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 MARCH 31, 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 March
31, 1997.
1
<PAGE>
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)
March 31, December 31,
1997 1996
---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,207 $ 4,065
Short-term investments 159,678 151,359
Accounts receivable, net of allowance of $5,481 and $5,366 83,630 77,042
Prepaid expenses, advances and other 25,767 32,323
Deferred income taxes 4,005 4,033
-------- ---------
Total current assets 283,287 268,822
Property and equipment, net of accumulated
depreciation of $24,045 and $21,908 49,071 45,210
Statutory deposits 9,119 9,125
Other assets 10,846 10,261
Deferred income taxes 645 1,301
--------- ---------
Total assets $ 352,968 $ 334,719
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 60 $ 60
Short-term borrowings 1,959 1,973
Accounts payable 18,452 18,755
Medical claims payable 131,638 118,649
Deferred premium revenue 13,374 10,479
Deferred income taxes 36
--------- ---------
Total current liabilities 165,483 149,952
Notes payable 120 134
Deferred income taxes 234 233
--------- ---------
Total liabilities 165,837 150,319
--------- ---------
Stockholders' equity (Notes 2, 3)
Common stock, $.01 par, 100,000,000 shares authorized; 56,772,502 issued
and 54,677,862 outstanding at March 31, 1997 and December 31, 1996 567 567
Additional paid-in capital 171,520 173,325
Stock compensation trust (common stock held in trust) (116,583) (120,652)
Treasury stock, 2,094,640 shares at March 31, 1997 and December 31, 1996 (41,211) (41,211)
Unrealized gain (loss) on investments, net of tax of $(49) and $174 (74) 265
Retained earnings 172,912 172,106
--------- ---------
Total stockholders' equity 187,131 184,400
--------- ---------
Total liabilities and stockholders' equity $ 352,968 $ 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.
2
<PAGE>
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 271,246 $ 259,595
Fee and other 4,521 3,897
Life and short-term disability premium 1,161 418
Home health services 5,066 4,625
Investment 1,171 3,023
----------- -----------
Total revenue 283,165 271,558
----------- -----------
Expense
Medical 244,644 220,677
Life and short-term disability claims 893 290
Home health patient services 3,687 3,347
Administrative (including interest expense of $107 and $251) 32,632 28,214
----------- -----------
Total expense 281,856 252,528
----------- -----------
Income before income taxes 1,309 19,030
Income tax expense (503) (7,161)
----------- -----------
Net income $ 806 $ 11,869
=========== ===========
Income per common and common equivalent share:
Net income $ .02 $ .25
=========== ===========
Weighted average common and common equivalent shares outstanding 46,497,386 48,304,866
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
3
<PAGE>
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ending
March 31, 1997
--------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 806
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 2,373
Provision for bad debts 115
Provision for deferred income taxes 85
Loss on sale and disposal of assets 2
Increase in accounts receivable (6,703)
Decrease in prepaid expenses, advances, and other 6,556
Increase in accounts payable (303)
Increase in medical claims payable 12,989
Increase in deferred premium revenue 2,895
------------
Total adjustments 18,009
----------
Net cash provided by operating activities 18,815
Cash flows used in investing activities:
Purchases of short-term investments (28,222)
Sales of short-term investments 19,341
Purchases of property and equipment (6,003)
Maturities of statutory deposits 6
Purchases of other assets (48)
Proceeds from sale of assets 17
------------
Net cash used in investing activities (14,909)
Cash flows provided by financing activities:
Principal payments on notes payable (14)
Decrease in short-term borrowings (14)
Exercise of stock options 1,534
Stock option tax benefit 730
------------
Net cash provided by financing activities 2,236
------------
Net increase in cash and cash equivalents 6,142
Cash and cash equivalents at beginning of period 4,065
------------
Cash and cash equivalents at end of period $ 10,207
============
</TABLE>
See accompanying notes to these financial statements.
4
<PAGE>
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ending
March 31, 1996
--------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 11,869
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 1,742
Provision for bad debts 193
Provision for deferred income taxes 123
Loss on sale and disposal of assets 9
Increase in accounts receivable (21,132)
Decrease in prepaid expenses, advances, and other 1,063
Increase in accounts payable 10,990
Increase in medical claims payable 18,197
Decrease in deferred premium revenue (2,593)
Increase in income taxes payable 3,233
------------
Total adjustments 11,825
-----------
Net cash provided by operating activities 23,694
Cash flows used in investing activities:
Purchases of short-term investments (96,976)
Sales of short-term investments 92,215
Purchases of property and equipment (4,439)
Purchases of statutory deposits (322)
Maturities of statutory deposits 308
Purchases of other assets (52)
Proceeds from sale of assets 71
-----------
Net cash used in investing activities (9,195)
Cash flows used in financing activities:
Principal payments on notes payable (163)
Decrease in short-term borrowings (181)
Exercise of stock options 2,938
Stock option tax benefit 3,068
Purchase of treasury stock (22,532)
------------
Net cash used in financing activities (16,870)
-----------
Net decrease in cash and cash equivalents (2,371)
Cash and cash equivalents at beginning of period 10,874
-----------
Cash and cash equivalents at end of period $ 8,503
===========
</TABLE>
See accompanying notes to these financial statements.
5
<PAGE>
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 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 group life and group 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.
6
<PAGE>
NOTE 1 - FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of March 31, 1997, the
consolidated statements of operations for the three months ended March 31, 1997
and 1996, and the consolidated statements of cash flows for the three months
ended March 31, 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 included in the
Company's 1996 Annual Report. The results of operations for the three month
periods ended March 31 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
7
<PAGE>
method is not expected to have a material effect on reported earnings per common
share.
NOTE 3 - STOCK COMPENSATION TRUST
On August 26, 1996, the Company established the MAMSI Stock Compensation Trust
("SCT") to fund a portion of its obligations arising from its various stock
compensation plans. MAMSI funded the SCT with 9,130,000 shares of newly issued
MAMSI stock. In exchange, the SCT has delivered a promissory note to MAMSI for
approximately $129.9 million which represents the purchase price of the shares.
Amounts owed by the SCT to MAMSI will be repaid by cash received by the SCT or
will be forgiven by MAMSI, which will result in the SCT releasing shares to
satisfy MAMSI obligations for stock compensation.
For financial reporting purposes, the SCT is consolidated with MAMSI. The fair
market value of the shares held by the SCT is shown as a reduction to
stockholders' equity in the Company's consolidated balance sheet. All
transactions between the SCT and MAMSI are eliminated. The difference between
the cost and fair value of common stock held in the SCT is included in
consolidated additional paid-in capital. At March 31, 1997, the SCT held
8,933,455 shares of common stock at a fair market value of approximately $120.6
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.
8
<PAGE>
MID ATLANTIC MEDICAL SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
All forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations is based on
management's current knowledge of factors affecting MAMSI's business. MAMSI's
actual results may differ materially if these assumptions prove invalid.
Significant risk factors, while not all inclusive, are:
1. The possibility of increasing price competition in
the Company's market place.
2. The possibility of state or federal budget related mandates that reduce
premiums for Medicaid or Medicare recipients.
3. The potential for increased medical expenses due
to:
- Increased utilization by the Company's
membership.
- Inflation of costs in the provider community.
- Federal or state mandates that increase
benefits.
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 MARCH 31, 1997 COMPARED WITH
THE THREE MONTHS ENDED MARCH 31, 1996
9
<PAGE>
Consolidated net income of the Company was $806,000 and $11,869,000 for the
first quarter of 1997 and 1996 respectively. Net earnings per share were $0.02
in the first quarter of 1997 as compared to $0.25 in the first quarter of 1996.
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 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 March 31, 1997 increased approximately $11.6
or 4.3 percent over the three months ended March 31, 1996. A 3.1 percent
increase in net average HMO and indemnity enrollment resulted in an increase of
approximately $8.0 million in health care premium revenue over the three months
ended March 31, 1996 and a 1.4 percent increase in average premiums per HMO and
indemnity enrollee increased health care premium revenue by $3.7 million over
the three months ended March 31, 1996. Management believes that commercial
health premiums should continue to increase over the next twelve months as the
Company continues to increase its commercial membership and as new and renewing
groups are charged higher premium rates due to legislatively mandated benefit
enhancements and general price increases initiated by the Company. Medicare
premiums should remain relatively stable and Medicaid premiums should begin to
show an overall decrease some time during 1997 as the State of Maryland,
effective July 1, 1997, begins to transition the Company's Maryland Medicaid
membership to other managed care organizations. This is a forward- looking
statement. See "Forward Looking Information"
10
<PAGE>
above for a description of the risk factors that may effect health premiums per
member.
The Company has implemented 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 have the effect of
slowing down the Company's future membership growth. In addition, the Company
received an approximate 2.5 percent premium rate increase in its Virginia
Medicaid program and an approximate 4 percent increase in its Maryland Medicaid
program both effective July 1, 1996. Effective January 1, 1997, the Company
received an average premium increase of 5 percent related to its Medicare
membership.
The Company's future membership growth depends on several factors such as
relative premium prices and product availability, future increases or decreases
in the Company's service area, increased competition in the Company's service
area and changes in state mandated enrollment in Medicaid HMO programs in which
the Company participates. Enrollment may also decrease if the Company determines
that premium reimbursement rates related to certain state Medicaid programs are
inadequate which would cause the Company to voluntarily withdraw from
participation.
Service revenue from non-MAMSI affiliated entities earned by the Company's home
health care subsidiaries contributed $5.1 million in revenue in the first
quarter of 1997 as compared to $4.6 million for the same period in 1996. This
increase is the result of increasing business volume for these subsidiaries,
particularly in the home infusion and mail order pharmacy areas, which is
largely 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
11
<PAGE>
contributed $1.2 million in revenues the first quarter of 1997 as compared to
$.4 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 M.D.IPA and OCI 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.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") increased to 90.2 percent for the first quarter of 1997 as compared to
85.0 percent for the comparable period of 1996 and, on a per member per month
basis, medical expenses increased 7.6 percent. This increase is due to a
combination of factors including a highly competitive marketplace, 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
12
<PAGE>
intensified peer review analysis. Additionally, the Company has greatly expanded
its initial health assessments of new Medicare members after they have enrolled
and has also increased its case management personnel. The Company has also
reduced the service area in which it offers its Medicare risk plan. This
reduction in service area, effective January 1, 1997, primarily targets those
areas where the current Medicare reimbursement is insufficient to support the
Company's participation. In addition, during the first quarter of 1997, the
Company identified certain claims which were overpaid. These overpayments were
caused, in large part, due to 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, the Company recorded, as a reduction of medical expenses,
approximately $5 million relating to claims paid in 1996. The Company believes
that it has taken the appropriate action and implemented the appropriate
controls to insure that future claims are paid at the appropriate amount. These
initiatives should help to control the Company's medical loss ratio. The overall
medical loss ratio is expected to stabilize and decrease slowly from the current
level over the next twelve months due to the combined effects of increased
premiums, and expanded utilization and case management efforts. The statements
in 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 11.5 percent for the first quarter of 1997 as compared to
10.4 percent for the same period in 1996. This increase is primarily due to
increased salaries and expenses in certain administrative areas of the Company,
including utilization management and customer service departments, as well as
additional sales expenses in new expansion areas of 1997.
13
<PAGE>
Management believes that the administrative expense ratio will exceed the
current level over the next year due to the continued expansion of utilization
management, claims audit and other personnel. Management's expectations
concerning the administrative expense ratio are forward-looking statements. The
administrative expense ratio is affected by changes in health premiums per
member, development of the Company's expansion areas and increased
administrative activity related to business volume.
Investment income decreased $1.9 million or 61.3 percent primarily due to a
decrease in realized gains on sales of marketable equity securities.
The net margin rate decreased from 4.4 percent in the first quarter of 1996 to
less than 1 percent in the current quarter. This decrease is primarily due to
increased medical expenses.
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 $169.9 million at March 31, 1997, primarily due to a change
in the Company's medical claims payment schedule. Accounts receivable increased
from $77.0 million at December 31, 1996 to $83.6 million at March 31, 1997. This
$6.6 million increase is primarily due to increasing membership, increased
receivables from the Company's hybrid customers, and increased receivables from
the federal government.
14
<PAGE>
Prepaid expenses, advances and other decreased from $32.3 million at December
31, 1996 to $25.8 million at March 31, 1997, principally due to receipt of
amounts related to the Company's 1996 estimated tax payments. Property and
equipment increased from $45.2 million at December 31, 1996 to $49.1 million at
March 31, 1997 principally due to the Company's ongoing enhancements to its
electronic data processing equipment as well as renovations of certain portions
of the Company's headquarter's office building.
Medical claims payable increased from $118.6 million at December 31, 1996 to
$131.6 million at March 31, 1997 primarily due to increased member utilization
and related claims accruals. Deferred premium revenue increased from $10.5
million at December 31, 1996 to $13.4 million at March 31, 1997 due to an
increase in advance cash receipts.
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 March 31, 1997, approximately $1.9 million was drawn
against these credit
facilities.
15
<PAGE>
Following is a schedule of the short-term capital resources available to the
Company (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 10,207 $ 4,065
Short-term investments 159,678 151,359
Working capital advances to Maryland hospitals 6,432 6,432
----------- -----------
Total available liquid assets 176,317 161,856
Credit line availability 22,041 21,802
----------- -----------
Total short-term capital resources $ 198,358 $ 183,658
=========== ===========
</TABLE>
The Company believes that the cash flow generated from operations along with its
current liquidity and borrowing capabilities are adequate for both current and
planned expanded operations. Certain MAMSI subsidiaries that are subject to
regulation by state insurance departments must notify state regulators before
the payment of any dividends to MAMSI and, in certain circumstances, must
receive positive affirmation prior to such payment. The Company does not
perceive these requirements to be a significant restriction on the subsidiaries'
ability to pay appropriate future dividends to the parent company.
The Company does not anticipate any adverse impact on future liquidity due to
medical malpractice issues because the Company carries substantial professional
liability insurance.
Certain capital expenditures will be made over the next nine months to enhance
the Company's computer systems, to establish additional sales offices and to
make necessary improvements to existing administrative offices. The Company has
entered into an agreement to purchase, for approximately $8.6 million,
additional office space for operational purposes.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 sought 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 filed a Motion to Dismiss the Complaint in its entirety, which was
granted on April 1, 1997 subject to appeal. The appeal period has lapsed without
any further action by the plaintiffs.
The Company is involved in other various legal actions arising in the normal
course of business, some of which seek substantial monetary damages. After
review, including consultation with legal counsel, management believes that any
ultimate liability that could arise from these other actions will not materially
affect the Company's consolidated financial position or results of operation.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
An annual meeting of the stockholders of MAMSI was
held on April 29, 1997. The following matters were
17
<PAGE>
submitted to a vote of the stockholders during the
annual meeting:
(1) The following individuals were elected to the Board of Directors for a three
year term with the indicated votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Mark D. Groban, M.D. 43,222,513 2,581,224 None
John P. Mamana, M.D. 43,677,506 2,126,231 None
William M. Mayer, M.D. 43,729,097 2,074,640 None
Gretchen P. Murdza 43,643,413 2,160,324 None
</TABLE>
Board members whose term of office continued after the meeting are as follows:
Thomas P. Barbera
Francis C. Bruno, M.D.
Stanley M. Dahlman, Ph.D.
Peter L. Flaherty, Jr., M.D.
Walter Girardin
George T. Jochum
Creighton R. Schneck
Alfred Talamantes
James A. Wild
(2) The adoption of the 1997 Bonus Plan was ratified by a count of 37,283,174
affirmative votes, 8,097,413 negative votes and 423,150 abstentions.
There were no broker non-votes with respect to the election of directors or
adoption of the 1997 Bonus Plan.
ITEM 5. OTHER INFORMATION
None.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index on page 20 of the
Form 10- Q
(b) There were no reports filed on Form 8-K during the quarter ended
March 31, 1997.
18
<PAGE>
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: May 15, 1997 /s/ Robert E. Foss
----------------------------
Robert E. Foss
Executive Vice
President and
Chief Financial
Officer
19
<PAGE>
6(a) List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
10.84 Form of Non-Qualified Stock Option
Agreement for Options Granted
Under 1991, 1992, 1993, 1994 and
1995 Non-Qualified Stock Option
Plan. . . . . . . . . . . . . . . . . . . . . . .
27 Financial Data Schedule for the Three
Months Ended March 31, 1997 . . . . . . . . . . .
20
FACE SHEET
Optionee:
Grant Date :
Plan :
Total Options Granted are:
Exercise Price per share of Common Stock:
Vesting Schedule:
Expiration Date:
Optioned shares must be purchased within 5 years from the date of grant,
. That is, all options must be exercised by
Notice Addresses:
If to the Corporation: If to the Optionee:
Mid Atlantic Medical Services, Inc.
4 Taft Court
Rockville, Maryland 20850
Attention: Secretary
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<PAGE>
MID ATLANTIC MEDICAL SERVICES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT FOR OPTIONS GRANTED UNDER 1991,1992,
1993, 1994 OR 1995 NON-QUALIFIED STOCK OPTION
PLAN
------------------------------------------------
AGREEMENT ("Agreement") dated the date indicated on the attached Face
Sheet, by and between Mid Atlantic Medical Services, Inc., a Delaware
corporation ("Corporation"), and the person indicated on the attached Face
Sheet, an employee of the Corporation and/or one of its subsidiaries
("Optionee").
WHEREAS, the Corporation desires to have the Optionee continue in its
employ and to provide the Optionee with an incentive by sharing in the success
of the Corporation;
WHEREAS, in order to provide such an incentive to its key employees,
the Corporation has adopted the non-qualified stock option plan indicated on the
attached Face Sheet ("Plan")'
WHEREAS, the Corporation desires to grant to the Optionee under the
Plan options not intended to qualify as "incentive stock options" within the
meaning of Section 422 or any successor provision of the Internal Revenue Code
of 1986, as amended ("Code"); and
WHEREAS, unless otherwise provided herein, capitalized terms used in
this Agreement shall have the meaning given them in the Plan.
NOW, THEREFORE, in consideration of the mutual covenants and
representations herein contained and intending to be legally bound, the parties
hereto agree as follows:
1. NUMBER OF SHARES AND PRICE. The Corporation hereby grants to the Optionee an
option ("Option") to purchase the number of shares of Common Stock set forth on
the attached Face Sheet of this Agreement. The exercise price per share of
Common Stock of the Option shall be as is set forth on the attached Face Sheet
of this Agreement, such price being the Fair Market Value per share of Common
Stock on the date of grant of the Option. The Option is not intended to qualify
as an "incentive stock option" under Section 422 of the Code.
2. TERM AND EXERCISE. The Option shall expire five (5) years from the date
hereof, subject to earlier termination as set forth in Section 3. Subject to the
provisions of Section 3, the Option shall become exercisable in installments as
set forth on the attached Face Sheet of this Agreement.
3. TERMINATION OF EMPLOYMENT. Upon termination of the employment of the Optionee
for any reason, the Option may only be exercised in accordance with Section 6(d)
of the Plan.
4. ANTIDILUTION PROTECTION. The Optionee shall have the protections against
dilution as are specified in Section 7 of the Plan.
5. EXERCISE OF THE OPTION. The Option may be exercised only by written notice,
delivered or mailed by registered or certified mail addressed to the Treasurer
of the Corporation at the Corporation's principal business office. Such notice
shall be accompanied by payment of the aggregate exercise price of the shares of
Common Stock being purchased either (i) in cash or its equivalent, (ii) by
tendering previously acquired shares of Common Stock valued at their Fair Market
Value at the date of payment as long as the tendered shares have been held by
the Optionee for at least six months, or (iii) by any combination of (i) and
(ii). Any shares of Common Stock tendered in payment for shares covered by the
Option shall be duly endorsed in blank or accompanied by stock powers duly
endorsed in blank. Upon receipt of the payment of the aggregate exercise price
of the shares of Common Stock purchased on exercise of the Option, certificates
representing such shares shall be issued to the Optionee. The shares of Common
Stock so purchased shall be fully paid and nonassessable except insofar as
statutory liability may be imposed under any applicable law.
6. CHANGES IN CONTROL. In the event of a change of control of the Corporation,
the Optionee shall have such rights as are specified in Section 8 of the Plan.
7. NOT A STOCKHOLDER. The Optionee shall not be deemed for any purposes to be a
stockholder of the Corporation with respect to any shares that may be acquired
on exercise of the Option except to the extent that the Option shall have been
exercised and stock certificates have been issued with respect thereto.
8. TRANSFERABILITY. The Option shall not be transferable by the Optionee
otherwise than by will, by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder.
9. SECURITIES ACT OF 1933. The Optionee agrees for himself or herself and his or
her heirs, legatees, and legal representatives, with respect to all shares of
Common Stock acquired pursuant to the terms and conditions of the Plan and the
Option (or any other shares of stock issued pursuant to a stock dividend or
stock split thereon or any securities issued in lieu thereof or in substitution
or exchange therefor), that the Optionee and his or her heirs, legatees and
legal representatives will not sell or otherwise dispose of these shares except
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "Act"), or except in a transaction that, in the opinion of
counsel for the Corporation, is exempt from registration
2
<PAGE>
under the Act. Further, the Corporation shall not be required to sell or issue
any shares of Common Stock under the Option if, in the opinion of the
Corporation, (a) the issuance of such shares would constitute a violation by the
Optionee or the Corporation of any applicable law or regulation of any
government authority or (b) the consent or approval of any governmental body is
necessary or desirable as condition of, or in connection with, the issuance of
such shares.
10. ABILITY OF THE CORPORATION TO TAKE CERTAIN ACTIONS. The existence of the
Option granted shall not affect in any way the right or power of the Corporation
or its directors or stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the Corporation's
capital structure or its business, or any merger or consolidation of the
Corporation, or any issuance of bonds, debentures, preferred or prior preference
stock ahead of or affecting the stock or the rights thereof, or dissolution or
liquidation of the Corporation, or any sale or transfer of all or any part of
its assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
11. WITHHOLDING TAXES. The Optionee shall have the right to satisfy federal,
state, local or foreign withholding taxes incurred upon exercise of the Option
in shares of Common Stock otherwise issuable to the Optionee upon exercise of
the Option in accordance with Section 11(f) of the Plan, without any further
Committee action being required.
12. DISPUTE RESOLUTION. As a condition of granting the Option, the Optionee
agrees, for the Optionee and his or her legal representatives and beneficiaries,
that any dispute or disagreement that may arise under or as a result of or
pursuant to the Plan and the Option shall be determined by the Committee in it
sole discretion, and any interpretation by the Committee of the terms of the
Plan and Option shall be final, binding and conclusive.
If you accept the foregoing terms and conditions, please sign and date this
letter on the lines provided below. In the absence of your written acceptance of
the terms hereof, no optioned share will be purchasable by you.
Very truly yours,
George T. Jochum
Chairman, President and
Chief Executive Officer of MAMSI
James A. Wild
Member of the Compensation Committee of MAMSI
SEEN AND ACCEPTED:
- ---------------------------
Signature
- ---------------------------
Social Security Number
- ------------------
Date
3
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0
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