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, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) YES NO X
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 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
September 30, 2002 and December 31, 2001 2
Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 2002 and 2001 3
Consolidated Statement of Stockholders' Equity
for the Nine Months Ended September 30, 2002 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 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 8-12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 12
Item 4. Controls and Procedures 12
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
Certifications 14-15
Exhibits 99.1-99.2 CEO and CFO Certifications 16-17
1
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 2002 2001
- -------------------------------------------------------------------------------
Cash and cash equivalents $ 11,122,547 $ 8,673,787
Investments in securities held to maturity 350,086 890,714
Certificates of deposit 1,400,000 1,300,000
Receivables 2,172,980 1,544,987
Prepaids and other assets 52,562 135,541
Deferred income taxes 951,600 916,000
------------- -------------
Total current assets 16,049,775 13,461,029
------------- -------------
Investment in securities held to maturity 3,654,343 4,083,452
Investment in securities available for sale 145,600 133,200
Certificate of deposit 100,000 100,000
Contracts with life insurance companies 91,251 92,337
------------- -------------
Total long-term investments 3,991,194 4,408,989
------------- -------------
Property and equipment, net of accum. depreciation 761,739 756,872
------------- -------------
Deferred income taxes 1,011,800 731,000
------------- -------------
$ 21,814,508 $ 19,357,890
============= =============
LIABILITIES
Reported and unreported claims payable $ 9,135,417 $ 8,238,361
Unearned premiums and administration fees 1,936,568 1,175,871
Accounts payable and accrued expenses 1,640,591 1,459,263
Contingency reserves payable 1,584,485 1,584,485
------------- -------------
Total current liabilities 14,297,061 12,457,980
Contingency reserves payable 4,327,242 2,262,226
------------- -------------
Total liabilities 18,624,303 14,720,206
------------- -------------
Minority interest in subsidiaries 13,097 15,768
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,327 and 1,260
shares at September 30, 2002 and
December 31, 2001, respectively 13,270 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 720,869 2,173,419
Accumulated other comprehensive income(loss) 6,448 (624)
Less cost of Class C common treasury stock,
140,156 shares (1,329,179) (1,329,179)
------------- -------------
3,177,108 4,621,916
------------- -------------
$ 21,814,508 $ 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 Sept. 30, Nine Months Ended Sept. 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------
Revenues:
Premiums, net of reins. ceded $ 19,467,837 $ 15,076,182 $ 56,496,119 $ 42,384,425
Third party administration fees 1,191,993 1,014,798 3,557,709 2,840,186
Investment income 115,370 164,574 359,743 543,815
Other income 373,302 279,058 1,047,653 757,647
------------- ------------- ------------- -------------
Total revenues $ 21,148,502 $ 16,534,612 $ 61,461,224 $ 46,526,073
------------- ------------- ------------- -------------
Operating expenses:
Claims incurred,
net of reins. recoveries $ 18,886,559 $ 12,592,451 $ 53,240,588 $ 35,931,224
Personnel expense 1,507,427 1,324,840 4,306,066 3,832,913
Commissions 727,319 2,494,055 2,212,793 3,660,856
Professional fees expense 214,370 183,111 680,610 703,645
Office expense 246,191 182,634 736,771 519,080
Advertising 117,158 105,458 434,105 295,349
Occupancy expense 198,983 221,083 582,170 607,119
State insurance taxes 251,871 188,770 730,184 487,203
Other general and
administrative expenses 202,500 114,091 737,961 430,272
------------- ------------- ------------- -------------
Total operating expenses $ 22,352,378 $ 17,406,493 $ 63,661,248 $ 46,467,661
------------- ------------- ------------- -------------
Income(loss) before income taxes
and minority interest $ (1,203,876) $ (871,881) $ (2,200,024) $ 58,412
Income taxes (benefit) (468,100) (241,177) (728,400) 70,173
------------- ------------- ------------- -------------
(Loss) before minority
interest $ (735,776) (630,704) $ (1,471,624) $ (11,761)
Minority interest in (loss)
of subsidiaries (8,347) (27,415) (19,074) (71,951)
------------- ------------- ------------- -------------
Net income (loss) $ (727,429) $ (603,289) $ (1,452,550) $ 60,190
============= ============= ============= =============
Earnings (loss) per common share $ (0.53) $ (0.44) $ (1.06) $ 0.04
============= ============= ============= =============
Weighted average number of
common shares outstanding 1,365,604 1,365,604 1,365,604 1,383,859
============= ============= ============= =============
See Notes to Consolidated Financial Statements.
3
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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 670 -- -- -- -- 670
Comprehensive (loss):
Net (loss) -- -- (1,452,550) -- --
Net change in un-
realized loss on
securities avail-
able for sale -- -- -- 7,072 --
Comprehensive (loss) -- -- -- -- -- (1,445,478)
-------- ----------- ----------- --------- ------------ -----------
Balance, Sept. 30, 2002 $29,628 $3,749,342 $ 720,869 $ 6,448 $(1,329,179) $3,177,108
======== =========== =========== ========= ============ ===========
See Notes to Consolidated Financial Statements.
4
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Sept. 30,
2002 2001
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)income $ (1,452,550) $ 60,190
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 212,938 211,484
Minority interest in (loss) of subsidiaries (19,074) (71,951)
Amortization of discounts and premiums on investments, net (110,258) (103,332)
Gain on disposal of equipment (200) --
(Increase) decrease in receivables (627,993) 884,444
Decrease in prepaids and other assets 82,979 20,143
(Increase) decrease in deferred income taxes (316,400) 112,200
Increase in reported and unreported claims payable 897,056 1,071,583
Increase in unearned premiums and administration fees 760,697 7,465
Increase (decrease) in accounts payable and accrued expenses 181,328 (343,145)
Increase in contingency reserves payable 2,065,016 1,575,125
------------- -------------
Net cash provided by operating activities $ 1,673,539 $ 3,424,206
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale $ (5,328) $ (5,455)
Held to maturity securities:
Matured 1,280,000 810,000
Purchased (200,005) (1,065,221)
Repayments on collateralized mortgage obligations -- 2,090
Proceeds from maturities of certificates of deposit 1,050,000 1,100,000
Purchase of certificates of deposit (1,150,000) (1,100,000)
Decrease in contracts with life insurance companies 1,086 7,029
Purchase of property and equipment (217,805) (82,141)
Proceeds from the sale of property and equipment 200 --
------------- -------------
Net cash provided by (used in) investing activities $ 758,148 $ (333,698)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 670 $ 1,010
Payment of dividends -- (69,930)
Purchase of treasury stock -- (500,000)
Increase (decrease) in minority investment of subsidiary 16,403 (327,589)
------------- -------------
Net cash provided by (used in) financing activities $ 17,073 $ (896,509)
------------- -------------
Increase in cash and cash equivalents $ 2,448,760 $ 2,193,999
CASH AND CASH EQUIVALENTS
Beginning 8,673,787 7,439,514
------------- -------------
Ending $ 11,122,547 $ 9,633,513
============= =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Income taxes, net of refunds $ 0 $ 0
Supplemental Disclosures of Noncash Investing
And Financing Activities
Decrease in unrealized loss on
securities available for sale $ 7,072 $ 3,045
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. All references to earnings (loss) per share in the consolidated
financial statements are to basic earnings (loss) per share, as the Company
has no potentially issuable common stock.
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 of 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 September 30, 2002
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 19,924,793 $ 1,148,873 $ 74,836 $ 21,148,502
Intersegment revenues -- 63,306 -- 63,306
Segment (loss) (727,429) (52,269) (7,642) (787,340)
Segment assets 21,406,723 1,219,620 547,038 23,173,381
The total segment loss is greater than the consolidated net loss by
$59,911 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
For the Three Months Ended September 30, 2001
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 15,669,036 $ 1,096,380 $ 72,420 $ 16,837,836
Intersegment revenues -- 57,652 -- 57,652
Segment profit (loss) (603,290) (347,752) 17,114 (933,928)
Segment assets 18,863,713 993,117 624,895 20,481,725
The total segment loss is greater than the consolidated net loss by
$330,639 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
For the Nine Months Ended September 30, 2002
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 57,486,612 $ 3,746,237 $ 228,375 $ 61,461,224
Intersegment revenues -- 186,155 -- 186,155
Segment (loss) (1,452,550) (120,503) (88,339) (1,661,392)
Segment assets 21,406,723 1,219,620 547,038 23,173,381
The total segment loss is greater than the consolidated net loss by
$208,842 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
For the Nine Months Ended September 30, 2001
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 43,376,974 $ 3,099,722 $ 315,943 $ 46,792,639
Intersegment revenues -- 169,815 -- 169,815
Segment profit (loss) 60,190 (469,869) 131,352 (278,327)
Segment assets 18,863,713 993,117 624,895 20,481,725
The total segment profit is less than the consolidated net income by
$338,517 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) was ($721,955) and ($600,397) for the three months
ended September 30, 2002 and 2001, respectively, and ($1,445,478) and $63,235
for the nine months ended September 30, 2002 and 2001, respectively. The
difference between comprehensive income (loss) and net income (loss) presented
in the Consolidated Statements of Operations is attributed solely to change in
unrealized gains and losses on securities available for sale during the periods
presented.
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
September 30, 2002, the Company's HMO enrollment was approximately 39,500
enrollees, while its subsidiaries DAS and CW have enrollment of approximately
78,000 enrollees under their Administrative Services Only (ASO) business.
This discussion and analysis contains certain forward-looking terminology such
as "believes," "anticipates," "will," and "intends," or comparable terminology.
Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. Potential
purchasers of the Company's securities are cautioned not to place undue
reliance on such forward-looking statements which are qualified in their
entirety by the cautions and risks described herein and in other reports filed
by the Company with the Securities and Exchange Commission.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
General
The Company's net loss increased $124,140 to $727,429 for the three months
ended September 30, 2002, as compared to a net loss of $603,289 for the three
months ended September 30, 2001. This increase in net losses was primarily due
to a net increase in operating expenses of $4,945,885, but was offset by an
increase in total revenues of $4,613,890 and a decrease in income taxes of
$226,923 for the three months ended September 30, 2002 as compared to
September 30, 2001.
Revenues
Total revenues increased $4,613,890, or 27.9%, for the three months ended
September 30, 2002, as compared to September 30, 2001. The revenues from the
net premiums generated by the health maintenance organization increased
$4,389,239, or 29.3%. This increase is attributable to a 17.1% increase
in the number of enrollees and a 10.4% increase in the premiums earned per
enrollee for the three months ended September 30, 2002, as compared to
September 30, 2001. Revenues from the TPA fees increased by $177,195 due to
the net increase in enrollment and expanded services with existing enrollment.
Investment income decreased by $49,204 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 September 30, 2001.
Operating Expenses
Total operating expenses increased $4,945,885, or 28.4%, for the three months
ended September 30, 2002, as compared to September 30, 2001. This was due to
an increase in claims incurred, personnel expenses, professional fees, state
insurance taxes, office expense and other general and administrative expenses,
but was somewhat offset by a decrease in commissions.
8
Net claims expense generated by the health maintenance organization increased
$6,212,013, or 49.1%. Average claims expense per enrollee increased 27.4%
for the three months ended September 30, 2002, as compared to
September 30, 2001, while the number of enrollees increased 17.1%. Recent
trends indicate that claims per enrollee have increased faster than revenue
per enrollee. The Company recently reapplied with the Division of Insurance
to increase the standard rates charged to policyholders. This will effect all
January 1, 2003 and future renewals, which increases revenue to offset the
continued trend of rising claims costs. Personnel expense increased
$182,587, or 13.8% for the three months ended September 30, 2002, as compared
to September 30, 2001. This is due to the increased number of personnel needed
from the increased enrollment and the annual salary adjustments made June of
each year. Professional fees increased $31,259, or 17.1% for the three months
ended September 30, 2002, as compared to September 30, 2001. Legal, accounting
and actuarial fee increases reduced by the decrease in mental health network
fees accounted for the majority of the change. State insurance taxes increased
$63,101 for the three months ended September 30, 2002, as compared to
September 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 $63,557 for the three
months ended September 30, 2002, as compared to September 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 $88,409 for the three months ended September 30, 2002, as compared to
September 30, 2001. Insurance expense increased as coverages were renewed
which accounted for most of the increase. Commissions decreased $1,766,736 for
the three months ended September 30, 2002 as compared to September 30, 2001 due
to the payment of a settlement in 2001 relating to commissions. The decrease
due to the settlement was offset by the increase in commissions paid, which
increased as a result of increased premium revenue when compared to the prior
year.
Income Taxes
Income tax benefit should represent 35% of income or loss, but
fluctuates each period due to adjustments for permanent tax differences.
For the three months ended September 30, 2002, income tax benefit represented
38.9% of the loss before taxes and minority interest.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
General
The Company's net income decreased $1,512,740 to a net loss of $1,452,550 for
the nine months ended September 30, 2002, as compared to net income of $60,190
for the nine months ended September 30, 2001. This decrease was primarily due
to a net increase in operating expenses of $17,193,587, but were offset by an
increase in total revenues of $14,935,151 and a decrease in income taxes of
$798,573 for the nine months ended September 30, 2002 as compared to
September 30, 2001.
Revenues
Total revenues increased $14,935,151, or 32.1%, for the nine months ended
September 30, 2002, as compared to September 30, 2001. The revenues from the
net premiums generated by the health maintenance organization increased
$14,199,262, or 33.8%. This increase is attributable to a 22.1% increase
in the number of enrollees and a 9.5% increase in the premiums earned per
enrollee for the nine months ended September 30, 2002, as compared to
September 30, 2001. Revenues from the TPA fees increased by $717,523 due to
the net increase in enrollment and expanded services with existing enrollment.
Investment income decreased by $184,072 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
September 30, 2001.
9
Operating Expenses
Total operating expenses increased $17,193,587, or 37.0%, for the nine months
ended September 30, 2002, as compared to September 30, 2001. This was due to
an increase in claims incurred, personnel expenses, advertising, state
insurance taxes, office expense and other general and administrative expenses.
The reduction in commissions slightly offset these increases.
Net claims expense generated by the health maintenance organization increased
$17,019,390, or 47.2%. Average claims expense per enrollee increased 20.6%
for the nine months ended September 30, 2002, as compared to September 30, 2001,
while the number of enrollees increased 22.1%. 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 January 1, 2003
and future renewals, which increases revenue to offset the continued trend of
rising claims costs. Personnel expense increased $473,153, or 12.3% for
the nine months ended September 30, 2002, as compared to September 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.
Advertising expense increased $138,756 for the nine months ended
September 30, 2002 as compared to September 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 have increased $242,981 for the nine months ended
September 30, 2002, as compared to September 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 $217,691 for the nine months ended September 30, 2002, as
compared to September 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 $307,689 for the nine
months ended September 30, 2002, as compared to September 30, 2001. The
impaired portion of the carrying value of a subsidiary was expensed and
accounted for about half of the increase in this amount. Insurance
expense also increased significantly as coverages were renewed and rates
increased. Commissions decreased $1,448,063 for the nine months ended
September 30, 2002 as compared to September 30, 2001 due to the payment of a
settlement in 2001 relating to commissions. The decrease due to the
settlement was offset by the increase in commissions paid, which increased
as a result of increased premium revenue when compared to the prior year.
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 nine months
ended September 30, 2002, income tax benefit represented 33.1% 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 $1,750,667 to $1,673,538
for the nine months ended September 30, 2002, as compared to September 30, 2001.
Cash provided by operations was mainly attributed to 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 nine months ended
September 30, 2002, an increase in receivables and an increase in deferred
income taxes. 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 nine months ended September 30, 2002,
which caused the increase in contingency reserves payable. The increase in
receivables was due mainly to the increase in income taxes receivable.
Deferred income taxes also increase due to the large amount of contingency
Reserves which are not deductible for income taxes until they are paid.
Cash flows provided from investing activities were a result of securities which
matured. Funds were used mainly for the purchase of securities and equipment.
Certificates of deposit which matured were all rolled over into new
certificates. 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 nine months
ended September 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. Even though cash flows may provide for the payment of dividends
and contingency reserves, the board of directors determine the amounts that are
paid. Risk based capital requirements, budgeted cash expenditures and a number
of other factors may influence the board's decision for these payments.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in the footnotes to our
financial statements for our latest 10K which we filed March 31, 2002.
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
11
increase premiums, a material adverse impact on the Company's operations could
result. Inflation has not had 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.
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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this quarterly
report on Form 10-Q, our principal executive officer and principal financial
officer have concluded that our disclosure and controls procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) are effective to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect those
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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
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.
12
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:_11/15/2002___ By: _/s/L. Paul Jensen_____
L. Paul Jensen
Chief Executive Officer
(Duly Authorized Officer)
Date:_11/15/2002___ By: _/s/Kirk J. Zimmer_____
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
13
Certifications
I, L. Paul Jensen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of South Dakota State
Medical Holding Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
__/s/__ L. Paul Jensen_____
L. Paul Jensen
Chief Executive Officer
November 15, 2002
14
I, Bruce E. Hanson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of South Dakota State
Medical Holding Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/_Bruce E. Hanson__
Bruce E. Hanson
Chief Finance Officer
November 15, 2002
15
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
September 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
November 15, 2002
16
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
September 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
November 15, 2002
17