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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 June 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
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization Identification No.)
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 June 30, 1998, 1,076,200 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 [_]
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997 - UNAUDITED
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JUNE 30, DECEMBER 31,
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,072,823 $ 1,408,901
Investments 4,259,440 4,840,825
Interest receivable 56,593 55,095
Premiums receivable 91,228 24,554
Prepaid expenses 180,813 95,518
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Total current assets 5,660,897 6,424,893
RESTRICTED INVESTMENTS 1,000,000 1,000,000
EQUIPMENT, net of accumulated depreciation of
$23,128 in 1998 and $30,429, in 1997 90,876 75,971
OTHER 35,070 35,378
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TOTAL $ 6,786,843 $ 7,536,242
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 159,609 $ 122,268
Claims payable and reserves for incurred
but unreported claims 774,746 145,131
Deferred revenue - 2,385
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Total current liabilities 934,355 269,784
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CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY (Note 3):
Junior preferred voting stock, $1.00 par value,
liquidation value $1,000, 7,500 shares
authorized, 2,154 shares issued and
outstanding in 1998; 2,152 in 1997 2,154 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, 1,076,200 shares issued and
outstanding in 1998; 1,075,000 in 1997 107,620 107,500
Class B, $0.10 par value, 1 share authorized
and outstanding in 1998 and 1997 - -
Additional paid-in capital 11,757,900 11,732,023
Accumulated deficit (6,060,422) (4,590,455)
Treasury stock, at cost, 1,503 shares in 1998
and 1997 (8,000) (8,000)
Unrealized gain on available-for-sale securities 53,236 23,238
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Total stockholders' equity 5,852,488 7,266,458
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TOTAL $ 6,786,843 $ 7,536,242
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See notes to consolidated financial statements.
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MD HEALTHSHARES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 - UNAUDITED
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Premiums $ 888,621 $ 35,771 $ 1,574,796 $ 37,081
Investment income 100,712 128,644 193,986 253,236
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Total revenues 999,333 164,415 1,768,782 290,317
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EXPENSES:
Medical expenses 751,255 30,765 1,334,502 31,891
Selling, general and administrative 1,063,139 802,811 1,881,120 1,684,509
Depreciation 14,714 4,224 23,128 6,554
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Total expenses 1,829,108 837,800 3,238,750 1,722,954
----------- ----------- ----------- -----------
NET LOSS $ (829,775) $ (673,385) $(1,469,968) $(1,432,637)
=========== =========== =========== ===========
NET LOSS PER COMMON
SHARE $ (0.77) $ (0.63) $ (1.37) $ (1.34)
=========== =========== =========== ===========
AVERAGE OUTSTANDING
COMMON SHARES 1,076,200 1,071,001 1,076,200 1,071,001
=========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,469,968) $ (1,432,637)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation 23,128 6,554
Changes in operating assets and liabilities:
Premiums receivable (66,674) (2,163)
Interest receivable (1,498) (18,364)
Prepaid expenses (85,295) (63,093)
Accounts payable and accrued expenses 37,341 (166,166)
Claims payable and reserves for incurred but unreported claims 629,615 21,854
Deferred revenue (2,385) 12,612
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Net cash used in operating activities (935,736) (1,641,403)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities - (2,150,000)
Sales and maturities of available-for-sale securities 581,385 1,071,777
Other - (58,036)
Purchases of equipment (7,604) (40,576)
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Net cash used in investing activities 573,781 (1,176,835)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 25,877 -
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NET DECREASE IN CASH (336,078) (2,818,238)
CASH AND CASH EQUIVALENTS, Beginning of period 1,408,901 9,147,525
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CASH AND CASH EQUIVALENTS, End of period $ 1,072,823 $ 6,329,287
============ ============
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Unrealized gain on available-for-sale securities $ 29,997 $ -
============ ============
</TABLE>
See notes to consolidated financial statements.
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MD HEALTHSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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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 June 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 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 the use of estimated medical cost ratios. Changes in
these estimates could be significant.
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 - The Company 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. RECAPITALIZATION
On March 22, 1997, the Company's stockholders approved a plan of
recapitalization and amendments to the Company's articles of incorporation.
In connection therewith, 7,500 shares of Junior Preferred Voting Stock,
2,000,000 shares of Preferred Stock and 8,000,000 shares of Class A Non-
Voting Stock were authorized. Additionally, all of the Company's 2,142
outstanding shares of Class A Common Stock were cancelled, and each former
share of Class A Common Stock was converted into one share of Junior
Preferred Voting Stock and 500 shares of Class A Non-Voting Common Stock.
The average number of outstanding common shares has been restated to
reflect the recapitalization.
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3. 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.
REGULATORY REQUIREMENTS The State of Louisiana has implemented financial
regulations for HMOs requiring, among other things, minimum net worth
requirements. As of December 31, 1997, admitted assets, as defined, less
liabilities, must be at least equal to $1,500,000 as reported in the
statutory filing of such calendar year. PCI was in compliance with the
state statutory net worth requirement at December 31, 1997 and June 30,
1998. The minimum state statutory net worth requirement will increase to
$2.0 million on July 1, 1998.
4. STOCKHOLDERS' EQUITY
During the first quarter, the Company sold three units of capital stock
which were comprised of three shares of Junior Preferred Voting Stock and
1,200 shares of Class A Non-Voting Common Stock. The average number of
outstanding common shares for the quarter reflects these transactions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company continued its focus on developing the infrastructure of its
managed care subsidiary company, Patient's Choice. Additional professional
staff with experience in managed care was retained. Network development
remained an ongoing activity as selected hospitals, physician groups, and
ancillary service providers were targeted for contracting in an effort to
create highly marketable networks. The Medical Affairs Department continued
its development and refinement of medical guidelines, employing specialty
advisory work groups to review and refine currently available medical
guidelines. The Company initiated a search for appropriate claims
processing and data collection systems with the intent of bringing this
function in-house by the end of the year.
The sales and marketing staff continued to focus its energies on larger
employed groups. The Company has answered numerous RFPs from public
agencies and private employers. Most of these proposals are for managed
care services beginning in January 1998, and prospects for obtaining some
of these contracts appear to be encouraging. As of September 1, 1998,
Patient's Choice has contracted with 130 groups to provide health care
coverage for 1,360 subscribers, and 2,597 covered lives in its HMO and
Point of Service plans.
The Company incurred during the second 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 plans. The Company anticipates that
such losses will continue until the number of enrollees in the Company's
health plans increases and premium income exceeds administrative expenses
and claims payments. While there is no assurance that the Company has
sufficient capital to fund these losses or that it will achieve enough
enrollees to support profitable operations, the Company does not anticipate
the need to raise additional capital during the next twelve months.
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
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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.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Reports of Form 8-K. No reports on Form 8-K were filed during the three
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months ended June 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: September 3, 1998 /s/ Patrick C. Powers
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Patrick C. Powers
Chief Executive Officer
Date: September 3, 1998 /s/ Adam Short
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Adam Short
Chief Financial Officer
