<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, 1997
Commission file number 0-28214
MEDICAL DEFENSE HOLDING CO.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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 July 28, 1997 there were 999,998 shares of the Registrant's Class A
Common Stock, $.50 par value outstanding and there were 33,230 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, 1997 and December 31, 1996 (Unaudited) 3, 4
Medical Defense Holding Co. Consolidated Statements of Operations
for the quarter and six months ended June 30, 1997 and 1996 (Unaudited) 5
Medical Defense Holding Co. Consolidated Statements of Cash Flow
for the six months ended June 30, 1997 and 1996 (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, 1997 and December 31, 1996
(Unaudited)
---------
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
-------- ------------
<S> <C> <C>
Investments:
Fixed maturity investments, at market value
(amortized cost of $77,900,009 and
$79,151,698, respectively) $77,440,033 $78,789,906
Short-term investments, at cost 6,142,149 4,508,740
----------- -----------
Total investments 83,582,182 83,298,646
Other assets:
Cash and cash equivalents 3,451,803 3,514,854
Accrued investment income 1,044,027 1,054,327
Premium receivable 1,333,458 1,895,965
Reinsurance recoverable on loss
and loss expenses:
Paid claims 2,798
Unpaid claims 1,371,000 1,951,000
Deferred policy acquisition costs 41,018
Property and equipment, net of accumulated
depreciation of $1,207,259 and
$1,163,536, respectively 1,073,196 1,117,542
Federal income tax:
Current 180,027 2,401,224
Deferred 1,318,000 1,204,000
Other assets 493,822 338,138
----------- -----------
Total assets $93,888,533 $96,778,494
=========== ===========
</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, 1997 and December 31, 1996
(Unaudited)
--------
<TABLE>
<CAPTION>
LIABILITIES & June 30, December 31,
STOCKHOLDERS' EQUITY 1997 1996
-------- ------------
<S> <C> <C>
Liabilities:
Claims and policy liabilities:
Unpaid losses and loss adjustment expenses $62,502,597 $63,205,000
Unearned premiums 5,087,983 7,571,534
----------- -----------
Total claims and policy liabilities 67,590,580 70,776,534
Other liabilities:
Retrospective premium due reinsurers 1,970,047 1,970,047
Amounts withheld or retained by Company
for account of others 653,026 273,679
Other liabilities 1,087,991 1,922,744
----------- -----------
Total liabilities 71,301,644 74,943,004
----------- -----------
Stockholders' equity:
Preferred stock, par value $1.00 per share;
12,000,000 shares authorized; 9,202,038 and
9,208,851 shares issued and outstanding, respectively 9,202,038 9,208,851
Class A common stock, $0.50 per share;
2,000,000 shares authorized; 999,998 shares
issued and outstanding 499,999 499,999
Class B common stock, $0.50 per share;
48,000,000 shares authorized; 33,230 and 19,604
shares issued and outstanding, respectively 16,615 9,802
Additional paid-in capital 1,668,803 1,668,803
Unrealized gains (losses) on investments
(net of recoverable deferred income taxes
of $122,565 and $122,565, respectively) (336,638) (237,920)
Retained earnings 11,536,072 10,685,955
----------- -----------
Total stockholders' equity 22,586,889 21,835,490
----------- -----------
Total liabilities, redeemable preferred
stock, and stockholders' equity $93,888,533 $96,778,494
=========== ===========
</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,
1997 1996 1997 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $ 2,904,048 $ 3,189,594 $ 5,905,187 $ 6,433,362
Investment income 1,329,718 1,402,013 2,647,102 2,856,265
Net realized investment gains 1,050 19,244 6,943 72,129
Other income 179 80 465 305
----------- ----------- ----------- -----------
Total revenues 4,234,995 4,610,931 8,559,697 9,362,061
----------- ----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses,
net of reinsurance recoveries of $(580,000),
$-0-, $(580,000) and $-0-, respectively 3,001,974 5,543,348 6,427,244 9,445,368
Amortization of policy acquisition costs 57,523 117,072
Other underwriting and insurance
expenses 506,738 538,859 1,061,581 1,122,619
Investment expenses 53,931 64,085 120,951 138,077
Other operating expenses 52,502 26,597 99,804 46,556
----------- ----------- ----------- -----------
Total expenses 3,615,145 6,230,412 7,709,580 10,869,692
----------- ----------- ----------- -----------
Income (loss) before provision
for federal income taxes 619,850 (1,619,481) 850,117 (1,507,631)
----------- ----------- ----------- -----------
Provision for federal income taxes:
Current 152,000 (630,392) 114,000 (690,000)
Deferred (152,000) 575,431 (114,000) 700,956
----------- ----------- ----------- -----------
Total tax provision/(benefit) 0 (54,961) 0 10,956
----------- ----------- ----------- -----------
Net income (loss) $ 619,850 $(1,564,520) $ 850,117 $(1,518,587)
=========== =========== =========== ===========
Earnings per common share and common
equivalent share (Note 9):
Primary-Weighted average shares 19,437,304 24,999,980 19,437,304 24,999,980
=========== =========== =========== ===========
Net income (loss) per common share $ 0.03 $ (0.06) $ 0.04 $ (0.06)
=========== =========== =========== ===========
</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, 1997 and 1996
(Unaudited)
--------
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 850,117 $ (1,518,587)
Adjustments to reconcile net income to net cash provided
by operating activities:
Realized investment gains (6,943) (72,129)
Depreciation and amortization of deferred policy
acquisition costs 53,361 159,707
Provision for deferred income tax (114,000) 700,956
Change in assets and liabilities:
Accrual and amortization of investment income (12,887) (18,929)
Premiums receivable from policyholders 562,507 586,907
Deferral of policy acquisition costs (41,018) (94,836)
Reinsurance recoverable on loss & loss expenses:
Paid claims 2,798 (403,900)
Unpaid claims 580,000 403,000
Unpaid losses & loss adjustment expenses (702,403) (1,483,350)
Unearned premiums (2,483,551) (1,904,351)
Amounts withheld or retained by Company on account
of others 379,347 448,800
Income tax 2,221,197 (1,740,000)
Other assets (155,684) 105,495
Other liabilities (834,753) (712,862)
----------- ------------
Net cash (used) provided by operating activities 298,088 (5,544,079)
----------- ------------
Investing activities:
Proceeds from:
Fixed maturity investments - Sales 4,034,922 4,572,813
Fixed maturity investments - Maturities 3,394,688 2,942,321
Short-term investments 7,050,000 13,490,844
Purchase of investments:
Fixed maturity investments (6,278,164) (6,031,407)
Short-term investments (8,553,570) (10,986,651)
Purchases of property and equipment (net) (9,015) (125,795)
----------- ------------
Net cash (used) provided by investing activities (361,139) 3,862,125
----------- ------------
Net (decrease) in cash and cash equivalents (63,051) (1,681,954)
Cash and cash equivalents, beginning of period 3,514,854 4,952,745
----------- ------------
Cash and cash equivalents, end of period $ 3,451,803 $ 3,270,791
=========== ============
Federal income taxes paid (refunded) $(2,107,197) $ 1,020,000
=========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated 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, 1997 and 1996 information contained in the following footnotes
is unaudited. It is management's opinion that the financial statements as
of June 30, 1997 and 1996 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, 1997 and 1996, 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 significant intercompany transactions have
been eliminated. 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)
--------
B. Recently Issued Accounting Standards:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (`SFAS
128'). SFAS No. 128 specifies revised computational guidelines,
presentation and disclosure requirements for earnings per share and
supersedes Accounting Principal Board Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December
15, 1997, including interim periods. Earlier application is not permitted,
however, upon adoption SFAS No. 128 requires restatement of all prior
periods earnings per share information. The Company has not yet determined
the impact SFAS No. 128 would have on earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("SFAS 130"), which is effective for fiscal years beginning after December
31, 1997. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. The Company
has not yet determined the effect SFAS 130 will have on the financial
statements.
C. Investments:
In May, 1993, the Financial Accounting Standards Board published SFAS 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, 1997 and the year ended December 31, 1996
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.
D. 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.
8
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
E. Income Taxes:
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109 ("SFAS 109") "Accounting for Income Taxes", which
requires recognition of deferred tax liabilities and assets for the
expected future tax effect of events that have been included in the
financial statements or tax returns.
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 holder's 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, 16,615 shares of preferred stock were converted to 33,230 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
June 30, 1997 Cost Gains Losses Value
------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury debt securities and obligations
of U.S. Government corporations and
agencies $39,471,661 $136,006 $354,128 $39,253,539
Corporate debt securities 6,258,960 62,224 46,425 6,274,759
Mortgage-backed securities 28,900,285 156,584 394,972 28,661,897
Other debt securities 3,269,103 17,056 36,321 3,249,838
----------- -------- -------- -----------
$77,900,009 $371,870 $831,846 $77,440,033
=========== ======== ======== ===========
December 31, 1996
-----------------
U.S. Treasury debt securities and obligations
of U.S. Government corporations and
agencies $40,130,465 $207,149 $336,604 $40,001,010
Corporate debt securities 6,371,525 78,063 37,161 6,412,427
Mortgage-backed securities 29,829,606 188,864 434,881 29,583,589
Other debt securities 2,820,102 13,306 40,528 2,792,880
----------- -------- -------- -----------
$79,151,698 $487,382 $849,174 $78,789,906
=========== ======== ======== ===========
</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, 1997
and the year ended December 31, 1996, is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C>
$(97,718) $(1,108,031)
======== ===========
</TABLE>
The amortized cost and estimated market value of debt securities by
contractual maturity are shown as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
June 30, 1997 Cost Value
------------- ----------- ----------
<S> <C> <C>
Due in one year or less $ 9,558,146 $ 9,508,782
Due after one year through five years 38,901,326 38,664,009
Due after five years through ten years 23,648,696 23,503,180
Due after ten years 5,791,841 5,764,062
----------- -----------
$77,900,009 $77,440,033
=========== ===========
</TABLE>
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, 1997 and December 31, 1996, is as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
U.S. Treasury securities $ 725,437 $ 726,630
Corporate bonds 137,112 140,595
Mortgage-backed securities 169,550 174,860
Other debt securities 11,928 12,242
---------- ----------
$1,044,027 $1,054,327
========== ==========
</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, 1997 and
December 31, 1996 on deposit with the State of Missouri. In addition,
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 at June 30,
1997 and December 31, 1996.
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, 1997 and
December 31, 1996, 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, 1997
and December 31, 1996, the escrowed funds were invested in a $400,000
par value U.S. Treasury Note with a fair value of $398,472 and
$400,876, respectively, which is included with investments on the
balance sheet. This U.S. Treasury Note matures April 30, 2001.
Net investment income by source was as follows for the six months ended
June 30, 1997 and 1996:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
Investment income:
Fixed maturity investments $2,454,884 $2,619,586
Short-term investments 192,218 236,679
---------- ----------
Total investment income 2,647,102 2,856,265
Less investment expenses 120,951 138,077
---------- ----------
Net investment income $2,526,151 $2,718,188
========== ==========
</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, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
-------- --------
<S> <C> <C>
Sale of fixed maturity investments:
Realized gains $12,514 $74,834
Realized losses (5,571) (2,705)
------- -------
Net realized gains $ 6,943 $72,129
======= =======
</TABLE>
6. Statutory Disclosures:
Net income and surplus reported by MDA separately in its reports filed or
to be 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,
1997 1996
-------- --------
<S> <C> <C>
Net income/(loss) for six months ended June 30 $ 603,399 $ (930,839)
=========== ===========
Surplus (including equity in MDS and
MDIC), June 30 $21,453,743 $23,077,748
=========== ===========
</TABLE>
Net income and surplus reported by MDIC separately in its reports filed or
to be 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,
1997 1996
-------- --------
<S> <C> <C>
Net income for six months ended June 30 $ 32,827 $ 11,311
========== ==========
Surplus, June 30 $4,365,525 $4,416,868
========== ==========
</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 total actual
tax provision and the amounts obtained by applying the statutory U.S.
federal income tax rate to income before income taxes:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
---------------- ----------------
Income Effective Income Effective
Taxes Tax Rate Taxes Tax Rate
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Pre-tax income calculated at
statutory tax rates $ 289,040 34.00% $(512,595) (34.00)%
Other permanent differences 20,142 2.37 9,194 0.61
Change in valuation allowance (309,182) (36.37) 514,357 34.12
--------- ------ --------- -------
Provision for income taxes $ 0 0% $ 10,956 0.73%
========= ====== ========= =======
</TABLE>
The components of the net deferred tax asset at June 30, 1997 and December
31, 1996, are as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
Deferred Deferred Deferred Deferred
Tax Asset Tax Liability Tax Asset Tax Liability
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Tax discounting of loss reserves $ 4,057,366 $ 4,069,721
Tax acceleration of unearned premium 345,983 514,864
Deferred policy acquisition costs $13,946
Unrealized gain/loss 156,129 122,565
----------- ------- -----------
$ 4,559,478 $13,946 $ 4,707,150 -
=========== ======= =========== =============
Net deferred federal income tax asset $ 4,545,532 $ 4,707,150
Valuation allowance (3,227,532) (3,503,150)
----------- -----------
Net realized deferred tax asset $ 1,318,000 $ 1,204,000
=========== ===========
</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 determines 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, June 30,
1997 1996
-------- --------
<S> <C> <C>
$ (275,618) $514,357
========== ========
</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, 1997 and December 31, 1996, respectively; however, as
the reserves are based on estimates, there can be no assurance that the
ultimate liability will not differ from such estimates.
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.
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 losses and loss adjustment expenses
is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -------------
<S> <C> <C>
Balance at January 1 $63,205,000 $65,660,000
Less reinsurance recoverables 1,951,000 2,383,000
----------- -----------
Net balance at January 1 61,254,000 63,277,000
----------- -----------
Incurred related to:
Current year 7,086,217 15,802,388
Prior years (658,973) 4,576,958
----------- -----------
Total incurred 6,427,244 20,379,346
----------- -----------
Paid related to:
Current year 287,670 749,388
Prior years 6,261,977 21,652,958
----------- -----------
Total paid 6,549,647 22,402,346
----------- -----------
Net balance at end of period 61,131,597 61,254,000
Plus reinsurance recoverables 1,371,000 1,951,000
----------- -----------
Balance at end of period $62,502,597 $63,205,000
=========== ===========
</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.
Following are the net income per common share computations for the six
months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
---------------- ----------------
<S> <C> <C>
Net income(loss) $ 850,117 $(1,518,587)
=========== ===========
Weighted average common shares outstanding 1,033,228 1,019,602
Weighted average common stock options expressed
as common stock equivalents 18,404,076 23,980,378
----------- -----------
Weighted average common and equivalent
shares outstanding 19,437,304 24,999,980
=========== ===========
Net income(loss) per common share $ 0.04 $ (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 8.2% decrease in total revenues in the second quarter of 1997
and an 8.6% decrease in total revenue for the six months ended June 30, 1997,
compared with the same periods in the prior year. The decrease in total revenues
during the quarter and the six months ended June 30, 1997, was primarily due to
a decrease in premium revenue. This decrease in premiums earned, which occurred
although MDA instituted a 15% overall rate increase effective January 1, 1997,
was due to a decline in premiums written during the first six months of 1997 of
approximately $1,070,000 or 24% compared to the same time period in 1996. This
decrease in premiums written was the result of a decline in total policyholders
of approximately 9% which was concentrated in the higher premium surgical
classifications. 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 5.2% for the quarter ended June 30, 1997, and
decreased by 7.3% for the six months ended June 30, 1997, compared to the same
periods in 1996. This variation was primarily the result of a slightly reduced
level of total invested assets and fluctuations in market interest rates during
the first six months of both 1997 and 1996. Net realized investment gains were
$1,050 in the second quarter and $6,943 for the six months ended June 30, 1997,
compared to $19,244 and $72,129 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 second quarter and six-month period ended June 30,
1997 represented approximately 85% and 90% of total revenues, respectively,
compared to 135% and 116% during the same periods in 1996. The decrease in
expenses during the first six months of 1997, compared to the same period in
1996, is almost entirely the result of decreases in expenses for losses and loss
adjustment expenses. Working with the Company's independent actuary, Company
management has continued to closely monitor its loss and loss adjustment
expenses. The Company's most recent actuarial study indicated some slight
improvement in projected ultimate loss and loss adjustment expenses for accident
years prior to 1997, which is reflected in the Company's results as of June 30,
1997. Actuarial studies performed for the same period in 1996 indicated an
projected increase in projected ultimate loss and loss adjustment expenses and
based on those studies the Company strengthened its reserve for losses and loss
adjustment expenses by approximately $2.4 million as of June 30, 1996. 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 not have to be revised, or that the Company's
reserve for loss and loss adjustment expense will not differ from the total of
amounts ultimately paid out. Other operating expenses for the quarter and six
months ended June 30, 1997 were down slightly from the same periods in 1996
which was primarily the result of a small decrease in Company staffing levels
during the first six months of 1997 compared to the same period in 1996.
Financial Condition
MDHC's total consolidated assets were $93,888,533 as of June 30, 1997 consisting
primarily of cash and investments which comprised approximately 93% of total
assets. Approximately 83% of MDHC's total assets consisted of cash, U.S.
Treasury bonds, U.S. government agency bonds, and other investments either
collateralized or guaranteed by U.S. government agencies or securities. MDHC's
total assets declined approximately $2.9 million during the six months ended
June 30, 1997, which was due primarily to a decline in premiums written of
approximately $1.1 million, a decrease in reinsurance recoverables on unpaid
claims of $0.6 million, payment of other liabilities of approximately $0.8
million, and a small decline in the market value of the Company's fixed maturity
investments which is the result of fluctuations in market interest rates. 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, 1997, were $71,301,644
which was a decline of approximately 5% from December 31, 1996. This decline
was the result of a decline in unearned premiums of $2.5 million, a decrease in
unpaid loss and loss adjustment expense of $0.7 million and the reduction of
other liabilities as noted above. Approximately 88% of MDHC's consolidated total
liabilities at June 30, 1997, relate to unpaid loss and loss adjustment
expenses.
Stockholders' equity increased 3.4% as of June 30, 1997, compared with the prior
year-end. This increase was primarily the result of net income for the six
months ended June 30, 1997 of $850,117.
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 provided by operating activities for the six months ended June 30, 1997
increased $5,842,167 from the comparable period in 1996. This increase in cash
provided by operating activities was caused primarily by a decrease in amounts
either paid or due relating to current and deferred federal income taxes of
approximately $3.1 million, a net increase in net income of approximately $2.4
million for the six months ended June 30, 1997 as compared to the same period in
1996, and other minor variations in cash flow between the comparable periods.
MDHC's investing activities resulted in a decrease in cash provided by investing
activities of $361,139 at June 30, 1997 compared to an increase in cash provided
by investing activities of $3,862,125 for the same period in 1996. This
variation was due to the net sale of short-term investments of $2.5 million for
the 1996 period to fund operating activities, whereas net purchases of
short-term investments for the six months ended June 30, 1997 totaled $1.5
million.
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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (`SFAS 128'). SFAS
No. 128 specifies revised computational guidelines, presentation and disclosure
requirements for earnings per share and supersedes Accounting Principal Board
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted, however, upon adoption SFAS No. 128 requires
restatement of all prior periods earnings per share information. The Company
has not yet determined the impact SFAS No. 128 would have on earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), which is effective for fiscal years beginning after December 31, 1997.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company has not yet determined the
effect SFAS 130 will have on the financial statements.
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.
Exhibit 11 - Computation of earnings per share (Disclosed in Note 9 of
the unaudited consolidated financial statements in Part I).
See accompanying Exhibit Index for additional Exhibits incorporated 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.
<TABLE>
<CAPTION>
<S> <C>
Medical Defense Holding Co.
(Registrant)
July 28, 1997 /s/ Ronald G. Benson
- ---------------------------------- -------------------------------------------------------------
Date Ronald G. Benson
President, CEO, and Chairman
of the Board (principal
executive officer); Director
July 28, 1997 /s/ Samuel J. Pippin
- ---------------------------------- -------------------------------------------------------------
Date Samuel J. Pippin
Director of Accounting and
Finance (principal financial
and accounting officer)
</TABLE>
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>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
--- ----------- ---
<S> <C> <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 1996 Annual
Report on Form 10K 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 1996 Annual Report on Form 10K and hereby incorporated
by reference.)...........................................................................
</TABLE>
<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, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 77,440,033
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 83,582,182
<CASH> 3,451,803
<RECOVER-REINSURE> 1,371,000
<DEFERRED-ACQUISITION> 41,018
<TOTAL-ASSETS> 93,888,533
<POLICY-LOSSES> 62,502,597
<UNEARNED-PREMIUMS> 5,087,983
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 653,026
<NOTES-PAYABLE> 0
<COMMON> 516,614
0
9,202,038
<OTHER-SE> 12,868,237
<TOTAL-LIABILITY-AND-EQUITY> 93,888,533
5,905,187
<INVESTMENT-INCOME> 2,647,102
<INVESTMENT-GAINS> 6,943
<OTHER-INCOME> 465
<BENEFITS> 6,427,244
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 1,061,581
<INCOME-PRETAX> 850,117
<INCOME-TAX> 0
<INCOME-CONTINUING> 850,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 850,117
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<RESERVE-OPEN> 63,205,000
<PROVISION-CURRENT> 7,086,217
<PROVISION-PRIOR> (658,973)
<PAYMENTS-CURRENT> 287,670
<PAYMENTS-PRIOR> 6,261,977
<RESERVE-CLOSE> 62,502,597
<CUMULATIVE-DEFICIENCY> (658,973)
</TABLE>
