately
$23.4 million in health care premium. Revenue from life and short-term
disability products contributed $3.9 million in for the first nine months of
1997 as compared to $2.1 million for the same period in 1996.
The medical loss ratio decreased to 89.6 percent for nine months ended September
30, 1997 as compared to 91.9 percent for the comparable period in 1996. The
reasons for this decrease are consistent with the items discussed in the
quarterly analysis as well as during the first quarter of 1997, the Company
identified certain claims which were overpaid. These overpayments were caused,
in large part, by a combination of factors including the ever increasing
complexity of the claims paying process as well as providers enhancing their
ability to maximize charges. In connection with these overpayments, in the first
quarter of 1997 the Company recorded, as a reduction of medical expenses,
approximately $5 million relating to claims incurred and paid in 1996. In the
third quarter of 1997, the Company recorded as a reduction of medical expenses
approximately $7 million related to claims incurred and paid in 1996. The
Company continues to believe that it has taken the appropriate action and
implemented appropriate controls to ensure that future claims are paid at the
appropriate amount although the complexity of paying claims and increasing
sophistication of providers requires constant evaluation of historical payment
patterns which may indicate improper payments.
<PAGE> 12
The administrative expense ratio for the first nine months of 1997 increased to
11.7 percent as compared to 10.6 percent for the same period in 1996. The
reasons for this increase are consistent with the items discussed in the
quarterly analysis.
The net margin rate was 1.0 percent for the first nine months of 1997 as
compared with .1 percent for the comparable period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive and the majority of the
Company's expenses are payments to health care providers, which generally vary
in direct proportion to the health premium revenues received by the Company.
Although medical utilization rates vary by season, the payments for such
expenses lag behind cash inflow from premiums because of the lag in provider
billing procedures. In the past, the Company's cash requirements have been met
principally from operating cash flow and it is anticipated that this source will
continue to be sufficient in the future.
The Company's cash and short-term investments increased from $155.4 million at
December 31, 1996 to $169.5 million at September 30, 1997, primarily due to a
change in the Company's medical claims payment schedule net income, proceeds
from the exercise of stock options and tax refunds. Accounts receivable
decreased from $77.0 million at December 31, 1996 to $72.8 million at September
30, 1997. This decrease is primarily due to a reduction in amounts due from the
Company's self-insured customers as well as a reduction in miscellaneous
receivables.
Prepaid expenses, advances and other decreased from $32.3 million at December
31, 1996 to $17.7 million at September 30, 1997, principally due to tax refunds
received related to 1996. Property and equipment increased from $45.2 million at
December 31, 1996 to $56.9 million at September 30, 1997 principally due to the
Company's ongoing enhancements to its electronic data processing equipment, the
purchase of a new office facility for expansion as well as renovations of
certain portions of the Company's headquarter's office building.
Medical claims payable decreased from $118.6 million at December 31, 1996 to
$96.8 million at September 30, 1997 primarily due to the reduction in membership
and the Company's identification of certain claims overpayments.
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 September 30, 1997, approximately $2.3 million was drawn
against these credit facilities.
Following is a schedule of the short-term capital resources available to the
Company (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 9,468 $ 4,065
Short-term investments 160,060 151,359
Working capital advances to Maryland hospitals 9,186 6,432
----------- -----------
Total available liquid assets 178,714 161,856
Credit line availability 21,708 21,802
----------- -----------
Total short-term capital resources $ 200,422 $ 183,658
=========== ===========
</TABLE>
The Company believes that the cash flow generated from operations along with its
current liquidity and borrowing capabilities are adequate for both current and
planned expanded operations. Certain MAMSI subsidiaries that are subject to
regulation by state insurance departments must notify state regulators before
the payment of any dividends to MAMSI and, in certain circumstances, must
receive positive affirmation prior to such payment. The Company does not
perceive these requirements to be a significant restriction on the subsidiaries'
ability to pay appropriate future dividends to the parent company.
<PAGE> 13
The Company does not anticipate any adverse impact on future liquidity due to
medical malpractice issues because the Company carries substantial professional
liability insurance.
Certain capital expenditures will be made over the near term to enhance the
Company's computer systems and to make necessary improvements to existing and
new administrative offices.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as the defendant in a suit filed by certain medical
providers on March 26, 1997 in the Circuit Court for Anne Arundel County,
Maryland, which alleges that the Company improperly reduced payments to
participating providers in the form of "withhold". It is the plaintiff's
allegation that certain payments should not have been reduced in this manner and
seek unspecified damages. This matter has been filed as a class action against
the Company. On August 18, 1997 the court stayed further proceedings in the
litigation pending plaintiff's pursuit of arbitration as provided for under the
contract.
The Company is involved in various other legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes that any
ultimate liability that could arise from these other actions will not materially
affect the Company's consolidated financial position or results of operation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index on page 15 of the Form 10-Q. (b) There were no reports
filed on Form 8-K during the quarter ended September 30, 1997.
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by undersigned
thereto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC.
--------------------------------------------
(Registrant)
Date: November 13, 1997 /s/ Robert E. Foss
----------------------------
Robert E. Foss
Executive Vice President
and
Chief Financial Officer
<PAGE> 15
6(a) List of Exhibits.
EXHIBIT INDEX
Exhibit
Number Description of Document
27 Financial Data Schedule for the Nine
Months Ended September 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,468
<SECURITIES> 160,060
<RECEIVABLES> 72,881
<ALLOWANCES> 5,401
<INVENTORY> 0
<CURRENT-ASSETS> 260,093
<PP&E> 56,871
<DEPRECIATION> 28,610
<TOTAL-ASSETS> 336,732
<CURRENT-LIABILITIES> 131,524
<BONDS> 90
0
0
<COMMON> 567
<OTHER-SE> 203,047
<TOTAL-LIABILITY-AND-EQUITY> 336,732
<SALES> 0
<TOTAL-REVENUES> 835,483
<CGS> 0
<TOTAL-COSTS> 724,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 35
<INTEREST-EXPENSE> 310
<INCOME-PRETAX> 12,928
<INCOME-TAX> 4,608
<INCOME-CONTINUING> 8,320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,320
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
