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 30,2002
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 6, 2002
Class C Common Stock 1,365,604
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
FORM 10-Q
INDEX
Page Number
Part 1. Financial Information (unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 2002 and December 31, 2001 2
Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2002 and 2001 3
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 2002 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-11
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 and Use of Proceeds 12
Item 3. Defaults 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 13
Exhibits 99.1-99.2 CEO and CFO Certifications 14-15
1
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 2002 2001
- -------------------------------------------------------------------------------
Cash and cash equivalents $ 9,835,503 $ 8,673,787
Investments in securities held to maturity 638,526 890,714
Certificates of deposit 1,400,000 1,300,000
Receivables 1,436,673 1,544,987
Prepaids and other assets 55,125 135,541
Deferred income taxes 903,800 916,000
------------- -------------
Total current assets 14,269,627 13,461,029
------------- -------------
Investment in securities held to maturity 4,072,439 4,083,452
Investment in securities available for sale 138,500 133,200
Certificate of deposit 100,000 100,000
Contracts with life insurance companies 89,988 92,337
------------- -------------
Total long-term investments 4,400,927 4,408,989
------------- -------------
Property and equipment, net of accum. depreciation 813,372 756,872
------------- -------------
Deferred income taxes 861,300 731,000
------------- -------------
$ 20,345,226 $ 19,357,890
============= =============
LIABILITIES
Reported and unreported claims payable $ 8,457,186 $ 8,238,361
Unearned premiums and administration fees 1,460,437 1,175,871
Accounts payable and accrued expenses 1,302,768 1,459,263
Contingency reserves payable 1,584,485 1,584,485
------------- -------------
Total current liabilities 12,804,876 12,457,980
Contingency reserves payable 3,620,303 2,262,226
------------- -------------
Total liabilities 16,425,179 14,720,206
------------- -------------
Minority interest in subsidiaries 21,444 15,768
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,281 shares 12,810 12,600
Class B preferred stock, issued 1,300 shares 1,300 1,300
Class C common stock, issued 1,505,760 shares 15,058 15,058
Additional paid-in capital 3,749,342 3,749,342
Retained earnings 1,448,298 2,173,419
Accumulated other comprehensive income(loss) 974 (624)
Less cost of Class C common treasury stock,
2002 140,156 shares, 2001 140,156 shares (1,329,179) (1,329,179)
------------- -------------
3,898,603 4,621,916
------------- -------------
$ 20,345,226 $ 19,357,890
============= =============
See Notes to Consolidated Financial Statements. 2
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------
Revenues:
Premiums, net of reins. ceded $ 18,931,379 $ 14,041,055 $ 37,028,282 $ 27,308,243
Third party administration fees 1,080,266 888,071 2,365,716 1,825,388
Investment income 123,594 178,895 244,373 379,241
Other income 353,743 273,686 674,351 478,589
------------- ------------- ------------- -------------
Total revenues $ 20,488,982 $ 15,381,707 $ 40,312,722 $ 29,991,461
------------- ------------- ------------- -------------
Operating expenses:
Claims incurred,
net of reins. recoveries $ 17,771,360 $ 11,680,324 $ 34,354,029 $ 23,338,773
Personnel expense 1,416,886 1,319,711 2,798,639 2,508,073
Commissions 720,258 569,882 1,485,474 1,166,801
Professional fees expense 220,491 226,803 466,240 520,534
Office expense 245,578 173,125 490,580 336,446
Advertising 155,335 96,459 316,947 189,891
Occupancy expense 195,280 201,223 383,187 386,036
State insurance taxes 239,925 149,604 478,313 298,433
Other general and
administrative expenses 215,133 48,477 535,461 316,181
------------- ------------- ------------- -------------
Total operating expenses $ 21,180,246 $ 14,465,608 $ 41,308,870 $ 29,061,168
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interest $ (691,264) $ 916,099 $ (996,148) $ 930,293
Income taxes (benefit) (248,200) 389,600 (260,300) 311,350
------------- ------------- ------------- -------------
Income (loss) before minority
interest $ (443,064) 526,499 $ (735,848) $ 618,943
Minority interest in (loss)
of subsidiaries (5,093) (30,074) (10,727) (44,537)
------------- ------------- ------------- -------------
Net income (loss) $ (437,971) $ 556,573 $ (725,121) $ 663,480
============= ============= ============= =============
Earnings (loss)per common share $ (0.32) $ 0.40 $ (0.53) $ 0.48
============= ============= ============= =============
Weighted average number of
common shares outstanding 1,365,604 1,387,727 1,365,604 1,393,137
============= ============= ============= =============
See Notes to Consolidated Financial Statements.
3
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002
(Unaudited)
Accumulated
Additional Other
Capital Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income(Loss) Stock Total
- -------------------------------------------------------------------------------------------
Balance,
December 31, 2001 $28,958 $3,749,342 $2,173,419 $ (624) $(1,329,179) $4,621,916
Issuance of Class A
preferred stock 210 -- -- -- -- 210
Comprehensive (loss):
Net (loss) -- -- (725,121) -- --
Net change in un-
realized loss on
securities avail-
able for sale -- -- -- 1,598 --
Comprehensive (loss) -- -- -- -- -- (723,523)
-------- ----------- ----------- --------- ------------ -----------
Balance, June 30, 2002 $29,168 $3,749,342 $1,448,298 $ 974 $(1,329,179) $3,898,603
======== =========== =========== ========= ============ ===========
See Notes to Consolidated Financial Statements.
4
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)income $ (725,121) $ 663,480
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 146,507 140,751
Minority interest in (loss) of subsidiaries (10,727) (44,537)
Amortization of discounts and premiums on investments, net (71,794) (66,056)
Gain on disposal of equipment (200) --
Decrease in receivables 108,314 1,078,474
Decrease in prepaids and other assets 80,416 15,143
Decrease (increase) in deferred income taxes (118,100) 102,000
Increase in reported and unreported claims payable 218,825 617,535
Increase in unearned premiums and administration fees 284,566 174,421
(Decrease) in accounts payable and accrued expenses (156,495) (342,502)
Increase in contingency reserves payable 1,358,077 1,025,732
------------- -------------
Net cash provided by operating activities $ 1,114,268 $ 3,364,441
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale $ (3,702) $ (3,648)
Held to maturity securities:
Matured 535,000 410,000
Purchased (200,005) (1,065,221)
Repayments on collateralized mortgage obligations -- 2,090
Proceeds from maturities of certificates of deposit 350,000 450,000
Purchase of certificates of deposit (450,000) (450,000)
Decrease in contracts with life insurance companies 2,349 5,019
Purchase of property and equipment (203,007) (72,367)
Proceeds from the sale of property and equipment 200 --
------------- -------------
Net cash (used in) provided by investing activities $ 30,835 $ (724,127)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 210 $ 400
Payment of dividends -- (69,930)
Purchase of treasury stock -- (500,000)
Increase (decrease) in minority investment of subsidiary 16,403 (324,776)
------------- -------------
Net cash provided by (used in) financing activities $ 16,613 $ (894,306)
------------- -------------
Increase in cash and cash equivalents $ 1,161,716 $ 1,746,008
CASH AND CASH EQUIVALENTS
Beginning 8,673,787 7,439,514
------------- -------------
Ending $ 9,835,503 $ 9,185,522
============= =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Income taxes, net of refunds $ 0 $ 0
Supplemental Disclosures of Noncash Investing
And Financing Activities
(Increase) decrease in unrealized loss on
securities available for sale $ 1,598 $ (1,407)
See Notes to Consolidated Financial Statements.
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 84.02% owned subsidiary,
CareWest, Inc. (CW) 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 (LOSS) PER COMMON SHARE
Earnings (loss) per common share is calculated by dividing net income (loss)
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 CW. These
subsidiaries 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 accounting principles generally accepted in the United States
of America. 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 2001 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 (loss)
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. Segment assets include
the investment in subsidiaries.
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.
For the Three Months Ended June 30, 2002
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 19,198,265 $ 1,213,692 $ 77,025 $ 20,488,982
Intersegment revenues -- 73,280 -- 73,280
Segment (loss) (437,971) (46,675) (8,571) (493,217)
Segment assets 20,004,176 1,138,231 543,817 21,686,224
The total segment loss is greater than the consolidated net loss by
$55,246 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
For the Three Months Ended June 30, 2001
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 14,290,626 $ 991,586 $ 95,837 $ 15,378,049
Intersegment revenues -- 62,052 -- 62,052
Segment profit (loss) 556,573 (57,036) 30,620 530,157
Segment assets 18,566,914 1,155,457 599,233 20,321,604
The total segment profit is less than the consolidated net income by
$26,416 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
For the Six Months Ended June 30, 2002
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 37,561,819 $ 2,597,364 $ 153,539 $ 40,312,722
Intersegment revenues -- 122,849 -- 122,849
Segment (loss) (725,121) (68,234) (80,697) (874,052)
Segment assets 20,004,176 1,138,231 543,817 21,686,224
The total segment loss is greater than the consolidated net loss by
$148,931 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
For the Six Months Ended June 30, 2001
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 27,707,938 $ 2,003,342 $ 243,523 $ 29,954,803
Intersegment revenues -- 112,163 -- 112,163
Segment profit (loss) 663,480 (122,117) 114,238 655,601
Segment assets 18,566,914 1,155,457 599,233 20,321,604
The total segment profit is less than the consolidated net income by
$7,879 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company 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 CW) 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
subsidiaries DAS and CW, 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, 2002, the Company's HMO enrollment was approximately 40,000
enrollees, while its subsidiaries DAS and CW have enrollment of approximately
72,500 enrollees under their Administrative Services Only (ASO) business.
This discussion and analysis contains certain forward-looking terminology such
as "believes," "anticipates," "will," and "intends," or comparable terminology.
Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. Potential
purchasers of the Company's securities are cautioned not to place undue
reliance on such forward-looking statements which are qualified in their
entirety by the cautions and risks described herein and in other reports filed
by the Company with the Securities and Exchange Commission.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
General
The Company's net income decreased $994,544 to a net loss of $437,971 for
the three months ended June 30, 2002, as compared to net income of $556,573
for the three months ended June 30, 2001. This decrease was primarily due
to a net increase in operating expenses of $6,714,638, but were offset by an
increase in total revenues of $5,107,275 and a decrease in income taxes of
$637,800 for the three months ended June 30, 2002 as compared to June 30, 2001.
Revenues
Total revenues increased $5,107,275, or 33.2%, for the three months ended
June 30, 2002, as compared to June 30, 2001. The revenues from the
net premiums generated by the health maintenance organization increased
$4,890,324, or 34.8%. This increase is attributable to a 24.0% increase
in the number of enrollees and a 9.0% increase in the premiums earned per
enrollee for the three months ended June 30, 2002, as compared to
June 30, 2001. Revenues from the TPA fees increased by $192,195 due to
the net increase in enrollment and expanded services with existing enrollment.
Investment income decreased by $55,301 due to lower yields overall. The
reduction in income due to the lower yields was partially offset by an
increase in invested assets when compared to the quarter ended June 30, 2001.
Operating Expenses
Total operating expenses increased $6,714,638, or 46.4%, for the three months
ended June 30, 2002, as compared to June 30, 2001. This was due to
an increase in claims incurred, personnel expenses, commissions, advertising,
state insurance taxes, office expense and other general and administrative
expenses.
8
Net claims expense generated by the health maintenance organization increased
$6,091,036, or 52.1%. Average claims expense per enrollee increased 22.2%
for the three months ended June 30, 2002, as compared to June 30, 2001, while
the number of enrollees increased 24.0%. Recent trends indicate that claims
per enrollee have increased faster that revenue per enrollee. The Company
recently reapplied with the Division of Insurance to increase the standard
rates charged to policyholders. This will effect all July 1, 2002 and future
renewals, which increases revenue in hopes of keeping pace with these increased
claims costs. Personnel expense increased $97,175, or 7.4% for the three
months ended June 30, 2002, as compared to June 30, 2001. This is due to the
increased number of personnel needed from the increased enrollment.
Commissions increased $150,376 for the three months ended June 30, 2002, as
compared to June 30, 2001. Enrollment increases of 24.0% in the health
maintenance organization and enrollment increases of 15.1% in the TPA combined
to increase commissions. Advertising expense increased $58,876 for the three
months ended June 30, 2002 as compared to June 30, 2001. This fluctuates each
year based on the strategy and timing for spending the budgeted amount. The
total amount budgeted for 2002 was increased about 10% from last year's budget.
State insurance taxes increased $90,321 for the three months ended
June 30, 2002, as compared to June 30, 2001. Since the expense is directly
related to the premiums collected by the health maintenance organization, the
increase in premium revenue increased these fees. Office expense increased
$72,453 for the three months ended June 30, 2002, as compared to June 30, 2001.
All components of office expense increased as a result of increased enrollment
and claims for the Company. Office expense is comprised of postage, supplies,
printing and telephone costs. Other general and administrative expenses
increased $166,656 for the three months ended June 30, 2002, as compared to
June 30, 2001. The difference in the carrying value and the underlying equity
in the net assets of a subsidiary was expensed and accounted for most of the
increase in this account. Insurance expense also increased as coverages and
rates continue to increase. Professional fees remained relatively constant even
though accounting fees continue to increase. The reduction of utilization
fees offset the other increases.
Income Taxes
Income tax expense or benefit should represent 35% of income or loss, but
fluctuates each period due to adjustments for permanent tax differences.
For the three months ended June 30, 2002, income tax benefit represented 35.9%
of the loss before taxes and minority interest.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
General
The Company's net income decreased $1,388,601 to a net loss of $725,121 for
the six months ended June 30, 2002, as compared to net income of $663,480
for the six months ended June 30, 2001. This decrease was primarily due
to a net increase in operating expenses of $12,247,702, but were offset by an
increase in total revenues of $10,321,261 and a decrease in income taxes of
$571,650 for the six months ended June 30, 2002 as compared to June 30, 2001.
Revenues
Total revenues increased $10,321,261, or 34.4%, for the six months ended
June 30, 2002, as compared to June 30, 2001. The revenues from the
net premiums generated by the health maintenance organization increased
$9,810,023, or 36.2%. This increase is attributable to a 24.8% increase
in the number of enrollees and a 9.2% increase in the premiums earned per
enrollee for the six months ended June 30, 2002, as compared to
June 30, 2001. Revenues from the TPA fees increased by $540,328 due to
the net increase in enrollment and expanded services with existing enrollment.
Investment income decreased by $134,868 due to lower yields overall. The
reduction in income due to the lower yields was partially offset by an
increase in invested assets when compared to the quarter ended June 30, 2001.
9
Operating Expenses
Total operating expenses increased $12,247,702, or 42.1%, for the six months
ended June 30, 2002, as compared to June 30, 2001. This was due to
an increase in claims incurred, personnel expenses, commissions, advertising,
state insurance taxes, office expense and other general and administrative
expenses. The reduction in professional fees slightly offset these increases.
Net claims expense generated by the health maintenance organization increased
$10,807,377, or 46.2%. Average claims expense per enrollee increased 17.1%
for the six months ended June 30, 2002, as compared to June 30, 2001,
while the number of enrollees increased 24.8%. Recent trends indicate that
claims per enrollee have increased faster that revenue per enrollee. The
Company recently reapplied with the Division of Insurance to increase the
standard rates charged to policyholders. This will effect all July 1, 2002 and
future renewals, which increases revenue in hopes of keeping pace with these
increased claims costs. Personnel expense increased $290,566, or 11.6% for
the six months ended June 30, 2002, as compared to June 30, 2001. This is due
to the increased number of personnel needed from the increased enrollment and
the annual salary raises given to existing employees. Commissions increased
$318,673 for the six months ended June 30, 2002, as compared to June 30, 2001.
Enrollment increases of 24.8% in the health maintenance organization and
enrollment increases of 15.4% in the TPA combined to increase commissions.
Advertising expense increased $127,056 for the six months ended June 30, 2002
as compared to June 30, 2001. This fluctuates each year based on the strategy
and timing for spending the budgeted amount. The total amount budgeted for
2002 was increased about 10% from last year's budget. State insurance taxes
are increased $179,880 for the six months ended June 30, 2002, as compared to
June 30, 2001. Since the expense is directly related to the premiums
collected by the health maintenance organization, the increase in premium
revenue increased these fees. Office expense increase $154,134 for the six
months ended June 30, 2002, as compared to June 30, 2001. All components of
office expense increased as a result of increased enrollment and claims for
the Company. Office expense is comprised of postage, supplies, printing and
telephone costs. Other general and administrative expenses increased $219,280
for the six months ended June 30, 2002, as compared to June 30, 2001. The
difference in the carrying value and the underlying equity in the net assets
of a subsidiary was expensed and accounted for about half of the increase in
this account. Insurance expense also increased as coverages and rates
continue to increase. Professional fees decreased by $54,294, even though
accounting fees increased from the prior year. The reduction of utilization
fees offset the increases in accounting fees.
Income Taxes
Income tax expense or benefit should represent 35% of income or loss, but
fluctuates each period due to adjustments for a valuation allowance for
deferred tax assets and permanent tax differences. For the six months
ended June 30, 2002, income tax benefit represented 26.1% of the loss
before taxes and minority interest. The valuation allowance for deferred
tax assets exists due to the fact that losses incurred by a subsidiary has
no prior cumulative taxable income from which to recover the taxes. Even
though the subsidiary files within the consolidated tax return, cumulative
losses are nondeductible due to an agreement signed with the government of
the foreign subsidiary, which prohibits the deductions until income is
produced by the subsidiary.
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.
10
Net cash provided by operating activities decreased by $2,250,173 to $1,114,268
for the six months ended June 30, 2002, as compared to June 30, 2001.
Cash provided by operations was mainly attributed to the decrease in
receivables, the increase in reported and unreported claims payable, the
increase in unearned premiums, and the increase in contingency reserves
payable. The cash provided by these changes were somewhat offset by the net
loss for the six months ended June 30, 2002. The decrease in receivables
was due to the collection of receivables from the prior year end. Reported and
unreported claims payable have increased since the increase in enrollment has
required additional reserves. Unearned premiums increased since the prior
year end, which is due to the higher premium income and fluctuates based
somewhat on the timing of premiums received from clients. Generally as
enrollment changes, the unearned premiums will change based on increases or
decreases in premium levels. There was no payment of contingency reserves
payable to physicians for the six months ended June 30, 2002, which caused the
increase in contingency reserves payable.
Cash flows provided from investing activities was fairly minimal for the six
months ended June 30, 2002. Funds were used mainly for the purchase of
securities, certificates of deposit and equipment. Securities and certificates
of deposit which matured offset the cash spent on purchasing the new
securities and certificates of deposit. Most of the equipment purchased was
additional computer equipment needed due to the continued growth of the
Company and its efforts to continue to increase efficiencies.
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. No dividends have been declared or paid for the six months
ended June 30, 2002. Future dividend payments are 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.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in the footnotes to our
financial statements. One of our most critical policies is also discussed
below.
Estimates are used extensively in determining the claims liability at the
date of the balance sheet. The information used to determine the liability
is historical data, current enrollment levels and other trends as they may
apply. The liability is then adjusted to a number which represents
management's best estimate at that time. The actual liability may change
continuously for 18 months, but becomes more determinable as the length
of time increases from the balance sheet date.
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
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.
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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.
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 and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held June 8, 2002. Three Directors
were elected to serve through the annual meeting of 2005.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99--CEO and CFO Certification
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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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:_08/15/2002___ By: _/s/L. Paul Jensen_____
L. Paul Jensen
Chief Executive Officer
(Duly Authorized Officer)
Date:_08/15/2002___ By: _/s/Kirk J. Zimmer_____
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
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Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. Sec. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of South Dakota State Medical Holding
Company, Inc., dba DAKOTACARE(the "Company") on Form 10-Q for the period ended
June 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, L. Paul Jensen, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that [to the best of my
knowledge]:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
__/s/__ L. Paul Jensen_____
Chief Executive Officer
August 15, 2002
14
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. Sec. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of South Dakota State Medical Holding
Company, Inc., dba DAKOTACARE(the "Company") on Form 10-Q for the period ended
June 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Bruce Hanson, Chief Finance Officer of the
Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that [to the best of my
knowledge]:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/_Bruce E. Hanson__
Chief Finance Officer
August 15, 2002
15