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, 2000
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 03, 2000
Class C Common Stock 1,398,607
<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
June 30, 2000 and December 31, 1999 2
Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2000 and 1999 3
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 2000 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999 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 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Default Upon Senior Securities 11
Item 4. Submission of Matters to a Vote
of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
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 2000 1999
Cash and cash equivalents $ 8,619,383 $ 5,494,336
Investments in securities held to maturity 542,767 431,570
Certificates of deposit 500,000 500,000
Receivables 1,065,143 929,028
Prepaids and other assets 106,000 140,513
Deferred income taxes 673,000 639,000
------------- -------------
Total current assets $ 11,506,293 $ 8,134,447
------------- -------------
Investment in securities held to maturity $ 2,727,189 $ 3,055,769
Investments in securities available for sale 116,900 286,400
Pledged certificates of deposit 500,000 500,000
Certificate of deposit 50,000 50,000
Contracts with life insurance companies 103,069 107,089
------------- -------------
Total long-term investments $ 3,497,158 $ 3,999,258
------------- -------------
Property and equipment, net of accum. depreciation $ 1,000,087 $ 1,110,477
------------- -------------
Deferred income taxes $ 402,500 $ 409,600
------------- -------------
$ 16,406,038 $ 13,653,782
============= =============
LIABILITIES
Reported and unreported claims payable $ 4,726,925 $ 4,667,253
Unearned premiums and administration fees 1,301,150 849,777
Accounts payable and accrued expenses 1,168,411 818,401
Contingency reserves payable 1,300,000 1,300,000
------------- -------------
Total current liabilities $ 8,496,486 $ 7,635,431
Contingency reserves payable 2,063,862 1,423,351
------------- -------------
Total liabilities $ 10,560,348 $ 9,058,782
------------- -------------
Minority interest in subsidiary $ 358,116 $ 355,001
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,175 shares $ 11,750 $ 11,480
Class B preferred stock, issued 1,300 shares 1,300 1,300
Class C common stock, issued 1,505,760 shares 15,058 15,058
Additional paid-in capital 3,749,342 3,749,342
Retained earnings 2,545,018 1,076,912
Accumulated other comprehensive income (5,715) (34,914)
Treasury Stock, Class C common stock (829,179) (579,179)
------------- -------------
$ 5,487,574 $ 4,239,999
------------- -------------
$ 16,406,038 $ 13,653,782
============= =============
</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>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
Revenues:
Premiums, net of reins. ceded $ 10,413,559 $ 8,387,829 $ 20,110,167 $ 16,668,867
Third party administration fees 819,092 770,088 1,645,776 1,542,738
Investment income 196,102 127,817 321,513 253,127
Other income 183,637 153,033 347,571 292,544
------------- ------------- ------------- -------------
Total revenues $ 11,612,390 $ 9,438,767 $ 22,425,027 $ 18,757,276
------------- ------------- ------------- -------------
Operating expenses:
Claims incurred,
net of reins. recoveries $ 7,774,623 $ 8,332,346 $ 15,155,075 $ 15,989,148
Personnel expense 1,045,681 1,045,355 2,055,498 2,069,447
Commissions 417,008 353,524 858,239 714,608
Professional fees expense 224,382 349,501 499,667 608,665
Office expense 215,382 220,997 323,638 396,804
Advertising 192,892 190,066 280,612 299,644
Occupancy expense 188,360 195,710 385,359 371,708
State insurance taxes 134,878 101,713 243,578 193,984
Other general and
administrative expenses 128,942 107,264 296,454 200,182
------------- ------------- ------------- -------------
Total operating expenses $ 10,322,148 $ 10,896,476 20,098,120 20,844,190
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interest $ 1,290,242 $ (1,457,709) $ 2,326,907 $ (2,086,914)
Income taxes (benefit) 499,000 (451,000) 855,685 (702,000)
------------- ------------- ------------- -------------
Income (loss) before minority
interest $ 791,242 $ (1,006,709) $ 1,471,222 $ (1,384,914)
Minority interest in income
(loss) of subsidiary 2,370 (448) 3,116 1,033
------------- ------------- ------------- -------------
Net income (loss) $ 788,872 $ (1,006,261) $ 1,468,106 $ (1,385,947)
============= ============= ============= =============
Earnings (loss) per common share $ 0.55 $ (0.69) $ 1.03 $ (0.95)
============= ============= ============= =============
Weighted average number of
common shares outstanding 1,421,627 1,460,548 1,427,288 1,462,933
============= ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
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SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Capital Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income(Loss) Stock Total
Balance,
December 31, 1999 $27,838 $3,749,342 $1,076,912 $(34,914) $(579,179) $4,239,999
Issuance of Class A
preferred stock 270 -- -- -- -- 270
Redemption of Class A
preferred stock -- -- -- -- -- --
Treasury stock
purchased at cost -- -- -- -- (250,000) (250,000)
Dividends paid on
Class C common
stock -- -- -- -- -- --
Comprehensive income:
Net income -- -- 1,468,106 -- --
Net change in un-
realized loss on
securities avail-
able for sale -- -- -- 29,199 --
Comprehensive income -- -- -- -- -- 1,497,305
-------- ----------- ----------- --------- ---------- -----------
Balance,June 30, 2000 $28,108 $3,749,342 $2,545,018 $ (5,715) $(829,179) $5,487,574
======== =========== =========== ========= ========== ===========
</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,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,468,106 $ (1,385,947)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 165,678 165,667
Minority interest in income (loss)
of subsidiary 3,115 1,033
Amortization of discounts and premiums
on investments, net (71,204) (66,122)
Loss on disposal of equipment 11,659 --
Loss on sale of investments 27,437 --
(Increase) in receivables (136,115) (202,807)
Decrease in prepaids and other assets 34,513 87,668
(Increase) in deferred income taxes (26,900) (20,000)
Increase (decrease) in reported and
unreported claims payable 59,672 (7,603)
Increase in unearned premiums and
administration fees 451,373 107,840
Increase in accounts payable and accrued expenses 350,010 382,301
Increase in contingency reserve payable 640,511 611,344
------------- -------------
Net cash provided by (used in) operating activities $ 2,977,855 $ (326,626)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale $ (8,377) $ (3,243)
Held to maturity securities:
Matured 291,956 250,000
Purchased -- --
Repayments on collateralized mortgage obligations 1,338 43,876
Proceeds from maturities of certificates of deposit 500,000 775,000
Proceeds from sale of securities available for sale 174,932 --
Purchase of certificates of deposit (500,000) (700,000)
(Increase) decrease in contracts with life
insurance companies 4,020 (10,000)
Purchase of property and equipment (66,947) (332,437)
Proceeds from the sale of property and equipment -- --
------------- -------------
Net cash provided by investing activities $ 396,922 $ 23,196
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 270 $ 250
Redemption of capital stock -- (330)
Payment of dividends -- (73,267)
Purchase of treasury stock (250,000) (251,677)
------------- -------------
Net cash (used in) financing activities $ (249,730) $ (325,024)
------------- -------------
Increase (decrease) in cash and cash equivalents $ 3,125,047 $ (628,454)
CASH AND CASH EQUIVALENTS
Beginning 5,494,336 5,372,457
------------- -------------
Ending $ 8,619,383 $ 4,744,003
============= =============
</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'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 1999
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 depreciation on the
underlying assets.
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.
6
<PAGE>
For the Three Months Ended June 30, 2000
<TABLE>
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 10,562,340 $ 883,273 $ 166,777 $ 11,612,390
Intersegment revenues -- 64,386 -- 64,386
Segment profit (loss) 788,872 13,581 (5,529) 796,924
Segment assets 15,605,144 1,752,206 469,542 17,826,892
The total segment profit is greater than the consolidated net income by
$8,052 because the equity in net income of subsidiaries has not been
eliminated from the individual segment amounts.
For the Three Months Ended June 30, 1999
---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 8,437,361 $ 824,965 $ 176,441 $ 9,438,767
Intersegment revenues -- -- -- --
Segment profit (loss) (1,006,262) (106,819) (58,916) (1,171,997)
Segment assets 12,629,910 1,958,147 523,985 15,112,042
The total segment loss is less than the consolidated net loss by
$165,735 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
</TABLE>
For the Six Months Ended June 30, 2000
<TABLE>
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 20,306,572 $ 1,757,419 $ 361,036 $ 22,425,027
Intersegment revenues -- 127,729 -- 127,729
Segment profit (loss) 1,468,106 70,864 (26,938) 1,512,032
Segment assets 15,605,144 1,752,206 469,542 17,826,892
The total segment profit is greater than the consolidated net income by
$43,926 because the equity in net income of subsidiaries has not been
eliminated from the individual segment amounts.
For the Six Months Ended June 30, 1999
---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 16,769,809 $ 1,640,446 $ 347,021 $ 18,757,276
Intersegment revenues -- 53,804 -- 53,804
Segment profit (loss) (1,385,947) (170,283) (66,638) (1,622,868)
Segment assets 12,629,910 1,958,147 523,985 15,112,042
The total segment loss is less than the consolidated net loss by
$236,921 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
</TABLE>
5. 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 August 2000, the lawsuit is in the
discovery stage. Management believes the lawsuit is without merit and the
Company will vigorously defend itself in this matter.
7
<PAGE>
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 self-funded and insured
customers' life and stop-loss insurance policies. The Company and its
subsidiary DAS, 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, 2000, the Company's HMO enrollment is approximately 26,000 enrollees,
while its subsidiary DAS has enrollment of approximately 56,700 enrollees under
their Administrative Services Only (ASO) business. DHP currently has no
enrollees and is in the process of formally dissolving.
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 JUNE 30, 2000 AND JUNE 30, 1999
General
The Company's net income increased $1,795,133 to net income of $788,872 for
The three months ended June 30, 2000, as compared to a net loss of $1,006,261
For the three months ended June 30, 1999. This increase was primarily due to
an increase in total revenues of $2,173,623, which was offset by a net
increase of $375,672 in operating expenses and income taxes.
Revenues
Total revenues increased $2,173,623, or 23.03%, for the three months ended
June 30, 2000, as compared to June 30, 1999. The revenues from the net
premiums generated by the health maintenance organization increased
$2,034,944, or 24.78%. This increase is attributable to a 13.72% increase
in the number of enrollees and a 9.71% increase in the premiums earned per
enrollee for the three months ended June 30, 2000, as compared to June
30, 1999. Revenues from the third party administration(TPA) fees increased
by $49,004 due to the net increase in enrollment.
Operating Expenses
Total operating expenses decreased $574,328, or 5.27%, for the three months
ended June 30, 2000, as compared to June 30, 1999. This was due to a
decrease in claims incurred, professional fees and occupancy expense, but was
offset by an increase in commissions, state insurance taxes, and other general
and administrative expenses. Personnel, advertising, occupancy, and office
expenses combined for a change of less than 1% when compared to the prior year.
Net claims expense decreased by $557,723, or 6.69%. Average claims expense per
enrollee decreased by 17.27% for the three months ended June 30, 2000, as
compared to June 30, 1999, while the number of enrollees increased by 13.72%.
This led to an overall net claims expense reduction. Professional fees
8
<PAGE>
decreased $125,119, or 35.80%, due primarily to a contract entered into in the
prior year, which focuses on disease management and the reduction on future
claims. Current year fees for this contract have been recorded as claims
expense since the reduction of claims expense is effected by this contract.
Occupancy expense decreased $7,350, or 3.76%. No significant items were noted
that caused this change. Commissions and state insurance taxes increased
$96,649, or 21.23%, for the three months ended June 30, 2000, as compared
to June 30, 1999. These expenses are directly related to premiums received
and thus increased because of the increased revenues. Other general
and administrative expenses increased $21,678, or 20.21%, due to increased
Division of Insurance fees and short-term computer data fee arrangements.
Income Taxes
Income tax expense (benefit) represents 38.67% and 30.94% of income before
income taxes and minority interest for the three months ended June 30, 2000
and 1999, respectively. The Company does not anticipate income to surpass
the top income tax bracket. The Company has recorded a valuation allowance
against deferred income taxes due to the question of recovery of taxes from
losses generated by a foreign subsidiary. The allowance recorded at June
30, 2000 is $117,500. This increased by $4,000 since March 31, 2000. At
June 30, 1999, there was no allowance recorded related to this foreign
subsidiary. As a result of previous levels of pretax earnings and the
availability of recoverable income taxes paid in recent years, no valuation
allowance is required for any other of the recorded deferred tax assets.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
General
The Company's net income increased $2,854,053 to net income of $1,468,106 for
The six months ended June 30, 2000, as compared to a net loss of $1,385,947
For the six months ended June 30, 1999. This increase was primarily due to
an increase in total revenues of $3,667,751, which was offset by a net
increase of $811,615 in operating expenses and income taxes.
Revenues
Total revenues increased $3,667,751, or 19.55%, for the six months ended
June 30, 2000, as compared to June 30, 1999. The revenues from the net
premiums generated by the health maintenance organization increased
$3,424,349, or 20.97%. This increase is attributable to a 11.57% increase
in the number of enrollees and a 8.42% increase in the premiums earned per
enrollee for the six months ended June 30, 2000, as compared to June
30, 1999. Revenues from the third party administration(TPA) fees increased by
$103,038 due to the net increase in enrollment.
Operating Expenses
Total operating expenses decreased $746,070, or 3.58%, for the six months
ended June 30, 2000, as compared to June 30, 1999. This was due to a
decrease in claims incurred, personnel, professional fees, advertising and
office expense, but was offset by an increase in commissions, state insurance
taxes, occupancy, and other general and administrative expenses.
Net claims expense decreased by $834,073, or 5.22%. Average claims per
enrollee decreased by 14.66% for the six months ended June 30, 2000, as
compared to June 30, 1999, while the number of enrollees increased by 11.57%.
This led to an overall net claims expense reduction. Professional fees
decreased by $108,998, or 17.91% for the six months ended June 30, 2000, as
compared to June 30, 1999. This is due primarily to a contract entered into in
the prior year, which focuses on disease management and its reduction of future
claims. Current year fees for this contract have been recorded as claims
expense since the reduction of claims expense is affected by this contract.
Personnel and advertising expenses decreased a total of $32,981, or 1.39%. No
specific variations were noted. Office expense decreased $73,166, or 18.44%,
due primarily to reduced postage costs. In the 4th quarter of 1999, heavy
mailings were sent and thus reduced the number of major mailings in the
9
<PAGE>
1st half year of 2000. Commissions and state insurance taxes increased
$193,225, or 21.27%, for the six months ended June 30, 2000, as compared to
June 30, 1999. These expenses are directly related to premiums received and
thus increased because of the increased revenues. Occupancy and other general
and administrative expenses increased $109,923, or 19.22%, due to increased
Division of Insurance fees and short-term computer data fee arrangements.
Income Taxes
Income tax expense (benefit) represents 36.77% and 33.64% of income before
income taxes and minority interest for the six months ended June 30, 2000
and 1999, respectively. The Company does not anticipate income to surpass
the top income tax bracket. The Company has recorded a valuation allowance
against deferred income taxes due to the question of recovery of taxes from
losses generated by a foreign subsidiary. The allowance recorded at June
30, 2000 is $117,500. This increased by $9,100 since December 31, 1999. At
June 30, 1999, there was no allowance recorded related to this foreign
subsidiary. As a result of previous levels of pretax earnings and the
availability of recoverable income taxes paid in recent years, no valuation
allowance is required for any other of the recorded deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash have been premium and fee revenue,
collection of premiums in advance of the claims costs 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 $3,304,481 to $2,977,855
for the six months ended June 30, 2000, as compared to June 30, 1999. The
increase in cash provided by operations was mainly attributable to net income,
an increase in accounts payable and accrued expenses, an increase in unearned
premiums and administration fees, and an increase in contingency reserves
payable for the six months ended June 30, 2000. There was no payment of
contingency reserves payable to physicians for the six months ended
June 30, 2000, which caused the increase in the balance for contingency
reserves payable. Accounts payable and accrued expenses is a factor of payment
cycles which fluctuate, but are not unusual in nature. Unearned subscriber
premiums and administration fees will likely continue to increase while sales
continue to increase. Cash flows have been provided from proceeds on the
maturities of securities and certificates of deposits. All of the certificates
of deposits which matured were reinvested into new certificates of deposits,
which offset the cash flow received on the maturities. The purchase of property
and equipment also reduced the cash flows. Cash flows used for financing
activities included the purchase of $250,000 of treasury stock.
The Company is not contractually obligated to pay out the contingency reserves
withheld but has historically elected to pay out a majority of the amounts
withheld. There were no dividends paid on Class C stock for the six months
ended June 30, 2000. Future dividend payment is dependent on operations and
liquidity of the Company. The Company believes that cash flows generated by
operations, withholding of contingency reserves payable, 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.
INFLATION
A substantial portion of the Company's operating expenses consist of health
care costs, which, in the general economy, have been rising at a rate greater
than that of the overall Consumer Price Index. The Company believes that its
cost control measures and risk sharing arrangements reduce the effect of
inflation on such costs. Historically, market conditions and the regulatory
10
<PAGE>
environment in which the Company operates have permitted the Company to offset
a portion or all of the impact of inflation on the cost of health care
benefits through premium increases. If the Company was not able to continue to
increase premiums, a material adverse impact on the Company's operations could
result. Inflation does not have a material effect on the remainder of the
Company's operating expenses.
TRENDS, EVENTS, OR UNCERTAINTIES
In recent years, there has been a trend by clients to switch to plans with
higher employee cost-sharing levels in order to maintain lower premiums. As a
provider of cost effective managed care plans for medium and small employers,
the Company believes it is delivering products and services that address
current health care reform issues. The Company will continue to evaluate its
business strategy as necessary to maximize its ability to adapt to the
changing health care marketplace.
YEAR 2000
There were no adverse problems with the computer systems, data systems or any
other items which rely on using computer dates, during the conversion from
1999 to 2000. No additional costs were incurred or are expected to be
incurred in the future.
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 August 2000, 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.
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.
11
<PAGE>
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:_08/14/2000___ By: /s/L. Paul Jensen______
L. Paul Jensen
Chief Executive Officer
(Duly Authorized Officer)
Date:_08/14/2000___ By: _/s/Kirk J. Zimmer_____
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
12
<PAGE>
[ARTICLE] 7
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-END] JUN-30-2000
[DEBT-HELD-FOR-SALE] 0
[DEBT-CARRYING-VALUE] 4,319,956
[DEBT-MARKET-VALUE] 4,315,824
[EQUITIES] 116,900
[MORTGAGE] 0
[REAL-ESTATE] 0
[TOTAL-INVEST] 4,436,856
[CASH] 8,619,383
[RECOVER-REINSURE] 0
[DEFERRED-ACQUISITION] 0
[TOTAL-ASSETS] 16,406,038
[POLICY-LOSSES] 4,726,925
[UNEARNED-PREMIUMS] 1,301,150
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 0
[NOTES-PAYABLE] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 13,050
[COMMON] 15,058
[OTHER-SE] 5,459,466
[TOTAL-LIABILITY-AND-EQUITY] 16,406,038
[PREMIUMS] 20,110,167
[INVESTMENT-INCOME] 294,076
[INVESTMENT-GAINS] -27,437
[OTHER-INCOME] 1,993,347
[BENEFITS] 15,155,075
[UNDERWRITING-AMORTIZATION] 0
[UNDERWRITING-OTHER] 858,239
[INCOME-PRETAX] 2,326,907
[INCOME-TAX] 855,685
[INCOME-CONTINUING] 1,468,106
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 1,468,106
[EPS-BASIC] 1.03
[EPS-DILUTED] 1.03
[RESERVE-OPEN] 4,667,253
[PROVISION-CURRENT] 15,644,192
[PROVISION-PRIOR] -489,117
[PAYMENTS-CURRENT] 10,917,267
[PAYMENTS-PRIOR] 4,178,136
[RESERVE-CLOSE] 4,726,925
[CUMULATIVE-DEFICIENCY] -489,117
</TABLE>
