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, 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 reports) and (2) has been subject to 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 November 10, 1997
Class C Common Stock 1,505,760
<PAGE> 1
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
September 30, 1997 and December 31, 1996 2
Consolidated Statements of Income for
the Three and Nine Months Ended September 30,
1997 and 1996 3
Consolidated Statement of Stockholders'
Equity for the Nine Months Ended September 30,
1997 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 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> 2
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
--------------- --------------
Cash and cash equivalents $ 4,389,253 $ 3,422,692
Investments in debt securities 880,979 524,511
Certificates of deposit 775,000 875,000
Receivables 754,163 794,460
Prepaids and other assets 200,288 171,071
Deferred income taxes 513,000 518,000
--------------- ---------------
Total current assets $ 7,512,683 $ 6,305,734
--------------- ---------------
Investments in debt securities $ 4,319,758 $ 4,194,036
Investments in equity securities 297,800 288,550
Pledged certificates of deposit 500,000 500,000
Cash surrender value of life insurance 78,000 69,000
--------------- ---------------
Total long-term investments $ 5,195,558 $ 5,051,586
--------------- ---------------
Property and equipment, net $ 958,186 $ 1,070,650
--------------- ---------------
Deferred income taxes $ 381,100 $ 340,000
--------------- ---------------
$ 14,047,527 $ 12,767,970
=============== ===============
LIABILITIES
Reported and unreported medical
claims liabilities $ 3,733,566 $ 3,188,455
Unearned subscriber premiums and
administration fees 857,617 854,905
Accounts payable and accrued expenses 1,057,244 670,101
Contingency reserve payable 950,000 950,000
--------------- ---------------
Total current liabilities $ 6,598,427 $ 5,663,461
Long-term debt 28,302 0
Contingency reserve payable 1,663,958 1,155,294
--------------- ---------------
Total liabilities $ 8,290,687 $ 6,818,755
--------------- ---------------
Minority interest in subsidiary $ 345,429 $ 309,143
--------------- ---------------
STOCKHOLDERS' EQUITY
Class A preferred stock,
issued 1,059 shares $ 10,590 $ 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 1,643,598 1,877,084
Unrealized loss on securities
available for sale (8,477) (13,132)
--------------- ---------------
$ 5,411,411 $ 5,640,072
--------------- ---------------
$ 14,047,527 $ 12,767,970
================ ===============
See Notes to Consolidated Financial Statements.
<PAGE> 3
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,
---------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Revenues:
Premiums, net of
reins. ceded $ 8,663,469 $ 7,542,688 $25,626,110 $20,963,894
Third party
administration fees 884,290 932,708 2,804,372 2,911,067
Net investment income 158,512 135,601 451,874 392,347
Other income 163,113 109,970 436,477 286,933
----------- ----------- ----------- -----------
Total revenues $ 9,869,384 $ 8,720,967 $29,318,833 $24,554,241
----------- ----------- ----------- -----------
Operating expenses:
Claims incurred,
net of reins. recoveries $ 7,317,669 $ 5,989,166 $22,623,296 $16,374,781
Personnel expense 939,467 973,057 2,861,398 2,782,634
Commissions 376,903 309,261 1,184,905 923,887
Professional fees expense 181,377 259,396 727,898 849,587
Office expense 158,191 164,980 483,381 556,323
Advertising 78,391 31,700 293,269 350,036
Occupancy expense 150,120 152,894 485,332 458,716
State insurance taxes 99,309 87,333 327,393 252,114
Other general and
administrative expenses 93,772 89,411 254,282 252,667
----------- ----------- ----------- -----------
Total operating expenses $ 9,395,199 $ 8,057,198 $29,241,154 $22,800,745
----------- ----------- ----------- -----------
Income before income taxes
and minority interest $ 474,185 $ 663,769 $ 77,679 $ 1,753,496
Income taxes 152,900 210,000 18,900 582,000
----------- ----------- ----------- -----------
Income before minority
interest in earnings (loss)
of subsidiary $ 321,285 $ 453,769 $ 58,779 $ 1,171,496
Minority interest in earnings
(loss) of subsidiary 11,363 11,688 36,286 28,162
----------- ----------- ----------- -----------
Net income $ 309,922 $ 442,081 $ 22,493 $ 1,143,334
=========== =========== =========== ===========
Earnings per common share $ 0.21 $ 0.29 $ 0.01 $ 0.76
=========== =========== =========== ===========
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> 4
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 380 -- -- -- 380
Redemption of Class A
preferred stock (210) -- -- -- (210)
Decrease in unrealized
loss on securities
available for sale -- -- -- 4,655 4,655
Dividends declared on
Class C common
stock -- -- (255,979) -- (255,979)
Net income for the
nine months -- -- 22,493 -- 22,493
------- ---------- ----------- --------- -----------
Balance,
Sept. 30, 1997 $26,948 $3,749,342 $ 1,643,598 $( 8,477) $5,411,411
======= ========== =========== ========= ===========
See Notes to Consolidated Financial Statements.
<PAGE> 5
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Sept.30,
--------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,493 $ 1,143,334
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 235,941 231,256
Minority interest in income of subsidiary 36,286 28,162
Amortization of discounts and premiums
on investments, net (88,516) (73,365)
Loss on sale of equipment 903 --
Change in deferred income taxes (36,100) (28,000)
Change in other assets and liabilities 946,046 135,327
Increase in contingency reserve payable 508,664 --
----------- -----------
Net cash provided by operating activities $1,625,717 $ 1,436,714
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of certificates
of deposit $1,075,000 $ 804,900
Purchase of certificates of deposits (975,000) (1,075,000)
Repayments on collateralized mortgage obligations 107,875 --
Purchase of debt securities (726,549) (1,675,611)
Proceeds from maturities of debt securities 225,000 478,402
Purchase of equity securities (4,595) (4,363)
(Increase) in cash surrender value of life insurance (9,000) (9,000)
Proceeds from the sale of leasehold imp. & equip. 18,709 --
Purchase of leasehold improvements and equipment (114,787) (147,086)
----------- -----------
Net cash (used in) investing activities $ (403,347)$(1,627,758)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 270 $ 970
Redemption of capital stock (210) (250)
Payment of dividends (255,979) (165,634)
----------- ----------
Net cash provided by (used in)
financing activities $ (255,809)$ (164,914)
----------- ----------
Increase (decrease) in cash and
cash equivalents $ 966,561 $ (355,958)
CASH AND CASH EQUIVALENTS
Beginning 3,422,692 3,586,196
----------- ----------
Ending $4,389,253 $ 3,230,238
=========== ==========
See Notes to Consolidated Financial Statements.
<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 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> 7
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 September 30, 1997, the Company's
HMO enrollment is approximately 26,000 enrollees, while its
subsidiaries DAS and DHP have enrollment of approximately 55,000
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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996
General
- -------
The Company's net income decreased $1,120,841 to net income of
$22,493 for the nine months ended September 30, 1997, as compared
to net income of $1,143,334 for the nine months ended September 30,
1996. This decrease was primarily due to an increase in total
revenues of $4,764,592, which was offset by a net increase of
$5,877,309 in operating expenses and income taxes.
Revenues
- --------
Total revenues increased $4,764,592, or 19.40%, for the nine months
ended September 30, 1997, as compared to September 30, 1996. The
revenues from the net premiums generated by the health maintenance
organization increased $4,662,216, or 18.99%. This increase is
attributable to a 20.82% increase in the number of enrollees and a
.48% increase in the premiums earned per enrollee for the nine
months ended September 30, 1997, as compared to September 30, 1996.
<PAGE> 8
Revenues from the third party administration (TPA) fees decreased
by $106,695 due to the net decrease in enrollees in this TPA
business through DAS and DHP.
Operating Expenses
- ------------------
Total operating expenses increased $6,440,409, or 28.25%, for the
nine months ended September 30, 1997, as compared to September 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 $6,248,515, or 38.16%. Average
claims per enrollee increased by 13.51% for the nine months ended
September 30, 1997, as compared to September 30, 1996, while the
number of enrollees increased by 20.82%. Personnel expenses,
commissions, and state insurance taxes increased $415,061, or
10.48%, for the nine months ended September 30, 1997, as compared
to September 30, 1996. These expenses increased due to the direct
correlation with increased health fee revenues. Advertising
expense decreased $56,767, or 16.22%, for the nine months ended
September 30, 1997, as compared to September 30, 1996, due to
reduced advertising penetration in 1997. Professional fees expense
decreased $121,689, or 14.32%, for the nine months ended September
30, 1997, as compared to September 30, 1996. This was due to
decreased consulting work being performed. Office expense
decreased $72,942, or 13.11%, for the nine months ended September
30, 1997, as compared to September 30, 1996. This was due to
office efficiencies from the direct effort to reduce various costs.
Income Taxes
- ------------
Income tax expense represents 24.33% and 33.19% of income before
income taxes and minority interest for the nine months ended
September 30, 1997 and 1996, respectively. The Company does not
anticipate income to surpass the top income tax bracket. The
decreased percentage reflects the estimated overall rate currently
applicable. As a result of 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 $189,003 to
$1,625,717 for the nine months ended September 30, 1997, as
<PAGE> 9
compared to September 30, 1996. The cash flows from 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. On October 8, 1997 a dividend was declared to stockholders
of Class C stock and payment was made October 15, 1997 in the
amount of $75,288. 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> 10
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> 11
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: November 14, 1997 By: /s/ Robert D. Johnson
-----------------------
Robert D. Johnson
Chief Executive Officer
(Duly Authorized Officer)
Date: November 14, 1997 By: /s/ Kirk J. Zimmer
-----------------------
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 4,819,758
<DEBT-MARKET-VALUE> 0
<EQUITIES> 297,800
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,117,558
<CASH> 4,389,253
<RECOVER-REINSURE> 754,163
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 14,047,527
<POLICY-LOSSES> 3,733,566
<UNEARNED-PREMIUMS> 857,617
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
11,890
<COMMON> 15,058
<OTHER-SE> 5,384,463
<TOTAL-LIABILITY-AND-EQUITY> 14,047,527
25,626,110
<INVESTMENT-INCOME> 451,874
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 3,240,849
<BENEFITS> 22,623,296
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 1,184,905
<INCOME-PRETAX> 77,679
<INCOME-TAX> 18,900
<INCOME-CONTINUING> 22,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,493
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<RESERVE-OPEN> 3,188,000
<PROVISION-CURRENT> 22,623,296
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 15,187,580
<PAYMENTS-PRIOR> 3,702,150
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