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 March 31, 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 May 9, 1997
----- --------------------------
Class C Common Stock 1,505,760
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
March 31, 1997 and December 31, 1996 2
Consolidated Statements of Income for
the Three Months Ended March 31, 1997
and 1996 3
Consolidated Statement of Stockholders'
Equity for the Three Months Ended
March 31, 1997 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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)
March 31, December 31,
ASSETS 1997 1996
----------- -----------
Cash and cash equivalents $ 3,752,028 $ 3,422,692
Investments in debt securities 702,579 524,511
Certificates of deposit 875,000 875,000
Receivables 815,483 794,460
Prepaids and other assets 170,392 171,071
Deferred income taxes 564,000 518,000
----------- -----------
Total current assets $ 6,879,482 $ 6,305,734
----------- -----------
Investments in debt securities $ 4,737,329 $ 4,194,036
Investments in equity securities 284,150 288,550
Pledged certificates of deposit 500,000 500,000
Cash surrender value of life insurance 72,000 69,000
----------- -----------
Total long-term investments $ 5,593,479 $ 5,051,586
----------- -----------
Property and equipment, net $ 1,045,383 $ 1,070,650
----------- -----------
Deferred income taxes $ 324,000 $ 340,000
----------- -----------
$ 13,842,344 $ 12,767,970
============ ============
LIABILITIES
Reported and unreported medical
claims liabilities $ 3,462,695 $ 3,188,455
Unearned subscriber premiums and
administration fees 1,087,414 854,905
Accounts payable and accrued expenses 782,338 670,101
Contingency reserve payable 950,000 950,000
----------- -----------
Total current liabilities $ 6,282,447 $ 5,663,461
Long-term debt 28,302 0
Contingency reserve payable 1,441,603 1,155,294
----------- -----------
Total liabilities $ 7,752,352 $ 6,818,755
----------- -----------
Minority interest in subsidiary $ 320,894 $ 309,143
----------- -----------
STOCKHOLDERS' EQUITY
Class A preferred stock,
issued 1,042 shares $ 10,420 $ 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 2,011,948 1,877,084
Unrealized loss on securities
available for sale (18,970) (13,132)
----------- -----------
$ 5,769,098 $ 5,640,072
----------- -----------
$ 13,842,344 $ 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 March 31,
----------------------------
1997 1996
------------- -------------
Revenues:
Premiums, net of reinsurance ceded $ 8,473,058 $ 6,554,060
Third party administration fees 961,217 1,006,994
Net investment income 131,702 122,713
Other income 143,453 76,126
------------- -------------
Total revenues $ 9,709,430 $ 7,759,893
------------- -------------
Operating expenses:
Claims incurred, net of
reinsurance recoveries $ 7,045,461 $ 5,177,299
Personnel expense 958,781 897,215
Commissions 435,319 320,878
Professional fees expense 254,509 299,836
State insurance taxes 115,580 80,507
Advertising 110,247 163,778
Occupancy expense 167,224 150,535
Office expense 155,600 194,963
Other general and administrative expenses 67,633 68,829
------------- -------------
Total operating expenses $ 9,310,354 $ 7,353,840
------------- -------------
Income before income taxes
and minority interest $ 399,076 $ 406,053
Income taxes 132,000 136,000
------------- -------------
Income before minority interest
in earnings of subsidiary $ 267,076 $ 270,053
Minority interest in earnings
of subsidiary 11,751 9,099
------------- -------------
Net income $ 255,325 $ 260,954
============= =============
Earnings per common share $ .17 $ .17
============= =============
Weighted average number of common
shares outstanding $ 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 THREE MONTHS ENDED MARCH 31, 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 170 -- -- -- 170
Redemption of Class A
preferred stock (170) -- -- -- (170)
Increase in unrealized
loss on securities
available for sale -- -- -- (5,838) (5,838)
Dividends declared on
Class C common
stock -- -- (120,461) -- (120,461)
Net income for the
three months -- -- 272,325 -- 272,325
------ ----------- ------------ --------- -----------
Balance,
March 31, 1997 $26,778 $3,749,342 $ 2,028,948 $(18,970) $5,786,098
======= ========== =========== ======== ==========
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)
Three Months Ended March 31,
----------------------------
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 255,325 $ 260,954
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 78,735 75,344
Minority interest in income of subsidiary 11,751 9,099
Amortization of discounts and premiums
on investments, net (31,428) (24,347)
Change in deferred income taxes (30,000) 4,000
Change in other assets and liabilities 598,642 81,653
Increase in contingency reserve payable 286,309 254,382
------------ -------------
Net cash provided by operating activities $ 1,169,334 $ 661,085
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale $ (1,438) $ (1,414)
Held to maturity securities:
Matured -- 300,000
Purchases (726,549) (141,119)
Repayments on collateralized mortgage obligations 36,616 12,678
Proceeds from maturities of certificates of deposit 675,000 404,900
Purchase of certificates of deposit (675,000) (675,000)
(Increase) in cash surrender value of life insurance (3,000) (3,000)
Purchase of property and equipment (25,166) (36,069)
----------- -------------
Net cash (used in) investing activities $ (719,537) $ (139,024)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 170 $ 190
Redemption of capital stock (170) (120)
Payment of dividends (120,461) --
----------- -------------
Net cash provided by (used in)
financing activities $ (120,461) $ 70
----------- -------------
Increase (decrease) in cash and cash
equivalents $ 329,336 $ 522,131
CASH AND CASH EQUIVALENTS
Beginning 3,422,692 3,586,196
------------ ------------
Ending $ 3,752,028 $ 4,108,327
============ ============
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 March 31, 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 THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996
General
The Company's net income decreased $5,629 to $255,325 for the
three months ended March 31, 1997, as compared to $260,954 for the
three months ended March 31, 1996, representing a 2.16% decrease.
This decrease was primarily due to an increase in total revenues
of $1,949,537, which was offset by an increase of $1,956,514 in
operating expenses.
Revenues
Total revenues increased $1,949,537, or 25.12%, for the three
months ended March 31, 1997, as compared to March 31, 1996. The
revenues from the net premiums generated by the health maintenance
organization increased $1,745,190, or 26.63%. This increase is
attributable to a 26.66% increase in the number of enrollees, but
is offset by a .02% decrease in the premiums earned per enrollee
<PAGE> 7
for the three months ended March 31, 1997, as compared to March
31, 1996. Revenues from the third party administration (TPA) fees
decreased by $45,777 due to the decrease in enrollees in this TPA
business through DAS and DHP.
Operating Expenses
Total operating expenses increased $1,956,514, or 26.61%, for the
three months ended March 31, 1997, as compared to March 31, 1996.
This was due to an increase in claims incurred, commissions, and
state insurance taxes, but was offset by a decrease in advertising
and professional fees expense.
Net claims expense increased by $1,868,162, or 36.08%. Average
claims per enrollee increased by 5.42% for the three months ended
March 31, 1997, as compared to March 31, 1996, while the number of
enrollees increased by 26.66%. Commissions and state insurance
taxes increased $149,514, or 37.25%, for the three months ended
March 31, 1997, as compared to March 31, 1996. These expenses
increased due to the direct correlation with increased health fee
revenues. Advertising expense decreased $53,531, or 32.69%, for
the three months ended March 31, 1997, as compared to March 31,
1996, due to reduced advertising penetration in the first quarter
of 1997. Professional fees expense decreased $45,327, or 15.12%,
for the three months ended March 31, 1997, as compared to March
31, 1996. This was due to decreased consulting work being
performed.
Income Taxes
Income tax expense represents 33.08% and 33.49% of income before
income taxes and minority interest for the three months ended
March 31, 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 increased by $508,249 to
$1,169,334 for the three months ended March 31, 1997, as compared
to March 31, 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.
<PAGE> 8
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
April 23, 1997, the Board of Directors approved payment of
dividends on the Class C common stock of $.09 per share for
shareholders of record as of April 23, 1997, payable on May 15,
1997. 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: May 14, 1997 By: /s/ Robert D. Johnson
------------- ----------------------------
Robert D. Johnson
Chief Executive Officer
(Duly Authorized Officer)
Date: May 14, 1997 By: /s/ Kirk J. Zimmer
------------- ----------------------------
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
<PAGE> 11
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 6,814,908
<DEBT-MARKET-VALUE> 0
<EQUITIES> 284,150
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 7,099,058
<CASH> 3,752,028
<RECOVER-REINSURE> 815,483
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 13,842,344
<POLICY-LOSSES> 3,462,695
<UNEARNED-PREMIUMS> 1,087,414
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
11,720
<COMMON> 15,058
<OTHER-SE> 5,742,320
<TOTAL-LIABILITY-AND-EQUITY> 13,842,344
8,473,058
<INVESTMENT-INCOME> 131,702
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 1,104,670
<BENEFITS> 7,045,461
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 435,319
<INCOME-PRETAX> 399,076
<INCOME-TAX> 132,000
<INCOME-CONTINUING> 255,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 701,253
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
<RESERVE-OPEN> 3,188,000
<PROVISION-CURRENT> 7,045,461
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 3,303,589
<PAYMENTS-PRIOR> 3,467,177
<RESERVE-CLOSE> 3,462,695
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
