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, 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 August 10, 1998
Class C Common Stock 1,505,760
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
FORM 10-Q
INDEX
Page Number
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Part 1. Financial Information (unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997 2
Consolidated Statements of Income for
the Three and Six Months Ended June 30, 1998 and 1997 3
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 1998 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997 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 9
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Default Upon Senior Securities 9
Item 4. Submission of Matters to a Vote
of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
</TABLE>
<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)
<TABLE>
<S> <C> <C>
June 31, December 31,
ASSETS 1998 1997
Cash and cash equivalents $ 6,534,320 $ 4,467,754
Investments in debt securities 319,519 901,599
Certificates of deposit 745,722 843,599
Receivables 593,553 799,395
Prepaids and other assets 81,226 124,729
Deferred income taxes 535,000 720,000
------------- -------------
Total current assets $ 8,809,340 $ 7,857,036
------------- -------------
Investments in debt securities $ 3,658,461 $ 3,887,081
Investments in equity securities 301,950 300,000
Pledged certificates of deposit 500,000 500,000
Cash surrender value of life insurance 90,000 81,000
------------- -------------
Total long-term investments $ 4,550,411 $ 4,768,081
------------- -------------
Property and equipment, net $ 921,818 $ 963,684
------------- -------------
Deferred income taxes $ 581,000 $ 422,000
------------- -------------
$ 14,862,569 $ 14,010,801
============= =============
LIABILITIES
Reported and unreported medical claims liabilities $ 4,189,258 $ 4,163,804
Unearned subscriber premiums and administration fees 889,953 629,783
Accounts payable and accrued expenses 927,448 695,050
Contingency reserve payable 1,150,000 1,627,000
------------- -------------
Total current liabilities $ 7,156,659 $ 7,115,637
Contingency reserve payable 2,042,411 1,336,846
------------- -------------
Total liabilities $ 9,199,070 $ 8,452,483
------------- -------------
Minority interest in subsidiary $ 348,945 $ 354,160
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,077 shares $ 10,770 $ 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 1,797,126 1,435,709
Unrealized loss on securities available for sale (9,042) (7,941)
Treasury Stock (250,000) --
------------- -------------
$ 5,314,554 $ 5,204,158
------------- -------------
$ 14,862,569 $ 14,010,801
============= =============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>2
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
Revenues:
Premiums, net of reins. ceded $ 8,829,883 $ 8,489,583 $ 18,050,866 $ 16,962,641
Third party administration fees 722,542 958,865 1,549,836 1,920,082
Net investment income 155,746 161,660 303,377 293,362
Other income 187,591 129,911 342,234 273,364
------------- ------------- ------------- -------------
Total revenues $ 9,895,762 $ 9,740,019 $ 20,246,313 $ 19,449,449
------------- ------------- ------------- -------------
Operating expenses:
Claims incurred,
net of reins. recoveries $ 7,152,935 $ 8,260,166 $ 15,156,785 $ 15,305,627
Personnel expense 957,290 963,150 1,899,995 1,921,931
Commissions 367,384 372,683 763,314 808,002
Professional fees expense 266,547 292,012 524,098 546,521
Office expense 160,990 169,590 298,158 325,190
Advertising 96,557 104,631 234,970 214,878
Occupancy expense 183,714 167,988 345,651 335,212
State insurance taxes 120,364 112,504 234,138 228,084
Other general and
administrative expenses 63,616 92,877 144,516 160,510
------------- ------------- ------------- -------------
Total operating expenses $ 9,369,397 $ 10,535,601 $ 19,601,625 $ 19,845,955
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interest $ 526,365 $ (795,582) $ 644,688 $ (396,506)
Income taxes 175,000 (266,000) 215,000 (134,000)
------------- ------------- ------------- -------------
Income (loss) before minority
interest in earnings (loss)
of subsidiary $ 351,365 $ (529,582) $ 429,688 $ (262,506)
Minority interest in earnings
(loss) of subsidiary (3,416) 13,172 (5,216) 24,923
------------- ------------- ------------- -------------
Net income (loss) $ 354,781 $ (542,754) $ 434,904 $ (287,429)
============= ============= ============= =============
Earnings (loss) per common share $ 0.24 $ (0.36) $ 0.29 $ (0.19)
============= ============= ============= =============
Weighted average number of
common shares outstanding 1,505,760 1,505,760 1,505,760 1,505,760
============= ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>3
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Unrealized
Loss on
Additional Securities
Capital Paid-In Retained Available Treasury
Stock Capital Earnings for Sale Stock Total
Balance,
December 31, 1997 $27,048 $3,749,342 $1,435,709 $(7,941) $ -- $5,204,158
Issuance of Class A
preferred stock 80 -- -- -- -- 80
Redemption of Class A
preferred stock -- -- -- -- -- --
Treasury stock
purchased at cost -- -- -- -- (250,000) (250,000)
Increase in unrealized
loss on securities
available for sale -- -- -- (1,101) -- (1,101)
Dividends declared on
Class C common
stock -- -- (73,487) -- -- (73,487)
Net income for the
six months -- -- 434,904 -- -- 434,904
-------- ----------- ----------- -------- ---------- -----------
Balance,March 31, 1998 $27,128 $3,749,342 $1,797,126 $(9,042) $(250,000) $5,314,554
======== =========== =========== ======== ========== ===========
</TABLE>
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)
<TABLE>
<S> <C> <C>
Six Months Ended June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 434,904 $ (287,429)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 146,110 157,165
Minority interest in income (loss)
of subsidiary (5,216) 24,923
Amortization of discounts and premiums
on investments, net (70,389) (66,212)
Change in deferred income taxes 26,000 (15,000)
Loss on disposal of equipment 3,381 --
Change in other assets and liabilities 290,367 689,231
Increase in contingency reserve payable 705,565 165,994
------------- -------------
Net cash provided by operating activities $ 1,530,722 $ 668,672
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of certificates
of deposit $ 875,000 $ 875,000
Purchase of certificates of deposits (775,000) (775,000)
Repayments on collateralized mortgage oblig. 113,926 70,708
Purchase of debt securities -- (726,549)
Proceeds from maturities of debt securities 765,000 225,000
Purchase of equity securities (3,051) (3,015)
(Increase) in cash surrender value of life ins. (9,000) (6,000)
Proceeds from the sale of equipment -- 6,799
Purchase of leasehold improvements and equip. (107,625) (49,808)
------------- -------------
Net cash provided by(used for) investing activities $ 859,251 $ (382,865)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 80 $ 270
Redemption of capital stock -- (210)
Payment of dividends (73,487) (255,979)
Treasury stock purchased (250,000) --
------------- -------------
Net cash provided by(used for) financing activities $ (323,407) $ (255,919)
------------- -------------
(Decrease)increase in cash and cash equivalents $ 2,066,566 $ 29,888
CASH AND CASH EQUIVALENTS
Beginning 4,467,754 3,422,692
------------- -------------
Ending $ 6,534,320 $ 3,452,580
============= =============
See Notes to Consolidated Financial Statements.
</TABLE>
<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.
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 June 30, 1998, the Company's
HMO enrollment is approximately 24,500 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.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
General
The Company's net income increased $722,333 to net income of $434,904
for the six months ended June 30, 1998, as compared to a net loss
of $287,429 for the six months ended June 30, 1997. This increase
was primarily due to an increase in total revenues of $796,864, which
was offset by a net increase of $104,670 in operating expenses and
income taxes.
Revenues
Total revenues increased $796,864, or 4.10%, for the six months ended
June 30, 1998, as compared to June 30, 1997. The revenues from the net
premiums generated by the health maintenance organization increased
$1,037,630, or 6.23%. This increase is attributable to an 8.56% increase
in the premiums earned per enrollee, but was offset by a 2.16% decrease
in the number of enrollees for the six months ended June 30, 1998, as
compared to June 30, 1997. Revenues from the third party administration
(TPA) fees decreased by $370,246 due to the net decrease in enrollees
in this TPA business through DAS and DHP.
Operating Expenses
Total operating expenses decreased $244,330, or 1.23%, for the
six months ended June 30, 1998, as compared to June 30, 1997. This
was due to an decrease in claims incurred, personnel, commissions,
professional fees and office expense, but was offset by an increase
in state insurance premiums, advertising and occupancy expense.
Net claims expense decreased by $148,842, or 0.97%. Average claims
per enrollee increased by 1.83% for the six months ended June 30, 1998,
as compared to June 30, 1997. The number of enrollees decreased by 2.16%,
which meant an overall decrease in expense. Personnel, commissions,
professional fees and office expense decreased $116,079, or 3.22%, for
the six months ended June 30, 1998, as compared to June 30, 1997, due
to reductions in overall enrollment and the related costs. No individual
account decreased by more than 10%. State insurance premiums,
advertising and occupancy expense increased by $36,585, or 4.70%, for
the six months ended June 30, 1998, as compared to June 30, 1997, due to
the increase in premiums and efforts to increase sales. No individual
account increased by more than 10%.
Income Taxes
Income tax expense/benefit represents 33.35% and 33.80% of income before
income taxes and minority interest for the six months ended June 30, 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.
Net cash provided by operating activities increased by $862,050 to
$1,530,722 for the six months ended June 30, 1998, as compared to June 31,
1997. Unearned subscriber premiums increased by $242,422 for the six
months ended June 30, 1998, as compared to June 30, 1997. This amount
fluctuates each month depending on billing dates and timeliness of
premium payments. During the end of the first quarter, an internal
computer conversion of the billing system was in process. It was
completed during the second quarter, which increased positive cash flow
over the first quarter. No future impact on cash flows from the
conversion are foreseen. Cash flows have been provided from proceeds on
the maturities of investments and certificates of deposits. The purchase
of leasehold improvements and equipment offset the cash flows to a minor
extent.
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. Dividends paid on Class C stock was $73,487 for the
six months ended June 30, 1998. Future dividend payment is dependent on
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. The Company redeemed
$250,000 of treasury stock under a new stock repurchase program
implemented in 1998. The repurchase program allows the Company to redeem
stock from deceased, disabled and retired stockholders upon the request
from the stockholders or their heirs. The repurchase price of the stock
is established by the board of directors.
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, forcast,
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.
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:______________ By: _______________________
Robert D. Johnson
Chief Executive Officer
(Duly Authorized Officer)
Date:______________ By: _______________________
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 5,223,702
<DEBT-MARKET-VALUE> 5,325,777
<EQUITIES> 301,950
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,525,652
<CASH> 6,534,320
<RECOVER-REINSURE> 52,323
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 14,862,569
<POLICY-LOSSES> 4,189,258
<UNEARNED-PREMIUMS> 889,953
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
12,070
<COMMON> 15,058
<OTHER-SE> 5,287,426
<TOTAL-LIABILITY-AND-EQUITY> 14,862,569
18,050,866
<INVESTMENT-INCOME> 1,549,836
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 645,611
<BENEFITS> 15,156,785
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 763,314
<INCOME-PRETAX> 644,688
<INCOME-TAX> 215,000
<INCOME-CONTINUING> 644,688
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 434,904
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
<RESERVE-OPEN> 4,163,804
<PROVISION-CURRENT> 14,861,403
<PROVISION-PRIOR> 295,382
<PAYMENTS-CURRENT> 10,586,497
<PAYMENTS-PRIOR> 4,367,671
<RESERVE-CLOSE> 4,189,258
<CUMULATIVE-DEFICIENCY> 295,382
</TABLE>
