<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 MARCH 31, 1999, 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
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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
(I.R.S. Employer Identification No.)
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 50,468,362 shares of common stock, par value $.01, outstanding as of March
31, 1999.
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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)
March 31, 1999 December 31, 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,294 $ 9,787
Short-term investments 183,696 174,325
Accounts receivable, net of allowance of $4,959 and $5,214 82,687 79,258
Prepaid expenses, advances and other 22,955 26,955
Deferred income taxes 1,655 1,247
----------- -----------
Total current assets 301,287 291,572
Property and equipment, net of accumulated
depreciation of $35,355 and $32,908 43,927 44,961
Statutory deposits 14,894 14,906
Other assets 9,045 9,055
Deferred income taxes 3,360 2,281
---------- -----------
Total assets $ 372,513 $ 362,775
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 59 $ 60
Short-term borrowings 2,685 1,845
Accounts payable 17,311 19,071
Medical claims payable 138,104 129,265
Deferred premium revenue 18,267 17,167
Deferred income taxes 1,907 1,026
----------- -----------
Total current liabilities 178,333 168,434
Notes payable 14
Deferred income taxes 3,436 3,109
----------- -----------
Total liabilities 181,769 171,557
----------- -----------
Stockholders' equity
Common stock, $.01 par, 100,000,000 shares authorized; 58,272,502 issued and
50,468,362 outstanding at March 31, 1999; 56,772,502 issued and
49,634,162 outstanding at December 31, 1998 582 567
Additional paid-in capital 155,079 138,247
Stock compensation trust (common stock held in trust) (85,773) (68,926)
Treasury stock, 7,804,140 shares at March 31, 1999; 7,138,340 shares at
December 31, 1998 (81,789) (75,623)
Accumulated other comprehensive income (Note 2) 1,134 1,313
Retained earnings 201,511 195,640
----------- -----------
Total stockholders' equity 190,744 191,218
----------- -----------
Total liabilities and stockholders' equity $ 372,513 $ 362,775
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1998 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
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 298,661 $ 274,066
Fee and other 5,464 5,095
Life and short-term disability premium 1,949 1,605
Home health services 4,909 5,025
Investment 2,215 3,711
----------- -----------
Total revenue 313,198 289,502
----------- -----------
Expense
Medical 262,489 241,042
Life and short-term disability claims 887 993
Home health patient services 3,953 4,185
Administrative (including interest expense of $76 and $138) 36,798 32,623
----------- -----------
Total expense 304,127 278,843
----------- -----------
Income before income taxes 9,071 10,659
Income tax expense (3,200) (3,969)
----------- -----------
Net income $ 5,871 $ 6,690
=========== ===========
Basic earnings per common share (Note 3) $ .14 $ .14
=========== ===========
Diluted earnings per common share (Note 3) $ .14 $ .14
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 4
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ending
March 31, 1999
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 5,871
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 2,730
Provision for bad debts (55)
Provision for deferred income taxes (162)
Loss on sale and disposal of assets 18
Increase in accounts receivable (3,374)
Decrease in prepaid expenses, advances, and other 4,000
Decrease in accounts payable (1,760)
Increase in medical claims payable 8,839
Increase in deferred premium revenue 1,100
-----------
Total adjustments 11,336
-----------
Net cash provided by operating activities 17,207
Cash flows used in investing activities:
Purchases of short-term investments (85,270)
Sales of short-term investments 75,603
Purchases of property and equipment (1,532)
Purchases of other assets (381)
Proceeds from sale of assets 221
-----------
Net cash used in investing activities (11,359)
Cash flows used in financing activities:
Principal payments on notes payable (15)
Increase in short-term borrowings 840
Purchase of treasury stock (6,166)
-----------
Net cash used in financing activities (5,341)
-----------
Net increase in cash and cash equivalents 507
Cash and cash equivalents at beginning of period 9,787
-----------
Cash and cash equivalents at end of period $ 10,294
===========
</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>
Three Months
Ending
March 31, 1998
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 6,690
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 2,878
Provision for bad debts 88
Provision for deferred income taxes 363
Increase in accounts receivable (5,352)
Increase in prepaid expenses, advances, and other (394)
Increase in accounts payable 1,427
Increase in medical claims payable 17,384
Increase in deferred premium revenue 2,877
-----------
Total adjustments 19,271
-----------
Net cash provided by operating activities 25,961
Cash flows used in investing activities:
Purchases of short-term investments (85,541)
Sales of short-term investments 65,038
Purchases of property and equipment (3,734)
Purchases of other assets (590)
Proceeds from sale of assets 153
-----------
Net cash used in investing activities (24,674)
Cash flows provided by financing activities:
Principal payments on notes payable (15)
Increase in short-term borrowings 379
Exercise of stock options 4,173
Stock option tax benefit 1,942
Purchase of treasury stock (3,475)
-----------
Net cash provided by financing activities 3,004
-----------
Net increase in cash and cash equivalents 4,291
Cash and cash equivalents at beginning of period 3,570
-----------
Cash and cash equivalents at end of period $ 7,861
===========
</TABLE>
See accompanying notes to these financial statements.
<PAGE> 6
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 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.
Other MAMSI subsidiaries include Alliance PPO, LLC, which provides a delivery
network of physicians to employers and insurance companies in association with
various health plans, and Mid Atlantic Psychiatric Services, Inc., which
provides psychiatric services to third party payors or self-insured employer
groups. MAMSI Life and Health Insurance Company 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. provide in-home medical care (including skilled nursing, infusion
and therapy) and mail-order pharmacy services to MAMSI's HMO members and other
payors. HomeCall Hospice Services, Inc. provides services to terminally ill
patients and their families.
NOTE 1 - FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of March 31, 1999, the
consolidated statements of operations for the three months ended March 31, 1999
and 1998, and the consolidated statements of cash flows for the three months
ended March 31, 1999 and 1998 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, 1998 audited consolidated financial statements. The results of
operations for the three month period ended March 31 are not necessarily
indicative of the operating results for the full year.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except share amounts):
Three Months Ended
March 31, March 31,
1999 1998
Numerator: ---------- ----------
Net income $ 5,871 $ 6,690
Denominator:
Denominator for basic earnings per share
- weighted average shares 42,485,030 46,771,933
Dilutive securities - employee stock options 59,656 206,859
Denominator for diluted earnings per share
- adjusted weighted average shares 42,544,686 46,978,792
<PAGE> 7
Options to purchase approximately 8.5 million shares of common stock at various
prices were outstanding at March 31, 1999, but were not included in the
computation of diluted earnings per share because the option proceeds were
greater than the average market price and, therefore, the effect would be
antidilutive.
During the first quarters of 1999 and 1998, total comprehensive income amounted
to $5,692,000 and $8,401,000, respectively.
The Company maintains a stock compensation trust ("SCT") to fund its obligations
arising from its various stock option plans. Shares held by the SCT are excluded
from the denominator used in calculating basic and diluted earnings per common
share.
NOTE 3 - FEDERAL EMPLOYEES' HEALTH BENEFIT PROGRAM POTENTIAL SETTLEMENT
During 1998, a pretax charge of approximately $16.5 million, which includes
approximately $4.4 million of interest, was recognized in the Company's
financial statements in anticipation of negotiations relating to potential
governmental claims for contracts with OPM, based upon an audit conducted by the
Office of Inspector General concerning the Company's participation in Federal
Employee Health Benefit Program ("FEHBP") for the years 1992-1997, related to
findings for years 1992- 1994. In the normal course of business, OPM audits
health plans with which it contracts to verify, among other things, that the
premiums calculated and charged to OPM are established in compliance with the
best price community rating guidelines established by OPM. OPM typically audits
plans once every five or six years, and each audit covers the prior five or six
year period. While the government's initial on-site audits are usually followed
by a post-audit briefing as well as a preliminary audit report in which the
government indicates its preliminary results, final resolution and settlement of
the audits can take two to three years.
In addition to claims made by the OPM auditors as part of the normal audit
process, OPM may also refer their results to the United States Department of
Justice ("DOJ") for potential legal action under the False Claims Act. The DOJ
has the authority to file a claim under the False Claims Act if it believes that
the health plan knowingly overcharged the government or otherwise submitted
false documentation or certifications. In False Claims Act actions, the
government may impose trebled damages and a civil penalty of not less than
$5,000 nor more than $10,000 for each separate alleged false claim.
In the first quarter of 1999 the Company received OPM's final audit report. Its
findings are consistent with the preliminary report which was the basis for
recording the $16.5 million pretax charge in 1998. The Company intends to
negotiate with OPM on all matters to attain a mutually satisfactory result.
There can be no assurance that these negotiations will be concluded
satisfactorily, that the audit will not be referred to the DOJ, or that
additional, possibly material, liability will not be incurred. The Company
believes that any ultimate liability in excess of amounts accrued would not
materially affect the Company's consolidated financial position. However, such
liability could have a material effect on results of operations or cash flows of
a future period if resolved unfavorably.
NOTE 4 - REPORTABLE SEGMENTS
The Company's principal business is providing health insurance products. The
Company has two reportable segments: commercial risk products and preferred
provider organizations. The Company evaluates performance and allocates
resources based on profit or loss from operations before income taxes, not
including gains or losses on the Company's investment portfolio. Management does
not allocate assets in the measurement of segment profit or loss. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies described in the Company's Form 10-K.
Effective January 1, 1999, the Company ended its participation in the Medicare
Program.
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ending
March 31, March 31,
1999 1998
In 000's ------------ ------------
<S> <C> <C>
Revenues:
Commercial risk $ 287,891 $ 251,362
Preferred Provider Organizations 5,464 5,095
Medicare 0 14,067
All other 17,628 15,267
----------- -----------
$ 310,983 $ 285,791
=========== ===========
Profit (Loss):
Commercial risk $ 4,165 $ 6,205
Preferred Provider Organizations 2,841 2,649
Medicare 0 (2,076)
All other (39) 356
----------- -----------
$ 6,967 $ 7,134
=========== ===========
</TABLE>
Reconciliations of segment data to the Company's consolidated data is as
follows:
<TABLE>
<CAPTION>
Three Months Ending
March 31, March 31,
1999 1998
In 000's ------------ ------------
<S> <C> <C>
Total profit from reportable segments $ 7,006 $ 6,778
Other (loss) profit (39) 356
Unallocated amounts:
Investment income 2,104 3,525
----------- -----------
Income before taxes $ 9,071 $ 10,659
=========== ===========
</TABLE>
<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 that the Company is not able to increase its market share at
the anticipated premium rates.
3. The possibility of state or federal budget related mandates that reduce
premiums for Medicaid recipients.
4. 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 or limit the Company's
oversight ability.
5. 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.
6. The possibility that one of the Company's vendors will experience year 2000
problems that disrupt the Company's operating or administrative systems.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1998
Consolidated net income of the Company was $5,871,000 and $6,690,000 for the
first quarters of 1999 and 1998, respectively. Diluted earnings per share was
$.14 in the first quarter of 1999 and 1998. This decrease in earnings is
primarily attributable to an increase in administrative expenses, coupled with a
decrease in investment earnings. Administrative costs increased due mainly to
increased compensation costs related to expansion of the Company's work force in
specialized claims and clinical areas. 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, 1999 increased approximately $23.7
million or 8.2 percent over the three months ended March 31, 1998. A 7.3 percent
increase in net average HMO and indemnity enrollment resulted in an increase of
approximately $20.2 million in health premium revenue, while a 1.6 percent
increase in average monthly premium per enrollee, combined for all products,
resulted in a $4.4 million increase in health premium revenue. The increase in
HMO and indemnity enrollment is principally due to the net effect of the
Company's withdrawal from the Medicare program on January 1, 1999 which is more
than offset by increases in the Company's commercial membership. Management
believes that commercial health premiums should continue to increase during 1999
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. 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 has implemented increased premium rates across essentially all of
its commercial products. 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. Commercial premium rate increases are expected to
continue in 1999 at the same rate as 1998, in the range of 5 percent to 7
percent. Management believes that these rate increases may have the effect of
slowing the Company's future membership growth. In addition, management
reevaluated premium reimbursement rates with regard to its Medicare and Medicaid
programs. Specifically, effective January 1, 1998, the Company withdrew from
participation in certain areas of the Virginia Medicaid program. Effective
January 1, 1999 the Company withdrew from participation in the Medicare program.
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 remained relatively stable and contributed
approximately $4.9 million in revenue in the first quarter of 1999 as compared
with $5.0 million in the first quarter of 1998. Revenue from life and short-term
disability products contributed $1.9 million in revenue in the first quarter of
1999 as compared to $1.6 million for the same period in 1998.
Medical expenses as a percentage of health premium revenue ("medical loss
ratio") decreased slightly from 88.0% for the first quarter of 1998 to 87.9% for
the 1st quarter of 1999. On a per member per month basis, medical expenses
increased 1.5 percent. The slight decrease in the medical loss ratio is due to a
combination of factors including increased utilization of outpatient services,
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 Company's withdrawal from the Medicare
program effective January 1, 1999, and also increased premiums per member. These
initiatives should help to control the Company's medical loss ratio. The
statements in this paragraph and 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 11.7 percent for the first quarter of 1999 as compared to
11.3 percent for the same period in 1998. This increase is mainly attributable
to increased compensation costs related to expansion of the Company's work force
in specialized claims and clinical areas. Management believes that the
administrative expense ratio will remain near the current level during 1999.
Management's expectation concerning the administrative expense ratio is a
forward-looking statement. The administrative expense ratio is affected by
changes in health premiums and other revenues, development of the Company's
expansion areas and increased administrative activity related to business
volume.
Investment income decreased $1.5 million primarily due to a decrease in realized
gains on sales of marketable equity securities.
The net margin rate decreased from 2.3 percent in the first quarter of 1998 to
1.9 percent in the current quarter. This decrease is consistent with the factors
previously described.
<PAGE> 11
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 continue to be
sufficient in the future.
The Company's cash and short-term investments increased $9.9 million from $184.1
million at December 31, 1998 to $194.0 million at March 31, 1999, primarily due
to net income and the timing of medical expense payments, which traditionally
lag behind the receipt of increased premiums per member. Accounts receivable
also increased from $79.3 million at December 31, 1998 to $82.7 million at March
31, 1999, principally due to increased membership. Prepaid expenses and other
decreased from $27.0 million at December 31, 1998 to $23.0 million at March 31,
1999 due to a decrease in income tax amounts paid in advance.
Medical claims payable increased from $129.3 million at December 31, 1998 to
$138.1 million at March 31, 1999, primarily due to increased membership and an
increase in medical expenses per member.
Additional paid-in capital increased from $138.2 million at December 31, 1998 to
$155.1 million at March 31, 1999, principally due to an additional 1.5 million
shares of the Company's stock being placed into the stock compensation trust,
which is also the reason for the change in the stock compensation trust balance.
Treasury Stock increased from $75.6 million at December 31, 1999 to $81.8
million at March 31, 1999 due to the purchase of 665,800 additional shares by
the Company.
The Company currently has access to total revolving credit facilities of $29.0
million, which is used to provide short-term capital resources for routine cash
flow fluctuations. At March 31, 1999, approximately $2.7 million was drawn
against these facilities. In addition, the Company maintains a $12 million
letter of credit for the benefit of the North Carolina Insurance Department in
support of operations of MAMSI Life and Health Insurance Company, and a $150,000
letter of credit for the Company's home health subsidiary. While no amounts have
been drawn against these letters of credit, they reduce the Company's credit
line availability.
Following is a schedule of the short-term capital resources available to the
Company (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 10,294 $ 9,787
Short-term investments 183,696 174,325
Working capital advances to Maryland hospitals 13,869 12,261
----------- -----------
Total available liquid assets 207,859 196,373
Credit line availability 14,150 14,855
----------- -----------
Total short-term capital resources $ 222,009 $ 211,228
=========== ===========
</TABLE>
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.
In 1997, the Company began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue ("Y2K"). This issue affects computer systems that have time- sensitive
programs that may not properly recognize the year 2000. This could result in
major system failures or miscalculations. The Company is
<PAGE> 12
currently addressing its internal year 2000 issue with modifications to existing
programs. As a part of the Company's initial assessment, 1,300 software programs
were identified for Y2K review. Of those 1,300, 182 programs were identified as
needing modification, of which 145 were modified and 37 were determined to be
obsolete. To date, the Company has modified the majority of the programs with
internal resources diverted from other projects, none of which are critical to
the Company's daily operations. Testing and validation of the modified programs
is complete. The Company has incurred less than $500,000 to date and does not
anticipate significant additional costs to bring the Y2K compliance program to
completion. Approximately 85% of the Company's critical vendors have indicated
Y2K compliance and the Company anticipates completion of this evaluation in the
second quarter of 1999. The Company is actively pursuing the remainder for
confirmation of Y2K compliance. Based upon the work completed to date, the
Company does not anticipate any future material impact on its financial
statements. With regard to the Company's most reasonably likely worst case
scenario, the Company believes that such scenario involves the possibility that
a small number of reports will display incorrect data, a small number of
programs may give unusual data, and a small number of vendors will not be Y2K
compliant. In terms of a contingency plan, the Company believes it has
sufficient internal resources to be able to correct such report errors and
address non- compliant vendors within a relatively short time frame. If internal
resources prove to be insufficient, the Company will engage outside resources.
The statements in this paragraph regarding future effects of the year 2000 issue
is a forward-looking statement. See "Forward-Looking Information" for a
description of risk factors.
At its February, 1998 meeting, the Board of Directors authorized a $20 million
stock repurchase program which allowed the Company to purchase its stock on the
open market, through block trades, or in private transactions over the
succeeding 12 months. On August 3, 1998, the Executive Committee of the Board of
Directors (subsequently ratified by the Board of Directors) increased the
authorization to purchase up to $40 million of common stock prior to February
25, 1999. On February 25, 1999, the Board of Directors authorized a $20 million
stock repurchase program to extend through September 2, 1999. As of March 31,
1999, the Company had repurchased 5,709,500 shares of its common stock for a
total cost of approximately $40.6 million under these stock repurchase programs.
MARKET RISK
The Company is exposed to market risk through its investment in fixed and
variable rate debt securities that are interest rate sensitive. The Company does
not use derivative financial instruments. The Company invests in instruments
that meet high credit quality standards, as specified in the Company's
investment policy guidelines; the policy also limits the amount of credit
exposure to any one issue, issuer, or type of instrument. The Company has no
significant market risk with regard to liabilities. There are no material
changes in market risk exposure at March 31, 1999 when compared with December
31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is contained in Item 2 "Management's
Discussion and Analysis of Financial Condition and Results
of Operations".
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as the defendant in a suit filed by certain medical
providers on March 26, 1997 in the Circuit Court for Anne Arundel County,
Maryland, which alleges that the Company improperly reduced payments to
participating providers in the form of "withhold". It is the plaintiffs'
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 parties are in active arbitration proceedings at this time.
Management believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's financial statements.
During the quarter ended March 31, 1998, the Company became involved in a
dispute with the Maryland Insurance Administration ("MIA") concerning the
construction and application of Section 15-1008 of the Maryland Insurance
Article. The law limits the time within which a carrier may retroactively
collect money owed by providers to the carrier by using the device of offsetting
future payments to providers with the amount owed by the provider to the
carrier. The law does not affect the right of carriers to otherwise recover
monies owed. The Company construed the law to be applicable to claims paid on or
after October 1, 1997. The MIA construed the law to apply to retroactive
adjustments made on or after October 1, 1997 and the MIA has ordered the Company
to abide by its construction of the law. The Company has not yet decided whether
to appeal. Management believes that the ultimate outcome of this matter will not
have a material adverse effect on the Company's financial statements as the
MIA's current position affects the method of collection of the claims reversals,
rather than the Company's legal right to the refunds.
On February 18, 1999, certain providers filed a class action lawsuit in the
Circuit Court for Anne Arundel County, Maryland concerning the construction and
application of Section 15-1008 of the Maryland Insurance Article. The complaint
requests an accounting of claims' payments, injunctive relief and punitive
damages. Management believes that the ultimate outcome of this matter will not
have a material adverse effect on the Company's financial statements as the
MIA's current position affects the method of collection of the claims reversals,
rather than the Company's legal right to the refunds.
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
effect the Company's consolidated financial position or results of operations.
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
An annual meeting of the stockholders of MAMSI was held on April 26, 1999. The
following matters were submitted to a vote of the stockholders during the annual
meeting:
<PAGE> 14
(1) The following individuals were elected to the Board of Directors for a three
year term except for Mr. Barbera who was elected to a two year term with the
indicated votes:
<TABLE>
<CAPTION>
For Against Abstain
---------- --------- --------
<S> <C> <C> <C>
Thonas P. Barbera 47,323,604 625,580 None
Francis C. Bruno, M.D. 46,406,963 1,542,221 None
Janet L. Norwood 47,340,345 608,839 None
John A. Paganelli 47,344,155 605,029 None
Ivan A. Sabel 47,343,605 605,579 None
James A. Wild 47,346,482 602,702 None
</TABLE>
Board members whose term of office continued after the meeting are as follows:
John H. Cook, M.D.
Raymond H. Cypess, D.V.M., PhD.
Robert E. Foss
Mark D. Groban, M.D.
John P. Mamana, M.D.
William M. Mayer, M.D.
Edward J. Muhl
Gretchen P. Murdza
(2) The adoption of the 1999 Non-Qualified Stock Option Plan was ratified by a
count of 31,783,467 affirmative votes, 15,908,992 negative votes and 256,725
abstentions.
(3) The adoption of the 1999 Senior Management Bonus Plan was ratified by a
count of 41,795,653 affirmative votes, 4,926,612 negative votes and 1,226,919
abstentions.
There were no broker non-votes with respect to the election of Directors, the
adoption of the 1999 Non-Qualified Stock Option Plan or the 1999 Senior
Management Bonus Plan.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index on page 16 of the Form 10-Q.
(b) Reports on form 8-K
In a report on Form 8-K dated February 25, 1999, the Company reported under
Item 5. "Other Events" a stock repurchase program.
In a report on Form 8-K dated January 8, 1999, the Company reported Under
Item 5. "Other Events" the resignation of its then current Chairman of the
Board.
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by undersigned
thereto duly authorized.
MID ATLANTIC MEDICAL SERVICES, INC.
--------------------------------------------
(Registrant)
Date: May 14, 1999 /s/ Robert E. Foss
---------------------------------
Robert E. Foss Senior Executive Vice President and
Chief Financial Officer (duly authorized officer and
principal financial officer)
<PAGE> 16
6(a) List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit In Sequential
Number Description of Document Numbering System
- ------- ----------------------- -------------------
27 Financial Data Schedule for the Three
Months Ended March 31, 1999. . . . . . . . . . .
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,294
<SECURITIES> 183,696
<RECEIVABLES> 82,687
<ALLOWANCES> 4,959
<INVENTORY> 0
<CURRENT-ASSETS> 301,287
<PP&E> 43,927
<DEPRECIATION> 35,355
<TOTAL-ASSETS> 372,513
<CURRENT-LIABILITIES> 178,333
<BONDS> 0
0
0
<COMMON> 582
<OTHER-SE> 190,162
<TOTAL-LIABILITY-AND-EQUITY> 372,513
<SALES> 0
<TOTAL-REVENUES> 313,198
<CGS> 0
<TOTAL-COSTS> 267,329
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 55
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> 9,071
<INCOME-TAX> 3,200
<INCOME-CONTINUING> 5,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,871
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
