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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended 12/31/97
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(No Fee Required)
For the transition period from _________ to ___________
Commission file number 0-22421
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MD HEALTHSHARES CORPORATION
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(Name of small business issuer in its charter)
Louisiana 72-130I480
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
12021 Bricksome Avenue, Baton Rouge, La. 70816
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (504) 293-3272
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Securities registered under Section 12(g) of the Exchange Act:
Junior Preferred Voting Stock, $1.00 Par Value, $1,000 Liquidation Preference
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(Title of class)
Class A Non-Voting Common Stock, $0.10 Par Value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [X] No [ ]
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $762,111
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
Not applicable. See Part II, Item 1.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
2,153 shares outstanding of Junior Preferred Voting Stock as of February 28,
1998;
1 share outstanding of Class B Common Stock as of February 28, 1998;
1,075,400 shares outstanding of Class A Non-Voting Common Stock as of February
28, 1998.
Transitional Small Business Disclosure Format (Check one): Yes X No
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PART I
ALTERNATIVE 2
ITEM 6. DESCRIPTION OF BUSINESS.
General
MD HealthShares Corporation (the "Company") is a physician-owned
healthcare financing holding company. The long-term objective of the Company is
to own or operate and offer to employers, payors, and consumers in Louisiana an
array of health care financing plans, including managed care plans such as
health maintenance organizations ("HMOs") and preferred provider organizations
("PPOs"). At the present time, all of the Company's managed care plans are
marketed through the Company's subsidiary, Patient's Choice, Inc. ("PCI").
The Company was incorporated as a for-profit corporation in the State
of Louisiana on July 18, 1995. The Company completed its initial public
offering on August 17, 1996 with the sale of 2,142 shares of Class A Common
Stock to 2,142 Louisiana physicians. On March 22, 1997 the Company's
stockholders approved a plan of recapitalization and amendments to the Company's
Articles of Incorporation pursuant to which 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 Managed Care Industry
The healthcare industry in the United States is undergoing a period of
rapid and, to a large extent, unpredictable change. Due to a number of
demographic, technological, fiscal and other factors, healthcare costs in the
United States have been increasing at rates substantially exceeding the rate of
inflation and growth in the gross national product for a number of years. These
cost increases have lead to significant governmental, private industry and
consumer pressure for healthcare plans that achieve lower costs and reduced
premiums as compared to traditional indemnity insurance plans. Managed care
plans are a private industry response to these pressures.
Managed care attempts to use market forces and active management of
the utilization of medical services to control costs. There are a number of
types of managed care plans in the United States, each of which has a wide
variety of possible organizational and operational structures. Some of the
primary types of managed care plans are outlined below.
Health Maintenance Organizations. HMOs are prepaid health plans that
undertake the provision of comprehensive out-patient and in-patient medical
services to enrollees through affiliated physicians or physician groups, who may
be employees of the HMO or independent contractors, and other affiliated medical
service providers such as hospitals,
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ambulatory surgery facilities, laboratories and radiology centers. Because such
services are provided on a prepaid premium basis, the financial risk of medical
costs in a HMO contract is shifted from the premium payor to the HMO. HMOs
compensate their affiliated providers for services under various payment
methods, including, with respect to non-employee physician providers, capitated
and negotiated fee payments. In most HMO models, physicians assume a portion of
the HMO's financial risk in providing healthcare services for enrollees.
There are five common models of HMOs. In the STAFF MODEL, the
physicians are employees of the HMO. A staff model HMO is a "closed panel" HMO
because only employees of the HMO may be physician-providers. Of all HMO
models, the staff model HMO provides the greatest opportunity for HMO control
over physician utilization and treatment. However, there is the least
opportunity in a staff model HMO for physician selection by patients. In the
GROUP MODEL, the HMO contracts with a multispeciality physician group. A group
model HMO is a closed-panel HMO, and it may perform medical services for the HMO
on an exclusive ("captive group") or non-exclusive basis ("independent group").
From the viewpoint of the patient there may be little apparent difference
between a staff model and a group model HMO. In the NETWORK MODEL, the HMO
contracts with more than one group practice for medical services. These groups
may be large multispeciality groups, or groups of primary care physicians. The
network model may be an open panel, in which the HMO will contract with any
group which meets credentialing criteria. In the DIRECT CONTRACT MODEL, the HMO
contracts directly with individual physicians rather than with independent
practice associations ("IPAs"). Direct contract model HMOs often seek to control
specialist use by enrollees through the requirement of primary physician
specialist referrals (a "gatekeeper system").
In the IPA MODEL, the HMO contracts with one or more IPAs to provide
medical services. An IPA is a legal entity composed of physicians who have, in
most cases, individual private medical practices outside of the IPA. IPAs
contract to provide medical services to defined populations in a managed care
context. IPAs often are established by physicians in order to achieve group
bargaining power in a managed care context while retaining their individual
private medical practices. An IPA model HMO is an open panel plan. However,
physician membership in IPAs organized by the HMO or other entities such as
hospitals may be more restrictive than in IPAs organized by physicians.
In an IPA model HMO, the affiliated IPA or IPAs may assume some or all
of the HMO's financial risk for physician and non-physician services covered by
the HMO's benefit plan. In most cases, a HMO-affiliated IPA is compensated for
physician services by the HMO in the form of capitation payments. The IPA in
turn compensates its physician members on a discounted fee or a capitation
basis. Primary care services are often compensated on a capitation fee basis,
and specialist services are often compensated on a discounted fee basis, though
capitation for specialists is becoming more common. Discounted fee payments may
be funded from budgeted primary care and specialist care risk pools, and such
payments ordinarily are subject to reduction if aggregate fees exceed budgeted
amounts. If the IPA assumes the financial risk for non-physician services, it
will fund risk pools from a portion of the HMO's capitation
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payments for the payment of hospital expenses and other non-physician medical
costs of enrollees. Often, a portion of both capitation and discounted fee
payments for medical services are withheld by the IPA from its physician members
and reserved for application of unbudgeted overutilization costs (for specialist
care or hospital costs, for example). Unexpended withholds and excess risk pool
amounts are usually distributed to physicians at regular intervals, sometimes on
the basis of utilization performance reviews. Thus, the risk pools and
compensation withholds are designed to provide both for physician assumption of
risk (in addition to primary care or specialist care capitation risk) and
physician incentive. Utilization management/quality assurance ("UM/QA")
standards are more difficult to administer in the IPA model HMO than in the
staff model or the group model, which can result in greater administrative
costs. IPA model HMOs often use a gatekeeper system.
PCI's HMOs will be operated as IPA model HMOs and physician-providers
to PCI's HMOs who are members of the Company's regional IPAs will bear the
primary financial risk of overutilization of medical services.
Preferred Provider Organizations. A PPO is an organization of
healthcare providers which agrees to render medical services on a discounted fee
basis. The organizing entity of a PPO is generally responsible for assembling
the network of participating providers, negotiating fee schedules with the
providers and payors, designing and implementing UM/QA requirements, marketing
the PPO and processing provider claims and reimbursements. In a pass-through
PPO, the provider reimbursement claims are typically paid by an employer-funded
employee health plan or indemnity insurance company, and the PPO passes through
the payments to the providers after deduction of an administrative fee. In a
premium-paid PPO, the PPO funds provider reimbursement claims from premium
payments received from, typically, a small employer. The premium-paid PPO thus
bears the financial risk of overutilization of both its network and out-of-
network providers. PCI plans to offer both pass-through PPOs and premium-paid
PPOs.
Point-of-Service Plans. Point-of-service plans ("POS") are indemnity-
like supplements to managed care plans that allow enrollees to determine, at the
point at which it is necessary to seek medical services, whether to utilize a
managed care network provider or an out-of-network provider. Enrollees
typically incur substantial out-of-pocket expense in exercising the out-of-
network option. PCI plans to offer a HMO with a POS feature.
Managed Indemnity Plans. Many traditional indemnity insurance plans,
service plans (e.g., Blue Cross and Blue Shield) and self-insured plans now
require beneficiaries and providers to observe a variety of utilization
management requirements.
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Operations of the Company
On January 8, 1997, PCI received a Certificate of Authority from the
Louisiana Department of Insurance ("LDOI") to operate a HMO, and, through PCI,
the Company commenced business operations as a managed care company in February,
1997. The LDOI has also authorized PCI to offer HMO plans that have certain
point of service features ("HMO/POS"), and certain risk-bearing PPO plans.
The Company has divided the state into six regional catchment areas,
New Orleans, Baton Rouge, Lafayette/Lake Charles, Alexandria, Monroe and
Shreveport, and has incorporated six IPAs that will enter into contracts with
PCI for the performance of managed care physician services in each catchment
area. Only record owners of the Company's Voting Preferred Stock who are members
of the Louisiana State Medical Society ("LSMS") may be members of the Company's
regional IPAs and physician-providers for PCI's benefit plans, except that the
Company reserves the right to permit physician-providers who are not
shareholders or LSMS members to become members of the Company's IPAs if such
non-shareholder physician members are necessary to achieve on a regional basis
appropriate numbers of physicians or physician specialty practice ratios.
Members of the Company's regional IPAs will be required to be providers to all
of PCI's managed care plans offered in the applicable catchment area. Provider
contracts will be subject to non-renewal or termination if providers fail to
observe or meet the requirements thereof and with respect to shareholder-
providers, continuing LSMS membership. PCI also contracts for medical services
on a discounted fee basis with hospitals, surgery centers, laboratories, and
other medical services providers in each catchment area, and with non-IPA member
physicians to the extent necessary to achieve on a regional basis appropriate
numbers of physicians or physician practice coverage ratios. Currently, PCI
operates the second largest hospital network in the state. The Company has less
saturation in the central and northern areas of the state where managed care
penetration in the health care arena has been historically low. The Company's
efforts are aimed at filling the gaps in its provider network in these regions
through more targeted marketing efforts.
In addition to its HMO, PCI plans to market three other types of
managed care plans, HMO/POS, pass-through PPO and premium-paid PPO. Each of
PCI's managed care plans will be offered in a variety of configurations of
price, benefits, deductibles and copayments.
PCI's HMO offers an array of prepaid medical services to enrollees.
After deduction of an administrative fee, PCI distributes the premium income in
accordance with actuarial models among certain budgeted pools for the provision
of non-physician services (and a budgeted pool for non-network physician
services on an emergency or approved call basis), and to the Company's regional
IPAs on a capitation basis for the provision of physician services. The
Company's IPAs distribute the capitation payments in accordance with actuarial
models among budgeted primary care and specialist physician pools. PCI
reconciles its budgeted pools periodically, and the physician budgeted pools
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of the regional IPAs will be reconciled periodically by the Company. In the
event of overutilization of PCI's budgeted pools, PCI may reduce capitation
payments to the IPAs. In such an event or in the event of overutilization of the
IPA budgeted pools, the Company may reduce the physician reimbursement schedules
of the IPAs.
PCI's HMO/POS will be a HMO with a point-of-service feature. Under
the POS, PCI will reimburse out-of-network providers on the basis of the
Company's discounted fee schedule, subject to substantial deductibles and
coinsurance obligation of enrollees. PCI will bear the financial risk of
enrollee overutilization of the POS feature of the HMO/POS.
Under PCI's premium-paid PPO, in return for the premium paid by the
employer or other enrolling group, PCI will reimburse network providers on the
basis of its discounted fee schedule, subject to certain enrollee copayment
requirements, and it will reimburse out-of-network providers on a reasonable and
customary fee basis, subject to substantial deductibles and coinsurance
requirements applicable to enrollees. PCI will bear the financial risk of
overutilization of both network and out-of-network providers of the premium-paid
PPO.
PCI's pass-through PPO network will contract with self-funded employer
health plans and indemnity insurers for the provisions of medical services on a
discounted fee basis. If PCI's pass-through PPO contracts with indemnity
insurers, it is anticipated that it would administer network provider
reimbursement claims and remit reimbursement payments to providers after
deduction of an administrative fee. If PCI's pass-through PPO contracts with a
self-funded employer plan, it is anticipated that PCI may, on a fee basis,
administer all claims under the plan. Medical services providers, including
out-of-network providers, would submit reimbursement claims to PCI, which will
process the claims, determine the applicable deductibles, copayments and
coinsurance, receive payments from the employer or other enrolling group, and
remit the payment balances to the medical services providers. PCI will not bear
substantial financial risk in the administration of the pass-through PPO.
The Company and PCI may at any time change the structure, terms or
other material aspects of, or terminate the Company IPAs or PCI's managed care
plans at any time, subject only to express contractual obligations.
As of February 28, 1998, the Company's HMO and HMO/POS plans had 1,861
enrollees. The Company had no enrollees in any of its PPO plans.
Strategy of the Company
The Company's business strategy is two-fold: first, to distinguish
itself from its competitors by providing competitively-priced managed care
products state-wide through a network of physicians that is larger than that of
any other managed care provider; and second, to distinguish itself from its
competitors by offering employers and other payors competitively priced HMO
products that provide employees and other enrollees the
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greatest possible freedom in the selection of physicians, and the greatest
possible freedom (consistent with appropriate and economically-sound medical
practices) for physicians to prescribe medical treatments. State-wide operations
for PCI's managed care plans will be possible only if the Company and PCI are
successful in contracting with the necessary numbers of physician and non-
physician medical services providers in each of the six catchment areas. The
minimal contracting necessary to commence the marketing of PCI's managed care
plans in the catchment areas must be completed without substantial delay since
the receipt of substantial premium income will be required to partially offset
anticipated losses from operations.
The Company believes that all of the currently operating HMOs against
which it will compete restrict the number of provider physicians in their panels
in accordance with various ratios determined on the basis of economic
experience. Because any properly credentialed record holder of Voting Preferred
Stock may become a provider for PCI's managed care plans, it will not have such
provider restriction. For cost-control purposes, patient utilization of HMO
resources can be more efficiently controlled in the context of a restricted
panel of primary care and specialist physicians. Unrestricted panels could
require the HMO to devote more administrative personnel and funds to utilization
review than its competitors in market areas where the HMO may have a surplus of
providers, and it could result in reduced margins for the HMO on its premium
revenues as compared to some HMO competitors.
PCI has adopted an open access system for enrollee utilization of
specialists rather than a gatekeeper system. The Company is not aware of any
HMO competitor in Louisiana which utilizes such an open access system. Although
an open access system will increase enrollees' freedom of choice, and perhaps
increase the attractiveness of PCI's HMOs to employers and other payors, self-
referral by patients to specialists likely will increase specialist utilization
by enrollees of PCI's HMOs as compared to such utilization by enrollees of PCI's
competitors, and could raise overall costs of patient treatment. Such increased
costs could have a material adverse effect on the Company.
It is the understanding of the Company that it is not customary for a
HMO to have extensive procedures for review of determinations to terminate or
not renew physician-provider contracts. However, PCI is developing procedures to
assure a reasonable degree of fair process in determinations to terminate or not
to renew such contracts, and such Procedures could result in increased
administrative costs and paperwork for PCI and its physician-providers.
Competition
Managed care business is highly competitive in Louisiana. As of
September 16, 1997, there were 22 licensed HMOs in Louisiana. It is estimated
that 16 of the licensed HMOs in Louisiana are currently in operation. Market
penetration of HMOs is still relatively low in Louisiana, as compared to the
national population, but has been increasing.
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Many of the HMOs that PCI competes with, such as Aetna Health Plans of
Louisiana, Inc., Cigna Health Care of Louisiana, Inc., and United Health Care of
Louisiana, Inc., are owned by large national companies whose financial resources
far exceed those that are available to the Company, and such companies and the
other HMOs operating in Louisiana have provider relationships, enrollment
contracts, and managerial and administrative resources that the Company does not
have and must develop to achieve profitable operations. The Company has entered
this competitive arena on a staged basis as a state-wide competitor. Although
there are a number of HMO competitors in Louisiana with substantially greater
financial and managerial resources and operative experience than the Company, to
the Company's knowledge only one HMO, the Ochsner Health Plan, which reportedly
has over 130,000 enrollees, currently conducts state-wide operations.
PPOs are not subject to federal or state regulation and data
concerning competition in the PPO segment of the healthcare financing industry
are difficult to ascertain. It has been estimated that there are at least 20
PPOs operating in Louisiana with over 1.5 million enrollees.
The Company believes that HMOs and PPOs compete in large part for
different segments of the healthcare financing market. As a prepaid plan, a HMO
offers, in general, cost protection to payors, the elimination of deductibles
and significant copayments for beneficiaries, and in many cases, lower premium
rate structures. As a provider arm for traditional indemnity insurance and
self-funded employer plans, a PPO often offers greater freedom of patient choice
and, within the PPO provider network, discounted fees for payors and
beneficiaries. However, HMOs and pass-through PPOs compete for business with
indemnity insurers and self-funded employer benefit plans which have determined
to chose either a HMO or a PPO as the primary healthcare financing vehicle, and
HMOs and premium-paid PPOs compete for business with smaller employers that do
not self-fund their medical benefit plans.
Marketing
The Company markets its HMO through independent brokers and direct
sales. The Company's direct marketing currently targets the 100+ employee group
market. The Company's marketing strategy includes special events and targeted
promotional activities rather than mass media exposure in order to utilize
marketing funds more efficiently. However, strategic plans are currently being
developed for the balance of the year wherein mass media may be utilized.
Quality Assurance
The Company employs standard guidelines for procedures and treatment
and, for surgical procedures and hospitalizations it requires prior
authorization, and, when appropriate, discharge planning, and case management.
Management has recently devised a quality assurance program which will be
reviewed and implemented in mid-1998. This program will include the
establishment of a medical executive committee of 10 members which will review
and make determinations on
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issues such as medical management policies and quality assurance. The Company
previously used the services of Managed Care Consultants, Inc., a third party
administrator ("TPA"), for review of admission standards and procedures, but
believes that its physician advisors within the network will exert better and
more efficient control over these matters. The Company also handles
precertifications, premium billing, broker commissions, and eligibility
verification in house.
Provider contracts are subject to non-renewal or termination if
providers fail to observe or meet the requirements of UM/QA standards and, with
respect to shareholder-providers, continuing LSMS membership.
Regulation
Acting as a spur to the development of private market solutions to
increasing costs of healthcare have been various proposals at the federal level
to provide universal medical coverage and to impose federal controls on the
financing of the private medical services marketplace. The enactment of any
such federal or state initiatives could have a significant and unpredictable
impact on the operations and prospects of the Company. There have been a number
of proposals in Louisiana to enroll all or a part of the state's Medicaid-
eligible population into one or more HMOs. It is not possible to predict what,
if any, effect the adoption of any such proposal would have on the operations or
prospects of the Company.
State Regulation. PCI is subject to regulation and supervision by the
LDOI. PCI has made and will be required to maintain a $1,000,000 deposit in
Louisiana financial institutions to secure against its insolvency. In addition,
PCI will be required to maintain capital and surplus of at least $2 million.
PCI is required to file periodic statutory and audited financial reports with
the LDOI. In addition, as a HMO holding company, the Company is required to
register with the LDOI and to file periodic holding company reports.
Louisiana law requires HMOs to provide coverage (subject to lifetime
maximum benefits) for "basic healthcare services" in their enrollee contracts.
Basic healthcare services include emergency care, inpatient hospital and
physician care, outpatient medical services, routine gynecological care
(including care relating to pregnancy) and radiology services. Coverage for
alcohol or drug abuse health services must be offered as an option to a HMO
physician for orthopedic or neurological conditions. HMO benefit packages may
include, in addition to required basic healthcare services, other healthcare
services, including oral surgery and podiatric and psychological care.
In general, the rate structures of HMOs are not regulated in
Louisiana. However, HMOs that provide coverage to certain "small employers" (3
to 35 employees) must use a modified community rate structure. Louisiana HMOs
are required to establish procedures for the continuous review of quality of
care, performance of providers, utilization of health services and facilities,
and costs of operations.
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Federal HMO Qualification. The Company does not at this time intend to
qualify PCI's HMOs under federal law. HMOs which qualify under federal law may
obtain a Medicare risk contract from the federal government and market its plan
to the Medicare population. The disadvantages to federal qualification include
the requirement that the HMO have a minimum of 5,000 enrollees, an extensive
application process, minimum healthcare benefits which are more extensive than
those required to be provided under Louisiana law, and, with respect to Medicare
patients, federally mandated rate structures and enrollment and marketing
requirements. However, PCI may seek federal qualification of its HMO at a later
date, if business considerations indicate that such qualification would benefit
the Company.
Federal Regulation. PCI will be subject to the "guaranteed issue"
provisions of the Health Insurance Portability and Accountability Act of 1996,
which requires insurance and managed care companies which service the small
business market (2 to 50 employees) to accept all small businesses which apply
for coverage, and which mandates renewability and portability of healthcare
coverage. Both the federal Anti-Kickback Statute, a criminal law, and the
federal Stark II Amendments, a civil statute, provide penalties for,
respectively, the payment of remuneration for the purpose of inducing patient or
medical services referrals, and the self-referral of certain medical services to
an entity in which a physician (or an immediate family member) has a financial
interest. Presently, both these statutes are applicable only to the Medicaid
and Medicare programs. PCI does not at this time intend to secure Medicare risk
contracts, and no federal waiver of the fee provisions of the federal Medicaid
enabling law has been granted to permit Louisiana to enroll a substantial number
of Medicaid-eligible beneficiaries in HMOs. However, Louisiana has in the past
sought such a waiver and it may do so in the future. If such a waiver
permitting Medicaid-eligible beneficiaries to enroll in state-qualified HMOs
were granted, PCI's HMOs may seek to enter that market. In that case, it would
become subject to the federal legislation discussed above. Moreover, such
federal legislation may be made applicable at some future date to HMO or other
managed care contracts. The Company believes that the operations of PCI's
managed care plans as currently contemplated would not violate such federal
legislation were it applicable to either of them, but expansion of the coverage
of federal law or clarification of its scope could require PCI's managed care
plans to modify the provider structures or operations which could have a
material adverse effect on the Company.
Antitrust Regulation. The activities of PCI's managed care plans will
be subject to federal and state antitrust laws and regulations. The interaction
between such laws and regulations and the numerous legal and economic
arrangements that exist and are being formed in the rapidly changing healthcare
marketplace are uncertain. There is a risk that because of such laws and
regulation the Company will not be able to adopt organization or operations
arrangements that would be optimal for the business of PCI's managed care plans,
or that it may have to change such optimal arrangements at some later date to
satisfy federal or state antitrust laws and regulations. The antitrust rules
applicable in the PPO area are particularly in doubt at present, and there are
indications that a PPO which
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has substantial market power, as the Company contemplates in regard to PCI's
PPOs, may violate certain antitrust laws if it fails to assume some of the
financial risk of payors.
Employees
As of February 28, 1998, the Company had 20 full time employees and
1 part-time employee.
Plan of Operation
Prior to the commencement of operations during the first quarter of
1997, the Company was in the development stage and had no operating revenues.
The Company has incurred since the inception of operations in the
first quarter of 1997 substantial losses from operations due to the lack of
sufficient premium income to offset costs of operations, including claims
payments. The Company has incurred unanticipated delays in rolling out the
marketing of its managed care health plans in all six catchment areas due to
market resistance encountered by the Company in securing provider contracts with
primary care physicians, hospitals, and other ancillary medical providers in
certain marketing areas, difficulties in hiring and retaining experienced full-
time executive officers, and the Company's late entry into the managed care
market for calendar year 1997. The Company anticipates that such losses will
continue as the number of enrollees in the Company's HMO increases due to
current marketing efforts, particularly after the new enrollment year commences
in 1998, until and unless the Company attains a sufficient number of enrollees
that premium income will exceed operating expenses and claims payments. However,
there can be no assurance that the Company has sufficient capital to fund such
continuing losses or that it will achieve sufficient numbers of enrollees to
support profitable operations. The Company does not anticipate that it will
require additional capital during the next twelve months.
The Company recently hired a full-time chief executive officer, Mr.
Patrick C. Powers, and a new Vice President of Sales, Mr. John M. Bird, both of
whom have significant experience in the Louisiana managed care marketplace. The
Company's new management team has under development plans for the Company's
future operational and marketing strategies.
Certain statements, other than statements of historical fact,
contained in this Annual Report on Form 10-KSB 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" or
"scheduled" or similar statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. All
forward-looking statements in this Form 10-KSB are expressly qualified in their
entirety by the cautionary statements in this paragraph.
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ITEM 7. DESCRIPTION OF PROPERTY.
As of December 31, 1997, the Company leased approximately 6,250 square
feet of office space in Baton Rouge, Louisiana, which serves as the Company's
corporate and administrative offices. The lease term on this property expires
June 30, 1999 and the Company pays rent of $5,468.75 per month. The Company
does not own or lease any other real property.
ITEM 8. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES.
The following table sets forth certain information with respect to
the directors and executive officers.
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NAME AGE POSITION
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Brian W. Amy, M.D. 45 Director
John M. Bird 45 Vice President of Sales
Lawrence Braud, M.D. 56 Director
Ralph W. Colpitts, M.D. 47 Director
Jimmy R. Coughran, M.D. 31 Director
Wallace Dunlap, M.D. 62 Director
Daniel G. Dupree, M.D. 49 Director
Michael S. Ellis, M.D. 56 Director
Melanie C. Firmin, M.D. 40 Director, Vice President
F. Dennis Irwin, M.D. 54 Vice President of Medical
Management
Charles C. Lewis, M.D. 56 Director
Patrick C. Powers 45 Chief Executive Officer
Michael J. Provenza 40 Chief Financial Officer
David R. Raines, Jr., M.D. 57 Director
William M. Roeling, M.D. 69 Director
Jay M. Shames, M.D. 61 Director
F. Jeff White, III, M.D. 39 Director
James A. White, III, M.D. 58 Director, Chairman and President
R. Bruce Williams, M.D. 48 Director
BRIAN W. AMY, M.D. Dr. Amy has practiced Surgery in Abbeville,
Director Louisiana for 12 years. A graduate of the LSU
School of Medicine, Dr. Amy is a Diplomate of the
American Board of Surgery and a Fellow of the
American College of Surgeons. Dr. Amy has served
as clinical assistant professor of surgery at the
LSU School of Medicine and is a member of the
Board of Directors of University Hospital,
Lafayette, Louisiana.
</TABLE>
11
<PAGE>
JOHN M. BIRD Mr. Bird began working for the Company as Vice
Vice President of Sales President of Sales in November 1997. From
1993-1995, Mr. Bird served as Vice President of
Sales and Marketing and President of Western
Kentucky Operations for Winston & Company
Benefits, Inc., an employee benefits sales
organization specializing in health insurance
sales to trade and professional associations. Mr.
Bird also served as Executive Vice President of
Sales and Marketing and later Chief Marketing
Officer of Blue Cross and Blue Shield of
Louisiana from 1995-1997, where he was
responsible for overseeing all functions related
to sales, marketing, advertising, public
relations and media relations.
LAWRENCE L. BRAUD, M.D. Dr. Braud has practiced Otolaryngology-
Director Head and Neck Surgery in Baton Rouge, Louisiana
for more than 21 years. Dr. Braud graduated from
the LSU School of Medicine and is a Fellow of the
American College of Surgeons and the American
Academy of Otolaryngology and a Diplomate of the
American Board of Otolaryngology-Head and Neck
Surgery. Dr. Braud is immediate Past President of
the LSMS, which he previously served as President
(1996), President-Elect (1995), Vice President
(1994) and Chairman of the Board of Councilors
(1989-1993). Dr. Braud served as President of the
Louisiana Academy of Otolaryngology in 1994, and
has been an assistant clinical instructor at the
LSU School of Medicine since 1979. Dr. Braud has
been a Director of the Company since 1995.
RALPH W. COLPITTS, M.D. Dr. Colpitts has practiced Plastic and
Director Reconstructive Surgery in Lake Charles, Louisiana
for more than 15 years. A graduate of St. Louis
University School of Medicine, Dr. Colpitts is a
Diplomate of the American Board of Plastic
Surgery and is a Fellow of the American Society
of Plastic and Reconstructive Surgery. Dr.
Colpitts is Chief of Surgery at Columbia
Hospital, Lake Charles, Louisiana, and is a
former President of the Calcasieu Parish Medical
Society.
12
<PAGE>
JIMMY R. COUGHRAN, M.D. Dr. Coughran is a Diplomate of the American
Director Board of Family Practice and has been
practicing in Winnsboro, Louisiana since 1995. A
graduate of LSU Medical School-Shreveport, Dr.
Coughran has served as Chief of Staff at Franklin
Medical Center.
WALLACE DUNLAP, M.D. Dr. Dunlap has been a Director of the Company
Director since 1997 and President of the Company's
subsidiary Patient's Choice, Inc. since 1997. Dr.
Dunlap graduated from Kansas University Medical
School and has practiced Pediatric Medicine in
Baton Rouge, Louisiana for more than 30 years. He
has also served on the Executive Committee of the
Company. Dr. Dunlap is a Diplomate of the
American Board of Pediatrics and a Fellow of the
American Academy of Pediatrics. He is Secretary-
Treasurer of the LSMS and has served as the
Chairman of the LSMS Council on Legislation and
as President of the East Baton Rouge Medical
Parish Medical Society.
DANIEL G. DUPREE, M.D. Dr. Dupree has practiced Dermatology
Director in Lafayette, Louisiana for over 18 years. A
graduate of the LSU School of Medicine, Dr.
Dupree is a Diplomate of the American Board of
Dermatology and a Fellow of the American Academy
of Dermatology. Dr. Dupree is Immediate Past-
President and has served as Vice President and
Secretary-Treasurer of the Lafayette Parish
Medical Society, served as Vice-Chairman of
LAMPAC in 1994-95, was a delegate to the 1995
LSMS meeting, and is an alternate delegate to the
Council on Legislation of the LSMS. Dr. Dupree
has been a Director of the Company since 1996.
MICHAEL E. ELLIS, M.D. Dr. Ellis has practiced Otolaryngology-Head and
Director Neck Surgery in New Orleans, Louisiana for 23
years. A graduate of the LSU School of Medicine,
Dr. Ellis is a Fellow of the American College of
Surgeons and the American Academy of Facial
Plastic and Reconstructive Surgery, and is a
Diplomate of the American Board of
Otolaryngology-Head and Neck Surgery and the
American Board of Cosmetic Surgery. Dr. Ellis is
President-Elect of the LSMS, President of the St.
13
<PAGE>
Bernard Medical Society, an LSMS Alternate
Delegate to the American Medical Association, and
a clinical professor in the Department of
Otolaryngology-Head and Neck Surgery at the LSU
School of Medicine. He has also served as
President of the Louisiana Academy of
Otolaryngology-Head and Neck Surgery, Chalmette
General Hospital and De La Ronde Hospital. Dr.
Ellis has been a Director of the Company since
1996.
MELANIE C. FIRMIN, M.D. Dr. Firmin has practiced Anesthesiology in
Director and Vice President Alexandria, Louisiana for 13 years. A graduate of
the LSU Medical Center-Shreveport, Dr. Firmin is
a Fellow of the American Society of
Anesthesiology and a Diplomate of the American
Board of Anesthesiology. She is past President of
the Rapides Parish Medical Society, is on the
Board of Directors of the Central Louisiana
Ambulatory Surgery Center and the Southfield Care
Center (a nursing home facility), and has served
as a Director of the Rapides Regional Women's
Hospital. She is also Medical Director of Central
Louisiana Ambulatory Surgery Center. Dr. Firmin
is a member of the Board of Directors of Rapides
Bank & Trust, Alexandria, Louisiana, and has been
a Director and Vice President of the Company
since 1995.
F. DENNIS IRWIN, M.D. Dr. Irwin has been the Company's Vice President
Vice President of Medical Management since July 1997. He became
of Medical Management board certified in Internal Medicine in 1974 and
is a member of the American College of Physicians
and the American College of Physician Executives.
A graduate of Case Western Reserve University
Medical School, Dr. Irwin served as an Assistant
Clinical Professor at the Department of Medicine
of the University of Hawaii from 1979 to 1982. He
has also served as Vice President and Chief
Managing Officer for Healthcenter HMO in
Harrisburg, Pennsylvania from 1996 to 1997 and
served as Medical Director for FHP HMO from 1991
to 1996. Dr. Irwin practiced Internal Medicine
for 17 years.
14
<PAGE>
CHARLES C. LEWIS, M.D. Dr. Lewis has practiced Radiology for 30 years,
Director and has practiced for approximately 18 of those
years in New Iberia, Louisiana. Dr. Lewis is a
Diplomate of the American Board of Radiology, a
member of the American College of Radiology, and
a member of the Radiology Society of North
America. He graduated from LSU School of Medicine
and has served as Chief of Staff at Dauterive
Hospital in New Iberia, Louisiana. He is also
Chairman of the Credentials Committee of the LSMS
House of Delegates, and served as the 9/th/
District Councilor to the Board of Governors of
the LSMS from 1990 to 1995. Dr. Lewis has been a
Director of the Company since 1996.
PATRICK C. POWERS Mr. Powers began as Chief Executive Officer of
Chief Executive Officer the Company in February 1998. From 1995-1998, he
served as President-Central Region of Managed
Comp Inc., a workers' compensation and insurance
services company, where he was responsible for
the company's operations in states west of the
Mississippi River. He also worked as President
and Chief Executive Officer of another managed
care company, Gulf South Health Plans, Inc., from
1986-1994, where he was responsible for the
overall performance of the company.
MICHAEL J. PROVENZA Mr. Provenza began working as Chief Financial
Chief Financial Officer Officer and Principal Accounting Officer of the
Company in September 1997. He was previously
employed as Chief Financial Officer for Health
Plus of Louisiana, a health maintenance
organization, from 1992-1997.
DAVID R. RAINES, JR., M.D. Dr. Raines has practiced Gastroenterology in
Director Monroe, Louisiana for the past 20 years. He has
served as President of the Gastroenterology
Clinic, Inc. since 1983 and President of the
Endoscopy Center of Monroe, Inc. since 1989. He
is a Fellow of the American Society of
Gastrointestinal Endoscopy and of the American
College of Gastroenterologists. He also is Fellow
of the American Society of Internal Medicine and
a member of the American Medical Association.
15
<PAGE>
WILLIAM ROELING, M.D. Dr. Roeling has practiced Obstetrics and
Director Gynecology in New Orleans, Louisiana for 35
years. A graduate of LSU School of Medicine, Dr.
Roeling has served as Chairman of the
Obstetrics/Gynecology Departments at Mercy
Hospital (1970) and Lakeside Hospital (1980-
1981), as a clinical instructor at Tulane
University Medical School (1961-1993), and as
President (1988-1989) and Member of the Board of
Trustees (1985-1991) of Lakeside Hospital (1985-
1991). Dr. Roeling served as President of the
Jefferson Parish Medical Society ("JPMS") in
1985, was on the Executive Committee of the JPMS
from 1991 through 1996, and has been a member of
the LSMS House of Delegates for over 25 years.
Dr. Roeling has been a Director of the Company
since 1995.
JAY M. SHAMES, M.D. Dr. Shames has practiced Internal Medicine and
Director Pulmonology in New Orleans, Louisiana since 1968.
A 1961 graduate of Tulane University School of
Medicine, Dr. Shames is a Diplomate of the
American Board of Internal Medicine and the
American Board of Pulmonary Diseases, is a Fellow
of the American College of Physicians and the
American College of Chest Physicians, and is a
member of the American Society of Internal
Medicine and the American Thoracic Society. Dr.
Shames was elected in March 1997 as President of
the Louisiana Society of Internal Medicine and
has previously served as President of the LSMS in
1994-1995. He is also on the Board of Governors
of Touro Infirmary, serves as a clinical
professor at Tulane University School of Medicine
and the LSU School of Medicine, and served as the
President of the Orleans Parish Medical Society
in 1984-1985. Dr. Shames has been a Director of
the Company since 1995.
JAMES A. WHITE III, M.D. Dr. White has practiced Otolaryngology-Head and
Director, Neck Surgery in Alexandria, Louisiana for over 25
Chairman and President years. A graduate of Tulane University School of
Medicine, Dr. White is a Fellow of the American
College of Surgeons, the American Academy of
Otolaryngology, and the American Academy of
Otolaryngologic Allergy, and is a Diplomate of
the American Board of Otolaryngology-Head and
Neck Surgery. He has served as President of the
Louisiana Academy of Otolaryngology-Head and Neck
16
<PAGE>
Surgery since 1996. Dr. White also serves as a
clinical instructor of Otolaryngology at Tulane
University School of Medicine. He was President
of the LSMS in 1993-1994, and served two
consecutive terms as President of the Rapides
Parish Medical Society in 1998 and 1989. Dr.
White has been President and a Director of the
Company since 1995. In 1992, Louisiana Wine
Partners, a Louisiana limited partnership of
which Dr. White was the general partner, filed a
petition for relief under Chapter 7 of the United
States Bankruptcy Code.
F. JEFF WHITE III, M. D. Dr. White has practiced Cardiology in Shreveport,
Director Louisiana since 1988. A 1982 graduate of the LSU
School of Medicine - Shreveport, Dr. White is a
Diplomate of the American Board of Internal
Medicine and the American Board of Cardiovascular
Diseases, and is a Fellow of the American College
of Cardiology and the American College of Chest
Physicians. Dr. White has been a member of the
Board of Directors of the Shreveport Medical
Society since 1992 and is currently serving as
President of that organization. He was also a
member of the Governmental Affairs Committee of
the American College of Cardiology and a Delegate
to the American Medical Association Young
Physicians' Section from 1995 to 1997. Dr. White
is Vice Chief of Medicine at the Willis Knighton
Medical Center. He has been a Director of the
Company since 1995.
R. BRUCE WILLIAMS, M.D. Dr. Williams has practiced Pathology in
Director Shreveport, Louisiana since 1979. A graduate of
Vanderbilt University Medical School, Dr.
Williams is a Fellow of the College of American
Pathologists and a Diplomate of the American
Board of Pathology. Dr. Williams served as
President of the LSMS and has also served as
Speaker of the LSMS House of Delegates and as
President of the Shreveport Medical Society. Dr.
Williams also serves as clinical associate
professor of the LSU Medical Center in
Shreveport, Louisiana. Dr. Williams has been a
Director of the Company since 1995.
17
<PAGE>
ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS.
The following table sets forth certain information with respect to the
aggregate remuneration paid to each of the three highest paid persons who were
officers or directors as a group during the year ended December 31, 1997:
<TABLE>
<CAPTION>
AGGREGATE
NAME POSITION REMUNERATION
- ----------------------- ------------------------------- ------------
<S> <C> <C>
Tom McCabe Interim Chief Executive Officer $267,105.85
F. Dennis Irwin, M.D. Vice President -
Medical Management $87,345.68
Jay Neukomm Vice President -
Sales and Marketing $56,336.00
</TABLE>
Directors receive no compensation for serving on the Board of
Directors other than reimbursement of reasonable expenses in attending meetings
of the Board of Directors and committees thereof.
ITEM 10. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS.
The following table sets forth the number of shares of the voting
securities of the Company held of record by officers and directors of the
Company as a group. None of the three highest paid persons who are officers of
the Company own any voting stock of the Company.
<TABLE>
<CAPTION>
Name and Address Amount Percent
Title of Class of Owner Owned of Class
- ------------------ ---------------- ------- --------
<S> <C> <C> <C>
Junior Preferred All directors as 7,500 *
Voting Stock a group
</TABLE>
- -------------
. Less than 1%
ITEM 11. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS.
None.
PART II.
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS' COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Company has paid no dividends and does not anticipate the payment
of dividends in the foreseeable future. There is no market for the Company's
Junior Preferred Voting
18
<PAGE>
Stock or Class A Non-Voting Common Stock. There were 2,153 registered holders of
the Company's capital stock at February 28, 1998.
ITEM 2. LEGAL PROCEEDINGS
Other than routine litigation arising out of the normal course of
business, the Company is not involved in any material legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
There have been no changes in or disagreements with the Company's
accountants since the inception of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted for shareholder vote in the fourth
quarter of 1997.
ITEM 5. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10 percent of the Company's
stock, to file reports of ownership and changes of ownership with the Securities
and Exchange Commission. The Company believes that the directors, executive
officers, and greater than 10 percent beneficial owners complied with all
applicable filing requirements during the fiscal year ended December 31, 1997
except as follows: In September 1997, Michael J. Provenza was hired as Chief
Financial Officer and failed to timely report stock ownership on a Form 3; in
November 1997, John M. Bird was hired by the Company as Vice President of Sales
and failed to timely report stock ownership on a Form 3.
ITEM 6. REPORTS OF FORM 8-K.
No reports on Form 8-K were filed during the last quarter of 1997.
PART F/S.
The Company's financial statements follow:
19
<PAGE>
MD HEALTHSHARES
CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND THE PERIOD FROM JULY 18, 1995 (DATE OF
INCORPORATION) TO DECEMBER 31, 1995 AND
INDEPENDENT AUDITORS' REPORT
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
MD HealthShares Corporation:
We have audited the accompanying consolidated balance sheets of MD HealthShares
Corporation and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended December 31, 1997 and 1996 and the period from July
18, 1995 (date of incorporation) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies as of December 31,
1997 and 1996, and the results of their operations and their cash flows for the
years ended December 31, 1997 and 1996 and the period from July 18, 1995 (date
of incorporation) to December 31, 1995, in conformity with generally accepted
accounting principles.
The Company was in the development stage at December 31, 1996; during the year
ended December 31, 1997, the Company completed its development activities and
commenced its planned principal operations. As discussed in Note 7 to the
consolidated financial statements, the Company obtained capital to fulfill its
development activities during 1996 and obtained regulatory approval on January
8, 1997 to operate as an HMO. As further discussed in Note 7 to the consolidated
financial statements, the Company's attainment of profitable operations is
dependent upon future events, including achieving a level of revenues adequate
to support the Company's cost structure.
DELOITTE & TOUCHE LLP
New Orleans, Louisiana
March 27, 1998
21
<PAGE>
<TABLE>
<CAPTION>
MD HEALTHSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,408,901 $ 9,147,525
Marketable securities (Note 2) 4,840,825 -
Premiums receivable 24,554 -
Interest receivable 55,095 57,473
Prepaid expenses 95,518 147,747
----------- -----------
Total current assets 6,424,893 9,352,745
----------- -----------
RESTRICTED INVESTMENTS (Note 6) 1,000,000 1,071,777
EQUIPMENT, net of accumulated depreciation of $30,429
in 1997 and $3,825 in 1996 75,971 13,844
OTHER 35,378 5,225
----------- -----------
TOTAL $ 7,536,242 $10,443,591
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 122,268 $ 355,856
Claims payable and reserves for incurred but unreported claims 145,131 -
Deferred revenue 2,385 -
----------- -----------
Total current liabilities 269,784 355,856
----------- -----------
CONTINGENCIES (Note 6) - -
STOCKHOLDERS' EQUITY (Notes 3 and 8):
Junior preferred voting stock, $1.00 par value, liquidation
value $1,000, 7,500 shares authorized, 2,152 shares
issued and outstanding in 1997; none in 1996 2,152 -
Preferred stock, $1.00 par value, 2,000,000 shares
authorized, none issued and outstanding in 1997 and 1996 - -
Common Stock:
Class A, no par value, 1,000,000 shares authorized,
2,142 shares issued and outstanding in 1996; none in 1997 - 11,826,306
Class B, no par value, 1 share authorized, issued and outstanding
in 1996; none in 1997 - 100
Class A non-voting, $0.10 par value, 8,000,000 shares
authorized, 1,075,000 shares issued and outstanding in 1997;
none in 1996 107,500 -
Class B, $0.10 par value, 1 share authorized and outstanding
in 1997; none in 1996 - -
Additional paid-in capital 11,732,023 -
Accumulated deficit (4,590,455) (1,738,671)
Treasury stock, at cost, 1,503 shares in 1997; none in 1996 (8,000) -
Unrealized gain on available-for-sale securities 23,238 -
----------- -----------
Total stockholders' equity 7,266,458 10,087,735
----------- -----------
TOTAL $ 7,536,242 $10,443,591
=========== ===========
See notes to consolidated financial statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
MD HEALTHSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND PERIOD FROM
JULY 18, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------------------------
JULY 18, 1995
YEAR ENDED TO
----------------------------------------- DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
REVENUE:
Investment income $ 448,592 $ 222,666 $ 2,634
Premium revenue 313,519 - -
------------ ------------ ----------
Total revenue 762,111 222,666 2,634
------------ ------------ ----------
EXPENSES:
Medical service expenses 331,905 - -
Selling, general and administrative 3,255,385 1,570,448 374,336
Interest expense - 10,862 4,500
Depreciation 26,605 3,825 -
------------ ------------ ----------
Total expenses 3,613,895 1,585,135 378,836
------------ ------------ ----------
NET LOSS $(2,851,784) $(1,362,469) $(376,202)
============ ============ ==========
NET LOSS PER COMMON SHARE - BASIC $ (2.66) $ (3.05) $ (3,762)
============ ============ ==========
AVERAGE OUTSTANDING COMMON
SHARES 1,072,267 446,308 100
============ ============ ==========
See notes to consolidated financial statements.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
MD HEALTHSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND PERIOD FROM
JULY 18, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------
COMMON STOCK
--------------------------------------
JUNIOR PREFERRED CLASS A CLASS B
VOTING STOCK NO PAR VALUE NO PAR VALUE
----------------- ------------------ -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
STOCKHOLDER'S DEFICIT, July 18, 1995 - $ - - $ - - $ -
ISSUANCE OF COMMON STOCK - - 1 100 - -
UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES - - - - - -
NET LOSS - - - - - -
------- ------- ------ ------------ ------ ------
STOCKHOLDER'S DEFICIT, December 31, 1995 - - 1 100 - -
ISSUANCE OF COMMON STOCK - - 2,142 11,826,306 1 100
REDEMPTION OF COMMON STOCK - - (1) (100) - -
CHANGE IN UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES - - - - - -
NET LOSS - - - - - -
------- ------- ------ ------------ ------ ------
STOCKHOLDERS' EQUITY, December 31, 1996 - - 2,142 11,826,306 1 100
RECAPITALIZATION (Note 3) 2,142 2,142 (2,142) (11,826,306) (1) (100)
ISSUANCE OF COMMON STOCK (Note 3) 10 10 - - - -
PURCHASE OF TREASURY STOCK (Note 3) - - - - - -
CHANGE IN UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES - - - - - -
NET LOSS - - - - - -
------- ------- ------ ------------ ------ ------
STOCKHOLDERS' EQUITY, December 31, 1997 2,152 $2,152 - $ - - $ -
======= ======= ====== ============ ====== ======
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------- UNREALIZED
CLASS A CLASS B GAIN ON
NON-VOTIING $0.10 PAR VALUE ADDITIONAL AVAILABLE-
----------------- --------------- PAID-IN ACCUMULATED TREASURY FOR-SALE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK SECURITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STOCKHOLDER'S DEFICIT, July 18, 1995 - $ - - $ - $ - $ - $ - $ -
ISSUANCE OF COMMON STOCK - - - - - - - -
UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES - - - - - - - 610
NET LOSS - - - - - (376,202) - -
--------- ------- ------ ------ ---------- ---------- ------ ------
STOCKHOLDER'S DEFICIT, December 31, 1995 - - - - - (376,202) - 610
ISSUANCE OF COMMON STOCK - - - - - - - -
REDEMPTION OF COMMON STOCK - - - - - - - -
CHANGE IN UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES - - - - - - - (610)
NET LOSS - - - - - (1,362,469) - -
--------- ------- ------ ------ ---------- ------------ ------ ------
STOCKHOLDERS' EQUITY, December 31, 1996 - - - - - (1,738,671) - -
RECAPITALIZATION (Note 3) 1,071,000 107,100 - - 11,717,164 - - -
ISSUANCE OF COMMON STOCK (Note 3) 4,000 400 1 - 14,859 - - -
PURCHASE OF TREASURY STOCK (Note 3) - - - - - - (8,000) -
CHANGE IN UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES - - - - - - - 23,238
NET LOSS - - - - - (2,851,784) - -
--------- ------- ------ ------ ---------- ------------ ------ ------
STOCKHOLDERS' EQUITY, December 31, 1997 1,075,000 $107,500 1 $ - $11,732,023 $ (4,590,455)$(8,000) $23,238
========= ======= ====== ====== ========== ============ ====== ======
</TABLE>
TOTAL
STOCKHOLDER'S DEFICIT, July 18, 1995 $ -
ISSUANCE OF COMMON STOCK 100
UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES 610
NET LOSS (376,202)
----------
STOCKHOLDER'S DEFICIT, December 31, 1995 (375,492)
ISSUANCE OF COMMON STOCK 11,826,406
REDEMPTION OF COMMON STOCK (100)
CHANGE IN UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES (610)
NET LOSS (1,362,469)
----------
STOCKHOLDERS' EQUITY, December 31, 1996 10,087,735
RECAPITALIZATION (Note 3) -
ISSUANCE OF COMMON STOCK (Note 3) 15,269
PURCHASE OF TREASURY STOCK (Note 3) (8,000)
CHANGE IN UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES 23,238
NET LOSS (2,851,784)
----------
STOCKHOLDERS' EQUITY, December 31, 1997 $ 7,266,458
==========
See notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
MD HEALTHSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND PERIOD FROM
JULY 18, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
JULY 18, 1995
YEAR ENDED TO
---------------------------------- DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,851,784) $(1,362,469) $(376,202)
Adjustments to reconcile net loss to cash flows from
operating activities:
Feasibility study - - 175,462
Loss on sales of available-for-sale securities - 15,328 -
Depreciation 26,605 3,825 -
Changes in operating assets and liabilities:
Premiums receivable (24,554) - -
Interest receivable 2,378 (54,984) (2,489)
Prepaid expenses 52,229 (97,747) (50,000)
Other (30,153) (5,225) -
Accounts payable and accrued expenses (233,588) 314,918 40,938
Interest payable - (4,500) 4,500
Claims payable and reserves for incurred but
unreported claims 145,131 - -
Deferred revenue 2,385 - -
------------ ------------ ----------
Net cash used in operating activities (2,911,351) (1,190,854) (207,791)
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (5,017,311) (355,663) (200,145)
Sales of available-for-sale securities 199,724 540,480 -
Sales of restricted investments 71,777 - -
Purchases of restricted investments - (1,071,777) -
Purchases of equipment (88,732) (17,669) -
------------ ------------ ----------
Net cash used in investing activities (4,834,542) (904,629) (200,145)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 15,269 11,826,406 100
Redemption of common stock - (100) -
Purchase of treasury stock (8,000) - -
Developmental funds provided by the medical community - 585,250 456,710
Developmental funds returned to the medical community - (1,041,960) -
Repayment of LSMS note payable - (175,462) -
------------ ------------ ----------
Net cash provided by financing activities 7,269 11,194,134 456,810
------------ ------------ ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (7,738,624) 9,098,651 48,874
CASH AND CASH EQUIVALENTS, Beginning of period 9,147,525 48,874 -
------------ ------------ ----------
CASH AND CASH EQUIVALENTS, End of period $ 1,408,901 $ 9,147,525 $ 48,874
============ ============ ==========
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Note payable issued $ - $ - $ 175,462
============ ============ ==========
Change in unrealized gain on available-for-sale
securities $ 23,238 $ (610) $ 610
============ ============ ==========
See notes to consolidated financial statements.
</TABLE>
25
<PAGE>
MD HEALTHSHARES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND PERIOD FROM
JULY 18, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION - MD HealthShares Corporation
("MDH") was incorporated on July 18, 1995 for the purpose of creating a
health maintenance organization ("HMO") and other healthcare financing
vehicles that provide medical services to HMO enrollees of the HMO and other
types of plans, primarily through contractual arrangements with a network of
hospitals and physicians located in the state of Louisiana. On October 2,
1996, MDH created Patient's Choice, Inc. ("PCI"), a wholly-owned subsidiary
organized to operate on a state-wide basis an independent practice
association HMO, and to administer on a state-wide basis a preferred provider
organization ("PPO"). The accompanying consolidated financial statements
include the accounts of the MDH and PCI ("the Company"). Material
intercompany balances and transactions are eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements. Estimates also affect the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates, the most significant of which relate to incurred
but unreported claims for medical services.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include investments in
highly liquid debt instruments with a maturity of three months or less when
purchased, excluding restricted investments.
MARKETABLE SECURITIES - Marketable securities have been categorized as
available-for-sale and, as a result, are stated at fair value with the
unrealized holding gains and losses reported as a separate component of
stockholders' equity. All marketable securities are available for current
operations and, therefore, have been classified as current assets.
RESTRICTED INVESTMENTS - Restricted investments at December 31, 1997, which
are comprised of certificates of deposit, are recorded at cost which
approximates fair value. Restricted investments at December 31, 1996, which
represent investments pledged to secure a stand-by letter of credit, are
recorded at cost which approximates fair value (see Note 6).
EQUIPMENT - Equipment is recorded at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective equipment, which lives range from 3 to 10
years.
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
determined by the use of an actuarially estimated loss ratio. Medical cost
adjustments to current period estimates will be reflected in the operations
of future periods and changes in these estimates could be significant.
26
<PAGE>
REVENUE RECOGNITION - Premium revenues are recognized in the period in which
members are entitled to health care services. Premiums collected in advance
are deferred.
MEDICAL SERVICE EXPENSES - The Company has contractual agreements with
independent physicians, hospitals, pharmacies, and others to provide
comprehensive health care services to enrollees and their eligible
dependents. Contracts with participating physicians provide for reimbursement
for health care services at less than 100% of their established fees.
REINSURANCE - The Company is covered under a medical reinsurance agreement
that generally provides coverage for 80 percent of eligible hospital services
in excess of $50,000 per member per year. No reinsurance recoveries were
received during 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.
DEVELOPMENTAL FUNDS PROVIDED BY THE MEDICAL COMMUNITY - Prior to the offering
of 2,142 shares of common stock at $6,000 per share to licensed physicians
who are members of the Louisiana State Medical Society ("LSMS") and whose
principal residences and medical offices (if a practicing physician) are
located in Louisiana, MDH solicited voluntary contributions ("developmental
funds") from the medical community to fund the Company's developmental
(primarily consulting) costs. The Board of Directors resolved to repay all
such developmental funds when the minimum number of shares (2,000) was
issued. Accordingly, such developmental funds (which were non-interest
bearing) were reflected in the 1995 financial statements as developmental
funds provided by the medical community. MDH ceased solicitation of such
developmental funds on February 14, 1996. In December 1996, MDH repaid all
of its developmental funds ($1,041,960) which were provided by the medical
community.
NET LOSS PER COMMON SHARE - BASIC - In February 1997, Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," was issued. This
Statement simplifies the standards for computing earnings per share
previously required under Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share." Basic earnings per share (EPS) excludes dilution and is
computed by dividing earnings available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings
of the entity. Diluted EPS is computed similarly to fully diluted EPS
pursuant to APB Opinion No. 15. SFAS No. 128 is effective for 1997 and
required restatement of all prior period EPS data; therefore, the net loss
per common share-basic as previously presented has been restated to reflect
the recapitalization as discussed in Note 3 in a manner similar to a stock
split.
INCOME TAXES - There are temporary differences in reporting certain expenses
for financial statement and federal income tax purposes. The Company has net
operating loss carryforwards at December 31, 1997 of approximately $3.2
million, which may be used to offset taxable income in future years. Such
carryforwards expire in varying amounts from 2010 to 2012.
IMPACT OF NEW ACCOUNTING STANDARDS - In June 1997, SFAS No. 130, "Reporting
Comprehensive Income," was issued and requires that an enterprise report by
major components and as a single total, the change in net assets during the
period from non-owner sources. Also in June 1997, SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued and
establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of these statements will not
impact the Company's consolidated financial position, results of operations
or cash flows, and any effect will be limited to the form and content of its
disclosures. Both statements are effective for fiscal years beginning after
December 15, 1997. The Company is in the process of reviewing its operating
segments.
RECLASSIFICATIONS - Certain amounts in prior years' consolidated financial
statements have been reclassified to conform to the 1997 presentation.
27
<PAGE>
2. MARKETABLE SECURITIES
Marketable securities at December 31, 1997 include the following:
<TABLE>
<CAPTION>
FAIR UNREALIZED UNREALIZED
VALUE GAIN LOSS COST
<S> <C> <C> <C> <C>
Marketable equity securities $ 769,137 $47,442 $24,204 $ 745,899
U.S. government and agency
securities 2,549,046 - - 2,549,046
Corporate notes 1,522,642 - - 1,522,642
------------------- -------------- -------------- -------------------
$4,840,825 $47,442 $24,204 $4,817,587
=================== ============== ============== ===================
</TABLE>
For the purpose of determining gross realized gains and losses, the cost of
securities sold is based upon specific identification. The debt securities
above have contractual maturities ranging from one to ten years.
3. STOCKHOLDERS' EQUITY
On August 17, 1996, MDH completed a public offering of 2,142 shares of its
Class A common stock, at a public offering price of $6,000 per share (the
"Offering"). The net proceeds from the Offering of approximately $11.8
million is being used to organize and operate on a state-wide basis an
independent practice association model HMO, and to organize and administer on
a state-wide basis a PPO.
Until March 22, 1997, the initially authorized common stock of MDH consisted
of Class A and Class B common stock. No person could own of record or
beneficially more than one share of Class A stock. The Class A and Class B
common stock could not be sold, assigned, transferred or otherwise disposed
of by any person unless, in the case of the Class A common stock, MDH failed
to exercise its right of first refusal. The right of first refusal specified
that MDH could purchase the Class A common stock from any person at the
lesser of the book value per share or the seller's cost to purchase the
stock. The Class B common stock, which was issued on November 23, 1996,
could, at MDH's option and discretion, be redeemed for $100 upon written
request of the Class B common stockholder, which was the LSMS. Additionally,
the Class A and Class B common stockholders elected twelve and three,
respectively, of the fifteen Directors of MDH.
On March 22, 1997, MDH's stockholders approved a plan of recapitalization and
amendments to MDH'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 MDH'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 Junior Preferred Voting Stock is the principal voting security of MDH.
The other voting security of MDH, one share of Class B Common Stock, is held
by the LSMS. The Class B Common stockholder elects three of the fifteen
directors of MDH and votes along with the other voting stockholders on all
matters voted upon by the stockholders. The Junior Preferred Voting
stockholders elect twelve of the fifteen directors of MDH.
28
<PAGE>
No dividends may be paid on the Junior Preferred Voting Stock. Additionally,
MDH's bylaws prohibit the donation of Junior Preferred Voting Stock and
permit the resale or other transfer of Junior Preferred Voting Stock only to
persons who are licensed Louisiana physicians and LSMS members, and who do
not already own a share of Junior Preferred Voting Stock, unless MDH
exercises its right of first refusal. The right of first refusal specifies
that MDH may purchase, at its option, the Junior Preferred Voting Stock from
any person for the liquidation value of $1,000.
The Class A Non-voting Common Stock may receive dividends when and if
declared by MDH. MDH's bylaws permit the resale of or other transfer of Class
A Non-voting Common Stock only to persons who are licensed Louisiana
physicians and LSMS members. Resale or other transfer of the shares of Class
A Non-voting Common Stock is prohibited until each holder's shares are
released from the resale prohibition as follows:
NUMBER OF
SHARES
RELEASED
March 22, 1998 100
March 22, 1999 200
March 22, 2000 200
---
500
===
Furthermore, ownership by any person of more than two percent of the
outstanding shares of Class A Non-voting Common Stock is prohibited; however,
MDH may issue up to six percent of the outstanding Class A Non-voting Common
Stock to executive officers of the Company pursuant to its stock-based
compensation plan (see Note 8).
During 1997, the Company sold ten units of capital stock which were comprised
of ten shares of Junior Preferred Voting Stock and 4,000 shares of Class A
Non-voting Common Stock. The average number of outstanding common shares for
1997 reflects these transactions.
During 1997, the Company also purchased three units of capital stock
comprised of three shares of Junior Preferred Voting Stock and 1,500 shares
of Class A Non-voting Common Stock. These shares are accounted for as
treasury stock.
4. RELATED PARTY TRANSACTIONS
Certain members of the LSMS's board of directors are members of the board of
directors of MDH. On September 6, 1995, MDH purchased a feasibility study
for the development of a physician-owned, state-wide HMO from the LSMS for
$175,462. This purchase was effected by the issuance of a note payable to
the LSMS. The note payable provided for interest at a rate of 8.0 percent
per annum and was payable in equal annual instalments (including interest) of
$98,394 on September 5, 1996 and 1997. On October 9, 1996, MDH repaid the
outstanding principle and accrued interest of $15,345 related to this note
payable.
29
<PAGE>
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents - The carrying amount approximates fair value
because of the nature of these instruments.
Marketable securities - The fair values of marketable securities are
estimated based on quoted market price for those or similar investments.
Restricted investments - The fair values of restricted investments are
estimated based on quoted market price for those or similar investments.
The estimated fair values of the Company's financial instruments at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Cash and cash equivalents $1,408,901 $1,408,901 $9,147,525 $9,147,525
Marketable securities 4,840,825 4,840,825 - -
Restricted investments 1,000,000 1,000,000 1,071,777 1,071,777
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
LETTER OF CREDIT - As an ongoing requirement of the State of Louisiana, PCI
has a statutory deposit of $1,000,000 at December 31, 1997. In connection
with the filing for a COA and as an ongoing requirement of the State of
Louisiana, PCI had a $1,000,000 stand-by letter of credit issued by Hibernia
National Bank, payable to the Louisiana Department of Insurance (LDOI) as
beneficiary in lieu of a $1,000,000 statutory deposit at December 31, 1996.
Such stand-by letter of credit was secured by a pledge of a $1,100,000 stated
value U.S. treasury security.
OPERATING LEASE - Beginning July 1, 1997, the Company entered into an
operating lease for the building housing its corporate headquarters. The
Company incurred rental expenses of $57,371 and $5,000 during 1997 and 1996,
respectively. Net rental commitments over the next two years are as follows:
1998 $65,625
1999 32,813
-------
$98,438
=======
LITIGATION - In the ordinary course of operations, the Company is subject to
various litigation matters relating to health benefits provided to its
subscribers. Although the outcome of these matters cannot be determined, it
is management's opinion that disposition of these proceedings will not have a
material adverse effect on the consolidated financial statements.
30
<PAGE>
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. The minimum
state statutory net worth requirement will increase to $2.0 million by July
1, 1998.
7. DEVELOPMENT STAGE ENTERPRISE
The Company was in the development stage at December 31, 1996. During 1996,
the Company obtained capital (see Note 3) to fulfill its development
activities. On January 8, 1997, PCI received a Certificate of Authority
("COA") from LDOI to operate as an HMO. Once regulatory approval was
obtained, PCI commenced marketing of its HMO and other benefit plans. There
can be no assurances that the Company will ever be able to achieve
profitable operations.
8. STOCK-BASED COMPENSATION PLAN
The Company has a stock-based compensation plan through which several of
the Company's officers are entitled to receive restricted stock grants
contingent upon their satisfaction of specific tenure requirements.
Restricted stock grants, which are vested one-third each year after the
award date, are scheduled to be awarded as follows:
NUMBER OF
SHARES
1998 -
1999 4,700
2000 4,500
2001 9,500
2002 12,000
2003 8,000
------
38,700
======
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company will recognize
compensation cost equal to the fair value of the restricted stock when
awarded.
9. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of risk consist primarily of investments in marketable
securities and commercial premiums receivable. As of December 31, 1997, the
Company had no significant concentrations of credit risk due to the limited
amounts which are invested in any one issuer and the large number of
employer groups comprising the Company's customer base.
10. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows:
1997 1996
---- ----
Net operating loss carryforwards $ 1,120,000 $ 30,800
Organizational expenses 364,000 455,000
----------- ---------
Deferred tax asset 1,484,000 485,800
Valuation allowance (1,484,000) (485,800)
----------- ---------
Deferred tax asset reported $ -- $ --
=========== =========
A valuation allowance for the entire deferred tax asset has been recorded
as its realization is not considered more likely than not.
******
31
<PAGE>
PART III.
ITEM 1. INDEX TO EXHIBITS
Exhibit 6(j): Letter employment contract dated February 23, 1998 by and between
MD HealthShares Corporation and Patrick C. Powers.
Exhibit 6(k): Contract of Lease effective July 1, 1997 by and between PMD
Investments and MD HealthShares Corporation.
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MD HEALTHSHARES CORPORATION
By: /s/ Patrick C. Powers
---------------------------------------------
Patrick C. Powers
Chief Executive Officer
Date: March 30, 1998
-------------------------------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ Patrick C. Powers
---------------------------------------------
Patrick C. Powers
Chief Executive Officer
Date: March 30, 1998
-------------------------------------------
By: /s/ Michael J. Provenza
-------------------------------------------
Michael J. Provenza
Chief Financial Officer and
Principal Accounting Officer
Date: March 30, 1998
-------------------------------------------
By: /s/ Wallace H. Dunlap, M.D.
-------------------------------------------
Wallace H. Dunlap, M.D.
Director
Date: March 30, 1998
-------------------------------------------
By: /s/ Daniel G. Dupree, M.D.
-------------------------------------------
Daniel G. Dupree, M.D.
Director
Date: March 30, 1998
-------------------------------------------
By: /s/ Michael S. Ellis, M.D.
-------------------------------------------
Michael S. Ellis, M.D.
Director
Date: March 30, 1998
-------------------------------------------
33
<PAGE>
By: /s/ Melanie C. Firmin, M.D.
-------------------------------------------
Melanie C. Firmin, M.D.
Director
Date: March 30, 1998
-------------------------------------------
By: /s/ David R. Raines, Jr., M.D.
-------------------------------------------
David R. Raines, Jr., M.D.
Director
Date: March 30, 1998
-------------------------------------------
By: /s/ William M. Roeling, M.D.
-------------------------------------------
William M. Roeling, M.D.
Director
Date: March 30, 1998
-------------------------------------------
By: /s/ Jay M. Shames, M.D.
-------------------------------------------
Jay M. Shames, M.D.
Director
Date: March 30, 1998
-------------------------------------------
By: /s/ F. Jeff White III, M.D.
-------------------------------------------
F. Jeff White III, M.D.
Director
Date: March 30, 1998
-------------------------------------------
By: /s/ R. Bruce Williams, M.D.
-------------------------------------------
R. Bruce Williams, M.D.
Director
Date: March 30, 1998
-------------------------------------------
34
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit 6(j): Letter employment contract dated February 23, 1998 by and between
MD HealthShares Corporation and Patrick C. Powers.
Exhibit 6(k): Contract of Lease effective July 1, 1997 by and between PMD
Investments and MD HealthShares Corporation.
35
<PAGE>
[LETTERHEAD OF MD HEALTHSHARES APPEARS HERE]
February 23, 1998
Mr. Patrick C. Powers
6441 Brandon Court
Plano, Texas 75093-8830
Re: Revised Offer of Employment
Dear Mr. Powers:
This letter outlines the terms upon which you are being offered full-time
employment as the Chief Executive Officer of MD HealthShares Corporation and
affiliates, including Patient's Choice, Inc. (collectively, the "Company") in
accordance with the position description attached hereto. This offer is valid
for ten (10) working days from the date hereinabove. As a relatively new
Company, some benefits being offered to you are necessarily subject to
establishing and/or securing the appropriate benefit plans, programs and
policies. Such plans are subject to a variety of federal and state laws and
regulations and those laws and regulations may require or warrant changes in or
elimination of some of the benefits outlined below. Consequently, while the
Company contemplates providing you with the benefits as outlined, this offer of
benefits is qualified and the benefits contingent upon a final decision to
establish or secure the stated benefits plans, programs, and policies and the
actual terms of such plans, programs and policies.
The duties and responsibilities of the position of Chief Executive Officer
have been forwarded to you in advance. Your employment will be "at will" and
nothing in this letter shall be construed as creating an employment contract or
agreement with Company for any fixed term.
Subject to the foregoing, your employment by the Company will include the
following terms:
. Annual base salary of $200,000, payable biweekly while employed at the
Company.
. Eligibility for an annual bonus based upon targets to be set by mutual
agreement between you and the Company after commencement of your
employment and will be modified annually as you and the Company deem
prudent. The first year's bonus will be guaranteed at twenty percent
(20%) of your base salary.
. Restricted stock grants of the Company's Class A Non-Voting Common Stock
upon completion of 18, 36, 48, and 60 months of satisfactory employment,
in the amounts of 2,500, 5,000, 5,000, and 8,000 respectively. Actual
ownership in each restricted stock grant will vest at the rate of 1/3 per
year pursuant to the attached step schedule.
<PAGE>
You will, however, be entitled to receive any dividends, income, or other
ownership privileges from each restricted stock grant at the time of the
grant.
. For example, upon the completion of 18 months of satisfactory employment
service you will receive a grant of 2,500 shares. You will be given
actual ownership of 833 at that time and be entitled to dividends, income
or other ownership privileges in the remaining 1,667 shares. One year
following the date of the initial grant, you will be entitled to actual
ownership of another 833 shares with the actual ownership of the final
834 shares provided two years following the date of the initial grant.
. The terms and conditions of your rights to and in any such Common Stock
shall be set forth in a separate agreement or agreements which shall,
among other things, outline any restrictions on the shares of Common
Stock. Should the company sell, merge, or otherwise become part of
another organization, your vesting in the stock grants shall accelerate
and become wholly vested at that time. Should there be a change of
control from the elected Board of Directors of the present physician
shareholders of the Company to another organization, you shall have the
option of continuing employment or resigning with six (6) months base
salary (no benefits other than as required by state or federal law).
. The Company will pay one hundred percent (100%) of the premium for family
health benefits coverage through "Patients Choice", the Company's HMO
subsidiary, or alternative health benefits coverage as are available to
the Company's other executive employees.
. The Company will pay for standard long-term disability insurance that
will provide for salary continuation in an amount equal to 50% of your
annual base salary at the time of disability. Eligibility for and
duration of long-term disability benefits will be subject to the policy
terms in force at the time of disability.
. The Company will pay for standard Group Term Life Insurance equal to
three (3) times your starting base salary. However, this benefit will be
subject to the policy terms in force at the time of employment
(guaranteed $30,000 coverage with the balance subject to medical
underwriting). This benefit is currently subject to industry constraints
but is modifiable under your direction as CEO and as the company grows.
. Participation in a defined contribution retirement plan based upon a
percent of your base salary. Participation and benefits will be subject
to the terms of the applicable plan documents in force at the time of
retirement. It is expressly understood that establishment of such a
defined contribution retirement plan shall be subject to and contingent
upon an analysis of the relevant tax, ERISA, and other legal and
financial considerations. The Company retains the right to amend, modify
or terminate any such plan hereafter established in accordance with the
terms of the plan document.
<PAGE>
. You will be eligible for participation in the Company's retiree health
program. Eligibility for, participation in, and benefits available will
be subject to the terms of the applicable plan documents in force at the
time of retirement. It is expressly understood that establishment of such
a retiree health plan shall be subject to and contingent upon an analysis
of relevant tax, ERISA, and other legal and financial considerations. The
Company retains the right to amend, modify or terminate any such plan
hereafter established in accordance with the terms of the plan document.
. Reasonable travel expenses will be reimbursed for travel on Company-
related business upon submission of supporting documentation. Prior
approval may be required on certain excess amounts as may be defined by
the Chairman/President.
. Car allowance of $6,000.00 per year.
. Reasonable relocation expenses including moving normal household goods,
new home closing costs, temporary living expenses, travelling to visit
family and costs of having family here for your local housing search, and
other relocation expenses (all grossed up to minimize your tax
consequences) will be reimbursed or paid for by the Company directly, to
a maximum of $46,750. Should you not complete one full year of employment
for any reason other than at the Company's convenience, the relocation
expenses will be recouped to the extent possible from your final
compensation.
. You will initially be entitled to four (4) weeks paid vacation annually.
. It is expressly understood and agreed that you are an at-will employee
and that the Company shall have the right to terminate your employment at
any time with or without stated or actual reason. In the event of
termination of your employment relationship, you will be eligible for the
following benefits:
For Cause Termination. The Company may terminate your employment at any
time for cause and such termination will be effective immediately. For
the purposes of this paragraph "for cause" shall mean dishonest,
fraudulent, or illegal acts; activity harmful to the reputation of the
Company; conduct not in the best interest of the Company's good name;
failure by employee to willfully perform his obligations under the terms
of this agreement; and/or, a violation of any statutory or common law
duty of the Company. If you are terminated "for cause", you will be
entitled to payment of any accrued salary and benefits through the date
of termination and an additional lump-sum payment of one month's base
salary. Any shares of Common Stock that have vested must be sold back to
the Company at the greater of book value or market price, if a market has
been established. All shares of Common Stock in which you have not yet
vested in an actual ownership interest will revert to the Company.
Purchase of shares shall occur within ninety (90) days of the date of
termination.
<PAGE>
Termination for the Company's Convenience. The Company may, for its own
convenience, terminate your employment at any time, without a "for cause"
showing by giving at least thirty (30) days prior written notice. If your
employment is terminated for the Company's Convenience in the first two
(2) years, you will be entitled to payment of any accrued salary and
benefits through the date of termination. In addition, you will be paid
an additional six (6) months of base salary (no benefits except those
required by law) as severance. If the termination for convenience occurs
in the third year, severance shall be an additional nine (9) months; if
in the fourth year or after, severance shall be twelve (12) months. The
payment of severance shall be a lump sum due within five (5) days of the
date of termination. Any shares of Common Stock that have vested must be
sold back to the Company at the greater book value or market price, if a
market has been established. All shares of Common Stock in which have not
yet vested in an actual ownership interest will revert to the Company.
Purchase of shares shall occur within ninety (90) days of the date of
termination.
Voluntary Termination. You may terminate your employment with the Company
at any time, for any reason, by giving the Company at least thirty (30)
days prior written notice. If you terminate your employment, you will be
entitled to payment of the accrued salary and benefits through the date
of termination. You will be eligible for no additional severance
payments. Any shares of Common Stock that have vested must be sold back
to the Company at the greater of book value or market price, if a market
has been established. All shares of Common Stock in which you have not
yet vested in an actual ownership interest will revert to the Company.
Purchase of shares shall occur within ninety (90) days of the date of
termination.
You agree to execute the Confidentiality Agreement attached that says you
shall not, during or after termination of your employment by the Company,
disclose or communicate any information or knowledge of a confidential nature
relating to the Company or its shareholders, directors, officers, employees,
healthcare providers, members or enrolees, the Company's trade or business
secrets, or any information in respect of which the Company owes an obligation
of confidence to any third party (i.e. any person, firm or corporation not
affiliated with the Company) or in any manner use any such information or
knowledge other than for the benefit of the Company.
This agreement shall become and be effective on and as of February 25, 1998,
or such later date when you assume the actual performance of duties for the
Company under this agreement; provided, however, that this agreement shall be
legally binding on the parties hereto on the date on which it has been signed by
you and the Company.
Please acknowledge your understanding of and agreement to these terms and
conditions by signing the letter where indicated below. We look forward to your
joining
<PAGE>
the MD HealthShares team as we quickly move forward to becoming the
premier HMO in Louisiana.
Sincerely.
MD HEALTHSHARES CORPORATION
By: /s/ James A. White, III, M.D.
--------------------------------------
James A. White, III, M.D.
President & Chairman, Board of Directors
Acceptance:
/s/ Patrick C. Powers
- --------------------------------------
Patrick C. Powers
Signature Date: 2-24-98
<PAGE>
CONTRACT OF LEASE
STATE OF LOUISIANA
PARISH OF EAST BATON ROUGE
THIS AGREEMENT, made and entered into on the dates hereinafter set forth, by
and between:
PMD INVESTMENTS, a joint venture, appearing hereby through its duly authorized
representatives, whose mailing address is declared to be 5945 Hickory Ridge,
Baton Rouge, Louisiana 70817, hereinafter referred to as "LANDLORD; and
MD HEALTHSHARES PATIENT'S CHOICE, a corporation domiciled in the Parish of
Orleans, State of Louisiana, whose mailing address is 12021 Bricksome Ave.,
Baton Rouge, Louisiana 70816, and whose tax identification number is 72-130-
1480, hereinafter referred to as "TENANT", provides as follows:
W I T N E S S E T H:
LANDLORD and TENANT enter into this agreement on the following terms and
conditions:
1. PREMISES.
LANDLORD does hereby lease to TENANT, and TENANT does hereby lease from
LANDLORD, delivery of possession of which is hereby acknowledged, that certain
property described as Lots 42 and 43, Wellington Park Subdivision, Baton Rouge,
Louisiana, with municipal address of 12021 Bricksome Avenue, Baton Rouge,
Louisiana 70816, hereinafter referred to as the "LEASED PREMISES"; said LEASED
PREMISES containing approximately 6,250 square feet.
2. TERM.
This lease is made for a period of twenty-four (24) months, beginning the 1st
day of July, 1997 and ending the last day of June, 1999.
3. RENT.
This lease is made for an annual rental of Sixty Five Thousand Six Hundred
Twenty Five and No/100 ($65,625.00) Dollars, payable monthly in the amount of
Five Thousand Four Hundred Sixty Eight and 75/100 ($5,468.75) Dollars per month,
due on the first day of each month, made payable to LANDLORD, and mailed or
delivered to LANDLORD addressed as follows:
PMD Investments
12032 Bricksome Ave.
Baton Rouge, LA 70816
Attention: Mr. Raymond G. Post, Jr.
<PAGE>
If rent is received by LANDLORD after the tenth day of any month, these TENANT
shall pay $250.00, immediately, as additional rent for that month.
4. DEPOSIT OF CASH SECURITY.
A. TENANT has deposited with LANDLORD an amount equal to one (1) month's rent
as security for the performance by TENANT of the terms and provisions of this
LEASE. The parties agree that LANDLORD may apply, use or retain all or any part
of the said security deposit to the extent necessary for the payment of any rent
and additional rent or other sum as to which TENANT is in default or for any sum
which LANDLORD may expend or may be required to expend because of TENANT's
default as to any of the terms and provisions of this lease, including, but not
limited to, any deficiency or damages in the reletting of the LEASED PREMISES,
regardless of whether such damages or deficiency occurred before or after
summary proceedings or other reentry by LANDLORD except as otherwise provided in
this lease.
B. The parties further agree that if TENANT complies with all of the terms and
provisions of this lease, the security shall be returned to TENANT within thirty
(30) days after the date fixed as to the termination of the lease and after
delivery of possession of the leased premises to LANDLORD, whichever occurs
last.
C. LANDLORD shall, in case of a sale or lease of the property of which the
LEASED PREMISES are a part, have the right to transfer the security to the
purchaser or new lessee and shall thereupon be relieved of all liability for the
return of said security. TENANT shall look to the new LANDLORD first then the
original Landlord if unable to recover the of said security.
5. USE OF PREMISES.
TENANT may occupy and use the LEASED PREMISES legally and for a business
office and for no other purpose. LANDLORD shall provide TENANT herein parking
facilities in the parking area contiguous to the building located on the LEASED
PREMISES, including the right to ingress and egress. TENANT shall not permit
the number of vehicles parked at the LEASED PREMISES to exceed the number of
paved and marked parking spaces available. TENANT shall not make any use of the
LEASED PREMISES in violation of any statutes, ordinances, laws or subdivision,
municipal or other governmental regulation. TENANT shall not permit any
hazardous substances on or about the premises or increase the fire or insurance
hazard by any use thereof. LANDLORD warrants, based on its current knowledge,
information and belief, that the LEASED PREMISES are in compliance with
applicable state and federal laws, rules and regulations, including, but not
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limited to the American with Disabilities Act (ADA), and LANDLORD shall be
responsible for maintaining said compliance with such laws, rules and
regulations now or hereafter affected during the term of the lease and any
renewals and extensions thereof.
The TENANT shall not, during the terms of this lease or any extension thereof,
remove from the LEASED PREMISES any personal property that is or has been
affixed to said LEASED PREMISES by the LANDLORD without the written consent of
the LANDLORD. TENANT may remove personal property so affixed by TENANT, but
shall reimburse LANDLORD for any damage to premises caused by such removal.
6. REPAIRS, UNKEEP AND MAINTENANCE.
Except as hereinafter provided, TENANT shall be responsible for, and assumes
the maintenance of, the LEASED PREMISES, including the locks, keys, plumbing,
glass, heating and air conditioning systems and all other fixtures. During the
first sixty (60) days of the initial term of this lease, however, LANDLORD shall
be responsible for any repairs or maintenance required to the heating and air
conditioning system. At the expiration of that sixty (60) day period, the TENANT
shall assume all such responsibility up to the amount of Two Hundred Fifty and
No/100 ($250.00) Dollars per occurrence. TENANT's responsibility includes the
protection and repair of all of the plumbing. The TENANT's obligation to pay the
first Two Hundred Fifty and No/100 ($250.00) Dollars of any needed repair or
maintenance shall not be considered an annual deductible, but shall apply in
each instance that a repair or maintenance is required. TENANT will maintain a
minimum interior temperature of 55 degrees during the winter months in an effort
to avoid possible freezing of pipes. TENANT assumes responsibility, and
expressly agrees to keep the LEASED PREMISES in as good condition as they were
in when received, caring for them as a prudent administrator would care for his
own property, normal wear and tear excepted.
TENANT acknowledges that it has inspected the LEASED PREMISES and they are in
good condition. The LEASED PREMISES and appurtenances, including the locks,
keys, plumbing, glass, heating and air conditioning systems and all other
fixtures are accepted by TENANT in their present condition, except for such
repairs and improvements LANDLORD has expressly agreed to make by written
provision in this lease. No repairs shall be due TENANT by LANDLORD except; (a)
those expressly noted herein; (b) repairs needed to keep roof watertight, and
structural repairs to the exterior walls and foundation, except those damages
caused by the neglect of the TENANT, TENANT's agents, employees, business
invitees or any other person.
To the extent that any warranty may exist with respect to any fixture or
equipment installed at the LEASED PREMISES, LANDLORD agrees to assign to TENANT
any and all such warranties applicable
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<PAGE>
for the duration of this lease; however, LANDLORD does not warrant that there
are any such warranties.
7. HAZARDOUS SUBSTANCES.
During the term of this lease, TENANT and their employees shall use their best
efforts to keep the LEASED PREMISES free from any and all hazardous substances.
TENANT agrees to notify LANDLORD immediately of any and all hazardous substances
in, on or about the LEASED PREMISES irrespective of the cause of such.
8. RENOVATIONS, ALTERATIONS AND IMPROVEMENTS.
TENANT shall not construct any improvements on or make any renovations or
alterations to the LEASED PREMISES without first obtaining the written consent
of LANDLORD, such consent not to be unreasonably withheld. All such
renovations, alterations, and improvements constructed by TENANT shall become
the property of LANDLORD upon expiration or termination of this lease unless
LANDLORD requires removal of all or part of such improvements by TENANT, in
which event such improvements as may be designated by LANDLORD shall be removed
by TENANT, at TENANT's expense, within thirty (30) days of the expiration or
termination of this lease. If LANDLORD requires the removal of all or part of
such improvements by TENANT and the TENANT nevertheless refuses to do the
removal, said improvements shall become the property of LANDLORD, who shall be
free to dispose of said improvements without liability to the TENANT. Damages,
if any, caused by such removal shall be repaired at TENANT's expense, so long as
removal is done by a licensed contractor using reasonable care to effect the
removal in a workmanlike manner.
Prior to the commencement of any of the renovations, alterations, or
improvements described hereinabove, TENANT shall promptly notify LANDLORD, in
writing, of all construction work being undertaken or planned, the costs and
expenses thereof, all purchase orders or agreements therefor, and the dates upon
which TENANT shall pay such costs and expenses. Upon request by LANDLORD,
TENANT shall promptly furnish LANDLORD with copies of all such documents. All
renovations, alterations, or improvements shall be done in a thoroughly
workmanlike manner and at the sole cost and expense of TENANT, all of which
costs and expenses shall be promptly and timely paid by TENANT.
9. BONDING OUT LIENS.
In the event TENANT makes any renovations, alterations, or improvements as
provided herein, and a laborer's or materialman's lien is filed against the
LEASED PREMISES or any part thereof as a result of said renovations,
alterations, or improvements, TENANT shall promptly deposit with the recorder of
mortgages of East Baton
4
<PAGE>
Rouge Parish, Louisiana, a bond guaranteeing payment of said lien in accordance
with Louisiana Revised Statute 9:4835, as amended.
10. UTILITIES, ETC.
TENANT will, at its own cost and expense, pay all garbage, sewerage, water,
gas, heat, electricity, and other utilities, which shall be directly billed to
TENANT and TENANT shall pay the provider of same directly, and TENANT will save
and hold LANDLORD harmless from any charge or liability for same. In the event
TENANT fails to pay the provider, LANDLORD shall have the option, but not the
obligation to pay the provider, and TENANT shall reimburse LANDLORD promptly on
demand for same as additional rent.
TENANT shall provide at their own cost and expense monthly pest control for
the LEASED PREMISES.
LANDLORD shall furnish, continuously throughout the term hereof, by and at its
cost and expense, the exterior lawn and grounds maintenance for the LEASED
PREMISES. The lawn shall be mowed on an "as needed" basis, except that during
peak growing season, the lawn shall be mowed on a weekly basis.
11. PAYMENT OF TAXES.
TENANT agrees to pay or reimburse LANDLORD promptly on demand as additional
rent their pro rata share of any and all ad valorem or other taxes or public
assessments applicable to the LEASED PREMISES. TENANT agrees to pay or
reimburse LANDLORD promptly for all increases in ad valorem taxes resulting from
improvements constructed on the LEASED PREMISES by TENANT. The payment or
reimbursement due under this paragraph shall either be amortized on an annual
basis and added to the amount of monthly rent or paid in a lump sum, at TENANT's
option.
12. ASSIGNMENT AND SUBLEASE.
TENANT shall not have the right to sublease and/or assign any portion of the
LEASED PREMISES or this lease without first obtaining the written consent of
LANDLORD, which consent shall not be unreasonably withheld. As a condition to
LANDLORD's consent, any such sublease or assignment must be in writing, a copy
of which must be sent to LANDLORD and approved in form by LANDLORD. No
assignment or sublease shall operate as a release of the obligations of TENANT
contained herein.
13. INSURANCE
LANDLORD shall obtain and maintain fire and extended coverage insurance on the
LEASED PREMISES and such insurance shall be for the sole benefit of LANDLORD.
All proceeds, payments, and rights
5
<PAGE>
to proceeds and payments made by an insurer pursuant to said policy or policies
are payable only to LANDLORD and TENANT shall not be a beneficiary of said
policy or policies. Any insurance payments or proceeds shall be used to repair
and restore, to the extent possible, the LEASED PREMISES to their pre-damage
condition; however, the cost of said repairs shall not exceed the amount of the
insurance payments or proceeds actually received. Upon TENANT's written request,
LANDLORD shall furnish TENANT with a certificate of insurance evidencing the
coverage required by this paragraph. Should any such policy of insurance be
cancelled or allowed to expire, TENANT has the option, but not the obligation,
of obtaining such insurance coverage in the amounts previously carried by
LANDLORD, the cost of which can be deducted from the rent due hereunder.
For the mutual protection of LANDLORD and TENANT, TENANT agrees to secure and
keep in force, during the term of this lease, such general public liability and
property damage insurance as shall protect them and the LANDLORD from any and
all claims for personal injury, including death, and for property damage, which
may arise from TENANT's operations on the LEASED PREMISES. The amount of such
public liability insurance shall not be less than Five Hundred Thousand and
No/100 ($500,000.00) Dollars, for injuries, including death, to any one person,
and not less than One Million and No/100 ($1,000,000.00) Dollars aggregate as a
result of any one accident. General liability insurance for property damages
shall be in an amount not less than Five Hundred Thousand and No/100
($500,000.00) Dollars for any one accident. TENANT shall carry an Employer's
Liability and Workers' Compensation Liability Insurance policy for full coverage
and protection against liability to employees.
TENANT shall, at its own cost and expense, obtain and maintain such other
insurance as it deems desirable on the property and improvements of TENANT
located on or about the LEASED PREMISES.
Prior to, upon or subsequent to the commencement of this Contract of Lease,
TENANT, upon demand by LANDLORD, shall furnish certificates of all insurance
policies required in connection with this agreement as aforesaid, which policies
shall be issued to TENANT and/or LANDLORD, as their interests may appear,
together with certificates certifying to LANDLORD that all said insurance is in
force and that said insurance will not be canceled or otherwise changed or
modified during the term of this agreement without notifying LANDLORD in writing
at least thirty (30) days in advance of such cancellation.
After cancellation for any reason, LANDLORD has the option, but not the
obligation, of obtaining insurance coverage for the benefit of TENANT, the cost
of which TENANT must pay and reimburse LANDLORD promptly upon demand as
additional rent.
6
<PAGE>
LANDLORD and TENANT each hereby release the other, and their agents and
employees, from any claim for damages or destruction to the LEASED PREMISES or
the contents thereof belonging to either, caused by fire or any other peril
covered by extended coverage insurance whether due to the negligence of either
of them or otherwise; the intent being that this agreement shall be binding upon
the respective insurance companies carrying such fire and extended coverage on
either the premises or the contents thereof.
TENANT shall reimburse LANDLORD for any damage to the LEASED PREMISES due to
the negligence of the TENANT other than damages covered by the insurance
described herein, as additional rent, within thirty (30) days of presentation of
an invoice for repairs. Failure to reimburse LANDLORD within thirty (30) days
will allow the LANDLORD to use the cash security for this purpose.
14. DESTRUCTION OF PREMISES
If the LEASED PREMISES be destroyed or damaged by fire or otherwise during the
term of this lease, LANDLORD shall restore the LEASED PREMISES to substantially
its former condition as promptly as is reasonably possible, the cost of which is
limited to insurance payments or proceeds actually received as provided above.
During any period in which TENANT is unable to occupy the premises on account of
such damage, the rent due under this lease for said period shall be abated.
Should the damage by fire or otherwise substantially reduce the use of the
LEASED PREMISES by the TENANT, but does not wholly prevent the reasonable use
thereof, then, in such case, the rents due under this lease shall be abated in
proportion to the diminished utility of the LEASED PREMISES.
If the LEASED PREMISES are destroyed by fire or other casualty, rendering the
premises untenantable and the premises cannot be restored within a period of
ninety (90) days following such fire or other casualty, either party may
terminate this lease upon written notice to the other party thereto. Any such
termination will be effective as of the date of the occurrence of such fire or
other casualty. If the TENANT should not then be in default, LANDLORD will
refund to TENANT rents paid in advance for such a period of time subsequent to
such fire or other casualty.
15. INDEMNITY
TENANT's assuming possession of the LEASED PREMISES constitutes an admission
that TENANT has examined them and found them in good and safe condition at that
moment. TENANT agrees to indemnify LANDLORD and save and hold LANDLORD harmless
from all damages, claims, and liability whatsoever for loss, injury or damage
(including costs and reasonable attorney's fees) to any person(s) whomsoever or
to the property of TENANT or others arising from the present or future condition
or upkeep and maintenance of the LEASED PREMISES or arising out of the
occupancy, use, condition
7
<PAGE>
or state of repair of the LEASED PREMISES caused by TENANT, TENANT's agent,
employees, business invitees, or any other person and TENANT expressly assumes
all such liability therefor.
16. IMAGE REQUIREMENT.
TENANT shall maintain the LEASED PREMISES in a clean and orderly condition to
the satisfaction of LANDLORD, including, but not limited to, the regular removal
of garbage and other rubbish from the parking area on an "as needed" basis as it
appears, maintaining outdoor lighting, and keeping the premises clean and free
from any and all garbage and obstructions. TENANT shall not make excessive use
of outdoor advertising materials, so as to detract from the overall image and
appearance.
TENANT will not cause or permit any nuisance to continue upon the LEASED
PREMISES caused by any acts or omissions of TENANT, TENANT's agents or
employees.
TENANT will not permit any sign, advertisement or notice to be inscribed,
painted or affixed on any part of the outside or inside of said building without
LANDLORD's prior written consent.
17. INSPECTION OF LEASED PREMISES AND OTHER.
The LANDLORD and his agents shall have the right, but not the obligation, to
enter upon and inspect all parts of the LEASED PREMISES during the standard
business hours of TENANT or by appointment (except emergency conditions dictate
otherwise) for any lawful purpose; provided, however, that the foregoing shall
be done without substantial interruption to or interference with the business
being transacted therein. LANDLORD may place any signs or markings on or about
the LEASED PREMISES relating to the leasing, sale or other disposition of the
LEASED PREMISES or any part thereof. LANDLORD shall also be entitled to allow
others to inspect the LEASED PREMISES in the event of any prospective lease,
sale or other disposition of the LEASED PREMISES or any part thereof upon the
giving of advance notice to TENANT.
18. DEFAULT.
At the option of LANDLORD, the rent for the unexpired term of this lease shall
become due if any of the following listed events occur and TENANT fails to
remedy same after having been given ten (10) days' prior written notice at the
address herein designated:
(a) If TENANT fails to pay the rent, additional rent or expenses assumed by
TENANT in this lease promptly, as stipulated.
(b) IF TENANT is adjudicated as bankrupt or put into receivership.
8
<PAGE>
(c) If TENANT fails to comply with any of the provisions and/or conditions
contained herein.
(d) If the LEASED PREMISES are abandoned or cease to be actively occupied and
used for business purposes for a period in excess of thirty (30) days.
(e) If any lien, privilege or other encumbrance is imposed or is filed against
the LANDLORD or the LEASED PREMISES or any portion thereof as a result of
any act or omission by TENANT.
If any event listed above occurs, LANDLORD shall have the further options to
cancel this lease immediately, or proceed for past due installments of rent
only, reserving the right to proceed for remaining installments later.
If TENANT fails or refuses to permit LANDLORD to reenter the premises,
LANDLORD shall have the right to evict TENANT in accordance with provisions of
Louisiana law, without forfeiting any of LANDLORD'S rights under this lease.
ATTORNEY'S FEES.
In the event it should become necessary for LANDLORD to take any action to
enforce any of the terms, covenants, conditions or provisions of this lease, or
to recover any of the amounts due hereunder, as rent or otherwise, TENANT agrees
to pay all costs and expenses thereof, including reasonable fees of any attorney
engaged by LANDLORD in connection therewith, provided LANDLORD prevails in its
enforcement action.
Should TENANT fail to pay any sums due to LANDLORD under this lease, such sums
shall bear interest at the rate of twelve percent (12%) per annum from date due
until paid.
In the event it should become necessary for TENANT to take any action to
enforce any of the terms, covenants, conditions or provisions of this lease,
LANDLORD agrees to pay all costs and expenses thereof, including reasonable fees
of any attorney engaged by TENANT in connection therewith, provided TENANT
prevails in its enforcement action.
20. NOTICES, ETC.
All notices, demands and correspondence made necessary by the provisions of this
lease shall be in writing and shall be deemed to be properly given, served or
addressed to, if and when delivered by hand and receipt thereof acknowledged or
sent by United States mail, registered or certified mail, return receipt
requested, directed as follows:
9
<PAGE>
To LANDLORD: PMD Investments
5945 Hickory Ridge
Baton Rouge, LA 70818
Attention: Mr. Ted Dove
To TENANT: MD Healthshares Patient's Choice
12021 Bricksome Ave.
Baton Rouge, LA 70816
21. OPTION TO RENEW.
TENANT shall have the exclusive right, privilege and option to renew this
lease under the same terms and conditions herein contained for two (2)
additional term(s) of twelve (12) months each, commencing on the last day of the
original term, provided that TENANT gives written notice to LANDLORD not later
than one hundred twenty (120) days prior to the expiration of the original term
or any renewal term as set forth in this agreement. The rental rate shall
escalate for each renewal term by the cumulative total of no less than: (a) the
annual Local Consumer Price Index plus other direct costs, such as taxes,
assessments, etc., not previously added to the lease rental amount since the
initial occupancy by the TENANT in the premises, or (b) may be negotiated at a
different rate.
22. OCCUPANCY BEYOND THE EXPIRATION OF THE TERM.
In the event TENANT fails to give LANDLORD a notice of its intention to
renew the lease as provided for above, but remains in possession of the LEASED
PREMISES beyond the expiration of the term, this lease shall be deemed to have
been extended for an additional one hundred twenty days (120) days (hereafter,
the "Extension"), and said Extension shall continue thereafter for additional
one hundred twenty (120) day periods until a written notice is given to LANDLORD
by TENANT of TENANT's intention to terminate the lease. Under no circumstance
shall TENANT be allowed to terminate the lease that is being maintained under an
Extension as provided in this paragraph on less than one hundred twenty (120)
days advance notice. If TENANT's occupancy of the premises shall continue under
an Extension, then the rental rate for each Extension period of the TENANT's
occupancy shall increase in the manner provided for in paragraph 21 above, plus
an additional five (5%) percent of the increased monthly lease rate.
In the event occupancy being maintained under an Extension is abandoned by
TENANT without a one hundred twenty (120) day advance notice to LANDLORD of
TENANT's intent to vacate the premises, then TENANT shall be liable unto
LANDLORD for liquidated damages in an amount equal to four (4) months rent,
based on the rental rate then in effect.
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<PAGE>
Any occupancy under an Extension shall be subject to all other conditions,
provisions, and obligations of this lease and TENANT shall indemnify LANDLORD
against loss or liability resulting from TENANT'S delay in so surrendering the
LEASED PREMISES including, but not limited to, reasonable attorney's fees and
any claim made by a succeeding TENANT founded on such delay.
23. WAIVER.
The waiver by either LANDLORD or TENANT of any breach of any term,
covenant, condition or provision herein contained shall not be deemed to be a
waiver of such term, covenant, condition or provision with respect to any
preceding or subsequent breach of the same or any other term, covenant,
condition or provision hereunder.
No term, covenant, condition or provision of this lease shall be deemed to
have been waived by a party, unless such waiver be in writing by such party.
Failure to strictly and promptly enforce any of the conditions of this lease
shall not operate as a waiver of any of rights of either party hereunder.
24. LANDLORD'S RIGHT TO CURE DEFAULTS.
LANDLORD, at any time and without notice, may, but shall not be obligated
to, cure any default by TENANT of any of TENANT's obligations under this lease;
and whenever LANDLORD so elects, all costs and expenses incurred by LANDLORD in
curing any default, including, but not limited to, reasonable attorneys' fees,
together with interest on the amount of costs and expenses so incurred at the
rate specified in paragraph 19 herein, shall be paid by TENANT to LANDLORD on
demand, and shall be recoverable as additional rent.
25. SURRENDER OF PREMISES.
TENANT shall surrender possession of the premises at the end of the term
hereof or any renewals or extension hereof in substantially as good a condition
as when received, ordinary wear and tear and damage by fire, casualty or the
element excepted, free of any hazardous substances not present at the inception
of the lease.
26. COVENANT OF QUIET ENJOYMENT.
LANDLORD covenants that at all times when TENANT is not in default under
and during the term of this lease, TENANT's quiet and peaceable enjoyment of the
premises shall not be unreasonably disturbed or interfered with by LANDLORD or
any person claiming by, through or under LANDLORD.
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27. ENTIRE AGREEMENT, ETC.
This agreement contains the entire understanding between the parties and
shall not be modified in any manner except by an instrument in writing signed by
the parties hereto, and shall be binding upon and inure to the benefit of the
successors and assigns of the respective parties. Time is of the essence to this
agreement and the performance of all of the obligations herein. This agreement
shall be governed under the laws of the State of Louisiana.
Signed by LANDLORD on the dates hereinafter set forth, in the undersigned
witnesses. This instrument may be executed in counterpart copies, each of which
shall be deemed an original for all purposes.
WITNESSES TO LANDLORD: LANDLORD: PMD INVESTMENTS
/S/ [Signature] BY: /s/ Ted E. Dove
- ----------------------- ---------------
/S/ [Signature] Ted E. Dove
- ----------------------- Date: 6/2/97
/S/ [Signature] BY: /s/ Raymond G. Post, Jr.
- ----------------------- ------------------------
Raymond G. Post, Jr.
/S/ [Signature] Date: 6/2/97
- -----------------------
/S/ [Signature] BY: /s/ James Moore
- ----------------------- ---------------
James Moore
Date: 6/1/97
Signed by TENANT on this 29th day of May, 1997, in the presence of the
undersigned witnesses. This instrument may be executed in counterpart copies,
each of which shall be deemed an original for all purposes.
WITNESSES TO TENANT: TENANT: MD HEALTHSHARES
PATIENT'S CHOICE
/S/ [Signature] BY: /s/ Thomas P. McCabe
- ----------------------- --------------------
Thomas P. McCabe, Interim Chief
Executive Officer
12
