UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] 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 0-23430
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South Dakota State Medical Holding Company, Incorporated
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
South Dakota 46-0401087
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1323 South Minnesota Avenue, Sioux Falls, South Dakota 57105
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(Address of principal executive office)
(Zip Code)
(605) 334-4000
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(Registrant's telephone number, including area code)
______________________________
(Former name, former address, and former fiscal year, if changed since
last report)
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.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
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<S> <C>
Class Outstanding at October 31, 1996
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Class C Common Stock 1,505,760
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Page 1
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
FORM 10-Q
INDEX
Part 1. Financial Information (unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995
Consolidated Statements of Income for
the Three and Nine Months Ended
September 30, 1996 and 1995
Consolidated Statement of Stockholders'
Equity for the Nine Months Ended
September 30, 1996
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote
of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
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Page 2
<TABLE>
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
<CAPTION>
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<S> <C> <C>
September 30, December 31,
ASSETS 1996 1995
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Cash and cash equivalents $ 3,230,238 $ 3,586,196
Investments in debt securities 1,107,965 1,195,129
Certificates of deposit 875,000 604,900
Receivables 685,924 534,570
Prepaids and other assets 99,958 71,957
Deferred income taxes 465,000 462,000
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Total current assets $ 6,464,085 $ 6,454,752
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Investments in debt securities $ 3,971,208 $ 2,613,470
Investments in equity securities 285,100 292,700
Pledged certificates of deposit 500,000 500,000
Cash surrender value of life insurance 60,000 51,000
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Total long-term investments $ 4,816,308 $ 3,457,170
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Leasehold improvements and equipment, net $ 1,089,721 $ 1,173,891
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Deferred income taxes $ 364,000 $ 339,000
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$ 12,734,114 $ 11,424,813
============ ============
LIABILITIES
Reported and unreported medical
claims liabilities $ 2,797,000 $ 2,710,000
Unearned subscriber premiums and
administration fees 752,068 815,653
Accounts payable and accrued expenses 806,359 787,008
Contingency reserve payable 900,000 973,000
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Total current liabilities $ 5,255,427 $ 5,285,661
Contingency reserve payable 1,326,585 981,669
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Total liabilities $ 6,582,012 $ 6,267,330
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Minority interest in subsidiary $ 306,054 $ 277,892
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STOCKHOLDERS' EQUITY
Class A preferred stock, issued
1,018 and 976 shares $ 10,180 $ 9,760
Class B preferred stock, issued
1,300 and 1,000 shares 1,300 1,000
Class C common stock, issued
1,505,760 shares 15,058 15,058
Additional paid-in capital 3,749,342 3,749,342
Retained earnings 2,085,180 1,107,480
Unrealized loss on securities
available for sale (15,012) (3,049)
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$ 5,846,048 $ 4,879,591
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$ 12,734,114 $ 11,424,813
============ ============
See Notes to Consolidated Financial Statements.
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Page 3
<TABLE>
<CAPTION>
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Sept 30, Nine Months Ended Sept 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Premiums, net of
reins. ceded $ 7,542,688 $ 6,787,277 $ 20,963,894 $ 20,250,694
T.P.A. fee 932,708 791,802 2,911,067 2,112,227
Net invest. income 135,601 126,890 392,347 346,585
Other income 109,970 74,305 286,933 263,322
------------ ------------ ------------ ------------
Total revenues $ 8,720,967 $ 7,780,274 $ 24,554,241 $ 22,972,828
------------ ------------ ------------ ------------
Operating expenses:
Claims incurred,
net of reins.
recoveries $ 5,989,166 $ 4,828,154 $ 16,374,781 $ 15,212,930
Personnel expense 973,057 830,924 2,782,634 2,327,592
Commissions 309,261 274,685 923,887 842,586
Prof. fees expense 259,396 219,310 849,587 676,540
Office expense 164,980 156,337 556,323 538,241
Advertising 31,700 82,380 350,036 419,580
Occupancy expense 152,894 135,633 458,716 365,156
State insurance taxes 87,333 81,106 252,114 247,734
Other general and
administrative exp. 89,411 58,693 252,667 214,874
------------ ------------ ------------ ------------
Total operating
expenses $ 8,057,198 $ 6,667,222 $ 22,800,745 $ 20,845,233
------------ ------------ ------------ ------------
Income before income
taxes and minority
interest $ 663,769 $ 1,113,052 $ 1,753,496 $ 2,127,595
Income taxes 210,000 335,000 582,000 685,000
Minority interest
in income of
subsidiary 11,688 7,415 28,162 5,860
------------ ------------ ------------ ------------
Net income $ 442,081 $ 770,637 $ 1,143,334 $ 1,436,735
============ ============ ============ ============
Earnings per
common share $ .29 $ .51 $ .76 $ .95
============ ============ ============ ============
Weighted average
number of common
shares outstanding 1,505,760 1,505,760 1,505,760 1,505,760
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
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Page 4
<TABLE>
<CAPTION>
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Unrealized
Loss on
Additional Securities
Capital Paid-In Retained Available
Stock Capital Earnings for Sale
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1995 $ 25,818 $ 3,749,342 $ 1,107,480 $ (3,049)
Issuance of Class A
preferred stock 670 -- -- --
Redemption of Class A
preferred stock (250) -- -- --
Issuance of Class B
preferred stock 300 -- -- --
Increase in unrealized
loss on securities
available for sale -- -- -- (11,963)
Dividends paid or accrued
on Class C common stock -- -- (165,634) --
Net income for the
nine months -- -- 1,143,334 --
------------ ------------ ------------ ------------
Balance,
September 30, 1996 $ 26,538 $ 3,749,342 $ 2,085,180 $ (15,012)
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
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Page 5
<TABLE>
<CAPTION>
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Sept 30,
--------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,143,334 $ 1,436,735
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 231,256 169,610
Minority interest in income of subsidiary 28,162 5,860
Amortization of discounts and premiums
on investments and certificates of
deposit, net (73,365) (74,133)
Change in deferred income taxes (28,000) (14,000)
Change in other assets and liabilities 135,327 573,105
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Net cash provided by operating activities $ 1,436,714 $ 2,097,177
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of certificates
of deposit $ 804,900 $ 900,000
Purchase of certificates of deposit (1,075,000) (1,200,000)
Purchase of debt securities (1,675,611) (1,013,033)
Purchase of equity securities (4,363) (4,208)
Proceeds from maturities of debt securities 478,402 330,839
(Increase) in cash surrender value of
life insurance (9,000) (9,000)
Purchase of leasehold improvements
and equipment (147,086) (477,664)
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Net cash (used in) investing activities $ (1,627,758) $ (1,473,066)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock $ 970 $ 550
Redemption of stock (250) (230)
Payment of dividends on common stock (165,634) (197,631)
Minority investment in subsidiary -- 15,000
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Net cash (used in) financing activities $ (164,914) $ (182,311)
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Increase (decrease) in cash
and cash equivalents $ (355,958) $ 441,800
CASH AND CASH EQUIVALENTS
Beginning 3,586,196 3,290,253
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Ending $ 3,230,238 $ 3,732,053
============ ============
See Notes to Consolidated Financial Statements.
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Page 6
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
D/B/A DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of South Dakota State Medical Holding
Company, Incorporated, d/b/a DAKOTACARE, (the "Company") and its wholly-
owned subsidiaries, DAKOTACARE Administrative Services, Incorporated (DAS),
and DAKOTACARE Insurance Ltd. (DIL), and its 50.11% owned subsidiary,
Dakota Health Plans, Incorporated (DHP), contained in this report are
unaudited but reflect all adjustments, consisting only of normal recurring
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the financial information for the period presented and are
not necessarily indicative of the results to be expected for the full year.
<PAGE>
Page 7
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
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The South Dakota State Medical Holding Company, Incorporated, markets its
products under the tradename of DAKOTACARE. Its products include group
managed health care products such as HMO products and cafeteria plan
administration and workers compensation managed care services. Its
subsidiaries' (DAS and DHP) products are managed care and claims
administration services for self-insured employer groups. Its subsidiary,
DIL, was incorporated in January 1996, and was formed to accept reinsurance
risk on some DAS's and DHP's self-funded customers, as well as other
potential insurance risks. The Company and subsidiaries DAS and DHP, market
their products through a network of independent insurance agents throughout
South Dakota.
The Company contracts with over 98% of the physicians in the state of
South Dakota, 100% of the hospitals in the state of South Dakota, and many
other health care providers to provide medical services to its enrollees.
At October 1, 1996, the Company's HMO enrollment is approximately 22,000
enrollees, while its subsidiaries DAS and DHP have enrollment of
approximately 62,000 enrollees under their Administrative Services Only
(ASO) business.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
General
- -------
The Company's net income decreased $328,556 to $442,081 for the three months
ended September 30, 1996, as compared to $770,637 for the three months ended
September 30, 1995, representing a 42.63% decrease. This decrease was
primarily due to an increase in operating expenses of $1,389,976 which was
offset by an increase of $940,693 in revenues and a $125,000 decrease in
income taxes.
Revenues
- --------
Total revenues increased $940,693, or 12.09%, for the three months ended
September 30, 1996, as compared to the three months ended September 30, 1995.
The revenues from the net premiums generated by the health maintenance
organization increased by $755,411. This increase is attributable to an
average of 4.63% increase in the premiums earned per enrollee and a 1.60%
increase in the number of enrollees for the three months ended
September 30, 1996, as compared to September 30, 1995. Revenues from the
third party administration (TPA) fees increased by $140,906 due to the
increase in enrollees in the TPA business through its subsidiaries DAS and
DHP. Net investment income increased $8,711, due primarily to the increase
in assets invested and higher yields earned.
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Page 8
Operating Expenses
- ------------------
Total operating expenses increased $1,389,976, or 20.85%, for the three
months ended September 30, 1996, as compared to the three months ended
September 30, 1995. This was primarily due to an increase in claims incurred,
personnel expense, professional fees expense, and office expense.
Net claims expense increased by $1,161,012, or 24.05%. Average claims per
enrollee increased by 16.80% for the three months ended September 30, 1996,
as compared to the three months ended September 30, 1995, while the number of
enrollees increased by 6.21%. Personnel expense increased by $142,133, or
17.11%, for the three months ended September 30, 1996, as compared to
September 30, 1995, due to the increase in personnel for DAS and DHP.
Professional fees expense increased $40,086, or 18.28%, for the three months
ended September 30, 1996, as compared to September 30, 1995. This was
primarily due to increased consulting work being performed and an increase
in utilization review by outside companies with increased enrollment.
Occupancy expense increased $17,261, or 12.73%, due to an increase in
depreciation on equipment purchased in the past two years due to growth in
TPA clients.
Income Taxes
- ------------
Income tax expense represents 31.64% and 30.10% of income before income taxes
and minority interest for the three months ended September 30, 1996 and 1995,
respectively. As a result of existing levels of pretax earnings and the
availability of recoverable income taxes paid in recent years, no valuation
allowance is required for recorded deferred tax assets.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
General
- -------
The Company's net income decreased $293,401 to $1,143,334 for the nine months
ended September 30, 1996, as compared to $1,436,735 for the nine months ended
September 30, 1995, representing a 20.42% decrease. This decrease was
primarily due to an increase in operating expenses of $1,955,512, which was
offset by an increase in total revenues of $1,581,413, and a decrease in
income taxes of $103,000.
Revenues
- --------
Total revenues increased $1,581,413, or 6.88%, for the nine months ended
September 30, 1996, as compared to the nine months ended September 30, 1995.
The revenues from net premiums increased $713,200. This increase is
attributable to an average of 1.35% increase in the premiums earned per
enrollee and was offset by a 2.14% increase in the number of enrollees for
the nine months ended September 30, 1996, as compared to the nine months
ended September 30, 1995. Revenues from the third party administration
(TPA) fees increased by $798,840 due to the increase in enrollees in this
TPA business through DAS and DHP. Net investment income increased $45,762
due primarily to the increase in assets invested and higher yields earned.
<PAGE>
Page 9
Operating Expenses
- ------------------
Total operating expenses increased $1,955,512, or 9.38%, for the nine months
ended September 30, 1996, as compared to the nine months ended September 30,
1995. This was primarily due to an increase in claims expense, personnel
expense, professional fees expense, and occupancy expense.
Net claims expense increased by $1,161,851, or 7.64%. Average claims per
enrollee increased by 6.20% for the nine months ended September 30, 1996, as
compared to September 30, 1995, while the number of enrollees increased by
1.35%. Personnel expense increased by $455,042, or 19.55%, for the nine
months ended September 30, 1996, as compared to September 30, 1995, primarily
due to the increase in personnel related to the Company's ASO business.
Professional fees expense increased $173,047, or 25.58%, for the nine months
ended September 30, 1996, as compared to September 30, 1995. This was
primarily due to increased consulting work being performed and an increase in
utilization review by outside companies with increased enrollment. Occupancy
expense increased $93,560, or 25.62%, due to increase in depreciation on
equipment purchased in the past two years due to growth in TPA clients.
Income Taxes
- ------------
Income tax expense represents 33.19% and 32.20% of income before income taxes
and minority interest for the nine months ended September 30, 1996 and 1995,
respectively. As a result of existing levels of pretax earnings and the
availability of recoverable income taxes paid in recent years, no valuation
allowance is required for recorded deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash have been premium revenue, collection
of premiums in advance of the claims cost associated with them, and an
agreement with participating physicians in which a percentage of fees for
services is withheld for cash flows of the Company. The Company in the past
has had borrowings from banks and affiliated companies, but currently does
not need to borrow for liquidity purposes.
Net cash provided by operating activities decreased by $660,463 to $1,436,714
for the nine months ended September 30, 1996, as compared to September 30,
1995. The cash flows from operations have been used primarily to purchase
investments, certificates of deposit, and leasehold improvements and
equipment and to pay dividends.
The Company is not contractually obligated to pay out the contingency
reserve withheld but has historically elected to pay out a majority of the
amounts withheld. On November 12, 1996, the Board of Directors approved
payment of dividends on the Class C common stock of $.07 per share for
shareholders of record as of November 12, 1996, payable on November 15,1996.
Future dividend payment is dependent on the operations and liquidity of the
Company. The Company believes that cash flow generated by operations,
withholding of contingency reserve payables, cash on hand, and short-term
investment balances will be sufficient to fund operations, pay out
the projected contingency reserve payable, and pay dividends on the Class C
common stock.
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Page 10
OUTLOOK, TRENDS, EVENTS, OR UNCERTAINTIES
The Company identifies the following important factors which could cause the
Company's actual financial and enrollment results to differ materially from
any such results which might be projected, forecast, estimated, or budgeted
by the Company in forward-looking statements or valuation analysis: the
intensification of price competition; the entry of new competitors; the
introduction of new products by new and existing competitors; adverse state
and federal legislation and regulation; increases in medical costs, including
increases in utilization and costs of medical services and the effects of
actions by competitors or groups of providers; termination of provider
contracts or renegotiation at less cost-effective rates or terms of payment;
price increases in pharmaceuticals; failure to obtain new customers, retain
existing customers, or reductions in force by existing customers; adverse
publicity and news coverage; the selection by employers and individuals of
higher copayment/deductible/coinsurance plans with relatively lower premiums;
the migration of employers from insured to self-funded coverage resulting in
reduced margins to the Company; higher general and administrative expenses
occasioned by the need for additional advertising, professional services,
administrative, or management information systems expenditures; changes in
interest rates causing a reduction of net investment income; and increases by
regulatory authorities of minimum capital, reserve, and other financial
viability requirements.
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Page 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
None
Item 2. Changes in Securities
- -----------------------------
None
Item 3. Default 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) No exhibits are attached.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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Page 12
SIGNATURES
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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.
South Dakota State Medical Holding Company, Incorporated
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(Registrant)
Date: 11/13/96 By: /s/ Robert D. Johnson
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Robert D. Johnson
Chief Executive Officer
(Duly Authorized Officer)
Date: 11/12/96 By: /s/ Kirk J. Zimmer
----------------- ----------------------------
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
