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 June 30, 1997
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
South Dakota State Medical Holding Company, Incorporated
(Exact name of registrant as specified in its charter)
South Dakota 46-0401087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1323 South Minnesota Avenue, Sioux Falls, South Dakota 57105
(Address of principal executive office)
(Zip Code)
(605) 334-4000
(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 filing requirements for the past 90 days.
YES X NO
___ ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 5, 1997
Class C Common Stock 1,505,760
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
FORM 10-Q
INDEX
Page Number
Part 1. Financial Information (unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1997 and December 31, 1996 2
Consolidated Statements of Income for
the Three and Six Months Ended June 30,
1997 and 1996 3
Consolidated Statement of Stockholders'
Equity for the Six Months Ended June 30,
1997 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30,
1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-9
Part II. Other Information 10
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Default Upon Senior Securities 10
Item 4. Submission of Matters to a Vote
of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE> 1
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1997 1996
Cash and cash equivalents $3,452,580 $3,422,692
Investments in debt securities 878,986 524,511
Certificates of deposit 775,000 875,000
Receivables 1,135,260 794,460
Prepaids and other assets 98,973 171,071
Deferred income taxes 541,000 518,000
Total current assets $6,881,799 $6,305,734
Investments in debt securities $4,336,613 $4,194,036
Investments in equity securities 292,000 288,550
Pledged certificates of deposit 500,000 500,000
Cash surrender value of life insurance 75,000 69,000
Total long-term investments $5,203,613 $5,051,586
Property and equipment, net $984,797 $1,070,650
Deferred income taxes $332,000 $340,000
$13,402,209 $12,767,970
LIABILITIES
Reported and unreported medical
claims liabilities $3,619,721 $3,188,455
Unearned subscriber premiums and
administration fees 1,071,654 854,905
Accounts payable and accrued expenses 980,019 670,101
Contingency reserve payable 950,000 950,000
Total current liabilities $6,621,394 $5,663,461
Long-term debt 28,302 0
Contingency reserve payable 1,321,288 1,155,294
Total liabilities $7,970,984 $6,818,755
Minority interest in subsidiary $334,066 $309,143
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,048 shares $10,480 $10,420
Class B preferred stock, issued 1,300 shares 1,300 1,300
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 1,333,676 1,877,084
Unrealized loss on securities available
for sale (12,697) (13,132)
$5,097,159 $5,640,072
$13,402,209 $12,767,970
See Notes to Consolidated Financial Statements.
<PAGE>2
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
Revenues:
Premiums, net of reins. ceded $8,489,583 $6,867,146 $16,962,641 $13,421,206
Third party administration fees 958,865 971,365 1,920,082 1,978,359
Net investment income 161,660 134,033 293,362 256,746
Other income 129,911 100,837 273,364 176,963
Total revenues $9,740,019 $8,073,381 $19,449,449 $15,833,274
Operating expenses:
Claims incurred, net
of reins. recoveries $8,260,166 $5,208,316 $15,305,627 $10,385,615
Personnel expense 963,150 912,362 1,921,931 1,809,577
Commissions 372,683 293,748 808,002 614,626
Professional fees expense 292,012 290,355 546,521 590,191
Office expense 169,590 196,380 325,190 391,343
Advertising 104,631 154,558 214,878 318,336
Occupancy expense 167,988 155,287 335,212 305,822
State insurance taxes 112,504 84,274 228,084 164,781
Other general and
administrative expenses 92,877 94,427 160,510 163,256
Total operating expenses $10,535,601 $7,389,707 $19,845,955 $14,743,547
Income before income taxes
and minority interest $(795,582) $683,674 $(396,506) $1,089,727
Income taxes (266,000) 236,000 (134,000) 372,000
Income before minority
interest in earnings (loss)
of subsidiary $(529,582) $447,674 $(262,506) $717,727
Minority interest in earnings (loss)
of subsidiary 13,172 7,375 24,9231 16,474
Net income $(542,754) $440,299 $(287,429) $701,253
Earnings per common share $ (0.36) $ .29 $ (0.19) $ .47
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.
<PAGE> 3
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
Unrealized
Loss on
Additional Securities
Capital Paid-In Retained Available
Stock Capital Earnings for Sale Total
Balance,
December 31, 1996 $26,778 $3,749,342 $1,877,084 $(13,132) $5,640,072
Issuance of Class A
preferred stock 270 -- -- -- 270
Redemption of Class A
preferred stock (210) -- -- -- (210)
Decrease in unrealized
loss on securities
available for sale -- -- -- 435 435
Dividends declared on
Class C common
stock -- -- (255,979) -- (255,979)
Net loss for the
six months -- -- (287,429) -- (287,429)
Balance,
June 30, 1997 $26,838 $3,749,342 $1,333,676 $(12,697) $5,097,159
See Notes to Consolidated Financial Statements.
<PAGE> 4
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $(287,429) $701,253
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 157,165 152,415
Minority interest in income of subsidiary 24,923 16,474
Amortization of discounts and premiums
on investments, net (66,212) (48,997)
Change in deferred income taxes (15,000) (16,000)
Change in other assets and liabilities 698,231 517,433
Increase in contingency reserve payable 165,994 0
Net cash provided by operating activities $668,672 $1,322,578
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of certificates of deposit $875,000 $604,900
Purchase of certificates of deposits (775,000) (875,000)
Repayments on collateralized mortgage obligations 70,708 --
Purchase of debt securities (726,549) (1,224,545)
Proceeds from maturities of debt securities 225,000 434,501
Purchase of equity securities (3,015) (2,879)
(Increase) in cash surrender value of life insurance (6,000) (6,000)
Proceeds from the sale of leasehold imp. & equip. 6,799 --
Purchase of leasehold improvements and equipment (78,110) (97,290)
Net cash (used in) investing activities $(411,167) $(1,166,313)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $28,302 $--
Proceeds from issuance of capital stock 270 620
Redemption of capital stock (210) (160)
Payment of dividends (255,979) (75,288)
Net cash provided by (used in)
financing activities $(227,617) $(74,828)
Increase (decrease) in cash and cash
equivalents $29,888 $81,437
CASH AND CASH EQUIVALENTS
Beginning 3,422,692 3,586,196
Ending $3,452,580 $3,667,633
See Notes to Consolidated Financial Statements.
<PAGE> 5
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 periods presented and
are not necessarily indicative of the results to be
expected for the full year.
2.EARNINGS PER COMMON SHARE
Earnings per common share is calculated by dividing
net income by the weighted average number of Class C
common shares outstanding during the period.
<PAGE> 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 of DAS's and DHP's self-funded
customers. 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 June 30, 1997, the Company's HMO enrollment is
approximately 26,000 enrollees, while its subsidiaries
DAS and DHP have enrollment of approximately 59,000
enrollees under their Administrative Services Only (ASO)
business.
This discussion and analysis contains certain forward-
looking terminology such as "believes," "anticipates,"
"will," and "intends," or comparable terminology. Such
statements are subject to certain risks and
uncertainties that could cause actual results to differ
materially from those projected. Potential purchasers
of the Company's securities are cautioned not to place
undue reliance on such forward-looking statements which
are qualified in their entirety by the cautions and
risks described herein and in other reports filed by the
Company with the Securities and Exchange Commission.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
General
The Company's net income decreased $988,682 to a loss of
$287,429 for the six months ended June 30, 1997, as
compared to net income of $701,253 for the six months
ended June 30, 1996, representing a 141% decrease. This
decrease was primarily due to an increase in total
revenues of $3,616,175, which was offset by a net
increase of $4,596,408 in operating expenses and income
taxes.
Revenues
Total revenues increased $3,616,175, or 22.84%, for the
six months ended June 30, 1997, as compared to June
30,1996. The revenues from the net premiums generated
by the health maintenance organization increased
$3,541,435, or 26.39%. This increase is attributable to
a 18.88% increase in the number of enrollees and a .45%
increase in the premiums earned per enrollee for the six
months ended June 30, 1997, as compared to June 30,
<PAGE> 7
1996. Revenues from the third party administration
(TPA) fees decreased by $58,277 due to the net decrease
in enrollees in this TPA business through DAS and DHP.
Operating Expenses
Total operating expenses increased $5,102,408, or
34.61%, for the six months ended June 30, 1997, as
compared to June 30, 1996. This was due to an increase
in claims incurred, personnel expenses, commissions, and
state insurance taxes, but was offset by a decrease in
advertising, professional fees, and office expense.
Net claims expense increased by $4,920,012, or 47.37%
Average claims per enrollee increased by 17.79% for the
six months ended June 30, 1997, as compared to June 30,
1996, while the number of enrollees increased by 18.88%.
Personnel expenses, commissions, and state insurance
taxes increased $369,033, or 14.25%, for the six months
ended June 30, 1997, as compared to June 30, 1996.
These expenses increased due to the direct correlation
with increased health fee revenues. Advertising expense
decreased $103,458, or 32.50%, for the six months ended
June 30, 1997, as compared to June 30, 1996, due to
reduced advertising penetration in the first half of
1997. Professional fees expense decreased $45,327, or
15.12%, for the six months ended June 30, 1997, as
compared to June 30, 1996. This was due to decreased
consulting work being performed. Office expense
decreased $66,153, or 16.90%, for the six months ended
June 30, 1997, as compared to June 30, 1996. This was
due to office efficiencies from the direct effort to
reduce various costs.
Income Taxes
Income tax expense represents 33.80% and 34.14% of
income before income taxes and minority interest for the
six months ended June 30, 1997 and 1996, 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. The
Company's long-term debt is a contract for deed on a
branch office building payable to the seller of the
property.
Net cash provided by operating activities decreased by
$653,906 to $668,672 for the six months ended June 30,
1997, as compared to June 30, 1996. The cash flows from
<PAGE> 8
operations have been used primarily to purchase
investments, certificates of deposits, and leasehold
improvements and equipment and to pay dividends for both
periods.
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 February 14, 1997, the Company paid out dividends of
$120,461 on Class C shares. On May 15, 1997, the
Company paid out dividends of $135,518 on Class C
shares. 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.
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.
<PAGE> 9
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.
<PAGE> 10
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.
South Dakota State Medical Holding Company, Incorporated
(Registrant)
Date: August 8, 1997 By:/s/ Robert D. Johnson
Robert D. Johnson
Chief Executive Officer
(Duly Authorized Officer)
Date: August 8, 1997 By:/s/ Kirk J. Zimmer
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
<PAGE> 11
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<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 6,490,599
<DEBT-MARKET-VALUE> 0
<EQUITIES> 292,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,782,599
<CASH> 3,452,580
<RECOVER-REINSURE> 204,972
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 13,402,209
<POLICY-LOSSES> 3,619,721
<UNEARNED-PREMIUMS> 1,071,654
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 28,302
0
11,780
<COMMON> 15,058
<OTHER-SE> 5,070,321
<TOTAL-LIABILITY-AND-EQUITY> 13,402,209
16,962,641
<INVESTMENT-INCOME> 293,362
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 2,193,446
<BENEFITS> 15,305,627
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 808,002
<INCOME-PRETAX> (396,506)
<INCOME-TAX> (134,000)
<INCOME-CONTINUING> (287,429)
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<NET-INCOME> (287,429)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
<RESERVE-OPEN> 3,188,000
<PROVISION-CURRENT> 15,305,627
<PROVISION-PRIOR> 0
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