1. Earnings per common share are computed after giving effect to dilutive stock options. All per share amounts and weighted average common and common equivalent shares have been adjusted to reflect all stock dividends on a retroactive basis. See Note 12 to the consolidated financial statements.
3. MAMSI has not declared or paid cash dividends on its common stock.
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:
During the three year period ended December 31, 1995, MAMSI and its subsidiaries (the "Company") have experienced substantial revenue growth due to increased HMO and PPO membership. The Company has achieved its membership growth by expanding its product line, which includes point- of-service, small group, indemnity health, hybrid products, Medicaid and Medicare products and through expansion into new geographic markets. Premium rates during this time have remained at or near competitive levels for the Company's marketplace. Operating margins have remained positive due to the control of medical expenses and, accordingly, profits and earnings per share have increased. The Company currently anticipates that there may be slight increases in premium rates during 1996 and that the Company's operating margins will remain stable. This is a forward-looking statement, and the Company's actual operating margins may differ from management's current expectation due to risk factors which may affect either the Company's revenues or expenses. See "Forward-Looking Information" above for a description of these risk factors.
The United States Congress recently passed a budget reconciliation package ("Budget Package") that included provisions reforming the Medicare program. Under the Budget Package, Medicare beneficiaries would be offered a variety of new health care options, including the ability to enroll in private plans, such as HMOs, PPOs, point-of-service plans, medical savings accounts and provider-sponsored organizations. A traditional fee-for-service Medicare program would, however, continue to be offered through the Health Care Financing Administration. The Budget Package also amended current laws that prohibit physician self-referral, guard against fraud and abuse and eliminate the requirement that HMOs participating in the Medicare program have membership that is composed of at least 50 percent non-government program beneficiaries. In addition, HMOs would be paid a monthly capitation rate that blends local and national costs with greater weight given to the local component. A floor would be established for payment to rural areas.
The Budget Package also aimed to modify the Medicaid program by converting the existing Medicaid program from a federal entitlement into a block grant payment to the states. In addition, federal standards for nursing homes would be revoked and states would have to establish and maintain their own standards. As stated above, ultimate passage of this legislation and the impact that this legislation would have on the Company's business cannot be predicted.
The Company believes that the current political environment in which it operates will result in continued legislative scrutiny of health care reform and may lead to additional legislative initiatives. The Company is unable to predict the ultimate impact upon the Company of any federal or state restructuring of the health care delivery or health care financing systems, but such changes could have a material adverse impact on the operations and financial condition of the Company.
attributable to an increase in membership, increased investment income from higher invested balances and realized gains, and a reduction in per member per month medical expenses (principally due to a reduction in the return of physician withhold), partially offset by a reduction in premiums per enrollee and an increase in administrative expenses principally due to additions to the Company's internal sales force, expansion into new geographic territories and the operations of the home health care subsidiaries that were purchased in late 1994.
In 1993, MAMSI invited the National Committee for Quality Assurance ("NCQA"), a private, non-profit organization, to evaluate the Company's methodologies in an effort to receive NCQA accreditation. NCQA accreditation is a voluntary process. The Company did not meet certain of NCQA's criteria and, therefore, did not receive NCQA accreditation. MAMSI believes that it has adopted methodologies and programs designed to respond to the concerns and questions raised in NCQA's assessment. The Company currently believes that, based on its success with large group sales since the denial of accreditation, the failure to receive NCQA accreditation has not had a significant adverse effect on its business or financial condition. It is MAMSI's intention to request the NCQA to review its current methodologies sometime in 1996. Although the Company believes that the likelihood of NCQA accreditation is high, there can be no assurance that accreditation will be received or that MAMSI will not experience disenrollment if accreditation is not ultimately received.
The Company's home health care and home infusion subsidiaries underwent voluntary accreditation review by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") during 1995. Full accreditation status was awarded as a result of this process.
Investment income increased $5.4 million or 81 percent primarily due to significantly greater invested balances and an increase in realized gains on sales of marketable equity securities.
The net margin rate decreased from 7.3 percent in 1994 to 6.4 percent in 1995. This decrease is primarily due to lower premium rates on certain products and increased administrative expenses.
The Company's business is not capital intensive and the majority of the Company's expenses are payments to health care providers, which generally vary in direct proportion to the premium revenues received by the Company. Although medical utilization rates vary by season, the payments for such expenses lag behind cash inflow from premiums because of the lag in provider billing procedures. In the past, the Company's cash requirements have been met principally from operating cash flow and it is anticipated that this source will continue to be sufficient in the future.
Cash and short-term investments increased from $154.0 million at December 31, 1994 to $215.6 million at December 31, 1995, primarily due to operating profits and proceeds from the exercise of employee stock options. Accounts receivable increased from $37.0 million at December 31, 1994 to $61.3 million at December 31, 1995, primarily due to the significant increase in membership during 1995 and also an increase in medical recoverable receivables related to new products.
Short-term investments are marked to market at the end of every quarter and the resulting unrealized gain or loss is reflected in the ending stockholders' equity balance. Accordingly, stockholders' equity at December 31, 1995 reflects an unrealized gain of $1.5 million, net of tax, on the Company's short-term investments primarily due to significant gains during the year in national equity markets plus the impact of falling interest rates on the market value of the Company's debt securities.
Long-term debt decreased from $5.3 million at December 31, 1994 to $.2 million at December 31, 1995, primarily due to the payoff of the Company's mortgage note payable without prepayment penalty. The Company has access to total revolving credit facilities of $10.0 million, which is used to provide short-term capital resources for routine cash flow fluctuations. At December 31, 1995, approximately $1.65 million was drawn against the lines-of-credit and approximately $469,000 was outstanding in letters-of-credit.
Additional paid-in capital increased from $29.4 million at December 31, 1994 to $40.4 million at December 31, 1995, due to proceeds from the exercise and related tax benefits of stock options.
December 31 (in thousands) 1995 1994 ------------------------ Cash and cash equivalents $ 10,874 $ 17,054 Short-term investments 204,734 136,901 Working capital advances to Maryland hospitals 4,053 3,982 -------- -------- Total available liquid assets 219,661 157,937 Credit line availability 7,880 8,452 -------- -------- Total short-term capital resources $ 227,541 $ 166,389 ======== ========
The medical loss ratio for 1994 decreased to 80.8 percent from 86.3 percent in 1993 and, on a per member per month basis, medical expenses decreased .5 percent. This decrease in the medical loss ratio reflects higher premiums, a reduction in membership utilization levels in 1994 and the efficacy of managed care controls developed and expanded by the Company over the preceding three years.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the new rules, deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. The cumulative effect of the change for the year ended December 31, 1993 reduced net income by approximately $663,000 or $.02 per share.
The net margin rate increased from 3.9 percent in 1993 to 7.3 percent in 1994. This increase is primarily due to medical expenses rising at a lesser rate than premium revenues, partially offset by an increase in administrative expenses.
Net realized gains on sales of marketable equity securities was approximately $307,000 in 1993.
Medical recoverables consist of refunds identified on paid claims that will be collected in the following year. This amount has been recorded as a reduction of medical expense in the consolidated statements of income. Other receivables consist primarily of amounts due for
The noncurrent portion of notes payable at December 31, 1995 mature in future years as follows (in thousands):
Interest expense paid in cash during 1995, 1994 and 1993 was approximately $1,541,000, $708,000 and $781,000, respectively.
Effective January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by Statement No. 109, "Accounting for Income Taxes" ("Statement No. 109"). The cumulative effect of adopting Statement No. 109 as of January 1, 1993 was to reduce net income by approximately $663,000.
The income tax rate for 1993 was increased to 35% to reflect changes adopted by the Revenue Reconciliation Act of 1993. This adjustment resulted in an increase in the Company's net deferred tax assets of $202,000 in 1993.
Contracts with participating physicians allow for withholdings generally ranging from 5% to 15% from primary care physicians and participating specialists on capitation and fee for service payments. The withheld amounts ultimately paid back to providers may be less than the total amount withheld. Withheld liabilities and related medical expenses were reduced by $22,802,000, $8,719,000 and $7,111,000 in 1995, 1994 and 1993, respectively.
The Company has a defined contribution 401(k) savings plan covering all full-time employees. Employees are allowed to contribute up to 10% of
their pre-tax earnings annually and the Company makes a matching contribution of 50% on the first 4% of contributions made by employees. Employees vest immediately in the employee contributions and ratably over six years in the Company contributions. During 1995, 1994 and 1993, the Company's contribution to the 401(k) plan aggregated $433,000, $231,000 and $247,000, respectively.
The net pension cost for the Plan was approximately $1,095,000 and $832,000 in 1994 and 1993, respectively.
In accordance with a personal service contract negotiated by the Company, its Chief Executive Officer is entitled to supplemental pension benefits based upon years of service and attained salary levels. Supplemental pension benefits of $1,682,000, $844,000 and $187,000 were accrued for the years ended December 31, 1995, 1994 and 1993, respectively.
In 1989, MAMSI implemented a non-qualified stock option plan whereby options for the purchase of up to 750,000 shares may be granted to officers and employees of the Company. Options issued under this plan may be exercised at 25% of the market value at the time the options are fully vested. The plan provides for reimbursement by the Company to the recipients of the stock options for personal income taxes that result upon the exercise of the options. In 1993, options under this plan for 439,800 shares of MAMSI stock were granted and vested immediately. These options were exercised in 1993 and the Company recorded compensation expense approximating $3,664,000 to account for the granting and exercise of the options. At December 31, 1995, all options that were granted to date under this plan have been exercised and no further options will be granted under this plan.
purchase of up to 3,000,000 shares of common stock, are summarized as follows:
2. Earnings per common share are computed after giving effect to dilutive stock options. All per share amounts and weighted average common and common equivalent shares have been adjusted to reflect all stock dividends on a retroactive basis. See Note 12 to the consolidated financial statements.