<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, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number: 0-22421
MD HealthShares Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Louisiana 72-1301480
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization Identification No.)
3029 S. Sherwood Forest Blvd. Ste. 200 Baton Rouge, LA 70816
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(Address of Principal Executive Offices)
(225) 293-3272
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(Issuer's Telephone Number, Including Area Code)
N/A
---
(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, 1999, 1,076,800 shares of the Registrant's Class A Non-Voting
Common Stock and 1 share of the Registrant's Class B Common Stock and 2,156
shares of Junior Preferred Voting Stock were outstanding.
Transitional Small Business Disclosure Format (check one) Yes [X] No [ ]
1
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
2
<PAGE>
MD HEALTHSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998 - UNAUDITED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
March 31, DECEMBER 31,
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,226,767 $ 2,112,479
Investments 2,978,284 2,808,827
Interest receivable 54,979 54,524
Premiums receivable (Note 6) 1,091,614 196,851
Prepaid expenses 217,030 113,613
----------- -----------
Total current assets 5,568,674 5,286,294
RESTRICTED INVESTMENTS (Note 2) 1,100,000 1,000,000
EQUIPMENT, net of accumulated depreciation of $88,859 in 1999
and $65,326 in 1998 159,394 141,908
OTHER 35,070 36,070
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TOTAL $ 6,863,138 $ 6,464,272
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred income (Note 4) $ 376,735 $ 1,750,000
Accounts payable and accrued payroll expenses 428,990 424,636
Claims payable and reserves for incurred but unreported claims 2,440,478 1,038,344
Deferred premium revenue 89,496 81,562
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Total current liabilities 3,335,699 3,294,542
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COMMITMENTS AND CONTINGENCIES (Note 2) - -
STOCKHOLDERS' EQUITY (Notes 2, 3 and 5):
Junior preferred voting stock, $1.00 par value, liquidation
value $1,000, 7,500 shares authorized, 2,156 shares
issued and outstanding in 1999 and 1998 2,156 2,156
Preferred stock, $1.00 par value, 2,000,000 shares authorized,
none issued and outstanding in 1999 and 1998 - -
Common stock:
Class A non-voting, $0.10 par value, 8,000,000 shares
authorized, 1,076,800 and 1,076,600 shares issued and outstanding
in 1999 and 1998, respectively 107,680 107,660
Class B, $0.10 par value, 1 share authorized and
outstanding in 1999 and 1998 - -
Additional paid-in capital 11,759,839 11,757,859
Accumulated deficit (8,302,551) (8,819,105)
Treasury stock, at cost, 515 shares in 1999, and 511 shares in 1998 (20,000) (16,000)
Accumulated other comprehensive (loss) income (19,685) 137,160
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Total stockholders' equity 3,527,439 3,169,730
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TOTAL $ 6,863,138 $ 6,464,272
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</TABLE>
See notes to consolidated financial statements.
3
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MD HEALTHSHARES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 - UNAUDITED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
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1999 1998
<S> <C> <C>
OPERATING REVENUES:
Premiums $3,317,123 $ 686,175
Investment income 136,436 83,274
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Total operating revenues 3,453,559 769,449
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OPERATING EXPENSES:
Medical expenses 2,829,506 583,249
Selling, general and administrative 1,457,231 817,977
Depreciation 23,533 8,415
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Total operating expenses 4,310,270 1,409,641
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OPERATING LOSS (856,711) (640,192)
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OTHER INCOME (Note 4) 1,373,265 -
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NET INCOME (LOSS) 516,554 (640,192)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized (loss) gain on securities available for sale:
Unrealized holding gains (losses) arising during the year (56,735) 79,373
Reclassification adjustment for (gains) losses included in
net income (loss) (100,110) (5,297)
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Total other comprehensive (loss) income (156,845) 74,076
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TOTAL COMPREHENSIVE INCOME (LOSS) $ 359,709 $ (566,116)
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NET INCOME (LOSS) PER COMMON
SHARE BASIC $0.48 $(0.60)
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WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 1,076,800 1,075,400
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
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MD HEALTHSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 - UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- ---------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 516,554 $ (640,192)
Adjustments to reconcile net income (loss) to cash flows from
operating activities:
Gain on sales of available-for-sale securities 100,110 -
Depreciation 23,533 8,415
Stock grants vested 2,000 -
Changes in operating assets and liabilities:
Premiums receivable (894,763) 18,463
Interest receivable (455) (23,769)
Prepaid expenses (103,417) 36,887
Accounts payable and accrued expenses 4,354 (6,659)
Claims payable and reserves for incurred but unreported claims 1,402,134 372,751
Deferred revenue 7,934 20,397
Deferred income (1,373,265) -
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Net cash used in operating activities (315,281) (213,707)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (1,226,062) (999,069)
Sales and maturities of available-for-sale securities 699,650 815,125
Other 1,000 308
Purchases of equipment (41,019) (6,939)
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Net cash used in investing activities (566,431) (190,575)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 19,500
Purchase of treasury stock (4,000) -
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Net cash (used in) provided by financing activities (4,000) 19,500
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NET DECREASE IN CASH (885,712) (384,782)
CASH AND CASH EQUIVALENTS, Beginning of period 2,112,479 1,408,901
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CASH AND CASH EQUIVALENTS, End of period $ 1,226,767 $1,024,119
=========== ==========
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Change in unrealized (loss) gain on available-for-sale securities $ (156,845) $ 74,076
=========== ==========
Stock grants vested $ 2,000 $ -
=========== ==========
</TABLE>
See notes to consolidated financial statements.
5
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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, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999.
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 during interim periods by the use of an estimated medical cost
ratio based on historical experience, projections of future experience, and
projected improvements in medical management. Since about two thirds of the
Company's membership for the three month period ended March 31, 1999 was
enrolled during that same period, the estimations of cost are based on
projections using an independently developed actuarial rating model that was
used in pricing these contracts. Improvements in medical management are
expected to reduce medical costs by approximately ten percent. Medical cost
adjustments to current period estimates will be reflected in the operations
of future periods and changes in these estimates could be significant.
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.
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 10-KSB for the year ended December 31, 1998.
2. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements
with five officers with salaries aggregating $822,500 annually. These
agreements provide for guaranteed bonuses ranging from 10--15% of these
officers' base salaries and also provide for severance payments of three to
twelve months base salary in the event of a change in control of the Board of
Directors of the Company.
RESTRICTED DEPOSITS - As an ongoing requirement of the state of Louisiana,
the Company's subsidiary, Patient's Choice, Inc. ("PCI") has deposited with
the Commissioner of Insurance a safekeeping receipt of $1,000,000, consisting
of certificates of deposit in ten separate banking corporations doing banking
<PAGE>
business with the state of Louisiana. Additionally, PCI has deposited with
the Commissioner of Insurance a safekeeping receipt of $100,000 to meet the
requirement for a Third Party Administrator license application for the state
of Louisiana.
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 matters will not have a
material adverse effect on the Company's consolidated financial statements.
Pursuant to the contract referred to in Note 4, PCI has agreed to indemnify
AHP for any possible monetary damages incurred by certain third parties as a
result of the execution of the contract. Management is presently unable to
determine the magnitude of any possible losses that may be incurred as a
result of this indemnification but does not believe that this indemnification
will have an adverse effect on the Company's consolidated financial
statements.
REGULATORY REQUIREMENTS--The state of Louisiana has implemented financial
regulations for HMOs requiring, among other things, minimum net worth
requirements. For each HMO which, by July 1, 1995 had not filed its
application for a certificate of authority with the Commissioner of Insurance
as required by law, the minimum net worth requirement is $2.0 million, plus
an additional $1.0 million of restricted deposits, effectively making the
minimum net worth requirement $3.0 million. ("PCI") was in compliance with
the state statutory net worth requirement at March 31, 1999 and December 31,
1998.
During 1999 and since the inception of operations in the first quarter of
1997, the Company has incurred substantial losses from operations due to the
lack of premium revenue resulting from delays in marketing its managed care
products. Based on current operations and projections, the Company could
fall out of compliance with the minimum capitalization requirements of the
Commissioner of Insurance during the third quarter of 1999, and would be
required prior to such time to raise additional capital as a condition to
remain in compliance. However, PCI has recently introduced several new
products to the marketplace and has been named as an approved HMO for several
large group accounts that are currently undergoing enrollment. Revenue from
these enrollment activities may reduce the Company's current operating losses
sufficient to permit it to remain in regulatory compliance through the
remainder of 1999. The Company is exploring on a preliminary basis several
alternatives to substantially increase premium revenue or capitalization,
including acquisition of existing base of members and/or the sale of
additional capital stock. However, there can be no assurance that the
Company will achieve income from operations in the near term from new
enrollees from group or individual products, or from the acquisition of
existing base of members, sufficient to remain in regulatory compliance
during all of 1999, or that, if necessary, the Company will succeed in
increasing its capitalization through the sale of additional capital stock.
PCI's failure to maintain compliance with regulatory capital requirements
could result in one or more actions by the Commissioner of Insurance with
respect to PCI that could be materially adverse to shareholders, including
the loss of part or all of their investments in the Company.
3. STOCKHOLDERS' EQUITY
During the first quarter of 1999, the Company purchased four units of capital
stock comprised of four shares of Junior Preferred Voting Stock. These
shares are accounted for as treasury stock.
See Note 5 for a discussion of the vesting of stock grants during the first
quarter of 1999.
<PAGE>
4. DEFERRED INCOME
On December 21, 1998, PCI entered into a contract with Advantage Health Plan
("AHP"), a Louisiana-based HMO in the process of a business wind down,
whereby PCI would offer its HMO products to approximately 11,000 existing AHP
commercial members effective February 1, 1999. PCI received $1.75 million
for guaranteeing coverage of these members. PCI assumed no responsibility
for medical services rendered to AHP-covered members prior to February 1,
1999. Additionally, none of the existing AHP contracts were acquired by PCI;
rather, PCI entered into new contracts that were priced according to its own
rate structure, subject to certain maximums and restrictions that were
established by the Department of Insurance ("DOI") for the state of
Louisiana.
At December 31, 1998, the Company had reflected the $1.75 million received in
connection with this contract as deferred income as the Company had not yet
offered medical coverage to existing AHP members. During the first quarter
of 1999, the Company offered medical coverage to approximately 11,000
existing AHP members, of whom approximately 2,700 existing AHP members
accepted coverage by PCI. The Company negotiated the amount received from
AHP based upon the assumption that all 11,000 would be offered coverage by
PCI. Furthermore, the amount was not negotiated with the intent that the
amount received from AHP would in any way cover losses expected to be
incurred in connection with the coverage of existing AHP members because the
Company was able to price these new contracts according to its own rate
structure as noted above. Nevertheless, the Company does believe that there
has been some limited risk of adverse selection with respect to these new
members. As a result of this risk and the substantial reduction in the number
of AHP members actually converted to coverage by PCI, the Company has
recognized approximately seventy five percent of the $1.75 million received
as other income during the first quarter of 1999. Additionally, the Company
has recognized two months accretion of deferred income during the first
quarter of 1999 and will continue to accrete the remaining amount of deferred
income into other income through the term, typically one year or less, of the
contracts accepted by former AHP members.
5. STOCK-BASED COMPENSATION PLAN
The Company has a stock-based compensation plan through which several
officers are entitled to receive restricted stock grants contingent upon
their satisfaction of specific tenure requirements. During the first quarter
of 1999, 200 shares of restricted stock became vested based upon an
individual officer's tenure with the Company. As a result, the Company
recognized $2,000 as compensation expense during the first quarter of 1999.
6. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of risk consist primarily of investments in marketable securities and
commercial premiums receivable. As of March 31, 1999, the Company had no
significant concentrations of credit risk for its investments due to the
limited amounts which are invested in any one issuer. However, the Company
did have a significant concentration of credit risk for its commercial
premiums receivable in that approximately fifteen percent of its premiums
receivable as of March 31, 1999 was outstanding from one large employer
group.
<PAGE>
ITEM 2. PLAN OF OPERATION
The Company realized net income of $516,554 in the first quarter of 1999 as
compared to a loss of $640,192 in the first quarter of 1998. This difference
in financial performance was the result of the Company's realization of
$1,373,265 of other income during the 1999 first quarter, which constituted a
portion of the $1,750,000 payment received by the Company in December, 1998
from Advantage Health Plan, Inc. for providing conversion coverage to AHP's
managed health care plan enrollees. The Company will recognize the balance
of the AHP payment as other income on a monthly basis through January, 2000.
Premium revenues increased significantly during the first quarter of 1999, as
did medical expenses and selling, general and administrative expenses,
reflecting the substantial increase in the Company' managed health care
enrollees in the 1999 period as compared to the same period in 1998. Without
the realization of other income from the AHP payment in the first quarter of
1999, the Company would have realized a net loss for the period of $856,711,
which reflects that the Company has not yet achieved premium income levels
required to fund both its medical expenses and its selling, general and
administrative expenses.
As of April 30, 1999, there were approximately 9,698 enrollees in the managed
health care plans of the Company's subsidiary, Patient's Choice. The Company
has implemented a business plan intended to result in an increase in the
number of managed health care plan enrollees to approximately 31,000 by May,
2000, when the Company anticipates, based on current projections, that it
will begin to realize profitable operations. The Company believes it has
sufficient capital to support the operating losses of Patient's Choice until
it achieves profitable operations. However, Patient's Choice may not be able
to maintain during this period the capital requirements imposed by Louisiana
law and the Louisiana Department of Insurance, which requirements aggregate
$3,000,000. The Company may need to raise between $1,000,000 and $3,000,000
during the next twelve months in order to maintain the required regulatory
capital of Patient's Choice.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
Reports of Form 8-K. No reports on Form 8-K were filed during the three
months ended March 31, 1999.
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: May 24, 1999 /s/ Patrick C. Powers
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Patrick C. Powers
Chief Executive Officer
Date: May 24 1999 /s/ Adam Short
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Adam Short
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-QSB 3/99
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 1,226,767 1,024,119
<SECURITIES> 2,978,284 5,098,845
<RECEIVABLES> 1,091,614 84,955
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,568,674 6,266,550
<PP&E> 159,394 74,495
<DEPRECIATION> 23,533 38,844
<TOTAL-ASSETS> 6,863,138 7,376,115
<CURRENT-LIABILITIES> 3,335,699 656,273
<BONDS> 0 0
0 0
2,156 2,155
<COMMON> 107,680 107,620
<OTHER-SE> 3,580,162 6,610,067
<TOTAL-LIABILITY-AND-EQUITY> 6,863,138 7,376,115
<SALES> 3,317,123 686,175
<TOTAL-REVENUES> 3,453,559 769,449
<CGS> 2,829,506 583,249
<TOTAL-COSTS> 4,310,270 1,409,641
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (856,711) (640,192)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (856,711) (640,192)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 1,373,265 0
<CHANGES> (156,845) 74,076
<NET-INCOME> 359,709 (566,116)
<EPS-BASIC> .48 (.60)
<EPS-DILUTED> 0 0
</TABLE>
