SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________________ to _______________
Commission file number: 0-22421
MD HealthShares Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Louisiana 72-1301480
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
12021 Bricksome Avenue, Baton Rouge, Louisiana 70816
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(Address of Principal Executive Offices)
(504) 293-3272
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if changed since Last Report)
Indicate by check mark whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's common equity, as
of the latest practicable date:
As of March 31, 1998, 1,076,200 shares of the Registrant's Class A Non-Voting
Common Stock and 1 share of the Registrant's Class B Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one) Yes [X] No [ ]
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997 - UNAUDITED
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MARCH 31, DECEMBER 31,
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 1,024,119 $ 1,408,901
Investments 5,098,845 4,840,825
Interest receivable 78,864 55,095
Premiums receivable 6,091 24,554
Prepaid expenses 58,631 95,518
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Total current assets 6,266,550 6,424,893
RESTRICTED INVESTMENTS 1,000,000 1,000,000
EQUIPMENT, net of accumulated depreciation of $38,844 in 1998
and $30,429, in 1997 74,495 75,971
OTHER 35,070 35,378
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TOTAL $ 7,376,115 $ 7,536,242
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 115,609 $ 122,268
Claims payable and reserves for incurred but unreported claims 517,882 145,131
Deferred revenue 22,782 2,385
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Total current liabilities 656,273 269,784
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CONTINGENCIES (Note 2) -- --
STOCKHOLDERS' EQUITY (Note 3):
Junior preferred voting stock, $1.00 par value, liquidation
value $1,000, 7,500 shares authorized, 2,155 shares
issued and outstanding in 1998; 2,152 in 1997 2,155 2,152
Preferred stock, $1.00 par value, 2,000,000 shares authorized,
none issued and outstanding in 1998 and 1997 -- --
Common stock:
Class A non-voting, $0.10 par value, 8,000,000 shares
authorized, 1,076,200 shares issued and outstanding
in 1998; 1,075,000 in 1997 107,620 107,500
Class B, $0.10 par value, 1 share authorized and
outstanding in 1998 and 1997 -- --
Additional paid-in capital 11,751,400 11,732,023
Accumulated deficit (5,230,647) (4,590,455)
Treasury stock, at cost, 1,503 shares in 1998 and 1997 (8,000) (8,000)
Unrealized gain on available-for-sale securities 97,314 23,238
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Total stockholders' equity 6,719,842 7,266,458
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TOTAL $ 7,376,115 $ 7,536,242
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 - UNAUDITED
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THREE MONTHS ENDED
MARCH 31,
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1998 1997
REVENUES:
Premiums $ 686,175 $ 1,310
Investment income 83,274 124,592
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Total revenues 769,449 125,902
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EXPENSES:
Medical expenses 583,249 1,126
Selling, general and administrative 817,977 881,698
Depreciation 8,415 2,330
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Total expenses 1,409,641 885,154
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NET LOSS $ (640,192) $ (759,252)
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NET LOSS PER COMMON SHARE $ (0.60) $ (0.71)
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AVERAGE OUTSTANDING COMMON SHARES 1,075,400 1,071,001
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See notes to consolidated financial statements.
MD HEALTHSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 - UNAUDITED
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1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (640,192) $ (759,252)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation 8,415 2,330
Changes in operating assets and liabilities:
Premiums receivable 18,463 (1,310)
Interest receivable (23,769) (2,014)
Prepaid expenses 36,887 (50,934)
Accounts payable and accrued expenses (6,659) 21,584
Claims payable and reserves for incurred but unreported claims 372,751 1,127
Deferred revenue 20,397 -
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Net cash used in operating activities (213,707) (788,469)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (999,069) -
Sales and maturities of available-for-sale securities 815,125 -
Other 308 (37,129)
Purchase of equipment (6,939) (15,656)
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Net cash in investing activities (190,575) (52,785)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 19,500 -
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NET DECREASE IN CASH (384,782) (841,254)
CASH AND CASH EQUIVALANTS, Beginning of period 1,408,901 9,147,525
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CASH AND CASH EQUIVELANTS, End of period $1,024,119 $8,306,271
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NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Unrealized gain on available-for-sale securities $ 74,076 $ -
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See notes to consolidated financial statements.
MD HEALTHSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Rule 310(g) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. Operating results for
the three month period ended March 31, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998.
RESERVES FOR INCURRED BUT UNREPORTED CLAIMS - The Company provides reserves
for estimated incurred but unreported physician, hospital, and pharmacy
services rendered to enrolled members during the period. These reserves are
presently based on the use of estimated medical cost ratios. Changes in
these estimates could be significant.
REVENUE RECOGNITION - Premium revenues are recognized in the period in which
the members are entitled to health care services. Premiums collected in
advance are deferred, (consistent with industry practice, third-party selling
expenses are reported as a reduction of premium revenue.)
REINSURANCE - The Company is covered under a medical reinsurance agreement
that generally provides coverage for 80% of hospital services in excess of
$50,000 per member per year, up to a yearly maximum of $1,000,000 per member.
There were no reinsurance recoveries in 1998 and 1997.
RISKS AND UNCERTAINTIES - The Company's business could be impacted by
continuing price pressure on new and renewal business, the Company's ability
to effectively control health care costs, additional competitors entering the
Company's markets, federal and state legislation in the area of health care
reform, and governmental licensing regulations of HMOs and insurance
companies. Changes in these areas could adversely impact the Company's
operations in the future.
FINANCIAL PRESENTATION - Certain reclassifications have been made to prior
period amounts to conform with current period presentation.
For a summary of other significant accounting policies, refer to Note 1 of
Notes to Consolidated Financial Statements included in the Company's annual
report on Form 10KSB for the year ended December 31, 1997.
2. RECAPITALIZATION
On March 22, 1997, the Company's stockholders approved a plan of
recapitalization and amendments to the Company's articles of incorporation.
In connection therewith, 7,500 shares of Junior Preferred Voting Stock,
2,000,000 shares of Preferred Stock and 8,000,000 shares of Class A Non-
Voting Stock were authorized. Additionally, all of the Company's 2,142
outstanding shares of Class A Common Stock were cancelled, and each former
share of Class A Common Stock was converted into one share of Junior
Preferred Voting Stock and 500 shares of Class A Non-Voting Common Stock.
The average number of outstanding common shares have been restated to reflect
the recapitalization.
3. COMMITMENTS AND CONTINGENCIES
RESTRICTED INVESTMENTS - In connection with the filing for a COA, and as an
ongoing requirement of the State of Louisiana, PCI has deposited with the
Commissioner a safe keeping receipt of $1,000,000, consisting of certificates
of deposits in ten separate banking corporations doing banking business
within the State of Louisiana.
REGULATORY REQUIREMENTS - The State of Louisiana has implemented financial
regulations for HMOs requiring, among other things, minimum net worth
requirements. As of December 31, 1997, admitted assets, as defined, less
liabilities, must be at least equal to $1,500,000 as reported in the
statutory filing of such calendar year. PCI was in compliance with the state
statutory net worth requirement at December 31, 1997 and March 31, 1998. The
minimum state statutory net worth requirement will increase to $2.0 million
on July 1, 1998.
4. STOCKHOLDERS' EQUITY
During the first quarter, the Company sold three units of capital stock which
were comprised of three shares of Junior Preferred Voting Stock and 1,200
shares of Class A Non-Voting Common Stock. The average number of outstanding
common shares for the quarter reflects these transactions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In February 1998, the Board of Directors appointed Patrick C. Powers as the
first Chief Executive Officer for the Corporation and its subsidiary licensed
health maintenance organization, Patient's Choice, Inc. Mr. Powers has
extensive experience in managed care, having previously served as the initial
President and CEO of Gulf South Health Plans of Louisiana. Additional
professional staff were added in certain key positions, including a new Chief
Financial Officer with significant experience in developing startup managed
care companies.
Network development is the ongoing priority of the Company. Additional
hospitals, physicians and physician groups, and ancillary service providers
have been contracted as providers to better serve the clients of Patient's
Choice and to create a marketable network of providers. The Medical Affairs
Department established a Medical Executive Committee with statewide physician
representation to assist physicians in providing high quality, cost-effective
care. Specialty advisory workgroups have been established for the major
medical specialties to allow physicians input into the development of
practice guidelines.
A sales and marketing staff is now in force with the objectives of working
with selected brokers and conducting direct sales. As the Company's
infrastructure, network, and medical management efforts are further
developed, the sales team will focus increasingly on enrolling larger
employer groups. As of August 1, 1998, the Company's subsidiary, Patient's
Choice, had contracted with 132 clients to provide health care coverage for
1,346 subscribers and 2,576 covered lives in its HMO and point of service
plans.
The Company incurred during the first quarter of 1998 and has incurred since
the inception of operations in the first quarter of 1997 substantial losses
from operations due to the lack of premium income resulting from delays in
marketing its managed care health plans. Such delays have been caused by
difficulties the Company has encountered in securing provider contracts with
hospitals and other ancillary medical providers in certain marketing areas of
Louisiana, difficulties in hiring and retaining experienced full-time
executive officers and the Company's late entry into the market for calendar
year 1997 contracts. The Company anticipates that such losses will continue
and accelerate as the number of enrollees in the Company's HMO subsidiary
increases due to current marketing efforts until and unless the Company
attains a sufficient number of enrollees that premium income will exceed
operating expenses and claims payments. However, there can be no assurance
that the Company has sufficient capital to fund such anticipated losses or
that it will ever achieve sufficient numbers of enrollees to support
profitable operations. The Company does not anticipate that it will require
additional capital during the next twelve months.
Certain statements, other than statements of historical fact, contained in
this Quarterly Report on Form 10-QSB are forward-looking statements as
defined in Section 21(E) of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are generally accompanied by such terms and
phrases as , "anticipates", "estimates", "expects", "believes", "should",
"projects", "scheduled", or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to
have been correct. All forward-looking statements in this Form 10-QSB are
expressly qualified in their entirety by the cautionary statements in the
paragraph.
The Company has reviewed its year 2000 compliance status and has determined
that all systems are sufficient except for one software package that will be
replaced effective January 1, 1999. The cost of this replacement will be
minimal.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the first quarter of 1998 the Company sold three Units of its capital
stock, each Unit consisting of one share of Junior Preferred Voting Stock and
500 shares of Class A Non-Voting Common Stock, at a price of $6,500 per Unit,
for total sales proceeds of $19,500. No underwriting discounts or commissions
were paid in connection with the sales. The offer and sale of the Units were
exempt from registration under the Securities Act of 1933, as amended ("Act"),
by virtue of Section 3(11) of the Act and Rule 147 of the Commission promulgated
thereunder. All offers and sales were made while the Units were subject to an
effective registration statement filed with the Louisiana Commissioner of
Securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The Company files the following exhibits:
6(l) Letter employment contract dated March 13, 1998 by and between MD
HealthShares Corporation and Adam Short.
(b) Reports of Form 8-K. No reports on Form 8-K were filed during the three
months ended March 31, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MD HEALTHSHARES CORPORATION
Date: August 17, 1998 /s/ Patrick C. Powers
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Patrick C. Powers
Chief Executive Officer
Date: August 17, 1998 /s/ Adam Short
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Adam Short
Chief Financial Officer
EXHIBIT INDEX
Exhibit 6(l) Letter employment contract dated March 13, 1998 by and between
MD HealthShares Corporation and Adam Short.