<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________________ to _______________
Commission file number: 0-22421
MD HealthShares Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Louisiana 72-1301480
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
12021 Bricksome Avenue, Baton Rouge, Louisiana 70816
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(Address of Principal Executive Offices)
(504) 293-3272
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if changed since Last Report)
Indicate by check mark whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's common equity, as
of the latest practicable date:
As of March 31, 1998, 1,076,200 shares of the Registrant's Class A Non-Voting
Common Stock and 1 share of the Registrant's Class B Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one) Yes [X] No [ ]
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997 - UNAUDITED
- --------------------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,024,119 $ 1,408,901
Investments 5,098,845 4,840,825
Interest receivable 78,864 55,095
Premiums receivable 6,091 24,554
Prepaid expenses 58,631 95,518
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Total current assets 6,266,550 6,424,893
RESTRICTED INVESTMENTS 1,000,000 1,000,000
EQUIPMENT, net of accumulated depreciation of $38,844 in 1998
and $30,429, in 1997 74,495 75,971
OTHER 35,070 35,378
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TOTAL $ 7,376,115 $ 7,536,242
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 115,609 $ 122,268
Claims payable and reserves for incurred but unreported claims 517,882 145,131
Deferred revenue 22,782 2,385
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Total current liabilities 656,273 269,784
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CONTINGENCIES (Note 2) -- --
STOCKHOLDERS' EQUITY (Note 3):
Junior preferred voting stock, $1.00 par value, liquidation
value $1,000, 7,500 shares authorized, 2,155 shares
issued and outstanding in 1998; 2,152 in 1997 2,155 2,152
Preferred stock, $1.00 par value, 2,000,000 shares authorized,
none issued and outstanding in 1998 and 1997 -- --
Common stock:
Class A non-voting, $0.10 par value, 8,000,000 shares
authorized, 1,076,200 shares issued and outstanding
in 1998; 1,075,000 in 1997 107,620 107,500
Class B, $0.10 par value, 1 share authorized and
outstanding in 1998 and 1997 -- --
Additional paid-in capital 11,751,400 11,732,023
Accumulated deficit (5,230,647) (4,590,455)
Treasury stock, at cost, 1,503 shares in 1998 and 1997 (8,000) (8,000)
Unrealized gain on available-for-sale securities 97,314 23,238
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Total stockholders' equity 6,719,842 7,266,458
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TOTAL $ 7,376,115 $ 7,536,242
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</TABLE>
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 - UNAUDITED
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
REVENUES:
Premiums $ 686,175 $ 1,310
Investment income 83,274 124,592
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Total revenues 769,449 125,902
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EXPENSES:
Medical expenses 583,249 1,126
Selling, general and administrative 817,977 881,698
Depreciation 8,415 2,330
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Total expenses 1,409,641 885,154
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NET LOSS $ (640,192) $ (759,252)
========= =========
NET LOSS PER COMMON SHARE $ (0.60) $ (0.71)
========= =========
AVERAGE OUTSTANDING COMMON SHARES 1,075,400 1,071,001
========= =========
See notes to consolidated financial statements.
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MD HEALTHSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 - UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (640,192) $ (759,252)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation 8,415 2,330
Changes in operating assets and liabilities:
Premiums receivable 18,463 (1,310)
Interest receivable (23,769) (2,014)
Prepaid expenses 36,887 (50,934)
Accounts payable and accrued expenses (6,659) 21,584
Claims payable and reserves for incurred but unreported claims 372,751 1,127
Deferred revenue 20,397 -
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Net cash used in operating activities (213,707) (788,469)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (999,069) -
Sales and maturities of available-for-sale securities 815,125 -
Other 308 (37,129)
Purchase of equipment (6,939) (15,656)
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Net cash in investing activities (190,575) (52,785)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 19,500 -
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NET DECREASE IN CASH (384,782) (841,254)
CASH AND CASH EQUIVALANTS, Beginning of period 1,408,901 9,147,525
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CASH AND CASH EQUIVELANTS, End of period $1,024,119 $8,306,271
========== ==========
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Unrealized gain on available-for-sale securities $ 74,076 $ -
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MD HEALTHSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Rule 310(g) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. Operating results for
the three month period ended March 31, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998.
RESERVES FOR INCURRED BUT UNREPORTED CLAIMS - The Company provides reserves
for estimated incurred but unreported physician, hospital, and pharmacy
services rendered to enrolled members during the period. These reserves are
presently based on the use of estimated medical cost ratios. Changes in
these estimates could be significant.
REVENUE RECOGNITION - Premium revenues are recognized in the period in which
the members are entitled to health care services. Premiums collected in
advance are deferred, (consistent with industry practice, third-party selling
expenses are reported as a reduction of premium revenue.)
REINSURANCE - The Company is covered under a medical reinsurance agreement
that generally provides coverage for 80% of hospital services in excess of
$50,000 per member per year, up to a yearly maximum of $1,000,000 per member.
There were no reinsurance recoveries in 1998 and 1997.
RISKS AND UNCERTAINTIES - The Company's business could be impacted by
continuing price pressure on new and renewal business, the Company's ability
to effectively control health care costs, additional competitors entering the
Company's markets, federal and state legislation in the area of health care
reform, and governmental licensing regulations of HMOs and insurance
companies. Changes in these areas could adversely impact the Company's
operations in the future.
FINANCIAL PRESENTATION - Certain reclassifications have been made to prior
period amounts to conform with current period presentation.
For a summary of other significant accounting policies, refer to Note 1 of
Notes to Consolidated Financial Statements included in the Company's annual
report on Form 10KSB for the year ended December 31, 1997.
<PAGE>
2. RECAPITALIZATION
On March 22, 1997, the Company's stockholders approved a plan of
recapitalization and amendments to the Company's articles of incorporation.
In connection therewith, 7,500 shares of Junior Preferred Voting Stock,
2,000,000 shares of Preferred Stock and 8,000,000 shares of Class A Non-
Voting Stock were authorized. Additionally, all of the Company's 2,142
outstanding shares of Class A Common Stock were cancelled, and each former
share of Class A Common Stock was converted into one share of Junior
Preferred Voting Stock and 500 shares of Class A Non-Voting Common Stock.
The average number of outstanding common shares have been restated to reflect
the recapitalization.
3. COMMITMENTS AND CONTINGENCIES
RESTRICTED INVESTMENTS - In connection with the filing for a COA, and as an
ongoing requirement of the State of Louisiana, PCI has deposited with the
Commissioner a safe keeping receipt of $1,000,000, consisting of certificates
of deposits in ten separate banking corporations doing banking business
within the State of Louisiana.
REGULATORY REQUIREMENTS - The State of Louisiana has implemented financial
regulations for HMOs requiring, among other things, minimum net worth
requirements. As of December 31, 1997, admitted assets, as defined, less
liabilities, must be at least equal to $1,500,000 as reported in the
statutory filing of such calendar year. PCI was in compliance with the state
statutory net worth requirement at December 31, 1997 and March 31, 1998. The
minimum state statutory net worth requirement will increase to $2.0 million
on July 1, 1998.
4. STOCKHOLDERS' EQUITY
During the first quarter, the Company sold three units of capital stock which
were comprised of three shares of Junior Preferred Voting Stock and 1,200
shares of Class A Non-Voting Common Stock. The average number of outstanding
common shares for the quarter reflects these transactions.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In February 1998, the Board of Directors appointed Patrick C. Powers as the
first Chief Executive Officer for the Corporation and its subsidiary licensed
health maintenance organization, Patient's Choice, Inc. Mr. Powers has
extensive experience in managed care, having previously served as the initial
President and CEO of Gulf South Health Plans of Louisiana. Additional
professional staff were added in certain key positions, including a new Chief
Financial Officer with significant experience in developing startup managed
care companies.
Network development is the ongoing priority of the Company. Additional
hospitals, physicians and physician groups, and ancillary service providers
have been contracted as providers to better serve the clients of Patient's
Choice and to create a marketable network of providers. The Medical Affairs
Department established a Medical Executive Committee with statewide physician
representation to assist physicians in providing high quality, cost-effective
care. Specialty advisory workgroups have been established for the major
medical specialties to allow physicians input into the development of
practice guidelines.
A sales and marketing staff is now in force with the objectives of working
with selected brokers and conducting direct sales. As the Company's
infrastructure, network, and medical management efforts are further
developed, the sales team will focus increasingly on enrolling larger
employer groups. As of August 1, 1998, the Company's subsidiary, Patient's
Choice, had contracted with 132 clients to provide health care coverage for
1,346 subscribers and 2,576 covered lives in its HMO and point of service
plans.
The Company incurred during the first quarter of 1998 and has incurred since
the inception of operations in the first quarter of 1997 substantial losses
from operations due to the lack of premium income resulting from delays in
marketing its managed care health plans. Such delays have been caused by
difficulties the Company has encountered in securing provider contracts with
hospitals and other ancillary medical providers in certain marketing areas of
Louisiana, difficulties in hiring and retaining experienced full-time
executive officers and the Company's late entry into the market for calendar
year 1997 contracts. The Company anticipates that such losses will continue
and accelerate as the number of enrollees in the Company's HMO subsidiary
increases due to current marketing efforts 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 anticipated losses or
that it will ever 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.
Certain statements, other than statements of historical fact, contained in
this Quarterly Report on Form 10-QSB are forward-looking statements as
defined in Section 21(E) of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are generally accompanied by such terms and
phrases as , "anticipates", "estimates", "expects", "believes", "should",
"projects", "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-QSB are
expressly qualified in their entirety by the cautionary statements in the
paragraph.
The Company has reviewed its year 2000 compliance status and has determined
that all systems are sufficient except for one software package that will be
replaced effective January 1, 1999. The cost of this replacement will be
minimal.
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the first quarter of 1998 the Company sold three Units of its capital
stock, each Unit consisting of one share of Junior Preferred Voting Stock and
500 shares of Class A Non-Voting Common Stock, at a price of $6,500 per Unit,
for total sales proceeds of $19,500. No underwriting discounts or commissions
were paid in connection with the sales. The offer and sale of the Units were
exempt from registration under the Securities Act of 1933, as amended ("Act"),
by virtue of Section 3(11) of the Act and Rule 147 of the Commission promulgated
thereunder. All offers and sales were made while the Units were subject to an
effective registration statement filed with the Louisiana Commissioner of
Securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The Company files the following exhibits:
6(l) Letter employment contract dated March 13, 1998 by and between MD
HealthShares Corporation and Adam Short.
(b) Reports of Form 8-K. No reports on Form 8-K were filed during the three
months ended March 31, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MD HEALTHSHARES CORPORATION
Date: August 17, 1998 /s/ Patrick C. Powers
-----------------------------
Patrick C. Powers
Chief Executive Officer
Date: August 17, 1998 /s/ Adam Short
-----------------------------
Adam Short
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit 6(l) Letter employment contract dated March 13, 1998 by and between
MD HealthShares Corporation and Adam Short.
<PAGE>
EXHIBIT 6(1)
March 13, 1998
Mr. Adam Short
3611 Riveroaks Court
Tyler, Texas 75707
RE: OFFER OF EMPLOYMENT
Dear Adam:
This letter outlines the terms upon which you are being offered full-time
employment as the Chief Financial Officer of MD HealthShares Corporation and
affiliates, including Patient's Choice, Inc. (collectively, the "Company") in
accordance with the position description attached hereto. Some benefits being
offered to you are 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 Financial Officer
are outlined in the attached job description. 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 $140,000, payable semi-monthly while employed at the
Company.
. Eligibility for an annual bonus based upon targets to be set by mutual
agreement between you and the Chief Executive Officer shortly after
commencement of your employment and will be modified annually as the Chief
Executive Officer deems prudent. The first year bonus will be guaranteed at
10% of your annual 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 1,250, 2,500, 2,500, 4,000 respectively. Actual ownership in
each restricted stock grant will vest at the rate of 1/3 per year pursuant
to the attached step schedule. 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 1,250 shares. You will be given actual
ownership of 417 at that time and be entitled to dividends, income or other
ownership privileges in the remaining 833 shares. One year following the
date of the initial grant, you will be entitled to actual ownership of
another 417 shares with the actual ownership of the final 416 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 or a change in the CEO position, 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 for family health benefits coverage through "Patients
Choice", the Company's HMO subsidiary, or alternative health benefits
coverage available to the Company's employees.
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<PAGE>
. 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 reimburse you the premium for a term life insurance policy
in an amount equal to three (3) times your annual base salary. Such policy
may be issued by a life insurance company of your choice, provided it has a
"Best" rating of "A" or better. At a future date, this benefit will be
provided through a Group Term Life Insurance program. At that time, the
Company will cease reimbursing you the premium previously referred to.
. 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.
. 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 Chief Executive
Officer.
. Car allowance of $500.00 per month.
. Reasonable relocation expenses including moving normal household goods, new
home closing costs, temporary living expenses, traveling 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 $40,000.
Should you not complete one full year 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 be entitled to four weeks paid vacation annually.
. It is expressly understood and agreed that you are an at-will employee and
that the Company has 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
wilfully perform his obligations under the terms of this agreement; and/or,
a violation of any statutory or common law duty of the Company. If your 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.
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, you will be
entitled to payment of any accrued salary and benefits through the date of
termination. In addition, if the termination for convenience occurs in the
first two years of employment, 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
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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 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.
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 a separate Confidentiality Agreement 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 the anticipated
start date, 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 the MD HealthShares team as we quickly move forward to becoming the
premier HMO in Louisiana.
Sincerely,
MD HEALTHSHARES CORPORATION
By: /s/ PATRICK C. POWERS
----------------------------
Patrick C. Powers
Chief Executive Officer
Signature Date: 3-13-98
----------------
Acceptance:
/s/ ADAM SHORT
- --------------------------------
Adam Short
Signature Date: 3-16-98
----------------
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