<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, 1998
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 8, 1998 there were 999,998 shares of the Registrant's Class A
Common Stock, $.50 par value outstanding and there were 53,400 shares
outstanding of the Registrant's Class B Common Stock, $.50 par value.
________________________________________________________________________________
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
________
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Investments:
Fixed maturity investments, at market value
(amortized cost of $70,113,658 and
$73,477,904, respectively) $70,718,094 $74,091,837
Short-term investments, at market 7,832,780 7,242,682
----------- -----------
Total investments 78,550,874 81,334,519
Other assets:
Cash and cash equivalents 4,850,948 2,955,161
Accrued investment income 779,739 998,833
Premiums receivable 665,618 1,521,050
Reinsurance recoverable on loss
and loss expenses:
Unpaid claims 1,373,000 1,373,000
Property and equipment, net of accumulated
depreciation of $1,271,259 and
$1,250,772, respectively 1,007,912 1,028,089
Federal income tax:
Current-refundable 383,879 383,879
Other assets 234,330 336,094
----------- -----------
Total assets $87,846,300 $89,930,625
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED BALANCE SHEETS, CONTINUED
March 31, 1998 and December 31, 1997
________
<TABLE>
<CAPTION>
(Unaudited)
LIABILITIES & March 31, December 31,
STOCKHOLDERS' EQUITY 1998 1997
----------- ------------
<S> <C> <C>
Liabilities:
Claims and policy liabilities:
Unpaid losses and loss adjustment expenses $56,724,181 $58,654,324
Unearned premiums 4,633,435 6,059,398
----------- -----------
Total claims and policy liabilities 61,357,616 64,713,722
Other liabilities:
Retrospective premium due reinsurers 1,113,047 1,113,047
Amounts withheld or retained by Company
for account of others 118,735 252,429
Other liabilities 2,843,980 1,496,619
----------- -----------
Total liabilities 65,433,378 67,575,817
----------- -----------
Stockholders' equity:
Preferred stock, par value $1.00 per share;
12,000,000 shares authorized; 7,426,010 and
7,436,095 shares issued and outstanding, respectively 7,426,010 7,436,095
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; 53,400 and
33,230 shares issued and outstanding, respectively 26,700 16,615
Additional paid-in capital 2,728,369 2,728,369
Accumulated Comprehensive Income;
Unrealized gains on investments, net
of deferred taxes of $205,438 and $208,872, respectively 398,791 405,456
Retained earnings 11,333,053 11,268,274
----------- -----------
Total stockholders' equity 22,412,922 22,354,808
----------- -----------
Total liabilities and stockholders' equity $87,846,300 $89,930,625
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF INCOME
for the quarters ended March 31, 1998 and 1997
(Unaudited)
---------
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Revenues:
Premiums earned $ 2,286,503 $ 3,001,139
Investment income 1,252,922 1,317,384
Net realized investment gains 3,132 5,893
Other income 286 286
---------- ----------
Total revenues 3,542,843 4,324,702
---------- ----------
Expenses:
Losses and loss adjustment expenses, 2,796,303 3,425,270
Amortization of policy acquisition costs 14,674
Other underwriting and insurance
expenses 520,320 554,843
Investment expenses 66,615 67,020
Other operating expenses 76,718 47,302
---------- ----------
Total expenses 3,474,630 4,094,435
---------- ----------
Income before provision
for federal income taxes 68,213 230,267
---------- ----------
Provision for federal income taxes:
Current (38,000)
Deferred 3,434 38,000
---------- ----------
Total tax provision 3,434 0
---------- ----------
Net Income $ 64,779 $ 230,267
========== ==========
Earnings per common share and common
equivalent share (Note 9):
Basic earnings per common share $0.06 $0.22
========== ==========
Diluted earnings per common share and
common share equivalent $0.00 $0.01
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
for the quarters ended March 31, 1998 and 1997
(Unaudited)
---------
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ----------
<S> <C> <C>
Net Income $ 64,779 $ 230,267
--------- ----------
Other comprehensive (loss), net of tax:
Unrealized holding (losses) arising during the period, net of tax (4,598) (1,122,252)
Less: reclassification adjustment for gains included in net income,
net of tax (2,067) (3,889)
--------- ----------
Other comprehensive (loss) (6,665) (1,126,141)
--------- ----------
Comprehensive income (loss) $ 58,114 $ (895,874)
========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
CONSOLIDATED STATEMENTS OF CASH FLOW
for the quarters ended March 31, 1998 and 1997
(Unaudited)
________
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 64,779 $ 230,267
Adjustments to reconcile net income to net cash provided
by operating activities:
Realized investment gains (3,132) (5,893)
Depreciation and amortization of deferred policy
acquisition costs 20,487 26,680
Provision for deferred income tax 3,434 38,000
Change in assets and liabilities:
Accrual and amortization of investment income 166,178 118,779
Premiums receivable from policyholders 855,432 986,106
Reinsurance recoverable on loss & loss expenses:
Paid claims 2,798
Unpaid claims
Unpaid losses & loss adjustment expenses (1,930,143) 15,959
Unearned premiums (1,425,963) (1,788,129)
Amounts withheld or retained by Company on account
of others (133,694) (61,784)
Income tax (22,500)
Other assets 101,764 (255,614)
Other liabilities 1,347,361 (1,046,197)
----------- -----------
Net cash used by operating activities (933,497) (1,761,528)
----------- -----------
Investing activities:
Proceeds from:
Fixed maturity investments - Sales 1,018,828 1,528,125
Fixed maturity investments - Maturities 3,843,158 1,358,244
Short-term investments - Maturities 5,100,000 3,550,000
Purchase of investments:
Fixed maturity investments (1,534,219) (1,989,980)
Short-term investments (5,598,173) (4,028,043)
Purchases of property and equipment (310) (583)
----------- -----------
Net cash provided (used) by investing activities 2,829,284 417,763
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,895,787 (1,343,765)
Cash and cash equivalents, beginning of period 2,955,161 3,514,854
----------- -----------
Cash and cash equivalents, end of period $ 4,850,948 $ 2,171,089
=========== ===========
Federal income taxes paid (refunded) $ 0 $ (15,500)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the accompanying financial
statements.
<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, 1998 and 1997 information contained in the following footnotes
is unaudited. It is management's opinion that the financial statements as of
March 31, 1998 and 1997 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, 1998 and
1997 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.
<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 Principle 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.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires presentation of comprehensive
income in a full set of general-purpose financial statements. The
purpose of reporting comprehensive income is to report a measure of all
changes in equity of an enterprise that result from recognized
transactions and other economic events of the period other than
transactions with owners in their capacity as owners. The Company has
elected to report comprehensive income in a separate statement of
comprehensive income which begins with net income. SFAS No. 130 is
effective for financial statements issued for periods beginning after
December 15, 1997, including interim periods. SFAS No. 130 requires
restatement of all prior periods comprehensive income information upon
which the Company is reporting.
C. Investments:
-----------
SFAS 115 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 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, 1998 and the year ended December 31,
1997 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 and included in
comprehensive income.
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.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
3. Summary of Significant Accounting Policies, continued:
------------------------------------------
D. Reinsurance:
-----------
SFAS 113 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.
E. Income Taxes:
------------
SFAS 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been
included in the financial statements or tax returns.
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, 26,700 shares of preferred stock were converted to 53,400 shares of
Class B common stock.
The Company has issued shares of $0.50 par value Class A common stock in
accordance with the agreement and plan of conversion dated November 29,
1994, in exchange for cash.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
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
March 31, 1998 Cost Gains Losses Value
-------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury debt securities and obligations
of U.S. Government corporations and
agencies $35,936,895 $429,283 $ 78,659 $36,287,519
Corporate debt securities 3,926,723 44,044 3 3,970,764
Mortgage-backed securities 25,677,776 256,538 83,985 25,850,329
Other debt securities 4,572,264 46,124 8,906 4,609,482
----------- -------- -------- -----------
$70,113,658 $775,989 $171,553 $70,718,094
=========== ======== ======== ===========
December 31, 1997
-----------------
U.S. Treasury debt securities and obligations
of U.S. Government corporations and
agencies $36,435,311 $417,449 $ 85,125 $36,767,635
Corporate debt securities 5,126,604 81,809 2,942 5,205,471
Mortgage-backed securities 27,129,137 270,152 92,807 27,306,482
Other debt securities 4,786,852 40,073 14,676 4,812,249
----------- -------- -------- -----------
$73,477,904 $809,483 $195,550 $74,091,837
=========== ======== ======== ===========
</TABLE>
The change in net unrealized holding gain or loss on available for sale
securities, net of deferred taxes, for the quarter ended March 31, 1998 and
the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- -----------
<S> <C>
$(6,665) $643,376
======= ========
</TABLE>
The amortized cost and estimated market value of debt securities by
contractual maturity are shown as follows:
<TABLE>
<CAPTION>
Amortized Estimated Market
March 31, 1998 Cost Value
-------------- ------------ ----------------
<S> <C> <C>
Due in one year or less $ 7,356,769 $ 7,383,216
Due after one year through five years 36,162,743 36,381,502
Due after five years through ten years 20,115,707 20,416,856
Due after ten years 6,478,439 6,536,520
----------- -----------
$70,113,658 $70,718,094
=========== ===========
</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. Actual prepayment experience may differ from estimates.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
5. Investments, continued:
Accrued investment income at March 31, 1998 and December 31, 1997, is as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
U.S. Treasury securities $510,404 $705,909
Corporate bonds 81,918 114,506
Mortgage-backed securities 169,269 159,026
Other debt securities 18,148 19,392
-------- --------
$779,739 $998,833
======== ========
</TABLE>
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, 1998 and
December 31, 1997, 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, 1998 and December 31, 1997.
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, 1998 and
December 31, 1997, 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, 1998
and December 31, 1997, the escrowed funds were invested in a $400,000
par value U.S. Treasury with a fair value of $406,748 and $406,248,
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, 1998 and 1997:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---------- ----------
<S> <C> <C>
Investment income:
Fixed maturity investments $1,126,272 $1,226,985
Short-term investments 126,650 90,399
---------- ----------
Total investment income 1,252,922 1,317,384
Less investment expenses (66,615) (67,020)
---------- ----------
Net investment income $1,186,307 $1,250,364
========== ==========
</TABLE>
<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, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Sale of fixed maturity investments:
Realized gains $ 9,640 $ 9,055
Realized losses (6,508) (3,162)
------- -------
Net realized gains $ 3,132 $ 5,893
======= =======
</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,
1998 1997
----------- -----------
<S> <C> <C>
Net income for the three months ended March 31 $ 37,382 $ 207,697
=========== ===========
Surplus as regards policyholders (including equity
in MDS and MDIC), March 31 $19,719,635 $21,185,097
=========== ===========
</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,
1998 1997
---------- ----------
<S> <C> <C>
Net income for the three months ended March 31 $ 8,834 $ 23,226
========== ==========
Surplus as regards policyholders, March 31 $4,426,180 $4,355,924
========== ==========
</TABLE>
<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, 1998 March 31, 1997
---------------------- ---------------------
Income Effective Income Effective
Taxes Tax Rate Taxes Tax Rate
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Pre-tax income calculated at
statutory tax rates $ 23,192 34.00% $ 78,291 34.00%
Net operating loss carryforward 159,043 233.15 11,596 5.04
Change in valuation allowance (178,801) (262.12) (89,887) (39.04)
--------- ------- -------- ------
Provision for income taxes $ 3,434 5.03% $ 0 0%
========= ======= ======== ======
</TABLE>
The components of the net deferred tax asset at March 31, 1998 and December 31,
1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
Deferred Deferred Deferred Deferred
Tax Asset Tax Liability Tax Asset Tax Liability
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Tax discounting of loss reserves $ 3,485,947 $ 3,571,217
Tax acceleration of unearned premium 315,074 412,039
Unrealized gain/loss $205,438 $208,872
------------ ------------- ------------ -------------
$ 3,801,021 $205,438 $ 3,983,256 $208,872
------------ ------------- ------------ -------------
Net deferred federal income tax asset $ 3,595,583 $ 3,774,384
Valuation allowance (3,595,583) (3,774,384)
------------ -----------
Net realized deferred tax asset $ 0 $ 0
============ ===========
</TABLE>
<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,
1998 1997
--------- ---------
<S> <C>
$(178,801) $293,001
========= =========
</TABLE>
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 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, 1998 and December 31, 1997, 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.
<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,
1998 1997
----------- ------------
<S> <C> <C>
Balance at January 1 $58,654,324 $63,205,000
Less reinsurance recoverables 1,373,000 1,951,000
----------- -----------
Net balance at January 1 57,281,324 61,254,000
----------- -----------
Incurred related to:
Current year 2,501,720 13,505,569
Prior years 294,583 (204,632)
----------- -----------
Total incurred 2,796,303 13,300,937
----------- -----------
Paid related to:
Current year 3,032 265,569
Prior years 4,723,414 17,008,044
----------- -----------
Total paid 4,726,446 17,273,613
----------- -----------
Net balance at end of period 55,351,181 57,281,324
Plus reinsurance recoverables 1,373,000 1,373,000
----------- -----------
Balance at end of period $56,724,181 $58,654,324
=========== ===========
</TABLE>
9. Net Income Per Common Share:
In February of 1997, the Financial Accounting Standards Board published
Statement of Financial Accounting Standard No. 128, Earnings Per Share
("SFAS 128"), which requires certain changes in the reporting of earnings
per share. The Company was required to adopt SFAS 128 at December 31, 1997.
Additionally, the Company was required to restate interim 1997 earnings per
share data as previously presented.
SFAS 128 requires the computation of basic earnings per share ("EPS") and
diluted EPS. Basic EPS is computed by dividing income (loss) available to
common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed by dividing income
(loss) available to shareholders by the weighted-average number of common
shares plus the weighted-average number of common share equivalents
outstanding for the period. Anti-dilutive amounts are not shown.
<PAGE>
MEDICAL DEFENSE HOLDING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
________
9. Net Income Per Common Share, continued:
All shares of the Company's preferred stock are convertible to common stock
at a ratio of two shares of common stock to one share of preferred stock,
and 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. Net
income per common share is computed using net income divided by the
weighted average number of common shares and common share equivalents
outstanding.
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, 1998 March 31, 1997
------------------- -------------------
<S> <C> <C>
Net income $ 64,779 $ 230,267
=========== ===========
Weighted average common shares outstanding 1,047,347 1,024,447
Weighted average common stock options
expressed as common stock equivalents 14,858,071 18,412,857
----------- -----------
Weighted average common and
equivalent shares outstanding 15,905,418 19,437,304
=========== ===========
Basic earnings per share $ 0.06 $ 0.22
=========== ===========
Diluted earnings per share $ 0.00 $ 0.01
=========== ===========
</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.
Under employment agreements with certain officers and directors, payments
totaling approximately $500,000 are to be made if the number of insureds
fall below 913. At March 31, 1998, the number of insureds totaled
approximately 1,130. Such payments are forfeited in whole or part if the
individual does not remain employed for a period of 36 months following the
payment date.
<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 18% decrease in total revenues for the three months ended March
31, 1998 compared with the same period in the prior year. This decline was due
to a decrease in premiums written for the first quarter of 1998 of approximately
$340,000 and a decline in insureds which combined to generate a decline in
earned premium of approximately $716,000 when compared to the same period in
1997. This decrease in written premium and earned premium was primarily the
result of the movement of insureds to other carriers, both in 1998 and during
the last nine months of 1997. During the three months ended March 31, 1998 the
total count of insureds for MDHC decreased to 1,132 from 1,177. During the last
nine months of 1997 the count of insureds decreased from 1,405 to 1,177. The
drop in insureds was approximately 21% for the year ended March 31, 1998. Total
investment income decreased 5.1% for the three months ended March 31, 1998,
compared to the previous year. This decrease in investment income was primarily
the result of a decrease in invested assets of approximately $3.2 million at
March 31, 1998 compared to March 31, 1997.
MDHC's total expenses for the quarter ended March 31, 1998 declined
approximately $620,000 or 15.1% when compared to the same period in 1997. 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 18.4% for the three months
ended March 31, 1998 and decreased slightly as a percentage of total revenues,
to 78.9% for the quarter compared to 79.2% for the same period in the prior
year. This decrease in loss and loss adjustment expenses was primarily the
result of fewer insureds.
MDHC's income before provision for federal income taxes was $68,213 for the
three months ended March 31, 1998. As a result of the factors noted above, the
Company's net income decreased $165,488, when compared with the same period in
1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
Results of Operations, continued
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires presentation of comprehensive income in a full set of
general-purpose financial statements. The purpose of reporting comprehensive
income is to report a measure of all changes in equity of an enterprise that
result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The Company
has elected to report comprehensive income in a separate statement of
comprehensive income which begins with net income. SFAS No. 130 is effective
for financial statements issued for periods beginning after December 15, 1997,
including interim periods. SFAS No. 130 requires restatement of all prior
periods comprehensive income information upon which the Company is reporting.
Financial Condition
MDHC's total consolidated assets were $87,846,300 as of March 31, 1998. Total
assets declined $2,084,325 from December 31, 1997 to March 31, 1998. This
decrease during the quarter was largely due to a combination of a decline in
premiums receivable from policyholders of $855,432 and the decline in invested
assets used to pay claim liabilities of $1,930,143. At March 31, 1998, MDHC's
assets consisted primarily of cash and investments which were approximately 95%
of total assets. Approximately 85% 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, 1998 were $65,433,378,
which was a decline of approximately 3.2% from December 31, 1997. This decline
was primarily the result of a decline in unearned premiums of $1,425,963 from
December 31, 1997 to March 31, 1998, 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 noted above
in the reserve for unpaid losses and loss adjustment expenses of $1,930,143
coupled with an increase in other liabilities of $1,347,361 which is primarily
due to the recording of outstanding claim drafts during the first quarter of
1998. Approximately 87% of MDHC's consolidated total liabilities at March 31,
1998, relate to unpaid loss and loss adjustment expenses.
Stockholders' equity increased 0.3% for the three months ended March 31, 1998
compared with the prior year-end primarily due to the net income for the period
of $64,779.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, Continued
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 $933,497
at March 31, 1998, compared to cash used by operating activities of $1,761,528
at March 31, 1997.
The decrease in net cash used from operations of $828,031 for the first quarter
of 1998 when compared to the net cash used from operations during the first
quarter of 1997 was primarily the result of a decrease in net income for the
period of $165,488, a decrease in the decline of unearned premiums due from
policyholders of approximately $362,000 which was a result of the decline in
total policyholders discussed earlier and a net decrease in losses and loss
adjustment expenses of $1,930,143.
MDHC's investing activities generated net cash provided by investing activities
of $2,829,284 for the quarter ended March 31, 1998 compared to a net increase in
cash from investing activities of $417,763 at March 31, 1997. This increase in
cash provided by investing activities of $2,411,521 was due to the net effect of
an increase in proceeds from investing activities of $3,525,617 at March 31,
1998, compared to the same period in 1997, coupled with an increase in the
purchase of investments of $1,114,096 for the quarter ended March 31, 1998
compared to the same period in 1997.
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. Under employment agreements with certain officers and directors, payments
totaling approximately $500,000 are to be made if the number of insureds fall
below 913. Such payments are forfeited in whole or in part if the individual
does not remain employed for a period of 36 months following the payment date.
MDHC anticipates that its future cash flow will be sufficient to meet the
Company's ongoing obligations for the foreseeable future.
<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.
See accompanying Exhibit Index incorporated by reference.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Defense Holding Co.
(Registrant)
May 11, 1998 /s/ Ronald G. Benson
- -------------------- --------------------------------------------
Date Ronald G. Benson
President, CEO, and Chairman
of the Board (principal
executive officer); Director
May 11, 1998 /s/ Samuel J. Pippin
- -------------------- --------------------------------------------
Date Samuel J. Pippin
Director of Accounting and
Finance (principal financial
and accounting officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
--- ----------- ---
<S> <C> <C>
3.1 -- Articles of Incorporation of Medical Defense Holding Co. (Filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
by reference.).......................................................................
3.2 -- Bylaws of Medical Defense Holding Co. (Filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by
reference.)..........................................................................
4.1 -- Right of First Refusal Agreement (Filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).........
4.2 -- Specimen Stock Certificate for Preferred Stock (Filed as Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by
reference.)..........................................................................
4.3 -- Specimen Stock Certificate for Class A Common Stock (Filed as Exhibit 4.3 to the
Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
by reference.).......................................................................
4.4 -- Specimen Stock Certificate for Class B Common Stock (Filed as Exhibit 4.4 to the
Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
by reference.).......................................................................
10.1 -- 1983 Management Agreement between Medical Defense Associates and Medical Defense Services
Corp., as amended (Filed as Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1 (file #33-87444) and hereby incorporated by reference.)......................
10.2 -- 1983 Management Agreement between Medical Defense Insurance Company and Medical Defense
Services Corp., as amended (Filed as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).........
10.3 -- Amended and Restated Employment Agreement between Ronald G. Benson and Medical Defense
Services Corp., dated January 1, 1993 (Filed as Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by
reference.)..........................................................................
10.4 -- Amended and Restated Employment Agreement between Geraldine Hatfield (Morrison) and
Medical Defense Services Corp., dated January 1, 1993 (Filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
by reference.).......................................................................
10.5 -- Amended and Restated Employment Agreement between Arlen D. Winsky and Medical Defense
Services Corp., dated January 1, 1993 (Filed as Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by
reference.)..........................................................................
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
--- ----------- ---
<S> <C> <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 Annual Report on Form 10-K for the year ended December 31, 1995
(file #0-28214) and hereby incorporated by reference.)...............................
10.14 -- Medical Defense Services Corp. Executive Compensation Plan II (Filed as Exhibit 10.14 to
the Registrant's 1997 Annual Report on Form 10-K (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 1997 Annual
Report on Form 10K (file #0-28214) and hereby incorporated by reference.)............
27 -- Financial Data Schedule..............................................................
</TABLE>
E-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from the
Company's financial statements for the three months ended March 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 70,718,094
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 78,550,874
<CASH> 4,850,948
<RECOVER-REINSURE> 1,373,000
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 87,846,300
<POLICY-LOSSES> 56,724,181
<UNEARNED-PREMIUMS> 4,633,435
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 118,735
<NOTES-PAYABLE> 0
<COMMON> 526,699
0
7,426,010
<OTHER-SE> 14,460,213
<TOTAL-LIABILITY-AND-EQUITY> 87,846,300
2,286,503
<INVESTMENT-INCOME> 1,252,922
<INVESTMENT-GAINS> 3,132
<OTHER-INCOME> 286
<BENEFITS> 2,796,303
<UNDERWRITING-AMORTIZATION> 14,674
<UNDERWRITING-OTHER> 520,320
<INCOME-PRETAX> 68,213
<INCOME-TAX> 3,434
<INCOME-CONTINUING> 64,779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,779
<EPS-PRIMARY> .06
<EPS-DILUTED> .00
<RESERVE-OPEN> 58,654,324
<PROVISION-CURRENT> 2,501,720
<PROVISION-PRIOR> 294,583
<PAYMENTS-CURRENT> 3,032
<PAYMENTS-PRIOR> 4,723,414
<RESERVE-CLOSE> 56,724,181
<CUMULATIVE-DEFICIENCY> 294,583
</TABLE>
