<PAGE> 1
-----------------------------------------------------------------------
-----------------------------------------------------------------------
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, 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
(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 48,333,222 shares of common stock, par value $.01, outstanding as of March
31, 2000.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
<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, 2000 December 31, 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,926 $ 3,725
Investment securities 225,512 202,522
Accounts receivable, net of allowance of $5,420 and $5,445 90,172 83,623
Prepaid expenses, advances and other 22,939 27,287
Deferred income taxes 436 381
----------- -----------
Total current assets 340,985 317,538
Property and equipment, net of accumulated
depreciation of $43,835 and $41,518 43,501 43,668
Statutory deposits 14,024 14,043
Other assets 10,479 10,357
Deferred income taxes 2,855 2,978
---------- -----------
Total assets $ 411,844 $ 388,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 14
Short-term borrowings 3,883 3,558
Accounts payable 25,443 21,980
Medical claims payable 167,611 154,403
Deferred premium revenue 23,620 16,949
Deferred income taxes 2,230 1,639
----------- -----------
Total current liabilities 222,787 198,543
Deferred income taxes 3,023 3,220
----------- -----------
Total liabilities 225,810 201,763
----------- -----------
Stockholders' equity
Common stock, $.01 par, 100,000,000 shares authorized; 59,772,502 issued and
48,333,222 outstanding at March 31, 2000; 59,772,502 issued and
49,439,222 outstanding at December 31, 1999 597 597
Additional paid-in capital 161,989 152,607
Stock compensation trust (common stock held in trust) (92,579) (83,215)
Treasury stock, 11,439,280 shares at March 31, 2000; 10,333,280 shares at
December 31, 1999 (113,807) (104,117)
Accumulated other comprehensive income (730) (1,013)
Retained earnings 230,564 221,962
----------- -----------
Total stockholders' equity 186,034 186,821
----------- -----------
Total liabilities and stockholders' equity $ 411,844 $ 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 Ending
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenue
Health premium $ 344,362 $ 298,661
Fee and other 5,218 5,464
Life and short-term disability premium 1,967 1,949
Home health services 5,639 4,909
Investment 2,927 2,215
----------- -----------
Total revenue 360,113 313,198
----------- -----------
Expense
Medical 298,685 262,489
Life and short-term disability claims 823 887
Home health patient services 4,987 3,953
Administrative (including interest expense of $137 and $76 42,555 36,798
----------- -----------
Total expense 347,050 304,127
----------- -----------
Income before income taxes 13,063 9,071
Income tax expense (4,461) (3,200)
----------- -----------
Net income $ 8,602 $ 5,871
=========== ===========
Basic earnings per common share $ .22 $ .14
=========== ===========
Diluted earnings per common share $ .22 $ .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, 2000
------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 8,602
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization $ 2,560
Provision for bad debts (25)
Provision for deferred income taxes 276
Loss on sale and disposal of assets 4
Increase in accounts receivable (6,524)
Decrease in prepaid expenses, advances, and other 4,348
Increase in accounts payable 3,463
Increase in medical claims payable 13,208
Increase in deferred premium revenue 6,671
-----------
Total adjustments 23,985
-----------
Net cash provided by operating activities 32,587
Cash flows used in investing activities:
Purchases of investment securities (91,184)
Sales of investment securities 68,663
Purchases of property and equipment (2,169)
Purchase of statutory deposits (83)
Maturities of statutory deposits 85
Purchases of other assets (395)
Proceeds from sale of assets 62
-----------
Net cash used in investing activities (25,025)
Cash flows used in by financing activities:
Principal payments on notes payable (14)
Increase in short-term borrowings 325
Exercise of stock options 17
Stock option tax benefit 1
Purchase of treasury stock (9,690)
-----------
Net cash used in financing activities (9,361)
-----------
Net decrease in cash and cash equivalents (1,799)
Cash and cash equivalents at beginning of period 3,725
-----------
Cash and cash equivalents at end of period $ 1,926
===========
</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, 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 investment securities (85,270)
Sales of investment securities 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> 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 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 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, 2000, the
consolidated statements of operations for the three months ended March 31, 2000
and 1999, and the consolidated statements of cash flows for the three months
ended March 31, 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 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,
2000 1999
Numerator: ---------- ----------
Net income $ 8,602 $ 5,871
Denominator:
Denominator for basic earnings per share
- weighted average shares 38,984,667 42,485,030
Dilutive securities - employee stock options 153,627 59,656
Denominator for diluted earnings per share
- adjusted weighted average shares 39,138,294 42,544,686
<PAGE> 7
Options to purchase approximately 8.5 million shares of common stock at various
prices were outstanding at March 31, 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 quarters of 2000 and 1999, total comprehensive income amounted
to $8,885,000 and $5,692,000, 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
In 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 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> 8
<TABLE>
<CAPTION>
Three Months Ending
March 31, March 31,
2000 1999
In 000's ------------ ------------
<S> <C> <C>
Revenues:
Commercial risk $ 336,863 $ 287,891
Preferred provider organizations 5,218 5,464
All other 15,105 17,628
----------- -----------
$ 357,186 $ 310,983
=========== ===========
Profit (Loss):
Commercial risk $ 7,754 $ 4,165
Preferred provider organizations 2,609 2,841
All other (81) (39)
----------- -----------
$ 10,282 $ 6,967
=========== ===========
</TABLE>
Reconciliations of segment data to the Company's consolidated data is as
follows:
<TABLE>
<CAPTION>
Three Months Ending
March 31, March 31,
2000 1999
In 000's ------------ ------------
<S> <C> <C>
Total profit from reportable segments $ 10,363 $ 7,006
Other loss (81) (39)
Unallocated amounts:
Investment income 2,781 2,104
----------- -----------
Income before taxes $ 13,063 $ 9,071
=========== ===========
</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 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 MARCH 31, 2000 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1999
Consolidated net income of the Company was $8,602,000 and $5,871,000 for the
first quarters of 2000 and 1999, respectively. Diluted earnings per share was
$.22 and $.14 in the first 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 March 31, 2000 increased approximately $46.9
million or 15.0 percent over the three months ended March 31, 1999. A 4.4
percent increase in net average HMO and indemnity enrollment resulted in an
increase of approximately $14.4 million in health premium revenue, while a 10.5
percent increase in average monthly premium per enrollee, combined for all
products, resulted in a $31.3 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> 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 7.5% to 8%. 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.
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 $5.6 million in
revenue in the first quarter of 2000 as compared with $4.9 million in the first
quarter of 1999. Revenue from life and short-term disability products
contributed $2.0 million in revenue in the first quarter of 2000 as compared to
$1.9 million for the same period in 1999.
The medical care ratio decreased from 87.9% for the first quarter of 1999 to
86.7% for the 1st quarter of 2000. On a per member per month basis, medical
expenses increased 9.0 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 11.8 percent for the first quarter of 2000 as compared to
11.7 percent for the same period in 1999. Management believes that the
administrative expense ratio will increase modestly in 2000 as additional
personnel with specialized medical and other expertise who were only with the
Company for part of 1999 are reflected for a full year. 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 $.7 million primarily due to an increase in
investment securities balances.
The net margin rate increased from 1.9 percent in the first quarter of 1999 to
2.4 percent in the current quarter. This increase 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 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 $21.2 million from $206.2
million at December 31, 1999 to $227.4 million at March 31, 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 also increased from $83.6 million
at December 31, 1999 to $90.2 million at March 31, 2000, principally due to the
timing of customer payments, increases in membership and increases in the
Company's home health care customer base. Prepaid expenses and other decreased
from $27.3 million at December 31, 1999 to $22.9 million at March 31, 2000 due
to a decrease in income tax amounts paid in advance.
Medical claims payable increased from $154.4 million at December 31, 1999 to
$167.6 million at March 31, 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
$162.0 million at March 31, 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 $113.8
million at March 31, 2000 due to the purchase of 1,106,000 additional shares by
the Company at a total cost of $9,690,000.
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 March 31, 2000, approximately $3.9 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,
2000 1999
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 1,926 $ 3,725
Investment securities 225,512 202,522
Working capital advances to Maryland hospitals 16,277 15,390
----------- -----------
Total available liquid assets 243,715 221,637
Credit line availability 12,967 13,292
----------- -----------
Total short-term capital resources $ 256,682 $ 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.
<PAGE> 12
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 March 31,
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. In April 2000, the Company
repurchased 604,200 shares of its common stock for a total cost of approximately
$5.7 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.
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 have resulted
in major system failures or miscalculations. The Company incurred less than
$500,000 to bring its Y2K compliance program to completion. All of the Company's
critical vendors indicated Y2K compliance at December 31, 1999. The year 2000
date rollover was completed by the Company without significant incident. The
Company plans to continue to monitor critical systems to insure that they remain
Y2K compliant.
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 March 31, 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 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, 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. 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 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 physicians and
health care practitioners to the carrier by using the device of offsetting
future payments to physicians and health care practitioners with the amount owed
by the physicians or health care practitioners 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. On May 1, 2000, the Company and the MIA entered into a consent order
which settled a portion of the claims without material impact to the Company's
financial statements. The remaining claims are within the jurisdiction of the
MIA. Management believes that the resolution of the remaining claims 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 May 1, 2000. 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 with the indicated votes:
<TABLE>
<CAPTION>
For Against Abstain
---------- --------- --------
<S> <C> <C> <C>
Howard M. Arnold 39,943,797 2,981,956 None
John W. Dillon 39,509,119 3,416,634 None
Mark D. Groban, M.D. 39,842,566 3,083,187 None
John P. Mamana, M.D. 39,954,786 2,970,967 None
</TABLE>
Board members whose term of office continued after the meeting are as follows:
Thomas P. Barbera
Francis C. Bruno, M.D.
John H. Cook III, M.D.
Raymond H. Cypess, D.V.M., PhD.
Robert E. Foss
Edward J. Muhl
Janet L. Norwood
John A. Paganelli
Ivan R. Sabel
James A. Wild
(2) The adoption of the 2000 Non-Qualified Stock Option Plan was ratified by a
count of 29,526,388 affirmative votes, 13,032,806 negative votes and 366,559
abstentions.
(3) The adoption of the 2000 Senior Management Bonus Plan was ratified by a
count of 37,352,791 affirmative votes, 4,997,875 negative votes and 575,087
abstentions.
There were no broker non-votes with respect to the election of Directors, the
adoption of the 2000 Non-Qualified Stock Option Plan or the 2000 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
None
<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 12, 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 Three
Months Ended March 31, 2000. . . . . . . . . . .
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,926
<SECURITIES> 225,512
<RECEIVABLES> 90,172
<ALLOWANCES> 5,420
<INVENTORY> 0
<CURRENT-ASSETS> 340,985
<PP&E> 43,501
<DEPRECIATION> 43,835
<TOTAL-ASSETS> 411,844
<CURRENT-LIABILITIES> 222,787
<BONDS> 0
0
0
<COMMON> 597
<OTHER-SE> 185,437
<TOTAL-LIABILITY-AND-EQUITY> 411,844
<SALES> 0
<TOTAL-REVENUES> 360,113
<CGS> 0
<TOTAL-COSTS> 304,495
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 137
<INCOME-PRETAX> 13,063
<INCOME-TAX> 4,461
<INCOME-CONTINUING> 8,602
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,602
<EPS-BASIC> .22
<EPS-DILUTED> .22
</TABLE>
