<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, 2000, or
[ ] Transition report pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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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
(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 49,001,722 shares of common stock, par value $.01, outstanding as of
September 30, 2000.
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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, 2000 December 31, 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,715 $ 3,725
Investment securities 236,158 202,522
Accounts receivable, net of allowance of $5,787 and $5,445 84,303 83,623
Prepaid expenses, advances and other 28,450 27,287
Deferred income taxes 2,019 381
----------- -----------
Total current assets 352,645 317,538
Property and equipment, net of accumulated
depreciation of $46,945 and $41,518 46,695 43,668
Statutory deposits 14,007 14,043
Other assets 10,051 10,357
Deferred income taxes 3,224 2,978
----------- -----------
Total assets $ 426,622 $ 388,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 14
Short-term borrowings 3,183 3,558
Accounts payable 29,444 21,980
Medical claims payable 172,596 154,403
Deferred premium revenue 20,414 16,949
Deferred income taxes 758 1,639
----------- -----------
Total current liabilities 226,395 198,543
Deferred income taxes 3,290 3,220
----------- -----------
Total liabilities 229,685 201,763
----------- -----------
Stockholders' equity
Common stock, $.01 par, 100,000,000 shares authorized; 61,772,502 issued and
49,001,722 outstanding at September 30, 2000; 59,772,502
issued and 49,439,222 outstanding at December 31, 1999 617 597
Additional paid-in capital 249,010 152,607
Stock compensation trust (common stock held in trust) (172,688) (83,215)
Treasury stock, 12,770,780 shares at September 30, 2000; 10,333,280
shares at December 31, 1999 (128,409) (104,117)
Accumulated other comprehensive loss (444) (1,013)
Retained earnings 248,851 221,962
----------- -----------
Total stockholders' equity 196,937 186,821
----------- -----------
Total liabilities and stockholders' equity $ 426,622 $ 388,584
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1999 has been extracted from the
audited financial statements at that date.
See accompanying notes to these financial statements.
<PAGE> 3
MID ATLANTIC MEDICAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 353,090 $ 318,794
Fee and other 5,409 5,224
Life and short-term disability premium 2,040 2,089
Home health services 7,455 6,531
Investment 3,434 2,612
----------- -----------
Total revenue 371,428 335,250
----------- -----------
Expense
Medical 306,221 281,050
Life and short-term disability claims 552 934
Home health patient services 5,828 5,264
Administrative (including interest expense of $175 and $211) 44,178 37,441
----------- -----------
Total expense 356,779 324,689
----------- -----------
Income before income taxes 14,649 10,561
Income tax expense (3,675) (3,441)
----------- -----------
Net income $ 10,974 $ 7,120
=========== ===========
Basic earnings per common share $ .29 $ .17
=========== ===========
Diluted earnings per common share $ .28 $ .17
=========== ===========
</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 Ended
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 1,049,261 $ 925,335
Fee and other 15,935 16,063
Life and short-term disability premium 5,990 6,043
Home health services 19,120 17,279
Investment 9,574 7,258
----------- -----------
Total revenue 1,099,880 971,978
----------- -----------
Expense
Medical 913,053 817,635
Life and short-term disability claims 2,332 2,849
Home health patient services 15,821 14,117
Administrative (including interest expense of $438 and $377) 129,792 110,775
----------- -----------
Total expense 1,060,998 945,376
----------- -----------
Income before income taxes 38,882 26,602
Income tax expense (11,993) (9,105)
----------- -----------
Net income $ 26,889 $ 17,497
=========== ===========
Basic earnings per common share $ .71 $ .42
=========== ===========
Diluted earnings per common share $ .69 $ .42
=========== ===========
</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
Ended
September 30, 2000
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 26,889
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 7,546
Provision for bad debts 342
Provision for deferred income taxes (3,068)
Loss on sale and disposal of fixed assets 361
Increase in accounts receivable (1,022)
Increase in prepaid expenses, advances, and other (1,163)
Increase in accounts payable 7,464
Increase in medical claims payable 18,193
Increase in deferred premium revenue 3,465
-----------
Total adjustments 32,118
-----------
Net cash provided by operating activities 59,007
Cash flows used in investing activities:
Purchases of investment securities (312,655)
Sales of investment securities 279,961
Purchases of property and equipment (10,282)
Purchases of statutory deposits (583)
Maturities of statutory deposits 581
Purchases of other assets (557)
Proceeds from sale of assets 249
-----------
Net cash used in investing activities (43,286)
Cash flows used in financing activities:
Principal payments on notes payable (14)
Decrease in short-term borrowings (375)
Exercise of stock options 5,933
Stock option tax benefit 1,017
Purchase of treasury stock (24,292)
-----------
Net cash used in financing activities (17,731)
-----------
Net decrease in cash and cash equivalents (2,010)
Cash and cash equivalents at beginning of period 3,725
-----------
Cash and cash equivalents at end of period $ 1,715
===========
</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
Ended
September 30, 1999
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 17,497
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 7,759
Provision for bad debts (102)
Provision for deferred income taxes (128)
Loss on sale of disposal of assets 8
Increase in accounts receivable (2,489)
Increase in prepaid expenses, advances, and other (251)
Increase in accounts payable 2,820
Increase in medical claims payable 22,055
Increase in deferred premium revenue 101
-----------
Total adjustments 29,773
-----------
Net cash provided by operating activities 47,270
Cash flows used in investing activities:
Purchases of investment securities (265,361)
Sales of investment securities 246,715
Purchases of property and equipment (4,815)
Purchases of other assets (167)
Proceeds from sale of assets 391
-----------
Net cash used in investing activities (23,237)
Cash flows used in financing activities:
Principal payments on notes payable (45)
Increase in short-term borrowings 1,662
Exercise of stock options 75
Stock option tax benefit 18
Purchase of treasury stock (25,359)
-----------
Net cash used in financing activities (23,649)
-----------
Net increase in cash and cash equivalents 384
Cash and cash equivalents at beginning of period 9,787
-----------
Cash and cash equivalents at end of period $ 10,171
===========
</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 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 pharmacy, and part ownership in an outpatient surgery
center.
MAMSI delivers managed health care products principally through its HMOs. The
HMOs, MD-Individual Practice Association, Inc. ("M.D. IPA"), Optimum Choice,
Inc.(R)("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 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 September 30, 2000, the
consolidated statements of operations for the three and nine months ended
September 30, 2000 and 1999, and the consolidated statements of cash flows for
the nine months ended September 30, 2000 and 1999 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, 1999 audited consolidated financial statements included in its
annual report on Form 10-K for the year ended December 31, 1999 ("1999 Form
10-K"). The results of operations for the three and nine month periods ended
September 30, 2000 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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 10,974 $ 7,120 $ 26,889 $ 17,497
Denominator:
Denominator for basic earnings per share
- weighted average shares 37,388,100 40,896,492 38,026,351 41,750,913
Dilutive securities - employee stock options 1,605,551 31,894 831,860 51,382
Denominator for diluted earnings per share
- adjusted weighted average shares 38,993,651 40,928,386 38,858,211 41,802,295
</TABLE>
<PAGE> 8
Options to purchase approximately 2.7 million shares of common stock at various
prices were outstanding at September 30, 2000, but were not included in the
computation of diluted earnings per share because the option proceeds would
exceed the average market price and, therefore, the effect would be
antidilutive.
During the first nine months of 2000 and 1999, total comprehensive income
amounted to $27,458,000 and $15,766,000, 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 - 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 income 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 1999 Form
10-K.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
In 000's ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Commercial risk $ 353,090 $ 304,096 $ 1,039,325 $ 887,201
Preferred provider organizations 5,409 5,224 15,935 16,063
All other 9,495 23,318 35,046 61,456
----------- ----------- ----------- -----------
$ 367,994 $ 332,638 $ 1,090,306 $ 964,720
=========== =========== =========== ===========
Income before taxes:
Commercial risk $ 7,738 $ 5,696 $ 20,754 $ 12,208
Preferred provider organizations 2,704 2,716 7,967 8,352
All other 945 (334) 1,066 (856)
----------- ----------- ----------- -----------
$ 11,387 $ 8,078 $ 29,787 $ 19,704
=========== =========== =========== ===========
</TABLE>
Reconciliations of segment data to the Company's consolidated data is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
In 000's ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total profit from reportable segments $ 10,442 $ 8,412 $ 28,721 $ 20,560
Other profit (loss) 945 (334) 1,066 (856)
Unallocated amounts:
Investment income 3,262 2,483 9,095 6,898
----------- ----------- ----------- -----------
Income before taxes $ 14,649 $ 10,561 $ 38,882 $ 26,602
=========== =========== =========== ===========
</TABLE>
NOTE 4 - CONTRACT ACCOUNTING
The Company has entered into certain long-term vendor contracts, some of which
include incentives or cost guarantees for all or a portion of the contract
period. The Company accounts for the benefit derived from these incentives or
guarantees ratably over the contract period.
<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 increased litigation, legislation or regulation (such as
the numerous class action lawsuits that have been filed against managed care
companies and the pending initiatives to increase health care regulation) that
might increase regulatory oversight which, in turn, would have the potential for
increased costs.
4. The potential for increased medical expenses due to:
- Increased utilization by the Company's membership.
- Inflation in practitioner 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 negotiate new or renewal
contracts with appropriate physicians, other health care practitioners,
hospitals and facilities.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1999
Consolidated net income of the Company was $10,974,000 and $7,120,000 for the
third quarters of 2000 and 1999, respectively. Diluted earnings per share was
$.28 and $.17 in the third quarters of 2000 and 1999, respectively. This
increase in earnings is attributable to an increase in premiums per member, a
reduction in medical expenses as a percentage of health premium revenue
("medical care ratio"), offset somewhat by an increase in administrative
expense. 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, 2000 increased approximately
$36.2 million or 10.8 percent over the three months ended September 30, 1999. A
.2 percent increase in net average HMO and indemnity enrollment resulted in an
increase of approximately $.7 million in health premium revenue, while a 10.5
percent increase in average monthly premium per enrollee, combined for all
products, resulted in a $33.6 million increase in health premium revenue. The
increase in HMO and indemnity enrollment is due to increases in the Company's
commercial membership. Management believes that commercial health premiums
should continue to increase during 2000 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 2000 in the range of 9% to 10%. 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, 1999 the
Company withdrew from participation in the Medicare program. In October, 1999,
the Company withdrew from participation in the North Carolina and West Virginia
Medicaid programs. Effective May 1, 2000, the Company has transferred its
membership in the Virginia Medicaid Program to a non- affiliated carrier.
Therefore, as of May 1, 2000, the Company has ended its participation in any
government entitlement health insurance programs.
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, and increased competition in the Company's
service area.
The Company's home health operations contributed approximately $7.5 million in
revenue in the third quarter of 2000 as compared with $6.5 million in the third
quarter of 1999. Revenue from life and short-term disability products
contributed $2.0 million in revenue in the third quarter of 2000 as compared
with $2.1 million in the third quarter of 1999.
The medical care ratio decreased from 88.2% for the third quarter of 1999 to
86.7% for the third quarter of 2000. On a per member per month basis, medical
expenses increased 8.7 percent. The decrease in the medical care ratio is due to
a combination of factors including continuing efforts by the Company to
implement product specific cost containment controls, continued activity in
specialized subrogation areas and claims review for dual health coverage, the
Company's withdrawal from certain state Medicaid programs, and also increased
premiums per member. The ongoing initiatives should help to control the
Company's medical care 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 care ratio.
Administrative expenses as a percentage of revenue ("administrative expense
ratio") increased to 11.9 percent for the third quarter of 2000 as compared to
11.2 percent for the same period in 1999. Management believes that the
administrative expense ratio will remain approximately the same throughout the
rest of 2000. 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 increased $.8 million primarily due to an increase in
investment securities balances.
The effective tax rate decreased from 32.6 percent for the quarter ending
September 30, 1999 to 25.1 percent for the quarter ending September 30, 2000
primarily due to the benefit derived from the effect of certain non-recurring
tax items which approximated $1.3 million.
The net margin rate increased from 2.1 percent in the third quarter of 1999 to
3.0 percent in the current quarter. This increase is consistent with the factors
previously described.
THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
The Company's consolidated net income for the nine months ended September 30,
2000 increased to $26,889,000 from $17,497,000 for the nine months ended
September 30, 1999. Diluted earnings per share on net income increased from $.42
in the first nine months of 1999 to $.69 for the same period in 2000. The
increase in earnings is primarily attributable to increased premiums per member
and reduction in the medical care ratio offset somewhat by an increase in
administrative expense.
<PAGE> 11
Revenue for the nine months ended September 30, 2000 increased approximately
$127.9 million or 13.2 percent over the nine months ended September 30, 1999. A
10.7 percent increase in average premiums per HMO and indemnity enrollee
increased health premium revenue by approximately $98.8 million and a 2.5
percent increase in net average HMO and indemnity enrollment resulted in an
increase of approximately $25.1 million in health premium revenue. Revenue from
life and short-term disability products contributed $6.0 million in revenue for
the first nine months of 2000 and 1999.
The medical care ratio decreased to 87.0 percent for the nine months ended
September 30, 2000 as compared to 88.4 percent for the comparable period in
1999. The reasons for this decrease are consistent with the items discussed in
the quarterly analysis.
The administrative expense ratio for the first nine months of 2000 increased to
11.8 percent as compared to 11.4 percent for the same period in 1999.
The net margin rate increased from 1.8 percent for the first nine months of 1999
to 2.4 percent for the comparable period of 2000. This increase is consistent
with the factors previously described.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive and the majority of the
Company's expenses are payments to physicians and health care practitioners,
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 investment securities increased $31.7 million from $206.2
million at December 31, 1999 to $237.9 million at September 30, 2000, primarily
due to the timing of medical expense payments, which traditionally lag behind
the receipt of increased premiums per member and net income offset by the effect
of treasury stock purchases. Accounts receivable increased from $83.6 million at
December 31, 1999 to $84.3 million at September 30, 2000, principally due to the
timing of customer payments offset by payment on receivables due from the
Federal Employees Health Benefits Program. Prepaid expenses, advances and other
increased from $27.3 million at December 31, 1999 to $28.5 million at September
30, 2000 due to an increase in income tax amounts paid in advance.
Net property and equipment increased from $43.7 million at December 31, 1999 to
$46.7 million at September 30, 2000 primarily due to build-out and renovation
costs associated with the purchase of a building, for use in the Company's
operations, in late December 1999.
Medical claims payable increased from $154.4 million at December 31, 1999 to
$172.6 million at September 30, 2000, primarily due to increased membership and
an increase in medical expenses per member.
Additional paid-in capital increased from $152.6 million at December 31, 1999 to
$249.0 million at September 30, 2000, due to an additional 2.0 million shares of
the Company's stock being placed into the SCT, as well as an increase in the
market value of the shares of the Company's stock held in the SCT. This also
accounts for the change in the SCT balance.
Treasury stock increased from $104.1 million at December 31, 1999 to $128.4
million at September 30, 2000 due to the purchase of 2,437,500 additional shares
by the Company at a total cost of $24,292,000.
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 September 30, 2000, approximately $3.2 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 $100,000
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.
<PAGE> 12
Following is a schedule of the short-term capital resources available to the
Company (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 1,715 $ 3,725
Investment securities 236,158 202,522
Working capital advances to Maryland hospitals 17,017 15,390
----------- -----------
Total available liquid assets 254,890 221,637
Credit line availability 13,717 13,292
----------- -----------
Total short-term capital resources $ 268,607 $ 234,929
=========== ===========
</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.
The Company's major business operations are principally conducted through its
HMOs and insurance company. HMOs and insurance companies are subject to state
regulations that, among other things, may require those companies to maintain
certain levels of equity, and restrict the amount of dividends and other
distributions that may be paid to their parent corporations. As of September 30,
2000, with the exception of OCCI, those subsidiaries of the Company were in
compliance with all minimum capital requirements. OCCI failed to meet its
working capital requirement of $1.6 million and its minimum capital requirement
of $2.5 million at September 30, 2000. In November 2000, additional capital was
provided to meet these requirements.
At its October 1999 Board meeting, the Board of Directors authorized a $20
million stock repurchase program to begin November 15, 1999 and extend through
June 30, 2000. As of December 31, 1999, the Company had repurchased 447,200
shares of its common stock for a total cost of approximately $3.1 million under
its then active stock repurchase program. During the three months ended March
31, 2000, the Company repurchased an additional 1,106,000 shares of its common
stock for a total cost of approximately $9.7 million. At its May 2000 Board
meeting, the Board of Directors authorized a $20 million stock repurchase
program to begin immediately. The authorized program included any unspent funds
carried forward from the October 1999 repurchase program. During the six months
ended September 30, 2000, the Company repurchased an additional 1,331,500 shares
of its common stock for a total cost of approximately $14.6 million. At its
October 2000 Board meeting, the Board of Directors authorized a $20 million
stock repurchase program to begin immediately. The newly authorized program
includes any unspent funds carried forward from the May 2000 repurchase program.
In October 2000, the Company repurchased an additional 132,200 shares of its
common stock for a total cost of approximately $2.1 million.
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 places its investments 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 September 30, 2000 when compared with
December 31, 1999.
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 had been named as the defendant in a suit filed by certain medical
physicians and health care practitioners on March 26, 1997 in the Circuit Court
for Anne Arundel County, Maryland ("Court") and various other venues, as
previously reported, which alleged that the Company improperly reduced payments
to participating physicians and health care practitioners in the form of
"withhold". In October 2000, the parties entered into a settlement of the
disputes, the outcome of which was not material to the Company's financial
statements.
In September 2000, the Company and other HMOs operating in Maryland were served
with similar class action suits challenging the constitutionality of the law
which allows the Company to subrogate against other insurance companies. The
Company's action was filed in the Circuit Court for Montgomery County, Maryland
which recently ruled in another case that the subrogation law was
constitutional. The Company believes that its operations with respect to the law
are valid. However, the Company is not able to predict, at this time, the
ultimate outcome of this action.
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
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, 2000.
<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 14, 2000 /s/ Robert E. Foss
-------------------------------------
Robert E. Foss Senior Executive Vice President and
Chief Financial Officer (duly authorized officer
and principal financial officer)
<PAGE> 15
6(a) List of Exhibits.
EXHIBIT INDEX
Location of Exhibit
Exhibit In Sequential
Number Description of Document Numbering System
------- ----------------------- -------------------
10.29 Amended and Restated Stock Compensation Trust
Agreement dated August 4, 2000. . . . . . . . . . . . . .
10.30 Common Stock Purchase Agreement dated
August 4, 2000. . . . . . . . . . . . . . . . . . . . . .
10.31 Allonge to Replacement Promissory Note dated
August 4, 2000. . . . . . . .. . . . . . . . . . . . . .
27 Financial Data Schedule for the Nine
Months Ended September 30, 2000. . . . . . . . . . . . .
