<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 June 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
--------
------------------------------
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 47,282,822 shares of common stock, par value $.01, outstanding as of June
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)
June 30, 2000 December 31, 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,989 $ 3,725
Investment securities 220,797 202,522
Accounts receivable, net of allowance of $5,366 and $5,445 82,052 83,623
Prepaid expenses, advances and other 29,319 27,287
Deferred income taxes 483 381
----------- -----------
Total current assets 334,640 317,538
Property and equipment, net of accumulated
depreciation of $44,869 and $41,518 44,925 43,668
Statutory deposits 14,014 14,043
Other assets 10,305 10,357
Deferred income taxes 2,750 2,978
----------- -----------
Total assets $ 406,634 $ 388,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 14
Short-term borrowings 3,098 3,558
Accounts payable 26,027 21,980
Medical claims payable 167,062 154,403
Deferred premium revenue 21,922 16,949
Deferred income taxes 2,049 1,639
----------- -----------
Total current liabilities 220,158 198,543
Deferred income taxes 2,854 3,220
----------- -----------
Total liabilities 223,012 201,763
----------- -----------
Stockholders' equity
Common stock, $.01 par, 100,000,000 shares authorized; 59,772,502 issued and
47,282,822 outstanding at June 30, 2000; 59,772,502 issued
and 49,439,222 outstanding at December 31, 1999 597 597
Additional paid-in capital 204,049 152,607
Stock compensation trust (common stock held in trust) (133,219) (83,215)
Treasury stock, 12,489,680 shares at June 30, 2000; 10,333,280 shares
at December 31, 1999 (124,748) (104,117)
Accumulated other comprehensive loss (934) (1,013)
Retained earnings 237,877 221,962
----------- -----------
Total stockholders' equity 183,622 186,821
----------- -----------
Total liabilities and stockholders' equity $ 406,634 $ 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
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 351,809 $ 307,880
Fee and other 5,308 5,375
Life and short-term disability premium 1,983 2,005
Home health services 6,026 5,839
Investment 3,213 2,431
----------- -----------
Total revenue 368,339 323,530
----------- -----------
Expense
Medical 308,147 274,096
Life and short-term disability claims 957 1,028
Home health patient services 5,006 4,900
Administrative (including interest expense of $126 and $90) 43,059 36,536
----------- -----------
Total expense 357,169 316,560
----------- -----------
Income before income taxes 11,170 6,970
Income tax expense (3,857) (2,464)
----------- -----------
Net income $ 7,313 $ 4,506
=========== ===========
Basic earnings per common share $ .19 $ .11
=========== ===========
Diluted earnings per common share $ .19 $ .11
=========== ===========
</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>
Six Months Ended
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 696,171 $ 606,541
Fee and other 10,526 10,839
Life and short-term disability premium 3,950 3,954
Home health services 11,665 10,748
Investment 6,140 4,646
----------- -----------
Total revenue 728,452 636,728
----------- -----------
Expense
Medical 606,832 536,585
Life and short-term disability claims 1,780 1,915
Home health patient services 9,993 8,853
Administrative (including interest expense of $263 and $166) 85,614 73,334
----------- -----------
Total expense 704,219 620,687
----------- -----------
Income before income taxes 24,233 16,041
Income tax expense (8,318) (5,664)
----------- -----------
Net income $ 15,915 $ 10,377
=========== ===========
Basic earnings per common share $ .42 $ .25
=========== ===========
Diluted earnings per common share $ .41 $ .25
=========== ===========
</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>
Six Months
Ended
June 30, 2000
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 15,915
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 5,180
Provision for bad debts (79)
Provision for deferred income taxes 118
Loss on sale and disposal of fixed assets 403
Decrease in accounts receivable 1,650
Increase in prepaid expenses, advances, and other (2,032)
Increase in accounts payable 4,047
Increase in medical claims payable 12,659
Increase in deferred premium revenue 4,973
-----------
Total adjustments 26,919
-----------
Net cash provided by operating activities 42,834
Cash flows used in investing activities:
Purchases of investment securities (139,114)
Sales of investment securities 120,970
Purchases of property and equipment (6,407)
Purchases of statutory deposits (332)
Maturities of statutory deposits 334
Purchases of other assets (491)
Proceeds from sale of assets 137
-----------
Net cash used in investing activities (24,903)
Cash flows used in financing activities:
Principal payments on notes payable (14)
Decrease in short-term borrowings (460)
Exercise of stock options 1,194
Stock option tax benefit 244
Purchase of treasury stock (20,631)
-----------
Net cash used in financing activities (19,667)
-----------
Net decrease in cash and cash equivalents (1,736)
Cash and cash equivalents at beginning of period 3,725
-----------
Cash and cash equivalents at end of period $ 1,989
===========
</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>
Six Months
Ended
June 30, 1999
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 10,377
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 5,370
Provision for bad debts (60)
Provision for deferred income taxes (289)
Loss on sale of disposal of assets 8
Increase in accounts receivable (5,175)
Increase in prepaid expenses, advances, and other (2,611)
Increase in accounts payable 234
Increase in medical claims payable 15,705
Increase in deferred premium revenue 1,120
-----------
Total adjustments 14,302
-----------
Net cash provided by operating activities 24,679
Cash flows used in investing activities:
Purchases of investment securities (171,099)
Sales of investment securities 165,342
Purchases of property and equipment (3,375)
Purchases of other assets (483)
Proceeds from sale of assets 392
-----------
Net cash used in investing activities (9,223)
Cash flows used in financing activities:
Principal payments on notes payable (30)
Increase in short-term borrowings 2,004
Exercise of stock options 188
Stock option tax benefit 17
Purchase of treasury stock (11,315)
-----------
Net cash used in financing activities (9,136)
-----------
Net increase in cash and cash equivalents 6,320
Cash and cash equivalents at beginning of period 9,787
-----------
Cash and cash equivalents at end of period $ 16,107
===========
</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 services 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 June 30, 2000, the
consolidated statements of operations for the three and six months ended June
30, 2000 and 1999, and the consolidated statements of cash flows for the six
months ended June 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 and Form 10-K for the year ended December 31, 1999 ("1999 Form
10-K"). The results of operations for the three and six month periods ended June
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 Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 7,313 $ 4,506 $ 15,915 $ 10,377
Denominator:
Denominator for basic earnings per share
- weighted average shares 37,706,287 41,871,216 38,345,477 42,178,123
Dilutive securities - employee stock options 736,401 62,595 445,014 61,126
Denominator for diluted earnings per share
- adjusted weighted average shares 38,442,688 41,933,811 38,790,491 42,239,249
</TABLE>
<PAGE> 8
Options to purchase approximately 5.1 million shares of common stock at various
prices were outstanding at June 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 six months of 2000 and 1999, total comprehensive income
amounted to $15,994,000 and $9,069,000, 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 SETTLEMENT
During 1998, a pretax charge of approximately $16.5 million, which included
approximately $4.4 million of interest, was recognized in the Company's
financial statements in anticipation of negotiations relating to potential
governmental claims in connection with contracts with the Office of Personnel
Management ("OPM"), related to an audit conducted by the Office of Inspector
General concerning the Company's participation in the 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. OPM's
current practice is to audit large plans every year. 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 the first quarter of 2000, the Company settled all findings without
material modification to its original charge.
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 1999 Form
10-K.
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ending Six Months Ending
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
In 000's ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Commercial risk $ 349,372 $ 295,214 $ 686,235 $ 583,105
Preferred provider organizations 5,308 5,375 10,526 10,839
All other 10,446 20,510 25,551 38,138
----------- ----------- ----------- -----------
$ 365,126 $ 321,099 $ 722,312 $ 632,082
=========== =========== =========== ===========
Income before taxes:
Commercial risk $ 5,262 $ 2,346 $ 13,016 $ 6,512
Preferred provider organizations 2,654 2,795 5,263 5,636
All other 202 (482) 121 (522)
----------- ----------- ----------- -----------
$ 8,118 $ 4,659 $ 18,400 $ 11,626
=========== =========== =========== ===========
</TABLE>
Reconciliations of segment data to the Company's consolidated data is as
follows:
<TABLE>
<CAPTION>
Three Months Ending Six Months Ending
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
In 000's ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total profit from reportable segments $ 7,916 $ 5,141 $ 18,279 $ 12,148
Other profit (loss) 202 (482) 121 (522)
Unallocated amounts:
Investment income 3,052 2,311 5,833 4,415
----------- ----------- ----------- -----------
Income before taxes $ 11,170 $ 6,970 $ 24,233 $ 16,041
=========== =========== =========== ===========
</TABLE>
NOTE 5 - 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> 10
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 JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
JUNE 30, 1999
Consolidated net income of the Company was $7,313,000 and $4,506,000 for the
second quarters of 2000 and 1999, respectively. Diluted earnings per share was
$.19 and $.11 in the second 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 June 30, 2000 increased approximately $44.8
million or 13.9 percent over the three months ended June 30, 1999. A 2.9 percent
increase in net average HMO and indemnity enrollment resulted in an increase of
approximately $9.8 million in health premium revenue, while a 11.1 percent
increase in average monthly premium per enrollee, combined for all products,
resulted in a $34.2 million increase in health premium revenue. The increase in
HMO and indemnity enrollment is principally 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> 11
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 $6.0 million in
revenue in the second quarter of 2000 as compared with $5.8 million in the
second quarter of 1999. Revenue from life and short-term disability products
contributed $2.0 million in revenue in the second quarters of 2000 and 1999.
The medical care ratio decreased from 89.0% for the second quarter of 1999 to
87.6% for the second quarter of 2000. On a per member per month basis, medical
expenses increased 9.3 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 11.7 percent for the second quarter of 2000 as compared to
11.3 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 net margin rate increased from 1.4 percent in the second quarter of 1999 to
2.0 percent in the current quarter. This increase is consistent with the factors
previously described.
THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1999
The Company's consolidated net income for the six months ended June 30, 2000
increased to $15,915,000 from $10,377,000 for the six months ended June 30,
1999. Diluted earnings per share on net income increased from $.25 in the first
six months of 1999 to $.41 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.
Revenue for the six months ended June 30, 2000 increased approximately $91.7
million or 14.4 percent over the six months ended June 30, 1999. A 10.8 percent
increase in average premiums per HMO and indemnity enrollee increased health
premium revenue by approximately $65.4 million and a 3.6
<PAGE> 12
percent increase in net average HMO and indemnity enrollment resulted in an
increase of approximately $24.2 million in health premium revenue. Revenue from
life and short-term disability products contributed $4.0 million in revenue for
the first six months of 2000 and for the same period in 1999.
The medical care ratio decreased to 87.2 percent for the six months ended June
30, 2000 as compared to 88.5 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 six months of 2000 increased to
11.8 percent as compared to 11.5 percent for the same period in 1999. The
reasons for this increase are consistent with the items discussed in the
quarterly analysis.
The net margin rate increased from 1.6 percent for the first six months of 1999
to 2.2 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 $16.6 million from $206.2
million at December 31, 1999 to $222.8 million at June 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 decreased from $83.6 million at
December 31, 1999 to $82.1 million at June 30, 2000, principally due to the
timing of customer payments and payment on receivables due from FEHBP. Prepaid
expenses, advances and other increased from $27.3 million at December 31, 1999
to $29.3 million at June 30, 2000 due to an increase in income tax amounts paid
in advance.
Medical claims payable increased from $154.4 million at December 31, 1999 to
$167.1 million at June 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
$204.0 million at June 30, 2000, principally due to 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 $124.7
million at June 30, 2000 due to the purchase of 2,156,400 additional shares by
the Company at a total cost of $20,631,000.
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 June 30, 2000, approximately $3.1 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> 13
Following is a schedule of the short-term capital resources available to the
Company (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 1,989 $ 3,725
Investment securities 220,797 202,522
Working capital advances to Maryland hospitals 16,613 15,390
----------- -----------
Total available liquid assets 239,399 221,637
Credit line availability 13,802 13,292
----------- -----------
Total short-term capital resources $ 253,201 $ 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 June 30,
2000, those subsidiaries of the Company were in compliance with all minimum
capital 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 newly authorized program includes any unspent
funds carried forward from the October 1999 repurchase program. During the three
months ended June 30, 2000, the Company repurchased an additional 1,050,400
shares of its common stock for a total cost of approximately $10.9 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 June 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> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has 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"), which alleges that the Company
improperly reduced payments to participating physicians and health care
practitioners 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. On July 6, 2000, the Court ordered consolidated arbitration and on
July 26, 2000, the Company filed an appeal of this order to the Maryland Court
of Special Appeals. On April 14, 2000, the plaintiffs filed a Second Amended
Complaint in the form of a class action against the Company alleging breach of
contract, breach of fiduciary duty, conversion, fraudulent scheme, deceptive
course of business practices and tortious interference with contractual
relations generally relating to failed settlement discussions between the
parties. On July 6, 2000, the Court granted plaintiffs' request to partially
lift the stay on certain counts in the Second Amended Complaint. Management
believes that the ultimate outcome of these matters will not have a material
adverse effect on the Company's financial statements.
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 17 of the Form 10-Q.
(b) There were no reports filed on Form 8-K during the
quarter ended June 30, 2000.
<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: August 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> 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 Six
Months Ended June 30, 2000. . . . . . . . . . .
