<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 March 31, 1997
Commission file number 0-28214
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 May 5, 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
<S> <C>
Page
----
ITEM 1. Financial Statements
Medical Defense Holding Co.
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 3, 4
(Unaudited)
Medical Defense Holding Co.
Consolidated Statements of Income
for the quarters ended March 31, 1997 5
and 1996 (Unaudited)
Medical Defense Holding Co.
Consolidated Statements of Cash Flow
for the quarters ended March 31, 1997 6
and 1996 (Unaudited)
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
March 31, 1997 and December 31, 1996
(Unaudited)
________
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Investments:
Fixed maturity investments, at market
value amortized cost of $78,205,434 and
$79,151,698, respectively) $76,720,502 $78,789,906
Short-term investments, at market 5,043,213 4,508,740
----------- -----------
Total investments 81,763,715 83,298,646
Other assets:
Cash and cash equivalents 2,171,089 3,514,854
Accrued investment income 931,885 1,054,327
Premiums receivable 909,859 1,895,965
Reinsurance recoverable on loss
and loss expenses:
Paid claims 0 2,798
Unpaid claims 1,951,000 1,951,000
Property and equipment, net of
accumulated depreciation of
$1,190,216 and $1,163,536,
respectively 1,091,445 1,117,542
Federal income tax:
Current 2,423,724 2,401,224
Deferred 1,166,000 1,204,000
Other assets 593,752 338,138
----------- -----------
Total assets $93,002,469 $96,778,494
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED BALANCE SHEETS, CONTINUED
March 31, 1997 and December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES & March 31, December 31,
STOCKHOLDERS' EQUITY 1997 1996
------------- -------------
<S> <C> <C>
Liabilities:
Claims and policy liabilities:
Unpaid losses and loss adjustment $63,220,959 $63,205,000
expenses
Unearned premiums 5,783,405 7,571,534
----------- -----------
Total claims and policy liabilities 69,004,364 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 211,895 273,679
Other liabilities 876,547 1,922,744
----------- -----------
Total liabilities 72,062,853 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 (provision)
of $122,565 and $122,565,
respectively) (1,364,061) (237,920)
Retained earnings 10,916,222 10,685,955
----------- -----------
Total stockholders' equity 20,939,616 21,835,490
----------- -----------
Total liabilities, redeemable
preferred stock, and stockholders'
equity $93,002,469 $96,778,494
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF INCOME
for the quarter ended March 31, 1997 and 1996
(Unaudited)
________
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Premiums earned, net of retrospective
premium due reinsurers of $-0-,
and $-0-, respectively $ 3,001,139 $ 3,243,768
Investment income 1,317,384 1,454,252
Net realized investment gains 5,893 52,885
Other income 286 225
----------- -----------
Total revenues 4,324,702 4,751,130
----------- -----------
Expenses:
Losses and loss adjustment expenses,
net of reinsurance recoveries of
$-0-, and $-0-, respectively 3,425,270 3,902,020
Amortization of policy acquisition
costs 0 59,549
Other underwriting and insurance
expenses 554,843 583,760
Investment expenses 67,020 73,992
Other operating expenses 47,302 19,959
----------- -----------
Total expenses 4,094,435 4,639,280
----------- -----------
Income before provision
for federal income taxes 230,267 111,850
----------- -----------
Provision for federal income taxes:
Current (38,000) (59,608)
Deferred 38,000 125,525
----------- -----------
Total tax provision 0 65,917
----------- -----------
Net Income $ 230,267 $ 45,933
=========== ===========
Earnings per common share and common
equivalent share (Note 9):
Primary - Weighted average shares 19,437,304 24,999,980
=========== ===========
Net income per common share $ 0.01 $ 0.00
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
5
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF CASH FLOW
for the quarter ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 230,267 $ 45,933
Adjustments to reconcile net income
to net cash provided
by operating activities:
Realized investment gains (5,893) (52,885)
Depreciation and amortization of
deferred policy acquisition costs 26,680 80,866
Provision for deferred income tax 38,000 125,525
Change in assets and liabilities:
Accrual and amortization of
investment income 118,779 59,298
Premiums receivable from 986,106 890,099
policyholders
Policy acquisition costs deferred 0 (41,740)
Reinsurance recoverable on loss &
loss expenses:
Paid claims 2,798 0
Unpaid claims 0 0
Unpaid losses & loss adjustment 15,959 (217,411)
expenses
Unearned premiums (1,788,129) (1,351,596)
Amounts withheld or retained by
Company on account of others (61,784) 1,589
Income tax (22,500) (809,608)
Other assets (255,614) 375,621
Other liabilities (1,046,197) (1,018,256)
----------- -----------
Net cash used by operating
activities (1,761,528) (1,912,565)
----------- -----------
Investing activities:
Proceeds from:
Fixed maturity investments - Sales 1,528,125 3,466,347
Fixed maturity investments -
Maturities 1,358,244
Short-term investments - Maturities 3,550,000 6,144,000
Purchase of investments:
Fixed maturity investments (1,989,980) (4,071,719)
Short-term investments (4,028,043) (5,866,205)
Purchases of property and equipment
(net) (583) (24,225)
----------- -----------
Net cash provided (used) by
investing activities 417,763 (351,802)
----------- -----------
Net decrease in cash and cash
equivalents (1,343,765) (2,264,367)
Cash and cash equivalents, beginning of
period 3,514,854 4,952,745
----------- -----------
Cash and cash equivalents, end of period $ 2,171,089 $ 2,688,378
=========== ===========
Federal income taxes paid (refunded) $ (15,500) $ 750,000
=========== ===========
The accompanying notes are an integral part of the accompanying financial statements.
</TABLE>
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 March 31, 1997 and 1996 information contained in the following footnotes
is unaudited. It is management's opinion that the financial statements as of
March 31, 1997 and 1996 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 March 31, 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 reports 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. 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.
C. Investments:
------------
In May, 1993, the Financial Accounting Standards Board published SFAS
115 which, among other things, requires companies to classify debt and
equity securities into three categories. Held-to-maturity debt
securities that the Company 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 quarter ended March 31, 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)
________
3. Summary of Significant Accounting Policies, continued:
------------------------------------------------------
E. Income Taxes:
-------------
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). 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.
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, 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
Cost Gains Losses Value
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
March 31, 1997
--------------
U.S. Treasury debt securities and
obligations
of U.S. Government corporations and
agencies $40,060,413 $ 46,226 $ 715,307 $39,391,332
Corporate debt securities 6,266,394 54,127 98,084 6,222,437
Mortgage-backed securities 29,336,679 121,079 840,869 28,616,889
Other debt securities 2,541,948 7,963 60,067 2,489,844
----------- -------- ---------- -----------
$78,205,434 $229,395 $1,714,327 $76,720,502
=========== ======== ========== ===========
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 quarter ended March 31, 1997 and
the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
$ (1,126,141) $(1,108,031)
============= ============
The amortized cost and estimated market value of debt securities by contractual
maturity are shown as follows:
Estimated
Amortized Market
Cost Value
----------- -----------
March 31, 1997
--------------
Due in one year or less $10,427,961 $10,289,542
Due after one year through five years 40,802,283 40,093,634
Due after five years through ten years 21,736,500 21,212,263
Due after ten years 5,238,690 5,125,063
----------- -----------
$78,205,434 $76,720,502
=========== ===========
</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 March 31, 1997 and December 31, 1996, is as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
U.S. Treasury securities $637,615 $ 726,630
Corporate bonds 92,776 140,595
Mortgage-backed securities 190,908 174,860
Other debt securities 10,586 12,242
-------- ----------
$931,885 $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 March 31, 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 March 31, 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 March 31, 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 March 31, 1997
and December 31, 1996, the escrowed funds were invested in a $400,000 par
value U.S. Treasury with a fair value of $393,188 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 quarters ended March
31, 1997 and 1996:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
----------- -----------
<S> <C> <C>
Investment income:
Fixed maturity investments $1,226,985 $1,321,113
Short-term investments 90,399 133,139
---------- ----------
Total investment income 1,317,384 1,454,252
Less investment expenses 67,020 73,992
---------- ----------
Net investment income $1,250,364 $1,380,260
========== ==========
</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
quarter ended March 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Sale of fixed maturity investments:
Realized gains $ 9,055 $53,872
Realized losses (3,162) (987)
------- -------
Net realized gains $ 5,893 $52,885
======= =======
</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>
March 31, March 31,
1997 1996
----------- -----------
<S> <C> <C>
Net income for the three months ended $ 207,697 $ 113,092
March 31 =========== ===========
Surplus as regards policyholders (including
equity in MDS and MDIC), March 31 $21,185,097 $24,421,378
=========== ===========
</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>
March 31, March 31,
1997 1996
---------- ----------
<S> <C> <C>
Net income for the three months ended $ 23,226 $ 5,281
March 31 ========== ==========
Surplus as regards policyholders, March 31 $4,355,924 $4,410,838
========== ==========
</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
exempted by state statute 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>
March 31, 1997 March 31, 1996
---------------------- --------------------
Income Effective Income Effective
Taxes Tax Rate Taxes Tax Rate
----------- --------- ------- ----------
<S> <C> <C> <C> <C>
Pre-tax income calculated at
statutory tax rates $ 78,291 34.00% $38,029 34.00%
Other permanent differences 11,596 5.04 35,653 31.87
Change in valuation allowance (89,887) (39.04) (7,765) (6.94)
-------- ------ ------- --------
Provision for income taxes $ 0 0% $65,917 58.93%
======== ====== ======= ========
</TABLE>
The components of the net deferred tax asset at March 31, 1997 and December 31,
1996 are as follows:
<TABLE>
<CAPTION>
March 31, 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 $ 4,063,426 $ 4,069,721
Tax acceleration of unearned premium 393,272 514,864
Unrealized gain/loss 505,453 122,565
----------- ------- ----------- -------
$ 4,962,151 $ - $ 4,707,150 $ -
=========== ======= =========== =======
Net deferred federal income tax asset $ 4,962,151 $ 4,707,150
Valuation allowance (3,796,151) (3,503,150)
----------- -----------
Net realized deferred tax asset $ 1,166,000 $ 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 primarily 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>
March 31, March 31,
1997 1996
--------- ---------
<S> <C>
$293,001 $(7,765)
======== =======
</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 March 31, 1997 and December 31, 1996, respectively.
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>
March 31, 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 3,259,248 15,802,388
Prior years 166,022 4,576,958
----------- -----------
Total incurred 3,425,270 20,379,346
----------- -----------
Paid related to:
Current year 137,850 749,388
Prior years 3,271,461 21,652,958
----------- -----------
Total paid 3,409,311 22,402,346
----------- -----------
Net balance at end of period 61,269,959 61,254,000
Plus reinsurance recoverables 1,951,000 1,951,000
----------- -----------
Balance at end of period $63,220,959 $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, continued:
----------------------------
Other than the preferred stock discussed above, the Company does not have
any other potentially dilutive stocks. Therefore, the computations for
fully diluted net income per common share are not presented since the
results do not differ from primary net income per common share.
Net income per common share for the three months ended March 31, is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
------------------ ------------------
<S> <C> <C>
Net income/(loss) $ 230,267 $ 45,933
=========== ===========
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 $ 0.01 $ 0.00
=========== ===========
</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 a 9% decrease in total revenues for the three months ended March
31, 1997 compared with the same period in the prior year. This decline was due
to a decrease in premiums written for the first quarter of 1997 of approximately
$721,000, which generated a decline in earned premium of approximately $243,000
when compared to the same period in 1996. This decrease in written premium,
which was primarily the result of the movement of insureds to other carriers,
occurred although MDA instituted a 15% overall rate increase which was effective
January 1, 1997. During the three months ended March 31, 1997 the total count of
insureds for MDHC decreased slightly, declining approximately 5% from the total
count of insureds at December 31, 1996. Total investment income decreased 12.2%
for the three months ended March 31, 1997, compared to the previous year. This
decrease in investment income was primarily the result of a decrease in invested
assets of approximately $8.5 million at March 31, 1997 compared to March 31,
1996, and a decline in realized gains of $46,992 when compared to the same
period in 1996.
MDHC's total expenses for the quarter ended March 31, 1997 declined
approximately $545,000 or 11.7% when compared to the same period in 1996. This
decrease in total incurred expenses was due almost entirely to a decline in
losses and loss adjustment expenses, which is MDHC's most significant operating
expense. Loss and loss adjustment expenses decreased 12.2% for the three months
ended March 31, 1997 and decreased slightly as a percentage of total revenues,
to 79.2% for the quarter compared to 82.1% for the same period in the prior
year. This decrease in loss and loss adjustment expenses was primarily the
result of a slight increase recorded in the first quarter of 1996 in MDHC's
reserves on incurred occurrence claim liabilities relating to accident years
prior to 1988, which was not repeated in the first quarter of 1997.
MDHC's income before provision for federal income taxes was $230,267 for the
three months ended March 31, 1997. As a result of the factors noted above, the
Company's net income increased $184,334, when compared with the same period in
1996.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
Financial Condition
MDHC's total consolidated assets were $93,002,469 as of March 31, 1997. Total
assets declined $3,776,025 from December 31, 1996 to March 31, 1997. This
decrease during the quarter was largely due to a decline in the market value of
the Company's fixed-income investments of $1,126,141, a decline in premiums
receivable from policyholders of $986,106, the decline in other liabilities of
$1,046,197 which is primarily the payment of outstanding claim drafts, and the
decline in premiums written discussed earlier. At March 31, 1997, MDHC's assets
consisted primarily of cash and investments which were approximately 90% of
total assets. Approximately 80% of the Company'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 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 the Company's total
investments is not anticipated to change substantially in the near future.
MDHC's total consolidated liabilities as of March 31, 1997 were $72,062,853,
which was a decline of approximately 3.8% from December 31, 1996. This decline
was primarily the result of a decline in unearned premiums of $1,788,129 from
December 31, 1996 to March 31, 1997, which is partially due to the decline in
policyholders discussed earlier and is partially routine for the three months
ended March 31 based on the renewal dates of the majority of the Company's
annual policies. The remaining decrease was the result of a decline in other
liabilities of $1,046,197 which is primarily due to the payment of outstanding
claim drafts during the first quarter of 1997. Approximately 88% of MDHC's
consolidated total liabilities at March 31, 1997, relate to unpaid loss and loss
adjustment expenses.
Stockholders' equity decreased 4.1% for the three months ended March 31, 1997
compared with the prior year-end primarily due to the change in the market value
of the Company's fixed-income investment portfolio which was discussed earlier.
Liquidity and Capital Resources
MDHC's cash flow in the immediate future will be primarily dependent upon cash
dividends from MDA. MDA's cash flow is generated from its operations and
investment portfolio. MDHC's net cash used by operating activities was
$1,761,528 at March 31, 1997, compared to cash used by operating activities of
$1,912,565 at March 31, 1996.
The decrease in net cash used from operations of $151,037 for the first quarter
of 1997 when compared to the net cash used from operations during the first
quarter of 1996 was primarily the result of an increase in net income for the
period of $184,334, a decline in income taxes paid or refunded of approximately
$765,000, an increase in other assets of approximately $630,000, an increase in
the decline of unearned premiums due from policyholders of approximately
$435,000 which was a result of the decline in total policyholders discussed
earlier, and a net increase in losses and loss adjustment expenses of
approximately $233,000.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
Liquidity and Capital Resources, continued
MDHC's investing activities generated net cash provided by investing activities
of $417,763 for the quarter ended March 31, 1997 compared to a net decrease in
cash from investing activities of $351,802 at March 31, 1996. This increase in
cash provided by investing activities of $769,565 was due to the net effect of a
decline in proceeds from investing activities of approximately $3.2 million at
March 31, 1997, compared to the same period in 1996, coupled with a decline in
the purchase of investments of approximately $3.9 million for the quarter ended
March 31, 1997 compared to the same period in 1996.
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.
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.
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>
Medical Defense Holding Co.
(Registrant)
<S> <C>
May 5, 1997 /s/ Ronald G. Benson
- -------------------------- ---------------------------------
Date Ronald G. Benson
President, CEO, and Chairman
of the Board (principal
executive officer); Director
May 5, 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 #0-28214) 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
#0-28214) 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
#0-28214) 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 #0-28214) 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 #0-28214) 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 #0-28214) 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
#0-28214) 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
#0-28214) 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 #0-28214) 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 #0-28214) 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 #0-28214) 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 #0-28214) 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 #0-28214) 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 #0-28214) 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 #0-28214) 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 #0-28214) 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 #0-28214) 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
#0-28214) 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 #0-28214) 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 (file #0-28214)
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 (file #0-28214) 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 three months ended March 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 76,720,502
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 81,763,715
<CASH> 2,171,089
<RECOVER-REINSURE> 1,951,000
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 93,002,469
<POLICY-LOSSES> 63,220,959
<UNEARNED-PREMIUMS> 5,783,405
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 211,895
<NOTES-PAYABLE> 0
<COMMON> 516,614
0
9,202,038
<OTHER-SE> 9,552,161
<TOTAL-LIABILITY-AND-EQUITY> 93,002,469
3,001,139
<INVESTMENT-INCOME> 1,317,384
<INVESTMENT-GAINS> 5,893
<OTHER-INCOME> 286
<BENEFITS> 3,425,270
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 554,843
<INCOME-PRETAX> 230,267
<INCOME-TAX> 0
<INCOME-CONTINUING> 230,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,267
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<RESERVE-OPEN> 63,205,000
<PROVISION-CURRENT> 3,259,248
<PROVISION-PRIOR> 166,022
<PAYMENTS-CURRENT> 137,850
<PAYMENTS-PRIOR> 3,271,461
<RESERVE-CLOSE> 63,220,959
<CUMULATIVE-DEFICIENCY> 166,022
</TABLE>
