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, 1999
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 July 26, 1999
Class C Common Stock 1,438,048
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
FORM 10-Q
INDEX
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Page Number
Part 1. Financial Information (unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 1999 and 1998 3
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 1999 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 11
Part II. Other Information 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Default Upon Senior Securities 12
Item 4. Submission of Matters to a Vote
of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
</TABLE>
1
<PAGE>
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 30, December 31,
ASSETS 1999 1998
Cash and cash equivalents $ 4,744,003 $ 5,372,457
Investments in securities held to maturity 590,133 405,094
Certificates of deposit 500,000 575,000
Receivables 1,455,587 1,252,780
Prepaids and other assets 66,262 153,930
Deferred income taxes 645,000 647,000
------------- -------------
Total current assets $ 8,000,985 $ 8,406,261
------------- -------------
Investment in securities held to maturity $ 3,154,628 $ 3,567,422
Investments in securities available for sale 297,000 305,700
Pledged certificates of deposit 500,000 500,000
Certificate of deposit 50,000 50,000
Cash surrender value of life insurance 110,000 100,000
------------- -------------
Total long-term investments $ 4,111,628 $ 4,523,122
------------- -------------
Property and equipment, net of accum. depreciation $ 1,079,776 $ 913,006
------------- -------------
Deferred income taxes $ 457,000 $ 435,000
------------- -------------
$ 13,649,389 $ 14,277,389
============= =============
LIABILITIES
Reported and unreported claims payable $ 4,402,019 $ 4,409,622
Unearned premiums and administration fees 946,883 839,043
Accounts payable and accrued expenses 1,110,226 727,925
Contingency reserves payable 1,300,000 1,300,000
------------- -------------
Total current liabilities $ 7,759,128 $ 7,276,590
Contingency reserves payable 2,001,912 1,390,568
------------- -------------
Total liabilities $ 9,761,040 $ 8,667,158
------------- -------------
Minority interest in subsidiary $ 351,637 $ 350,606
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,097 shares $ 10,970 $ 11,050
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 312,779 1,771,993
Accumulated other comprehensive income (20,580) (8,638)
Treasury Stock, Class C common stock (532,157) (280,480)
------------- -------------
$ 3,536,712 $ 5,259,625
------------- -------------
$ 13,649,389 $ 14,277,389
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
Revenues:
Premiums, net of reins. ceded $ 8,387,829 $ 8,829,883 $ 16,668,867 $ 18,050,866
Third party administration fees 770,088 722,542 1,542,738 1,549,836
Investment income 127,817 155,746 253,127 303,377
Other income 153,033 187,591 292,544 342,234
------------- ------------- ------------- -------------
Total revenues $ 9,438,767 $ 9,895,762 $ 18,757,276 $ 20,246,313
------------- ------------- ------------- -------------
Operating expenses:
Claims incurred,
net of reins. recoveries $ 8,332,346 $ 7,152,935 $ 15,989,148 $ 18,156,785
Personnel expense 1,045,355 957,290 2,069,447 1,899,995
Commissions 353,524 367,384 714,608 763,314
Professional fees expense 349,501 266,547 608,665 524,098
Office expense 220,997 160,990 396,804 298,158
Advertising 190,066 96,557 299,644 234,970
Occupancy expense 195,710 183,714 371,708 345,651
State insurance taxes 101,713 120 364 193,984 234,138
Other general and
administrative expenses 107,264 63,616 200,182 144,516
------------- ------------- ------------- -------------
Total operating expenses $ 10,896,476 $ 9,369,397 $ 20,844,190 $ 19,601,625
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interest $ (1,457,709) $ 526,365 $ (2,086,914) $ 644,688
Income taxes (credits) (451,000) 175,000 (702,000) 215,000
------------- ------------- ------------- -------------
Income (loss) before minority
interest $ (1,006,709) $ 351,365 $ (1,384,914) $ 429,688
Minority interest in income
(loss) of subsidiary (448) (3,416) 1,033 (5,216)
------------- ------------- ------------- -------------
Net income (loss) $ (1,006,261) $ 354,781 $ (1,385,947) $ 434,904
============= ============= ============= =============
Earnings (loss) per common share $ (0.69) $ 0.24 $ (0.95) $ 0.29
============= ============= ============= =============
Weighted average number of
common shares outstanding 1,460,548 1,493,884 1,462,933 1,499,789
============= ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
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<S> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Capital Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
Balance,
December 31, 1998 $27,408 $3,749,342 $1,771,993 $ (8,638) $(280,480) $5,259,625
Issuance of Class A
preferred stock 250 -- -- -- -- 250
Redemption of Class A
preferred stock (330) -- -- -- -- (330)
Treasury stock
purchased at cost -- -- -- -- (251,677) (251,677)
Dividends paid on
Class C common
stock -- -- (73,267) -- -- (73,267)
Comprehensive loss:
Net loss -- -- (1,385,947) -- --
Net change in un-
realized loss on
securities avail-
able for sale -- -- -- (11,942) --
Comprehensive loss -- -- -- -- -- (1,397,889)
-------- ----------- ----------- --------- ---------- -----------
Balance,June 30, 1999 $27,328 $3,749,342 $ 312,779 $(20,580) $(532,157) $3,536,712
======== =========== =========== ========= ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
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,
1999 1998
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (1,385,947) $ 434,904
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 165,667 146,110
Minority interest in income (loss)
of subsidiary 1,033 (5,216)
Amortization of discounts and premiums
on investments, net (66,122) (70,389)
Loss on disposal of equipment -- 3,381
(Increase) decrease in receivables (202,807) 205,842
Decrease in prepaids and other assets 87,668 43,503
(Increase) decrease in deferred income taxes (20,000) 26,000
Increase (decrease) in reported and
unreported claims payable (7,603) 25,454
Increase in accounts payable and accrued
expenses 107,840 232,398
Increase in unearned premiums and
administration fees 382,301 260,170
Increase in contingency reserve payable 611,344 228,565
------------- -------------
Net cash provided by (used in) operating activities $ (326,626) $ 1,530,722
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale $ (3,243) $ (3,050)
Held to maturity securities:
Matured 250,000 765,000
Purchased -- --
Repayments on collateralized mortgage obligations 43,876 113,926
Proceeds from maturities of certificates of deposit 775,000 875,000
Purchase of certificates of deposit (700,000) (775,000)
(Increase) in cash surrender value of life insurance (10,000) (9,000)
Purchase of property and equipment (332,437) (107,625)
Proceeds from the sale of property and equipment -- --
------------- -------------
Net cash provided by investing activities $ 23,196 $ 859,251
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 250 $ 80
Redemption of capital stock (330) --
Payment of dividends (73,267) (73,487)
Purchase of treasury stock (251,677) (250,000)
------------- -------------
Net cash used in financing activities $ (325,024) $ (323,407)
------------- -------------
Increase (decrease) in cash and cash equivalents $ (628,454) $ 2,066,566
CASH AND CASH EQUIVALENTS
Beginning 5,372,457 4,467,754
------------- -------------
Ending $ 4,744,003 $ 6,534,320
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
D/B/A DAKOTACARE
CONDENSED 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.
3. TREASURY STOCK
As a service to the Company's shareholders to facilitate liquidity for Class
C common Stock (Common Stock) in the event of death, disability, or retirement
of a shareholder, the Company's Board of Directors adopted a Stock Repurchase
Program (Program) in February 1998. Participation in the Program is
voluntary. No shareholder is required to sell his or her shares of Common
Stock under the Program nor is the Company required to purchase any Common
Stock under the Program. The purchase and sale of Common Stock under the
Program is subject to repurchase conditions as described in the Program. The
Board of Directors of the Company may, at any time, modify or terminate the
Program. The Company may also, at its discretion, offer to repurchase shares
of Common Stock outside the Program in compliance with applicable laws.
4. SEGMENT INFORMATION
The Company has three reportable segments: Health Maintenance Organization
(HMO), Third Party Administration (TPA) and Reinsurance. The HMO segment
consists of the operations of the Company. The Company is a South Dakota
licensed HMO engaged in the development of comprehensive health care delivery
systems. The TPA segment consists of the operations of DAS and DHP. DAS and
DHP are TPA's of health care plans for independent employer companies. The
reinsurance segment consists of the operations of DIL. DIL's primary
activity is in providing reinsurance quota share excess medical stop loss
coverage to DAS and DHP's self funded customers.
The Company evaluates performance and allocates resources based on net income
determined under generally accepted accounting principles. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. The Company allocates payroll
costs incurred based on the activities of admitting new enrollees and in
adjudicating claims. The HMO segment profit includes the equity in earnings
(loss) of the TPA and reinsurance segments. Intersegment revenues primarily
relate to equipment rental charges which are based on the respective
segment's underlying cost.
6
<PAGE>
The Company's reportable segments are derived from the operations of the
Company and subsidiaries that offer different products. The reportable
segments are managed separately because they provide distinct services.
Period Ended June 30, 1999
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 16,769,809 $ 1,640,446 $ 347,021 $ 18,757,276
Segment profit (loss) (1,149,026) (170,283) (66,638) (1,385,947)
Segment assets 11,997,257 1,961,147 523,985 14,482,389
</TABLE>
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 and
insured customers' life and stop-loss insurance policies. 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, 1999, the Company's HMO enrollment is
approximately 22,700 enrollees, while its subsidiary DAS has enrollment
of approximately 53,200 enrollees under its Administrative Services
Only (ASO) business. DHP currently has no enrollees and is in the
process of formally dissolving. All the enrollees from DHP's former
clients have been enrolled as DAS clients.
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, 1999 AND JUNE 30, 1998
General
The Company's net income decreased $1,820,851 to a net loss of $1,385,947
for the six months ended June 30, 1999, as compared to net income of
$434,904 for the six months ended June 30, 1998. This decrease was due
primarily to a decrease in total revenues of $1,489,037, and a net increase
of $1,242,565 in operating expenses. Income taxes offset these losses by
decreasing $917,000 to a benefit of $702,000 for the six months ended
June 30, 1999.
7
<PAGE>
Revenues
Total revenues decreased $1,489,037, or 7.35%, for the six months ended
June 30, 1999, as compared to June 30, 1998. The revenues from the
net premiums generated by the health maintenance organization decreased
$1,381,999, or 7.66%. This decrease is attributable to a 10.65% decrease
in the number of enrollees, but was partially offset by a 3.24% increase in
the premiums earned per enrollee for the six months ended June 30, 1999, as
compared to June 30, 1998. Revenues from the third party administration(TPA)
fees decreased by $7,098, even though there was an increase in membership.
The net decrease was caused by a larger decrease in revenues earned per
enrollee as compared to the net increase in the number of enrollees.
Operating Expenses
Total operating expenses increased $1,242,565, or 6.34%, for the six months
ended June 30, 1999, as compared to June 30, 1998. This was due to an
increase in claims incurred, personnel expense, professional fees expense,
advertising, occupancy expense, office expense, and other general and
administrative expenses, but was offset by commissions and state insurance
premiums.
Net claims expense increased by $832,363, or 5.49%. Average claims per
per enrollee increased by 17.74% for the six months ended June 30, 1999,
as compared to June 30, 1998, while the number of enrollees decreased
by 10.65%. The overall effect was a net increase in the claims expense.
Personnel expense increased $169,452, or 8.92% for the six months ended
June 30, 1999 as compared to June 30, 1998. Factors effecting personnel
expense was annual employee wage increases and the addition of additional
computer technicians needed to complete the additional projects.
Professional fees expense increased by $84,567, or 16.14% for the six months
ended June 30, 1999 as compared to June 30, 1998 due to an additional
contract, which enables us to reduce our claims costs for certain types of
claims this year and in the future. Advertising, occupancy expense, office
expense, and other general and administrative expense increased by a total of
$245,043, or 23.95%. Advertising, postage and telephone were the accounts
with the largest increases. Advertising increased because of a new ad
campaign, while the postage and telephone increases were due to additional
communications with customers and data line additions for the computer
communications between offices. Commissions and state insurance premiums
decreased $88,860, or 8.91%, for the six months ended June 30, 1999, as
compared to June 30, 1998. Commissions and state insurance premiums are
directly related to premiums received and thus decreased because of the
decreased revenues.
Income Taxes
Income tax credits or expense represents 33.64% and 33.35% of loss or
income before income taxes and minority interest for the six months
ended June 30, 1999 and 1998, 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.
8
<PAGE>
Net cash provided by operating activities decreased by $1,857,348 resulting
in net cash used in operating activities of $326,626 for the six months
ended June 30, 1999, as compared to June 30, 1998. The decrease in cash was
mainly attributable to a decrease in net income of $1,820,851 to a net loss
of $1,385,947 for the six months ended June 30, 1999 as compared to
June 30, 1998. Contingency reserves increased $382,779 for the six months
ended June 30, 1999 as compared to June 30, 1998, due to the fact that no
payments were made to physicians for the six months ending June 30, 1999.
The other operating accounts offset the reserve increase by decreasing
$419,276 for the six months ended June 30, 1999 as compared to June 30, 1998.
These other accounts are all a factor of billing and payment cycles which
fluctuate, but are not unusual in nature. Cash flows have been provided from
proceeds on the maturities of certificates of deposits, but most of these
matured certificates of deposits were reinvested into new certificates of
deposits. The resulting net cash provided by the matured certificates of
deposits was $75,000. The purchase of property and equipment offset the
cash flows in the amount of $332,437, which increased by $224,812 for the
six months ended June 30, 1999 as compared to June 30, 1998.
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 $73,267 for the
six months ended June 30, 1999. 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 reserves 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.
9
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YEAR 2000 ISSUE AND MANAGEMENT INFORMATION SYSTEM COMMITMENT
The Year 2000 issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do
not properly recognize such information could generate erroneous data or cause
a system to fail. The Company is heavily dependent on computer processing in
its business activities and the Year 2000 issue creates risk for the Company
from unforeseen problems in the Company's computer system and from third
parties with whom the Company processes financial information. Such failures
of the Company's computer system and/or third parties' computer systems could
have a material impact on the Company's ability to conduct its business.
DAKOTACARE has prepared a four step plan in completing the Year 2000
evaluation. The four phases are: identify corporate assets, assess the
related risks to each category of corporate assets, test required changes,
and implement changes. Currently, all phases are 99% completed. As part of
phase one and two, vendors, service providers and suppliers were identified
as a risk to corporate assets. In phase three, testing was completed with all
the third parties and their readiness for the Year 2000. At this time,
management feels that there should be no significant problems associated with
these third parties due to the testing completed.
The Company's management feels that the worst case scenario would be the
potential that the local utilities are without service for up to one week.
If this should happen, it would force the Company and the surrounding
community to close the operations until power is restored. Since all of
the claims activity is generated by hospitals, physicians and other third
parties, we expect the volume will decrease during the power outages. The
Company can manually process claims and pay checks. With decreased volume,
the most urgent functions could be completed. Claims might be delayed in
processing due to the power outage, but the delay would not be significant.
Recently, advertising statements by the local electric utility company claim
that they are Year 2000 compliant, which gives the Company more confidence
that the risk is minimized. An additional problem that would compound the
worst case scenario is that the Year 2000 analysis work prepared by the
Company is inaccurate for both internal and external systems. The main
problem would still be the fact that claims processing and payments would be
delayed until the problems are corrected. Management doesn't feel that a
problem of this nature would take more than 3-4 weeks to correct. Even though
claims are delayed, the fact that most of the physicians who submit claims to
the Company are also shareholders of the Company is a mitigating factor. The
close relationships with the providers will help during the correction
process. Once corrections are made to the system, processing the delayed
claims and the current claims will be a priority. Extra labor hours would
enable the process to be completed within an additional 3-4 weeks after the
problem in the system is corrected.
The contingency plan is in process, but not completed. Recently, the Division
of Insurance required a third party review of our Year 2000 plan. In their
opinion, the partial plan in place is good. The risks have been identified
and most of the tests performed, but the contingency plan for the risk items
still needs to be determined. Most of the risks have been mitigated as
determined from the tests performed and changes that have been implemented.
Once all the changes needed are implemented, the contingency planning should
be nearly complete. In light of this, the finalized contingency plan will
be completed by October 1999.
Based on the Company's review of its computer systems, management believes the
remaining cost of the remediation effort to make the systems year 2000
10
<PAGE>
compliant is approximately $75,000. Such costs will be charged against income
as they are incurred.
In addition, in January 1999, the Company entered into a sales license and
service agreement (Agreement) to purchase certain computer equipment and other
related items, and to obtain a license for certain software and programs.
Total amounts committed under this Agreement are approximately $215,000. The
items are currently being implemented and expect to be in use during
September 1999. The items purchased are for claims processing and are
warranted to be Year 2000 compliant.
LITIGATION
During 1998, a substantial claim was filed against the Company in circuit
court which alleges wrongful non-renewal of a sales agency contract and seeks
compensatory and punitive damages. As of July 1999, the lawsuit is in the
discovery stage. Management believes the lawsuit is without merit and the
Company will vigorously defend itself in this matter.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not have any material risk as defined by Item 305 of
Regulation S-K. The Company has market risk with its cash and investments,
but due to the conservative nature of the invested assets, management feels
that the market risk is limited.
11
<PAGE>
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:__08/11/99____ By: /s/_Robert D. Johnson__
Robert D. Johnson
Chief Executive Officer
(Duly Authorized Officer)
Date:__08/11/99____ By: /s/_Kirk J. Zimmer_____
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
12
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<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
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0
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