<PAGE>
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1996
COMMISSION FILE NUMBER 33-87444
MEDICAL DEFENSE HOLDING CO.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1696112
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1311 EAST WOODHURST, SPRINGFIELD, MISSOURI 65804
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (417) 887-3120
__________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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.
X YES NO
--- ___
As of August 5, 1996 there were 999,998 shares of the Registrant's Class A
Common Stock, $.50 par value outstanding and there were 19,604 shares
outstanding of the Registrant's Class B Common Stock, $.50 par value.
________________________________________________________________________________
<PAGE>
MEDICAL DEFENSE HOLDING CO.
Quarterly Report - Form 10Q
Table of Contents
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
ITEM 1. Financial Statements
Medical Defense Holding Co.
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995
(Unaudited) 3, 4
Medical Defense Holding Co.
Consolidated Statements of Operations
for the quarter and six months ended
June 30, 1996 and 1995 (Unaudited) 5
Medical Defense Holding Co.
Consolidated Statements of Cash Flow
for the six months ended June 30, 1996
and 1995 (Unaudited) 6
Medical Defense Holding Co. Notes to
Consolidated Financial Statements
(Unaudited) 7-17
ITEM 2. Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 18-20
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities 21
ITEM 3. Defaults Upon Senior
Securities 21
ITEM 4. Submission of Matters to a
Vote of Security Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on
Form 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
(Unaudited)
________
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Investments:
Fixed maturity investments, at market
value (amortized cost of $81,409,878
and $82,944,882, respectively) $ 80,129,668 $ 84,258,601
Short-term investments, at cost 5,141,988 7,489,028
------------ ------------
Total investments 85,271,656 91,747,629
Other assets:
Cash and cash equivalents 3,270,791 4,952,745
Accrued investment income 1,138,777 1,158,529
Premium receivable 1,965,986 2,552,893
Deferred policy acquisition costs 98,292 120,527
Reinsurance recoverable on loss
and loss expenses:
Paid claims 403,900 0
Unpaid claims 1,980,000 2,383,000
Property and equipment, net of
accumulated depreciation of $1,132,158
and $1,074,167, respectively 1,166,699 1,083,539
Federal income tax:
Current 1,121,526 0
Deferred 3,695,266 3,512,609
Other assets 582,244 687,739
------------ ------------
Total assets $100,695,137 $108,199,210
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED BALANCE SHEETS, CONTINUED
June 30, 1996 and December 31, 1995
(Unaudited)
_________
<TABLE>
<CAPTION>
LIABILITIES & June 30, December 31,
STOCKHOLDERS' EQUITY 1996 1995
------------- ------------
<S> <C> <C>
Liabilities:
Claims and policy liabilities:
Unpaid losses and loss adjustment
expenses $ 64,176,650 $ 65,660,000
Unearned premiums 6,150,486 8,054,837
------------ ------------
Total claims and policy liabilities 70,327,136 73,714,837
Other liabilities:
Retrospective premium due reinsurers 2,195,496 2,195,496
Amounts withheld or retained by Company
for account of others 815,437 366,637
Current income taxes payable 618,474
Other liabilities 1,033,806 1,746,668
------------ ------------
Total liabilities 74,371,875 78,642,112
------------ ------------
Stockholders' equity:
Preferred stock, par value $1.00 per
share; 12,000,000 shares authorized;
11,990,189 shares issued and outstanding 11,990,189 11,990,189
Class A common stock, $0.50 per share;
1,000,000 shares authorized; 999,998
shares issued and outstanding 499,999 499,999
Class B common stock, $0.50 per share;
24,000,000 shares authorized; 19,604 shares
issued and outstanding 9,802 9,802
Unrealized gains (losses) on
investments (net of recoverable deferred
income taxes (provision) of $435,374 and
$(448,239), respectively (845,138) 870,111
Retained earnings 14,668,410 16,186,997
------------ ------------
Total stockholders' equity 26,323,262 29,557,098
------------ ------------
Total liabilities, redeemable
preferred stock, and
stockholders' equity $100,695,137 $108,199,210
============ ============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
4
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
---------
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned, net of retrospective
premium due reinsurers of $-0-,
$-0-, $-0-, and $-0-, respectively $ 3,189,594 $ 3,588,014 $ 6,433,362 $ 7,134,598
Investment income 1,402,013 1,441,776 2,856,265 2,839,907
Net realized investment gains 19,244 25,696 72,129 41,511
Other income 80 62 305 295
----------- ----------- ----------- -----------
Total revenues 4,610,931 5,055,548 9,362,061 10,016,311
----------- ----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses,
net of reinsurance recoveries of
$-0-, $-0-, $-0- and $27,027,
respectively 5,543,348 3,630,395 9,445,368 7,404,326
Amortization of policy acquisition 57,523 233 117,072 233
costs
Other underwriting and insurance
expenses 538,859 590,973 1,122,619 1,340,457
Investment expenses 64,085 62,060 138,077 132,104
Other operating expenses 26,597 3,921 46,556 9,368
----------- ----------- ----------- -----------
Total expenses 6,230,412 4,287,582 10,869,692 8,886,488
----------- ----------- ----------- -----------
Income/(Loss) before provision
for federal income taxes (1,619,481) 767,966 (1,507,631) 1,129,823
----------- ----------- ----------- -----------
Provision for federal income taxes:
Current (630,392) 318,000 (690,000) 328,000
Deferred 575,431 11,974 700,956 184,110
----------- ----------- ----------- -----------
Total tax provision/(benefit) (54,961) 329,974 10,956 512,110
----------- ----------- ----------- -----------
Net Income/(Loss) $(1,564,520) $ 437,992 $(1,518,587) $ 617,713
=========== =========== =========== ===========
Earnings per common share and common
equivalent share (Note 9):
Primary-Weighted average shares 24,999,980 24,999,980 24,999,980 24,999,980
=========== =========== =========== ===========
Net income/(loss) per common share $ (0.06) $ N/A $ (0.06) $ N/A
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
5
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF CASH FLOW
for the six months ended June 30, 1996 and 1995
(Unaudited)
---------
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
------------- ------------
<S> <C> <C>
Operating activities:
Net income/(loss) $ (1,518,587) $ 617,713
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized investment gains (72,129) (41,511)
Depreciation and amortization of
deferred policy acquisition costs 159,707 43,284
Provision for deferred income tax 700,956 184,110
Change in assets and liabilities:
Accrual and amortization of (18,929) 167,084
investment income
Premiums receivable from 586,907 1,526,200
policyholders
Deferral of policy acquisition costs (94,836) (17,225)
Reinsurance recoverable on loss &
loss expenses:
Paid claims (403,900) 2,267,661
Unpaid claims 403,000 (207,000)
Unpaid losses & loss adjustment expenses (1,483,350) 557,653
Unearned premiums (1,904,351) (1,338,917)
Amounts withheld or retained by
Company on account of others 448,800 356,326
Income tax (1,740,000) 978,000
Other assets 105,495 (140,981)
Other liabilities (712,862) (1,089,735)
------------ -----------
Net cash provided (used) by (5,544,079) 3,862,662
operating activities ------------ -----------
Investing activities:
Proceeds from:
Fixed maturity investments - Sales 4,572,813 3,885,269
Fixed maturity investments - Maturities 2,942,321 2,077,049
Short-term investments 13,490,844 2,940,000
Purchase of investments:
Fixed maturity investments (6,031,407) (8,055,835)
Short-term investments (10,986,651) (4,098,000)
Purchases of property and equipment (net) (125,795) (26,232)
------------ -----------
Net cash provided/(used) by 3,862,125 (3,277,749)
investing activities ------------ -----------
Financing activities:
Proceeds from sale of stock 0 499,996
------------ -----------
Net cash provided by financing 0 499,996
activities ------------ -----------
Net increase/(decrease) in cash (1,681,954) 1,084,909
and cash equivalents
Cash and cash equivalents, beginning of 4,952,745 5,625,817
period ------------ -----------
Cash and cash equivalents, end of period $ 3,270,791 $ 6,710,726
============ ===========
Federal income taxes paid (refunded) $ 1,020,000 $ (650,000)
============ ===========
</TABLE>
The accompanying notes are an integral part of
the accompanying financial statements.
6
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
________
1. Organization and Related Matters:
--------------------------------
Medical Defense Holding Co. (the "Company") is a Missouri general business
corporation formed on November 28, 1994, for the purpose of facilitating
the consummation of a series of transactions whereby Medical Defense
Associates ("MDA") converted from a mutual assessment insurance
organization under Chapter 383 RSMo to a wholly-owned stock insurance
company subsidiary of the Holding Company. MDA's conversion was completed
on June 26, 1995 in accordance with an agreement and plan of conversion
dated November 29, 1994. The agreement and plan of conversion was approved
by eligible policyholders at a special meeting on April 3, 1995.
MDA was organized in 1976 as a mutual assessment insurance organization for
the purpose of providing protection against loss from medical professional
liability claims for Missouri health care professionals. MDA's wholly-owned
subsidiary, Medical Defense Services Corp. ("MDS") provides management
services primarily to MDA. Medical Defense Services Corp.'s wholly-owned
subsidiary, Medical Defense Insurance Company ("MDIC"), is a stock
insurance company organized under Chapter 379 RSMo for the purpose of
providing protection against loss from medical professional liability
claims. MDIC is licensed to operate in Missouri and Kansas but only wrote
business in Kansas from its inception in 1982 until September 1, 1988 when
it ceased writing business. In June of 1994, MDIC again began writing
policies in Kansas.
2. Basis of Presentation:
---------------------
All June 30, 1996 and 1995 information contained in the following footnotes
is unaudited. It is management's opinion that the financial statements as
of June 30, 1996 and 1995 and for the six months then ended reflect all
adjustments which are necessary to present a fair statement of results for
the interim periods presented. The financial statements of MDA and its
subsidiaries as of June 30, 1995, have been consolidated with the Company
in a manner similar to a pooling of interests to reflect the conversion of
MDA to a wholly-owned stock subsidiary of the Company, effective on June
26, 1995. All other adjustments made are of a normal recurring nature.
3. Summary of Significant Accounting Policies:
------------------------------------------
The following is a description of the significant accounting policies under
generally accepted accounting principles followed by the Company in the
preparation of the accompanying consolidated financial statements:
A. Pervasiveness of Estimates:
--------------------------
The preparation of consolidated 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 at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
7
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
3. Summary of Significant Accounting Policies, continued:
------------------------------------------
B. Investments:
-----------
In May, 1993, the Financial Accounting Standards Board published
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity
Securities" which, among other things, requires companies to
classify debt and equity securities into three categories. Held-
to-maturity debt securities that the Association has the positive
intent and ability to hold to maturity are reported at amortized
cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and are to be reported at fair
value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified in the other two
categories are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of surplus as
regards policyholders.
The accompanying consolidated GAAP financial statements of the
Company for the six months ended June 30, 1996 and the year ended
December 31, 1995 have been prepared in accordance with SFAS 115,
and the Company has classified all investments in fixed
maturities as available for sale. Should the Company experience
declines in market value that are other than temporary, the
difference between amortized cost and market would be recognized
through current earnings.
Fair value is defined as market value based on third-party quoted
market prices or, when unavailable, on similar investments.
Investment income includes amortization of premium and accretion
of discount relating to fixed maturities acquired at other than
par value.
C. Reinsurance:
-----------
The Company has adopted Statement of Financial Accounting
Standards No. 113 ("SFAS 113"), "Accounting and Reporting for
Reinsurance of Short-duration and Long-duration Contracts" which
requires certain changes in the manner in which insurance
enterprises account for and report on insurance contracts. Among
other things, SFAS 113 eliminates the practice by insurance
enterprises of reporting assets and liabilities related to
reinsurance contracts net of the effects of reinsurance. It
requires reinsurance receivables and prepaid reinsurance premiums
to be reported as assets.
D. Income Taxes:
------------
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes". SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events
that have been included in the financial statements or tax
returns.
8
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
4. Capital Stock:
-------------
The Company has issued shares of $1.00 par value redeemable convertible
preferred stock to the eligible policyholders of MDA in exchange for their
mutual policyholders' rights in MDA. Each share of preferred stock is
convertible into two shares of Medical Defense Holding Co. Class B Common
Stock, at the holders option, and may be converted at any time prior to
redemption. Each share of preferred stock is redeemable, at the Company's
option, after three years from the date of issuance at a price per share of
$1.00. The preferred stock does not provide a stated dividend and no
dividends may be paid on any Company common stock while there are preferred
stock shares outstanding. Subsequent to the conversion of MDA to a stock
company, 9,802 shares of preferred stock were converted to 19,604 shares of
Class B common stock.
The Company has issued shares of $0.50 par value Class A common stock in
accordance with an agreement and plan of conversion dated November 29,
1994, in exchange for cash.
5. Investments:
-----------
The following information summarizes the difference between amortized cost
and market value of fixed maturities investments:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
June 30, 1996
-------------
U.S. Treasury debt securities and
obligations of U.S. Government
corporations and agencies $41,212,481 $ 121,586 $ 663,499 $40,670,568
Corporate debt securities 6,479,160 72,836 95,456 6,456,540
Mortgage-backed securities 30,229,066 147,468 788,435 29,588,099
Other debt securities 3,489,171 0 74,710 3,414,461
----------- ---------- ---------- -----------
$81,409,878 $ 341,890 $1,622,100 $80,129,668
=========== ========== ========== ===========
December 31, 1995
-----------------
U.S. Treasury debt securities and
obligations of U.S. Government
corporations and agencies $40,744,234 $ 927,384 $ 77,008 $41,594,610
Corporate debt securities 6,582,096 218,052 7,370 6,792,778
Mortgage-backed securities 32,741,359 418,313 148,756 33,010,916
Other debt securities 2,877,193 16,484 33,380 2,860,297
----------- ---------- ---------- -----------
$82,944,882 $1,580,233 $ 266,514 $84,258,601
=========== ========== ========== ===========
</TABLE>
9
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
5. Investments, continued:
The change in net unrealized holding gain or loss on available for sale
securities, net of deferred taxes, for the six months ended June 30, 1996
and the year ended December 31, 1995, is as follows:
June 30, December 31,
1996 1995
---------- ------------
$(1,715,249) $ 4,309,126
============ ============
The amortized cost and estimated market value of debt securities by
contractual maturity are shown as follows:
Estimated
Amortized Market
Cost Value
----------- -----------
June 30, 1996
- - -------------
Due in one year or less $ 8,210,273 $ 8,099,297
Due after one year through five years 45,864,861 45,226,448
Due after five years through ten years 21,013,049 20,607,730
Due after ten years 6,321,695 6,196,193
----------- -----------
$81,409,878 $80,129,668
=========== ===========
For purposes of the above, bonds without prepayment characteristics have
been included at their stated maturity date. Bonds with prepayment features
are included at their estimated maturity date as supplied by the Company's
investment adviser.
Accrued investment income at June 30, 1996 and December 31, 1995, is as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
U.S. Treasury securities $ 800,849 $ 801,524
Corporate bonds 143,898 147,178
Mortgage-backed securities 178,043 193,528
Other debt securities 15,987 15,374
Short-term investments 0 925
---------- ----------
$1,138,777 $1,158,529
========== ==========
</TABLE>
10
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
_________
5. Investments, continued:
-----------
Securities on Deposit With Statutory Authorities:
------------------------------------------------
To comply with the Missouri Department of Insurance, MDA had a U.S.
Treasury Note with a par value of $1,400,000 as of June 30, 1996, on
deposit with the State of Missouri.
To comply with a special agreement with the Missouri Department of
Insurance related to the conversion of MDA to a Chapter 379 stock
insurance company and the release of MDA members from potential
future assessment liability, MDA had U.S. Treasury Notes with a total
par value of $5,000,000, on deposit with the State of Missouri.
To comply with the Missouri Department of Insurance, MDIC had a U.S.
Treasury Note with a par value of $850,000 as of June 30, 1996 and
December 31, 1995, on deposit with the State of Missouri.
Escrow Funds:
------------
Pursuant to the settlement agreement for a specific claim, MDA has
deposited $400,000 in escrow to guarantee future annuity payments.
The Company receives all earnings on the escrowed funds. At June 30,
1996 and December 31, 1995, the escrowed funds were invested in a
$400,000 par value U.S. Treasury Note maturing October 13, 1996 with
a fair value of $402,876 and $408,248, respectively, which is
included with investments on the balance sheet.
Net investment income by source was as follows for the six months ended
June 30, 1996 and 1995:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Investment income:
Fixed maturity investments $2,619,586 $2,603,921
Short-term investments 236,679 235,986
---------- ----------
Total investment income 2,856,265 2,839,907
Less investment expenses 138,077 132,104
---------- ----------
Net investment income $2,718,188 $2,707,803
========== ==========
</TABLE>
11
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
__________
5. Investments, continued:
-----------
Realized gains on investments reflected in the results of operations for
the six months ended June 30, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
--------- ---------
<S> <C> <C>
Sale of fixed maturity investments:
Realized gains $74,834 $42,548
Realized losses (2,705) (1,037)
------- -------
Net realized gains $72,129 $41,511
======= =======
</TABLE>
6. Statutory Disclosures:
---------------------
Net income and surplus reported by MDA separately in its reports filed with
the Missouri Department of Insurance utilizing statutory accounting principles
and practices prescribed or permitted by the Missouri Department of Insurance
are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
------------ -----------
<S> <C> <C>
Net income/(loss) for six months ended $ (930,839) $ 400,267
June 30 =========== ===========
Surplus (including equity in MDS and
MDIC), June 30 $23,077,748 $26,758,994
=========== ===========
</TABLE>
Net income and surplus reported by MDIC separately in its reports filed with
the Missouri Department of Insurance utilizing statutory accounting principles
and practices prescribed or permitted by the Missouri Department of Insurance
are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Net income for six months ended June 30 $ 11,311 $ 13,177
========== ==========
Surplus, June 30 $4,416,868 $4,380,034
========== ==========
</TABLE>
12
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
7. Federal Income Tax:
------------------
The Company files a consolidated federal income tax return. MDA and MDIC
are statutorily exempt from state income taxes. State income taxes relating
to the Company and MDS are included in other operating expenses in the
consolidated statement of income. None of the Company's income tax filings
are currently under examination.
The following table accounts for the differences between the actual current
tax provision and the amounts obtained by applying the statutory
U.S. federal income tax rate to income before income taxes:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
Income Effective Income Effective
Taxes Tax Rate Taxes Tax Rate
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Pre-tax income calculated at
statutory tax rates $ (512,595) (34.00)% $ 384,140 34.00%
Nondeductible reorganization costs 94,077 8.32
Other permanent differences 9,194 0.61 26,198 2.32
Change in valuation allowance 514,357 34.12 7,695 0.68
----------- ---------- --------- ---------
Provision for income taxes $ 10,956 0.73% $ 512,110 45.32%
=========== ========== ========== =========
The components of the net deferred tax asset at June 30, 1996 and December 31, 1995, are as follows:
June 30, 1996 December 31, 1995
------------- -----------------
Deferred Deferred Deferred Deferred
Tax Asset Tax Liability Tax Asset Tax Liability
---------- ------------- ---------- -------------
Tax discounting of loss reserves $4,517,881 $4,582,544
Tax acceleration of unearned premium 418,233 547,729
Deferred policy acquisition costs $ 33,419 $ 40,979
-------------
Unrealized gain/loss 435,374 448,239
---------- ------------- ----------- -------------
$5,371,488 $ 33,419 $ 5,130,273 $489,218
========== ============= =========== =============
Net deferred federal income tax asset $5,338,069 $ 4,641,055
Valuation allowance (1,642,803) (1,128,446)
---------- -----------
Net realized deferred tax asset $3,695,266 $ 3,512,609
========== ===========
</TABLE>
13
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
7. Federal Income Tax, continued:
------------------
The valuation allowance represents the difference between the total
deferred tax asset related to loss reserve discounting required by the
Internal Revenue Service and the amount that is more likely than not to be
realized. Medical malpractice is a long tail line of business. MDA's payout
pattern as well as the industry payout pattern for this line of business is
expected to be 15 years or longer.
Management evaluates the payout pattern based on advice from its outside
actuary concerning trends in claim frequencies and severities and needed
changes in future premium rates, industry trends and experience of direct
Missouri competitors in these matters.
Projection of future income is inherently uncertain and the achievability
of any projection is made more difficult by the length of the discount
period. Historical losses cannot be adjusted precisely to future cost
levels and the impacts of future emergence of new classes of losses or
types of losses which may not be represented sufficiently in MDA's data
base or which are not yet quantifiable, cannot be precisely anticipated.
Utilizing an outside actuary, management believes that it can reasonably
estimate the amount of the loss reserves which will likely settle in the
next three years. Based on this estimate, management can determine how much
of the discount will likely reverse and could be recovered, if necessary,
from taxes paid in the three-year carryback period.
Management does not believe it can reasonably determine the amount of loss
reserve deferred tax benefit which can be recovered from future taxable
income arising more than three years in the future, using a more likely
than not standard.
The change in the valuation allowance is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C>
$514,357 $(519,704)
======== =========
</TABLE>
14
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
8. Unpaid Losses and Loss Adjustment Expenses:
------------------------------------------
The Company's reserves for loss and loss adjustment expenses represent the
estimated ultimate cost of all losses and loss adjustment expenses which
are unpaid at the balance sheet date, on a consolidated basis, for both MDA
and MDIC.
The reserves include estimates of future trends in claim frequency,
severity and cash flow, which could vary as the losses are ultimately
settled; thus, the ultimate liability may be in excess of, or less than,
the amounts provided in the accompanying financial statement.
Company management believes the reserves are reasonably stated to cover the
ultimate cost of losses and related loss adjustment expenses which are
unpaid at June 30, 1996 and December 31, 1995, respectively. As the result
of an increase in claims paid for MDA late in the first quarter and during
the second quarter of 1996, the Company's management retained its
independent actuary to prepare an interim reserve study. Based on that
study and an additional study performed by another actuary, the Company
determined to strengthen its reserve for losses and loss adjustment
expenses by approximately $2.4 million. This reserve strengthening related
primarily to totally expected ultimate losses for the most recent years
from 1993 up to and including the current year. The Company will continue
to monitor the level of claim severity, and to seek input from actuaries as
appropriate. There can be no assurance, however, that the estimates of the
actuaries will prove to be accurate, or that the Company's reserve for loss
and loss adjustment expense is at the appropriate level. If recent trends
in claims continue, the Company may be required to significantly increase
the reserve again at the end of the year. In the event that claim severity
decreases over the next six months, current reserve amounts may prove to be
adequate.
MDIC's reserves for loss and loss adjustment expenses have not been
actuarially reviewed due to the few number of claims outstanding. MDIC's
reserves represent less than 1% of total reserves for the periods
represented by the financial statements.
Company management believes the reserves are reasonably stated to cover the
ultimate net cost of unpaid losses and loss adjustment expenses; however,
as the reserves are based on estimates, there can be no assurance that the
ultimate liability will not differ from such estimates.
15
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
8. Unpaid Losses and Loss Adjustment Expenses, continued:
--------------------------------------------
Activity in the liability for unpaid claims and claim adjustment expenses
is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Balance at January 1 $65,660,000 $65,803,000
Less reinsurance recoverables 2,383,000 2,905,000
----------- -----------
Net balance at January 1 63,277,000 62,898,000
----------- -----------
Incurred related to:
Current year 7,999,893 18,115,000
Prior years 1,445,475 (1,956,478)
----------- -----------
Total incurred 9,445,368 16,158,522
----------- -----------
Paid related to:
Current year 53,973 1,333,057
Prior years 10,471,745 14,446,465
----------- -----------
Total paid 10,525,718 15,779,522
----------- -----------
Net balance at end of period 62,196,650 63,277,000
Plus reinsurance recoverables 1,980,000 2,383,000
----------- -----------
Balance at end of period $64,176,650 $65,660,000
=========== ===========
</TABLE>
9. Net Income Per Common Share:
---------------------------
Net income per common share is computed using net income divided by the
weighted average number of common shares and common share equivalents
outstanding. All of the Company's outstanding shares of preferred stock are
convertible to common stock at a ratio of two shares of common stock for
each one share of preferred stock. Since the Company's preferred stock has
no stated dividend rate, and thus, no effective yield, these securities are
considered common stock equivalents for the purpose of computing net income
per common share.
16
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
9. Net Income Per Common Share:
---------------------------
Other than the preferred stock discussed above, the Company does not have
any other potentially dilutive stocks. Therefore, the computations for
fully dilutive net income per common share are not presented since the
results do not differ from primary net income per common share.
Net income per share information is not computed for the periods ending
June 30, 1995 and prior, as the conversion of MDA to a stock insurance
company and a wholly-owned subsidiary of MDHC was not completed until June
26, 1995, and therefore, virtually all of the earnings for those periods
are attributable to the pre-conversion earnings of MDA. Following are the
computations for the six months ended June 30, 1996:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
--------------
<S> <C>
Net income/(loss) $(1,518,587)
===========
Weighted average common shares
outstanding 1,019,602
===========
Weighted average common stock options
expressed as common stock equivalents 23,980,378
===========
Weighted average common and equivalent
shares outstanding 24,999,980
===========
Net income/(loss) per common share $ (0.06)
===========
</TABLE>
10. Commitments and Contingencies:
-----------------------------
The Company is party to a number of insurance claims arising in the normal
course of business. While the results of litigation cannot be predicted
with certainty, management, based upon the advice of Company's counsel,
believes that the final outcome of such litigation will not have a material
adverse effect on the consolidated financial position or results of
operations of the Company.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
Medical Defense Holding Co. ("MDHC") is a Missouri general business corporation
formed for the purpose of facilitating the conversion of Medical Defense
Associates ("MDA") from a mutual insurance association to a stock insurance
company. On June 26, 1995, the conversion was completed with the exchange of the
policyholders' rights in MDA, the mutual insurance association, for shares of
convertible Preferred Stock in MDHC, the parent holding company. MDHC owns all
of the outstanding shares of MDA.
The accompanying consolidated financial statements and related discussion
include the accounts of MDHC and its wholly-owned insurance subsidiary, MDA, and
have been consolidated with MDHC in a manner similar to a pooling of interests
to reflect the conversion of MDA to a wholly-owned stock subsidiary of MDHC.
MDHC does not have any significant revenue producing operations of its own other
than through its ownership of MDA. Cash flow within MDHC consists of investment
income and operating expenses. Also included in the accompanying consolidated
financial statements are MDA's wholly-owned subsidiaries, Medical Defense
Services Corp. ("MDS") and Medical Defense Insurance Company ("MDIC"). MDS is a
wholly-owned subsidiary of MDA and provides management services primarily to
MDA. MDIC is a wholly-owned subsidiary of MDS and is a stock insurance company
organized under Chapter 379 RSMo for the purpose of providing protection against
loss from medical professional liability claims. During the past 12 months, MDIC
has written a small amount of premium, less than $100,000, entirely in the state
of Kansas.
RESULTS OF OPERATIONS
MDHC recorded an 8.8% decrease in total revenues in the second quarter of 1996
and a 6.5% decrease for the six months ended June 30, 1996, compared with the
same periods in the prior year. The decrease in total revenues during the
quarter and the six month period ended June 30, 1996, was primarily due to a
decrease in premium revenue. This decrease in premiums earned, which occurred
although MDA instituted a 14% overall rate increase effective January 1, 1996,
was due to a decline in premiums written during the first six months of 1996 of
approximately $1,240,000 or 22% compared to the same time frame in 1995. This
decrease in premiums written was the result of a small decline in total
policyholders which was concentrated in the higher premium surgical
classifications. Total policyholders declined less than 5% when compared with
total policyholders with the Company at the beginning of 1996. The remaining
decreases were the result of various other changes in the Company's book of
business which primarily relate to specialty classifications and discounts which
policyholders are eligible to receive.
Investment income decreased 2.8% for the quarter ended June 30, 1996, and
increased by less than 1% for the six months ended June 30, 1996, compared to
the same periods in 1995. This variation was primarily the result of
fluctuations in market interest rates during the first six months of both 1996
and 1995. Realized investment gains were $19,244 in the quarter and $72,129 for
the six-month period compared to $25,696 and $41,511 in the same prior year
periods, respectively.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
RESULTS OF OPERATIONS, continued
MDHC's total expenses for the quarter and six-month period ended June 30, 1996
represented approximately 135% and 116% of total revenues, respectively,
compared to 84.8% and 88.7% during the same periods in 1995. The increase in
expenses during the first six months of 1996, compared to the same period in
1995, is almost entirely the result of increases in expenses for claim losses
and claim loss adjustment expenses. As the result of an increase in claims paid
late in the first quarter and during the second quarter of 1996, the Company's
management retained its independent actuary to prepare an interim reserve study.
Based on that study and an additional study performed by another actuary, the
Company determined to strengthen its reserve for losses and loss adjustment
expenses by approximately $2.4 million. This reserve strengthening related
primarily to totally expected ultimate losses for the most recent years from
1993 up to and including the current year. The Company will continue to monitor
the level of claim severity, and to seek input from actuaries as appropriate.
There can be no assurance, however, that the estimates of the actuaries will
prove to be accurate, or that the Company's reserve for loss and loss adjustment
expense is at the appropriate level. If recent trends in claims continue, the
Company may be required to significantly increase the reserve again at the end
of the year. In the event that claim severity decreases over the next six
months, current reserve amounts may prove to be adequate. Other operating
expenses for the quarter and six months ended June 30, 1996, were generally
consistent with the prior periods with the exception of deferred acquisition
costs which relate entirely to state premium tax that the Company was generally
not subject to prior to MDA's demutualization on June 20, 1995. For the six
months ended June 30, 1996, other underwriting and insurance expenses were down
$217,838 or approximately 16% which was due to non-recurring expenses incurred
in the first quarter of 1995 relating to MDA's conversion and demutualization.
FINANCIAL CONDITION
MDHC's total consolidated assets were $100,695,137 as of June 30, 1996
consisting primarily of cash and investments which comprised approximately 88%
of total assets. Approximately 79% of MDHC's total assets consisted of either
cash, U.S. Treasury bonds, U.S. government agency bonds, or other investments
either collateralized or guaranteed by U.S. government agencies or securities.
MDHC's total assets declined $7,504,073 during the six months ended June 30,
1996, which was due to an increase in the payment of claim losses and loss
adjustment expenses of approximately $3.5 million, a decline in the net market
value of the Company's investment portfolio of almost $2.6 million, and a
decline in premiums written of approximately $1.2 million. MDHC does not hold,
either directly or indirectly, any real estate owned for investment purposes or
any fixed maturity investments rated below AA by nationally recognized rating
agencies. The composition of MDHC's total investments is not anticipated to
change substantially in the near future.
MDHC's total consolidated liabilities as of June 30, 1996, were $74,371,875
which was a decline of approximately 5.4% from December 31, 1995. This decline
was primarily the result of a decline in unearned premiums of $1,904,351 from
December 31, 1995 to June 30, 1996. Approximately 86% of MDHC's consolidated
total liabilities at June 30, 1996, relate to unpaid loss and loss adjustment
expenses.
Stockholders' equity decreased 10.9% as of June 30, 1996, compared with the
prior year-end due to a decline in the net unrealized losses on investments of
$1,715,249 and a net loss for the period of $1,518,587.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
LIQUIDITY AND CAPITAL RESOURCES
MDHC's cash flow is generated from its operations and investment portfolio. Net
cash used by operating activities increased $9,406,741 from an increase in cash
provided of $3,862,662 at June 30, 1995, to an increase in cash used by
operating activities of $5,544,079 at June 30, 1996. This increase in cash used
by operating activities was caused primarily by an increase in claim loss and
loss adjustment expense payments of approximately $3.5 million, a decline in
premiums written which was approximately $1.2 million when compared to the same
period in 1995, an increase in amounts either paid or due relating to current
and deferred federal income taxes of approximately $2.2 million, and the
decrease in net income of $2,136,300 for the six months ended June 30, 1996,
compared to the same period in 1995.
MDHC's investing activities resulted in a net increase in cash provided by
investing activities of $3,862,125 at June 30, 1996, compared to a decrease in
cash provided by investing activities of $3,277,749 for the same period in 1995.
This increase was due to the utilization of proceeds from short-term investments
for operating activities and a decline in the purchase of new fixed-maturity
investments of approximately $2 million as these funds were also utilized in
operating activities.
On June 26, 1995, MDHC received an additional $499,996 in cash for the sale of
additional shares of Class A Common Stock to Company Principals in conjunction
with the consummation of the conversion of MDA to a wholly-owned subsidiary of
MDHC.
MDHC's cash flow from operations and its investment portfolio are utilized to
meet its obligations related to payment of losses and loss adjustment expenses,
payment of operating expenses, and other needs as deemed necessary from time to
time. MDHC anticipates that its future cash flow will be sufficient to meet the
Company's ongoing obligations for the foreseeable future.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The exhibits to this report are listed in the Exhibit Index on page E-
1 and E-2 of this report, which index is incorporated herein by
reference.
(b) Reports on Form 8-K.
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Defense Holding Co.
(Registrant)
August 5, 1996 /s/ Ronald G. Benson
- - -------------- ----------------------------
Date Ronald G. Benson
President, CEO, and Chairman
of the Board (principal
executive officer); Director
August 5, 1996 /s/ Samuel J. Pippin
- - -------------- ---------------------------
Date Samuel J. Pippin
Director of Accounting and
Finance (principal financial
and accounting officer)
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- - ------- ----------- ----
<S> <C> <C>
3.1 -- Articles of Incorporation of Medical Defense Holding Co.
(Filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (file #33-87444) and hereby
incorporated by reference.)..................................
3.2 -- Bylaws of Medical Defense Holding Co. (Filed as
Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1 (file #33-87444) and hereby incorporated by
reference.)..................................................
4.1 -- Right of First Refusal Agreement (Filed as Exhibit 4.1
to the Registrant's Registration Statement on Form S-1
(file #33-87444) and hereby incorporated by
reference.)..................................................
4.2 -- Specimen Stock Certificate for Preferred Stock
(Filed as Exhibit 4.2 to the Registrant's Registration
Statement on Form S-1 (file #33-87444) and hereby
incorporated by reference.)..................................
4.3 -- Specimen Stock Certificate for Class A Common Stock
(Filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1 (file #33-87444) and hereby
incorporated by reference.)..................................
4.4 -- Specimen Stock Certificate for Class B Common Stock
(Filed as Exhibit 4.4 to the Registrant's Registration
Statement on Form S-1 (file #33-87444) and hereby
incorporated by reference.)..................................
10.1 -- 1983 Management Agreement between Medical Defense
Associates and Medical Defense Services Corp.,
as amended (Filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 (file
#33-87444) and hereby incorporated by reference.)............
10.2 -- 1983 Management Agreement between Medical Defense
Insurance Company and Medical Defense Services Corp.,
as amended (Filed as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 (file# 33-87444)
and hereby incorporated by reference.).......................
10.3 -- Amended and Restated Employment Agreement between
Ronald G. Benson and Medical Defense Services Corp.,
dated January 1, 1993 (Filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1
(file #33-87444) and hereby incorporated by reference.)......
10.4 -- Amended and Restated Employment Agreement between
Geraldine Hatfield (Morrison) and Medical Defense
Services Corp., dated January 1, 1993 (Filed as
Exhibit 10.4 to the Registrant's Registration Statement
on Form S-1 (file #33-87444) and hereby incorporated
by reference.)...............................................
10.5 -- Amended and Restated Employment Agreement between
Arlen D. Winsky and Medical Defense Services Corp.,
dated January 1, 1993 (Filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1
(file #33-87444) and hereby incorporated by reference.)......
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- - ------- ----------- ----
<S> <C>
10.6 -- Amended and Restated Employment Agreement between
David W. Brown and Medical Defense Services Corp.,
dated January 1, 1993 (Filed as Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1
(file #33-87444) and hereby incorporated by reference.).......
10.7 -- Amended and Restated Employment Agreement between
Gary L. Robinson and Medical Defense Services Corp.,
dated January 1, 1993 (Filed as Exhibit 10.7 to the
Registrant's Registration Statement on Form S-1
(file #33-87444) and hereby incorporated by reference.).......
10.8 -- Amended and Restated Employment Agreement between
John J. Stamatis and Medical Defense Services Corp.,
dated January 1, 1993 (Filed as Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1
(file #33-87444) and hereby incorporated by reference.).......
10.9 -- Medical Defense Services Corp. Integrated Money Purchase
Pension and Trust Agreement, between, Medical Defense
Services Corp. and Boatmen's Trust Company, as amended,
dated December 31, 1990 (Filed as Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1
(file #33-87444) and hereby incorporated by reference.).......
10.10 -- Carnahan, Evans, Cantwell & Brown, P.C. Defined
Contribution Prototype Plan and Trust Agreement,
adopted December 31, 1990 (Filed as Exhibit 10.10
to the Registrant's Registration Statement on
Form S-1 (file #33-87444) and hereby incorporated
by reference.)................................................
10.11 -- Medical Defense Services Corp. Executive Compensation Plan,
dated October 15, 1993 (Filed as Exhibit 10.11 to the
Registrant's Registration Statement on Form S-1
(file #33-87444) and hereby incorporated by reference.).......
10.12 -- Form of Deposit Agreement between Medical Defense
Associates and Central Bank, Jefferson City, Missouri
(Filed as Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 (file #33-87444) and hereby
incorporated by reference.)...................................
10.13 -- Form of Employment Guaranty Agreement by Medical Defense
Holding Co. guaranteeing existing Medical Defense Services
Corp.'s employment agreements (Filed as Exhibit 10.13 to
the Registrant's 1995 Annual Report on Form 10K
(file #33-87444) and hereby incorporated by reference.).......
11.1 -- Statement re computation of per share earnings (Disclosed
in Note 9 to the Registrant's accompanying unaudited
consolidated financial statements included in Part I
of this form 10Q).............................................
21.1 -- Subsidiaries of the registrant (Filed as Exhibit 21.1 to
the Registrant's 1995 Annual Report on Form 10K (file
#33-87444) and hereby incorporated by reference.).............
28.1 -- Information from reports furnished to state insurance
regulatory authorities (Filed as Exhibit 28.1 to the
Registrant's 1995 Annual Report on Form 10K (file #33-87444)
and hereby incorporated by reference.)........................
</TABLE>
E-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from
the Company's Financial Statements for the six months ended June 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 80,129,668
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 85,271,656
<CASH> 3,270,791
<RECOVER-REINSURE> 2,383,900
<DEFERRED-ACQUISITION> 98,292
<TOTAL-ASSETS> 100,695,137
<POLICY-LOSSES> 64,176,650
<UNEARNED-PREMIUMS> 6,150,486
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 815,437
<NOTES-PAYABLE> 0
<COMMON> 509,801
0
11,990,189
<OTHER-SE> 13,823,272
<TOTAL-LIABILITY-AND-EQUITY> 100,695,137
6,433,362
<INVESTMENT-INCOME> 2,856,265
<INVESTMENT-GAINS> 72,129
<OTHER-INCOME> 305
<BENEFITS> 9,445,368
<UNDERWRITING-AMORTIZATION> 117,072
<UNDERWRITING-OTHER> 1,122,619
<INCOME-PRETAX> (1,507,631)
<INCOME-TAX> 10,956
<INCOME-CONTINUING> (1,518,587)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,518,587)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<RESERVE-OPEN> 65,660,000
<PROVISION-CURRENT> 7,999,893
<PROVISION-PRIOR> 1,445,475
<PAYMENTS-CURRENT> 53,973
<PAYMENTS-PRIOR> 10,471,745
<RESERVE-CLOSE> 64,176,650
<CUMULATIVE-DEFICIENCY> 1,445,875
</TABLE>
