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, 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 November 2, 1999
Class C Common Stock 1,432,948
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
FORM 10-Q
INDEX
<TABLE>
<S> <C>
Page Number
Part 1. Financial Information (unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 1999 and 1998 3
Consolidated Statement of Stockholders' Equity
for the Nine Months Ended September 30, 1999 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 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 7-12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 12
Part II. Other Information 13
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Default Upon Senior Securities 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
</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>
September 30, December 31,
ASSETS 1999 1998
Cash and cash equivalents $ 4,743,095 $ 5,372,457
Investments in securities held to maturity 527,440 405,094
Certificates of deposit 500,000 575,000
Receivables 1,299,912 1,252,780
Prepaids and other assets 61,094 153,930
Deferred income taxes 348,000 647,000
------------- -------------
Total current assets $ 7,479,541 $ 8,406,261
------------- -------------
Investment in securities held to maturity $ 3,034,385 $ 3,567,422
Investments in securities available for sale 293,600 305,700
Pledged certificates of deposit 500,000 500,000
Certificate of deposit 50,000 50,000
Cash surrender value of life insurance 116,000 100,000
------------- -------------
Total long-term investments $ 3,993,985 $ 4,523,122
------------- -------------
Property and equipment, net of accum. depreciation $ 1,102,874 $ 913,006
------------- -------------
Deferred income taxes $ 13,000 $ 435,000
------------- -------------
$ 12,589,400 $ 14,277,389
============= =============
LIABILITIES
Reported and unreported claims payable $ 4,525,056 $ 4,409,622
Unearned premiums and administration fees 815,968 839,043
Accounts payable and accrued expenses 782,694 727,925
Contingency reserves payable 650,000 1,300,000
------------- -------------
Total current liabilities $ 6,773,718 $ 7,276,590
Contingency reserves payable 3,004,590 1,390,568
------------- -------------
Total liabilities $ 9,778,308 $ 8,667,158
------------- -------------
Minority interest in subsidiary $ 352,821 $ 350,606
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,130 shares $ 11,300 $ 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 (713,793) 1,771,993
Accumulated other comprehensive income (25,757) (8,638)
Treasury Stock, Class C common stock (579,179) (280,480)
------------- -------------
$ 2,458,271 $ 5,259,625
------------- -------------
$ 12,589,400 $ 14,277,389
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 2
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Premiums, net of reins. ceded $ 8,670,970 $ 8,785,362 $ 25,339,837 $ 26,836,228
Third party administration fees 772,950 $ 738,790 2,315,688 2,288,626
Investment income 123,223 157,360 376,350 460,737
Other income 152,316 135,327 444,860 477,561
------------- ------------- ------------- -------------
Total revenues $ 9,719,459 $ 9,816,839 $ 28,476,735 $ 30,063,152
------------- ------------- ------------- -------------
Operating expenses:
Claims incurred,
net of reins. recoveries $ 7,745,387 $ 7,259,757 $ 23,734,535 $ 22,416,542
Personnel expense 1,048,217 986,612 3,117,664 2,886,607
Commissions 325,965 356,708 1,040,573 1,120,022
Professional fees expense 252,102 238,355 860,767 762,453
Office expense 153,890 162,205 550,694 460,363
Advertising 28,600 53,424 328,244 288,394
Occupancy expense 145,104 173,191 516,812 518,842
State insurance taxes 127,517 110,302 321,501 344,440
Other general and
administrative expenses 138,066 166,680 338,248 311,196
------------- ------------- ------------- -------------
Total operating expenses $ 9,964,848 $ 9,507,234 $ 30,809,038 $ 29,108,859
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interest $ (245,389) $ 309,605 $ (2,332,303) $ 954,293
Income taxes 780,000 50,775 78,000 265,775
------------- ------------- ------------- -------------
Income (loss) before minority
interest $ (1,025,389) $ 258,830 $ (2,410,303) $ 688,518
Minority interest in income
(loss) of subsidiary 1,183 (1,339) 2,216 (6,555)
------------- ------------- ------------- -------------
Net income (loss) $ (1,026,572) $ 260,169 $ (2,412,519) $ 695,073
============= ============= ============= =============
Earnings (loss) per common share $ (0.71) $ 0.18 $ (1.66) $ 0.47
============= ============= ============= =============
Weighted average number of
common shares outstanding 1,436,052 1,467,111 1,453,874 1,488,777
============= ============= ============= =============
</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
NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<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 630 -- -- -- -- 630
Redemption of Class A
preferred stock (380) -- -- -- -- (380)
Treasury stock
purchased at cost -- -- -- -- (298,699) (298,699)
Dividends paid on
Class C common
stock -- -- (73,267) -- -- (73,267)
Comprehensive loss:
Net loss -- -- (2,412,519) -- --
Net change in un-
realized loss on
securities avail-
able for sale -- -- -- (17,119) --
Comprehensive loss -- -- -- -- -- (2,429,638)
-------- ----------- ----------- --------- ---------- -----------
Balance,Sept. 30, 1999 $27,658 $3,749,342 $ (713,793) $(25,757) $(579,179) $2,458,271
======== =========== =========== ========= ========== ===========
</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>
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Nine Months Ended Sept. 30,
1999 1998
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (2,412,519) $ 695,073
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 257,320 220,053
Minority interest in income (loss)
of subsidiary 2,216 (6,555)
Amortization of discounts and premiums
on investments, net (100,924) (104,748)
Loss on disposal of equipment -- 3,381
(Increase) decrease in receivables (47,132) 6,069
Decrease (increase) in prepaids and other assets 92,836 (4,111)
Decrease in deferred income taxes 721,000 48,000
Increase in reported and unreported
claims payable 115,434 26,999
(Decrease) increase in accounts payable and
accrued expenses (23,075) 65,955
Increase in unearned premiums and
administration fees 54,769 154,294
Increase (decrease) in contingency reserve payable 964,022 (32,706)
------------- -------------
Net cash provided by (used in) operating activities $ (376,053) $ 1,071,704
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale $ (5,019) $ (4,716)
Held to maturity securities:
Matured 460,000 765,000
Purchased -- --
Repayments on collateralized mortgage obligations 51,614 233,967
Proceeds from maturities of certificates of deposit 1,175,000 1,075,000
Purchase of certificates of deposit (1,100,000) (975,000)
(Increase) in cash surrender value of life insurance (16,000) (12,000)
Purchase of property and equipment (447,188) (162,859)
Proceeds from the sale of property and equipment -- --
------------- -------------
Net cash provided by investing activities $ 118,407 $ 919,392
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 630 $ 440
Redemption of capital stock (380) --
Payment of dividends (73,267) (73,487)
Purchase of treasury stock (298,699) (280,480)
------------- -------------
Net cash used in financing activities $ (371,716) $ (353,527)
------------- -------------
Increase (decrease) in cash and cash equivalents $ (629,362) $ 1,637,569
CASH AND CASH EQUIVALENTS
Beginning 5,372,457 4,467,754
------------- -------------
Ending $ 4,743,095 $ 6,105,323
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
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 as indicated in the Company's 1998
Annual Consolidated Financial Statements. 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.
<PAGE> 6
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.
<TABLE>
<S> <C> <C> <C> <C>
Period Ended September 30, 1999
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 25,506,217 $ 2,464,206 $ 506,312 $ 28,476,735
Segment profit (loss) (2,062,556) (177,399) (172,564) (2,412,519)
Segment assets 10,428,619 1,630,102 530,679 12,589,400
</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 September 30, 1999, the Company's HMO enrollment is
approximately 23,200 enrollees, while its subsidiary DAS has enrollment
of approximately 55,700 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 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
General
The Company's net income decreased $1,286,741 to a net loss of $1,026,572
for the three months ended September 30, 1999, as compared to net income of
$260,169 for the three months ended September 30, 1998. This decrease was due
primarily to a decrease in total revenues of $97,380, a net increase of
$457,614 in operating expenses, and a net increase of $730,775 in income tax
expenses.
<PAGE> 7
Revenues
Total revenues decreased $97,380, or 0.99%, for the three months ended
September 30, 1999, as compared to September 30, 1998. The revenues from
the net premiums generated by the health maintenance organization decreased
$114,392, or 1.30%. This decrease is attributable to a 3.88% decrease in
the number of enrollees, but was partially offset by a 2.68% increase in the
premiums earned per enrollee for the three months ended September 30, 1999,
as compared to September 30, 1998. Revenues from the third party
administration(TPA) fees increased by $34,160, or 4.62%, while investment
income decreased $34,137, or 21.69% for the three months ended September
30, 1999 as compared September 30, 1998. Investment income decreased due to
the decrease in interest rates in short term funds.
Operating Expenses
Total operating expenses increased $457,614, or 4.81%, for the three months
ended September 30, 1999, as compared to September 30, 1998. This was due to
an increase in claims incurred, personnel expense, professional fees expense,
and state insurance premiums, but was offset by commissions, advertising, office
expense, and other general and administrative expense.
Net claims expense increased by $485,630, or 6.69%. Average claims per
enrollee increased by 11.00% for the three months ended September 30, 1999,
as compared to September 30, 1998, while the number of enrollees decreased
by 3.88%. The overall effect was a net increase in the claims expense.
Personnel expense increased $61,605, or 6.24% for the three months ended
September 30, 1999 as compared to September 30, 1998. Factors effecting
personnel expense were annual employee wage increases and the addition of
additional computer technicians needed to complete additional projects.
Professional fees expense and state insurance premiums increased by a total
of $30,962, or 8.88% for the three months ended September 30, 1999 as compared
to September 30, 1998 due to varying factors. Commissions decreased $30,743,
or 8.62% for the three months ended September 30, 1999 as compared to
September 30, 1998, due to reduced premiums received during the period.
Advertising, occupancy expense, office expense, and other general and
administrative expense decreased by a total of $89,840, or 16.17, due to
timing of expenses paid and other varying factors.
Income Taxes
Income tax expense represents a negative 317.86% of loss and 16.40% of income
before income taxes and minority interest for the three months ended
September 30, 1999 and 1998, respectively. The negative percentage for
the current period resulted from an entry to income tax expense in adjusting
deferred taxes. A valuation allowance of $913,000 for deferred tax assets
was recorded for September 30, 1999, due to a lack of the availability of
recoverable income taxes paid in for the two years prior to
September 30, 1999. At September 30, 1998, no valuation allowance was
required.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
General
The Company's net income decreased $3,107,592 to a net loss of $2,412,519
for the nine months ended September 30, 1999, as compared to net income of
$695,073 for the nine months ended September 30, 1998. This decrease was due
primarily to a decrease in total revenues of $1,586,417, and a net increase
of $1,700,179 in operating expenses. Income taxes offset these losses by
decreasing $187,775 to $78,000 for the nine months ended September 30, 1999.
The Company has recorded a valuation allowance for the deferred tax benefit
<PAGE> 8
related to losses before income taxes for the period ended September 30, 1999.
Revenues
Total revenues decreased $1,586,417, or 5.28%, for the nine months ended
September 30, 1999, as compared to September 30, 1998. The revenues from
the net premiums generated by the health maintenance organization decreased
$1,462,759, or 5.56%. This decrease is attributable to an 8.48% decrease
in the number of enrollees, but was partially offset by a 3.19% increase in
the premiums earned per enrollee for the nine months ended September 30, 1999,
as compared to September 30, 1998. Revenues from the third party
administration(TPA) fees increased by $36,880, or 1.62%, while membership
increased 8.66%. The revenues increased by a smaller percentage when compared
to the enrollment increase due to the lesser amount of revenues earned per
enrollee when comparing the two periods.
Operating Expenses
Total operating expenses increased $1,700,179, or 5.84%, for the nine months
ended September 30, 1999, as compared to September 30, 1998. This was due to
an increase in claims incurred, personnel expense, professional fees expense,
advertising, office expense, and other general and administrative expenses,
but was offset by commissions and state insurance premiums.
Net claims expense increased by $1,317,993, or 5.88%. Average claims
per enrollee increased by 15.68% for the nine months ended September 30, 1999,
as compared to September 30, 1998, while the number of enrollees decreased
by 8.48%. The overall effect was a net increase in the claims expense.
Personnel expense increased $231,057, or 8.00% for the nine months ended
September 30, 1999 as compared to September 30, 1998. Factors effecting
personnel expense was annual employee wage increases and the addition of
additional computer technicians needed to complete additional projects.
Professional fees expense increased by $98,314, or 12.89% for the nine months
ended September 30, 1999 as compared to September 30, 1998 due to an additional
contract, which enables the Company to reduce claims costs for certain
types of claims this year and in the future. Advertising, office expense, and
other general and administrative expense increased by a total of $157,233, or
14.83%. Advertising, postage, printing, and telephone were the accounts with
the largest increases. Advertising increased because of the timing of a new
ad campaign, while the postage, printing 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 $102,388, or 6.99%, for the nine months ended
September 30, 1999, as compared to September 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 expense represents a negative 3.34% of loss and 27.85% of income
before income taxes and minority interest for the nine months ended
September 30, 1999 and 1998, respectively. The negative percentage for the
current year resulted from an entry to income tax expense in adjusting
deferred taxes. A valuation allowance of $913,000 for deferred tax assets
was recorded for September 30, 1999, due to a lack of the availability of
recoverable income taxes paid in for the two years prior to
September 30, 1999. At September 30, 1998, no valuation allowance was
required.
<PAGE> 9
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 decreased by $1,447,757 resulting
in net cash used in operating activities of $376,053 for the nine months
ended September 30, 1999, as compared to September 30, 1998. The decrease
in cash was mainly attributable to a decrease in net income of $3,107,592 to
a net loss of $2,412,519 for the nine months ended September 30, 1999 as
compared to September 30, 1998. Contingency reserves increased $996,728 to
$964,022 for the nine months ended September 30, 1999 as compared to
September 30, 1998, due to the fact that no payments were made to physicians
for the nine months ending September 30, 1999. Deferred income taxes
increased $673,000 to $721,000 for the nine months ended September 30, 1999
as compared to September 30, 1998. This increase was caused by the entry to
add a valuation allowance for Deferred income taxes. The other operating
accounts decreased $9,893 to a total of $351,444 for the nine months ended
September 30, 1999 as compared to September 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
$447,188, which increased by $284,329 for the nine months ended
September 30, 1999 as compared to September 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
nine months ended September 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, and upon approval of the Board of Directors, 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
<PAGE> 10
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.
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, the volume of claims should 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 complete. The risks have been identified, all of the
tests performed, and the contingency plan for the risk items have been
<PAGE> 11
completed. The risks, which were determined from the tests performed, have
been mitigated and the changes have been implemented. The Division of
Insurance performed a third party review of our Year 2000 plan, which was
almost fully completed at that time. They did not inform the Company of any
material items that needed to be changed.
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
compliant is approximately $25,000. 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
December 1999. The original deadlines were missed due to vendor imposed
scheduling conflicts. 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 November 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.
<PAGE> 12
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:_11/15/1999___ By: _/s/L. Paul Jensen_____
L. Paul Jensen
Chief Executive Officer
(Duly Authorized Officer)
Date:_11/15/1999___ By: _/s/Kirk J. Zimmer_____
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
<PAGE> 13
[ARTICLE] 7
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] SEP-30-1999
[DEBT-HELD-FOR-SALE] 0
[DEBT-CARRYING-VALUE] 4,611,825
[DEBT-MARKET-VALUE] 4,643,564
[EQUITIES] 293,600
[MORTGAGE] 0
[REAL-ESTATE] 0
[TOTAL-INVEST] 4,905,425
[CASH] 4,743,095
[RECOVER-REINSURE] 122,000
[DEFERRED-ACQUISITION] 0
[TOTAL-ASSETS] 12,589,400
[POLICY-LOSSES] 4,525,056
[UNEARNED-PREMIUMS] 815,968
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 0
[NOTES-PAYABLE] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 12,600
[COMMON] 15,058
[OTHER-SE] 2,430,613
[TOTAL-LIABILITY-AND-EQUITY] 12,589,400
[PREMIUMS] 25,339,837
[INVESTMENT-INCOME] 376,350
[INVESTMENT-GAINS] 0
[OTHER-INCOME] 2,760,548
[BENEFITS] 23,734,535
[UNDERWRITING-AMORTIZATION] 0
[UNDERWRITING-OTHER] 1,040,573
[INCOME-PRETAX] (2,332,303)
[INCOME-TAX] 78,000
[INCOME-CONTINUING] (2,412,519)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (2,412,519)
[EPS-BASIC] (1.66)
[EPS-DILUTED] (1.66)
[RESERVE-OPEN] 4,409,622
[PROVISION-CURRENT] 22,898,842
[PROVISION-PRIOR] 835,693
[PAYMENTS-CURRENT] 18,220,441
[PAYMENTS-PRIOR] 5,245,009
[RESERVE-CLOSE] 4,525,056
[CUMULATIVE-DEFICIENCY] 835,693
</TABLE>
