<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1998.
[_] 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: 0-22421
MD HealthShares Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Louisiana 72-1301480
------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization
12021 Bricksome Avenue, Baton Rouge, Louisiana 70816
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(Address of Principal Executive Offices)
(225) 293-3272
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if changed since Last Report)
Indicate by check mark whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 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 [_] No [X]
State the number of shares outstanding of each of the issuer's common equity, as
of the latest practicable date:
As of September 30, 1998, 1,076,600 shares of the Registrant's Class A Non-
Voting Common Stock and 1 share of the Registrant's Class B Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one) Yes [X] No [_]
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
MD HEALTHSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 - UNAUDITED
- ------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 594,406 $ 1,408,901
Investments 3,310,353 4,840,825
Interest receivable 73,834 55,095
Premiums receivable 47,165 24,554
Prepaid expenses 160,470 95,518
----------- -----------
Total current assets 4,186,228 6,424,893
RESTRICTED INVESTMENTS (Note 2) 1,000,000 1,000,000
EQUIPMENT, net of accumulated depreciation of $68,969 in 1998
and $30,429, in 1997 90,240 75,971
OTHER 35,070 35,378
----------- -----------
TOTAL $ 5,311,538 $ 7,536,242
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 213,840 $ 122,268
Claims payable and reserves for incurred but unreported claims 603,157 145,131
Deferred revenue 25,755 2,385
----------- -----------
Total current liabilities 842,752 269,784
----------- -----------
CONTINGENCIES (Note 2) - -
STOCKHOLDERS' EQUITY (Note 3):
Junior preferred voting stock, $1.00 par value, liquidation value $1,000,
7,500 shares authorized, 2,156 shares issued and outstanding in 1998;
2,152 in 1997 2,156 2,152
Preferred stock, $1.00 par value, 2,000,000 shares authorized,
none issued and outstanding in 1998 and 1997 - -
Common stock:
Class A non-voting, $0.10 par value, 8,000,000 shares authorized, 1,076,600
shares issued and outstanding in 1998; 1,075,000 in 1997 107,660 107,500
Class B, $0.10 par value, 1 share authorized and outstanding in 1998 and 1997 - -
Additional paid-in capital 11,757,859 11,732,023
Accumulated deficit (7,253,062) (4,590,455)
Treasury stock, at cost, 509 shares in 1998 and 503 shares in 1997 (14,000) (8,000)
Unrealized (loss)/gain on available-for-sale securities (131,827) 23,238
----------- -----------
Total stockholders' equity 4,468,786 7,266,458
----------- -----------
TOTAL $ 5,311,538 $ 7,536,242
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MD HEALTHSHARES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 - UNAUDITED
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Premiums $ 1,010,277 $ 81,900 $ 2,585,073 $ 118,981
Investment income 21,331 73,082 215,317 326,318
------------ ---------- ------------ ------------
Total revenues 1,031,608 154,982 2,800,390 445,299
------------ ---------- ------------ ------------
EXPENSES:
Medical expenses 1,112,812 82,310 2,447,314 114,201
Selling, general and administrative 1,096,025 620,388 2,977,145 2,304,897
Depreciation 15,410 4,433 38,538 10,987
------------ ---------- ------------ ------------
Total expenses 2,224,247 707,131 5,462,997 2,430,085
------------ ---------- ------------ ------------
NET LOSS $ (1,192,639) $ (552,149) $ (2,662,607) $ (1,984,786)
============ ========== ============ ============
NET LOSS PER COMMON
SHARE - BASIC $ (1.11) $ (0.51) $ (2.47) $ (1.85)
============ ========== ============ ============
AVERAGE OUTSTANDING
COMMON SHARES 1,076,600 1,072,814 1,076,378 1,071,612
============ ========== ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MD HEALTHSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 - UNAUDITED
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,662,608) $ (1,984,786)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation 38,538 10,987
Changes in operating assets and liabilities:
Premiums receivable (22,611) (2,163)
Interest receivable (18,739) (5,458)
Prepaid expenses (64,952) (35,145)
Accounts payable and accrued expenses 90,572 (309,131)
Claims payable and reserves for incurred but unreported claims 458,026 67,911
Deferred revenue 24,370 2,358
Other 308 (54,386)
------------ ------------
Net cash used in operating activities (2,157,096) (2,309,813)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities - (2,150,000)
Sales and maturities of available-for-sale securities 1,375,410 1,071,777
Purchases of equipment (52,809) (75,323)
------------ ------------
Net cash provided by (used in) investing activities 1,322,601 (1,153,546)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 26,000 52,000
Treasury stock redeemed (6,000) (6,000)
------------ ------------
Net cash provided by financing activities 20,000 46,000
------------ ------------
NET DECREASE IN CASH (814,495) (3,417,359)
CASH AND CASH EQUIVALENTS, Beginning of period 1,408,901 9,147,525
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 594,406 $ 5,730,166
============ ============
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Unrealized loss on available-for-sale securities $ (155,064) $ -
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MD HEALTHSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Rule 310(g) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. Operating results for
the three month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998.
RESERVES FOR INCURRED BUT UNREPORTED CLAIMS - The Company's wholly-owned
subsidiary, Patient's Choice, Inc.(PCI), provides reserves for estimated
incurred but unreported physician, hospital, and pharmacy services rendered
to enrolled members during the period. These reserves are presently based
on estimates. Changes in these estimates could be significant. A lag
analysis was prepared using PCI's limited claims history. This lag analysis
resulted in an increase to medical expenses and reserves for incurred but
unreported claims of approximately $250,000 in the third quarter of 1998.
REVENUE RECOGNITION - Premium revenues are recognized in the period in
which the members are entitled to health care services. Premiums collected
in advance are deferred, (consistent with industry practice, third-party
selling expenses are reported as a reduction of premium revenue.)
REINSURANCE - PCI is covered under a medical reinsurance agreement that
generally provides coverage for 80% of hospital services in excess of
$50,000 per member per year, up to a yearly maximum of $1,000,000 per
member. There were no reinsurance recoveries in 1998 and 1997.
RISKS AND UNCERTAINTIES - The Company's business could be impacted by
continuing price pressure on new and renewal business, the Company's
ability to effectively control health care costs, additional competitors
entering the Company's markets, federal and state legislation in the area
of health care reform, and governmental licensing regulations of HMOs and
insurance companies. Changes in these areas could adversely impact the
Company's operations in the future.
FINANCIAL PRESENTATION - Certain reclassifications have been made to prior
period amounts to conform with current period presentation.
For a summary of other significant accounting policies, refer to Note 1 of
Notes to Consolidated Financial Statements included in the Company's annual
report on Form 10KSB for the year ended December 31, 1997.
2. COMMITMENTS AND CONTINGENCIES
RESTRICTED INVESTMENTS - In connection with the filing for a COA, and as an
ongoing requirement of the State of Louisiana, PCI has deposited with the
Commissioner a safe keeping receipt of $1,000,000, consisting of
certificates of deposits in ten separate banking corporations doing banking
business within the State of Louisiana.
<PAGE>
REGULATORY REQUIREMENTS - The State of Louisiana has implemented financial
regulations for HMOs requiring, among other things, minimum net worth
requirements. For each HMO which, by July 1, 1995 had not filed its
application for a certificate of authority with the commissioner as
required by law, the minimum net worth requirement is two million dollars.
PCI has been in compliance with these statutory requirements since its
inception.
3. STOCKHOLDERS' EQUITY
During the first three quarters, the Company sold four units of capital
stock which were comprised of four shares of Junior Preferred Voting Stock
and 1,600 shares of Class A Non-Voting Common Stock. Additionally, during
the period, the Company redeemed six shares of Junior Preferred Voting
Stock from physician shareholders who have moved out of state. The average
number of outstanding common shares for the quarter reflects these
transactions.
ITEM 2. PLAN OF OPERATION
As of November 1, 1998, PCI had 26 employees and had contracted with 151
groups to provide health care coverage for 1,628 subscribers and 3,170
covered lives in its HMO and Point of Service plans. The Company's managed
care subsidiary, Patient's Choice, Inc. has been selected by the East Baton
Rouge Parish School System, which has approximately 18,000 employees, as
one of three HMOs to be offered to employees effective January 1, 1999.
During the next twelve months the Company will continue to expand its
network of hospitals, physician groups, and ancillary service providers,
and to market its health plans to both small and large groups.
The Company incurred during the third quarter of 1998, and has incurred
since the inception of operations in the first quarter of 1997, substantial
losses from operations due to the lack of premium income resulting from
delays in marketing its managed care products. Based on current operations,
the Company could fall out of compliance with the minimum capitalization
requirements of the Louisiana Department of Insurance during the second
quarter of 1999, and would be required prior to such time to raise
additional capital as a condition to remain in compliance. However,
Patient's Choice has recently introduced several new products to the
marketplace, and has been named as an approved HMO for several large group
accounts which are currently undergoing enrollment. Revenue from these
enrollment activities may reduce the Company's current operating losses
sufficiently to permit it to remain in regulatory compliance through the
second quarter of 1999. The Company is exploring on a preliminary basis
several alternatives to substantially increase premium income or
capitalization, including the acquisition of existing books of business
and/or the sale of additional capital stock. However, there can be no
assurance that the Company will achieve income in the near term from new
enrollees from group or individual products, or from the acquisition of
existing books of business, sufficient to remain in regulatory compliance
during the next six months, or that, if necessary, the Company will succeed
in increasing its capitalization through the sale of additional capital
stock.
Certain statements, other than statements of historical fact, contained in
this Quarterly Report on Form 10-QSB are forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are generally accompanied by such terms and
phrases as "anticipates", "estimates", "expects", "believes", "should",
"projects", "scheduled", or similar statements. The Company believes that
the expectations reflected in such forward-looking statements are
reasonable, however it can give no assurance that such expectations will
prove correct. All forward-looking statements in this Form 10-QSB are
expressly qualified in their entry by the cautionary statements in the
paragraph.
The Company has reviewed its year 2000 compliance status and has determined
that all systems are sufficient except for one software package that will
be replaced effective January 1, 1999. The cost of this replacement will be
minimal.
<PAGE>
PART II
OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27: Financial Data Schedule
(b) Reports of Form 8-K. No reports on Form 8-K were filed during the
three months ended September 30, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MD HEALTHSHARES CORPORATION
Date: November 19, 1998 /s/ Patrick C. Powers
--------------------------
Patrick C. Powers
Chief Executive Officer
Date: November 19, 1998 /s/ Adam A. Short
--------------------------
Adam Short
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-QSB 9/98
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 594,406 1,408,901
<SECURITIES> 3,310,353 4,840,825
<RECEIVABLES> 120,999 79,649
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,186,228 6,424,893
<PP&E> 90,240 75,971
<DEPRECIATION> 68,969 30,429
<TOTAL-ASSETS> 5,311,538 7,536,242
<CURRENT-LIABILITIES> 842,752 269,784
<BONDS> 0 0
0 0
2,156 2,152
<COMMON> 107,660 107,500
<OTHER-SE> 4,358,970 7,156,806
<TOTAL-LIABILITY-AND-EQUITY> 5,311,538 7,536,242
<SALES> 2,585,073 118,981
<TOTAL-REVENUES> 2,800,390 445,299
<CGS> 2,447,314 114,201
<TOTAL-COSTS> 5,462,997 2,430,085
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,662,607) (1,984,786)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,662,607) (1,984,786)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,662,607) (1,984,786)
<EPS-PRIMARY> (2.47) (1.85)
<EPS-DILUTED> 0 0
</TABLE>
