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, 1998
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 April 20, 1998
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
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Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 2
Consolidated Statements of Income for
the Three Months Ended March 31, 1998 and 1997 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 10
</TABLE>
<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)
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<S> <C> <C>
March 31, December 31,
ASSETS 1998 1997
Cash and cash equivalents $ 4,290,600 $ 4,467,754
Investments in debt securities 718,483 901,599
Certificates of deposit 744,632 843,599
Receivables 1,059,714 799,395
Prepaids and other assets 108,833 124,729
Deferred income taxes 488,000 720,000
------------- -------------
Total current assets $ 7,410,262 $ 7,857,036
------------- -------------
Investments in debt securities $ 3,888,545 $ 3,887,081
Investments in equity securities 300,500 300,000
Pledged certificates of deposit 500,000 500,000
Cash surrender value of life insurance 87,000 81,000
------------- -------------
Total long-term investments $ 4,776,045 $ 4,768,081
------------- -------------
Property and equipment, net $ 953,931 $ 963,684
------------- -------------
Deferred income taxes $ 605,000 $ 422,000
------------- -------------
$ 13,745,238 $ 14,010,801
============= =============
LIABILITIES
Reported and unreported medical claims liabilities $ 4,169,625 $ 4,163,804
Unearned subscriber premiums and administration fees 195,668 629,783
Accounts payable and accrued expenses 882,564 695,050
Contingency reserve payable 1,150,000 1,627,000
------------- -------------
Total current liabilities $ 6,598,427 $ 7,115,637
Contingency reserve payable 1,711,212 1,336,846
------------- -------------
Total liabilities $ 8,109,069 $ 8,452,483
------------- -------------
Minority interest in subsidiary $ 352,361 $ 354,160
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,115 shares $ 11,150 $ 10,690
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 1,515,832 1,435,709
Unrealized loss on securities available for sale (8,874) (7,941)
------------- -------------
$ 5,283,808 $ 5,204,158
------------- -------------
$ 13,745,238 $ 14,010,801
============= =============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>3
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
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1998 1997
Revenues:
Premiums, net of reins. ceded $ 9,220,983 $ 8,473,058
Third party administration fees 827,294 961,217
Net investment income 147,631 131,702
Other income 154,643 143,453
------------- -------------
Total revenues $ 10,350,551 $ 9,709,430
------------- -------------
Operating expenses:
Claims incurred, net of reins. recoveries $ 8,003,850 $ 7,045,461
Personnel expense 942,705 958,781
Commissions 395,930 435,319
Professional fees expense 257,551 254,509
Office expense 137,168 155,600
Advertising 138,413 110,247
Occupancy expense 161,937 167,224
State insurance taxes 113,774 115,580
Other general and administrative expenses 80,900 67,633
------------- -------------
Total operating expenses $ 10,232,228 $ 9,310,354
------------- -------------
Income before income taxes and minority interest $ 118,323 $ 399,076
Income taxes 40,000 132,000
------------- -------------
Income before minority interest in
earnings (loss) of subsidiary $ 78,323 $ 267,076
Minority interest in earnings (loss)
of subsidiary (1,800) 11,751
------------- -------------
Net income $ 80,123 $ 255,325
============= =============
Earnings per common share $ 0.05 $ 0.17
============= =============
Weighted average number of
common shares outstanding 1,505,760 1,505,760
============= =============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>4
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
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Unrealized
Loss on
Additional Securities
Capital Paid-In Retained Available
Stock Capital Earnings for Sale Total
Balance,
December 31, 1997 $27,048 $3,749,342 $1,435,709 $(7,941) $5,204,158
Issuance of Class A
preferred stock 460 -- -- -- 460
Redemption of Class A
preferred stock -- -- -- -- --
Decrease in unrealized
loss on securities
available for sale -- -- -- (933) (933)
Dividends declared on
Class C common
stock -- -- -- -- --
Net income for the
three months -- -- 80,123 -- 80,123
-------- ----------- ----------- -------- -----------
Balance,March 31, 1998 $27,508 $3,749,342 $1,515,832 $(8,874) $5,283,808
======== =========== =========== ======== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>5
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
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1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 80,123 $ 255,325
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 71,806 78,735
Minority interest in income of subsidiary (1,800) 11,751
Amortization of discounts and premiums
on investments, net (35,515) (31,428)
Change in deferred income taxes 49,000 (30,000)
Change in other assets and liabilities (962,203) 598,642
Increase in contingency reserve payable 374,366 286,309
------------- -------------
Net cash (used for)provided by operating activities $ (424,223) $ 1,169,334
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of certificates
of deposit $ 600,000 $ 675,000
Purchase of certificates of deposits (500,000) (675,000)
Repayments on collateralized mortgage oblig. 31,095 36,616
Purchase of debt securities -- (726,549)
Proceeds from maturities of debt securities 185,000 --
Purchase of equity securities (1,433) (1,438)
(Increase) in cash surrender value of life ins. (6,000) (3,000)
Purchase of leasehold improvements and equip. (62,053) (25,166)
------------- -------------
Net cash provided by(used for) investing activities $ 246,609 $ (719,537)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 460 $ 170
Redemption of capital stock -- (170)
Payment of dividends -- (120,461)
------------- -------------
Net cash provided by(used for) financing activities $ 460 $ (120,461)
------------- -------------
(Decrease)increase in cash and cash equivalents $ (177,154) $ 329,336
CASH AND CASH EQUIVALENTS
Beginning 4,467,754 3,422,692
------------- -------------
Ending $ 4,290,600 $ 3,752,028
============= =============
See Notes to Consolidated Financial Statements.
</TABLE>
<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.
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, accepts 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, 1998, the Company's
HMO enrollment is approximately 25,500 enrollees, while its
subsidiaries DAS and DHP have enrollment of approximately 49,000
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.
<PAGE>7
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
General
The Company's net income decreased $175,202 to net income of $80,123
for the three months ended March 31, 1998, as compared to net income
of $255,325 for the three months ended March 31, 1997. This decrease
was primarily due to an increase in total revenues of $641,121, which
was offset by a net increase of $829,874 in operating expenses and
income taxes.
Revenues
Total revenues increased $641,121, or 6.60%, for the three months
ended March 31, 1998, as compared to March 31, 1997. The revenues
from the net premiums generated by the health maintenance organization
increased $780,720, or 9.41%. This increase is attributable to a
9.43% increase in the premiums earned per enrollee, but was slightly
offset by a 0.03% decrease in the number of enrollees for the three
months ended March 31, 1998, as compared to March 31, 1997. Revenues
from the third party administration (TPA) fees decreased by $133,923
due to the net decrease in enrollees in this TPA business through DAS
and DHP.
Operating Expenses
Total operating expenses increased $912,874, or 9.90%, for the
three months ended March 31, 1998, as compared to March 31, 1997.
This was due to an increase in claims incurred and advertising, but
was offset by a decrease in personnel, commissions, professional
fees, and office expense.
Net claims expense increased by $958,389, or 13.60%. Average claims
per enrollee increased by 13.65% for the three months ended March 31,
1998, as compared to March 31, 1997, while the number of enrollees
decreased by 0.03%. Advertising increased $28,166, or 25.55%, for
the three months ended March 31, 1998, as compared to March 31,1997.
The increased was due to an effort to increase overall marketing.
Personnel, commissions, professional fees and office expense decreased
$70,855, or 3.93%, for the three months ended March 31, 1998, as
compared to March 31, 1997, due to reductions in overall enrollment and
the related costs.
Income Taxes
Income tax expense represents 33.81% and 33.08% of income before income
taxes and minority interest for the three months ended March 31, 1998
and 1997, respectively. The Company does not anticipate income to
surpass the top income tax bracket. 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.
<PAGE>8
Net cash provided by operating activities decreased by $1,593,557 to
a net cash used of $424,223 for the three months ended March 31, 1998, as
compared to March 31, 1997. A payment of $477,206 was made on
January 1, 1998, which was the final payment for 1995 reserves withheld.
Unearned subscriber premiums also decreased by $810,326 for the three months
ended March 31, 1998, as compared to March 31, 1997. These fluctuate each
month depending on billing dates and customer timeliness. An internal
computer conversion of the billing system caused minor billing delays, which
effected the cash flow for the first quarter. This conversion is not
expected to cause future delays. The cash flows used for operations have been
provided by the proceeds from maturities of investments and certificates of
deposits. The proceeds were offset by the purchase of leasehold improvements
and equipment.
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. There were no dividends paid
or declared during the first quarter of 1998. 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.
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:__05/14/98 By: _/s/Robert D. Johnson
Robert D. Johnson
Chief Executive Officer
(Duly Authorized Officer)
Date:__05/14/98 By: _/s/Kirk J. Zimmer___
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
<PAGE>10
<TABLE> <S> <C>
<ARTICLE>7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 5,851,660
<DEBT-MARKET-VALUE> 5,950,863
<EQUITIES> 300,500
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,152,160
<CASH> 4,290,600
<RECOVER-REINSURE> 233,136
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 13,745,238
<POLICY-LOSSES> 4,169,625
<UNEARNED-PREMIUMS> 195,668
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
12,450
<COMMON> 15,058
<OTHER-SE> 5,256,300
<TOTAL-LIABILITY-AND-EQUITY> 13,745,238
9,220,983
<INVESTMENT-INCOME> 147,631
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 981,937
<BENEFITS> 8,003,850
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 395,930
<INCOME-PRETAX> 118,323
<INCOME-TAX> 40,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,123
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<RESERVE-OPEN> 4,163,804
<PROVISION-CURRENT> 7,712,220
<PROVISION-PRIOR> 291,630
<PAYMENTS-CURRENT> 3,813,822
<PAYMENTS-PRIOR> 4,187,857
<RESERVE-CLOSE> 4,169,625
<CUMULATIVE-DEFICIENCY> 291,630
</TABLE>
