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, 2003
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 July 21, 2003
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, 2003 and December 31, 2002 2
Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2003 and 2002 3
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 2003 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6-7
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 13
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
Certifications 14-15
Exhibit 32.1 CEO Certification 16
Exhibit 32.2 CFO Certification 17
1
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 2003 2002
(Unaudited) (Audited)
- --------------------------------------------------------------------------------------
Cash and cash equivalents $ 11,643,473 $ 10,543,214
Investment in securities held to maturity 499,801 448,229
Certificates of deposit 1,400,000 1,400,000
Receivables 1,864,446 2,045,091
Prepaids and other assets 55,112 49,998
Deferred income taxes 1,179,500 891,400
------------- -------------
Total current assets 16,642,332 15,377,932
------------- -------------
Investment in securities held to maturity 4,280,349 4,277,417
Investment in securities available for sale 149,500 146,500
Certificate of deposit 100,000 100,000
Contracts with life insurance companies 100,532 93,532
------------- -------------
Total long-term investments 4,630,381 4,617,449
------------- -------------
Property and equipment, net of accum. depreciation 574,050 702,621
------------- -------------
Deferred income taxes 141,500 --
------------- -------------
$ 21,988,263 $ 20,698,002
============= =============
LIABILITIES
Reported and unreported claims payable $ 9,604,791 $ 9,906,383
Unearned premiums and administration fees 2,323,566 2,315,745
Accounts payable and accrued expenses 1,430,942 1,318,078
Contingency reserves payable 2,215,750 2,215,750
------------- -------------
Total current liabilities 15,575,049 15,755,956
Contingency reserves payable 4,429,430 2,974,808
------------- -------------
Total liabilities 20,004,479 18,730,764
------------- -------------
Minority interest in subsidiary 7,467 6,676
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred, voting, no par value, $10 stated value,
2,500 shares authorized; 1,392 and 1,350 shares issued
and outstanding at June 30, 2003 and December 31, 2002;
liquidation preference of outstanding shares of $13,920 and
$13,500 at June 30, 2003 and December 31, 2002, respectively 13,920 13,500
Class B preferred, voting, no par value, $1 stated value,
2,500 shares authorized; 1,800 and 1,300 shares issued
and outstanding at June 30, 2003 and December 31, 2002;
liquidation preference of outstanding shares of $1,800 and
$1,300 at June 30, 2003 and December 31, 2002, respectively 1,800 1,300
Class C common, nonvoting, $.01 par value, 10,000,000
shares authorized; issued 1,505,760 shares 15,058 15,058
Additional paid-in capital 3,749,342 3,749,342
Accumulated (deficit) (480,955) (495,488)
Accumulated other comprehensive income 6,331 6,029
Less cost of Class C common treasury stock, 140,156 shares (1,329,179) (1,329,179)
------------- -------------
1,976,317 1,960,562
------------- -------------
$ 21,988,263 $ 20,698,002
============= =============
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,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------
Revenues:
Premiums, net of reins. ceded $ 21,536,302 $ 18,931,379 $ 42,404,093 $ 37,028,282
Third party administration fees 1,476,827 1,080,266 2,849,047 2,365,716
Investment income 88,683 123,594 192,870 244,373
Other income 356,225 353,743 699,197 674,351
------------- ------------- ------------- -------------
Total revenues 23,458,037 20,488,982 46,145,207 40,312,722
------------- ------------- ------------- -------------
Operating expenses:
Claims incurred,
net of reins. recoveries 19,047,765 17,771,360 38,595,158 34,354,029
Personnel expense 1,639,291 1,416,886 3,184,293 2,798,639
Commissions 830,894 720,258 1,651,032 1,485,474
Professional fees expense 279,173 220,491 471,523 466,240
Office expense 276,794 245,578 483,804 490,580
Advertising 159,408 155,335 276,612 316,947
Occupancy expense 238,808 195,280 455,041 383,187
State insurance taxes 275,096 239,925 522,877 478,313
Other general and
administrative expenses 162,136 215,133 584,667 535,461
------------- ------------- ------------- -------------
Total operating expenses 22,909,365 21,180,246 46,225,007 41,308,870
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interest 548,672 (691,264) (79,800) (996,148)
Income taxes (benefit) 5,188 (248,200) (94,912) (260,300)
------------- ------------- ------------- -------------
Income (loss) before minority
interest 543,484 (443,064) 15,112 (735,848)
Minority interest in income
(loss) of subsidiary 4,360 (5,093) 579 (10,727)
------------- ------------- ------------- -------------
Net income (loss) $ 539,124 $ (437,971) $ 14,533 $ (725,121)
============= ============= ============= =============
Earnings (loss) per common share $ 0.39 $ (0.32) $ 0.01 $ (0.53)
============= ============= ============= =============
Weighted average number of
common shares outstanding 1,365,604 1,365,604 1,365,604 1,365,604
============= ============= ============= =============
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, 2003
(Unaudited)
Accumulated
Additional Other
Capital Paid-In Accumulated Comprehensive Treasury
Stock Capital (Deficit) Income Stock Total
- --------------------------------------------------------------------------------------------
Balance,
December 31, 2002 $29,858 $3,749,342 $ (495,488) $ 6,029 $(1,329,179) $1,960,562
Issuance of Class A
preferred stock 420 -- -- -- -- 420
Issuance of Class B
preferred stock 500 -- -- -- -- 500
Comprehensive income:
Net income -- -- 14,533 -- --
Net change in un-
realized gain on
securities avail-
able for sale -- -- -- 302 --
Comprehensive income -- -- -- -- -- 14,835
-------- ----------- ------------ --------- ------------ -----------
Balance, June 30, 2003 $30,778 $3,749,342 $ (480,955) $ 6,331 $(1,329,179) $1,976,317
======== =========== ============ ========= ============ ===========
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,
2003 2002
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 14,533 $ (725,121)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 143,492 146,507
Minority interest in income (loss) of subsidiary 579 (10,727)
Amortization of discounts and premiums on investments, net (67,021) (71,794)
Gain on disposal of equipment -- (200)
Decrease in receivables 180,645 108,314
(Increase) decrease in prepaids and other assets (5,114) 80,416
(Increase) in deferred income taxes (429,600) (118,100)
Increase (decrease) in reported and unreported
claims payable (301,592) 218,825
Increase in unearned premiums and administration fees 7,821 284,566
Increase (decrease) in accounts payable and
accrued expenses 112,864 (156,495)
Increase in contingency reserves payable 1,454,622 1,358,077
------------- -------------
Net cash provided by operating activities $ 1,111,229 $ 1,114,268
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale $ (2,698) $ (3,702)
Held to maturity securities:
Matured 212,000 535,000
Purchased (199,483) (200,005)
Proceeds from maturities of certificates of deposit 500,000 350,000
Purchase of certificates of deposit (500,000) (450,000)
(Increase) decrease in contracts with life
insurance companies (7,000) 2,349
Proceeds from the sale of property and equipment -- 200
Purchase of property and equipment (14,921) (203,007)
------------- -------------
Net cash (used in) provided by investing activities $ (12,102) $ 30,835
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 920 $ 210
Increase in minority investment of subsidiary 212 16,403
------------- -------------
Net cash provided by financing activities $ 1,132 $ 16,613
------------- -------------
Increase in cash and cash equivalents $ 1,100,259 $ 1,161,716
CASH AND CASH EQUIVALENTS
Beginning 10,543,214 8,673,787
------------- -------------
Ending $ 11,643,473 $ 9,835,503
============= =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Income taxes, net of (refunds) $ (200,000) $ 0
Supplemental Disclosures of Noncash Investing
And Financing Activities
Increase in unrealized gain on
securities available for sale $ 302 $ 1,598
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 majority 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. INCOME(LOSS) PER COMMON SHARE
Income(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 income(loss) per share in the consolidated
financial statements are to basic income(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 2002 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 income includes the
equity in net income(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 June 30, 2003
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 21,508,050 $ 1,589,149 $ 415,809 $23,513,008
Intersegment revenues -- 63,306 -- 63,306
Segment income (loss) 539,124 65,835 (10,864) 594,095
Segment assets 21,457,718 1,712,285 651,686 23,821,689
The total segment income is greater than the consolidated net income by
$54,971 because the equity in net income of subsidiaries has not been
eliminated from the individual segment amounts.
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 Six Months Ended June 30, 2003
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 42,383,664 $ 3,052,408 $ 745,102 $46,181,174
Intersegment revenues -- 122,305 -- 122,305
Segment income(loss) 14,533 61,124 (25,157) 50,500
Segment assets 21,457,718 1,712,285 651,686 23,821,689
The total segment income is greater than the consolidated net income by
$35,967 because the equity in net income 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.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) was $539,926 and ($434,966) for the three months
ended June 30, 2003 and 2002, respectively, and was $14,835 and ($723,523) for
the six months ended June 30, 2003 and 2002, 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
June 30, 2003, the Company's HMO medical care enrollment was approximately
37,600, while its subsidiaries DAS and CW had combined medical care
enrollment of approximately 64,100. The Company also offers ancillary
products and the resulting exclusive enrollment under the HMO was
approximately 2,000, while its subsidiaries DAS and CW had combined ancillary
product exclusive enrollment of approximately 15,700. The resulting total
population served by the Company through any of its products resulted in
a total of approximately 119,400 at June 30, 2003.
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, 2003 AND JUNE 30, 2002
General
The Company's net income increased $977,095 to $539,124 for the three
months ended June 30, 2003, as compared to a net loss of $437,971 for
the three months ended June 30, 2002. This increase in net income was
primarily due to the increase in total revenues over total operating expenses.
Total revenues increased $2,969,055 for the three months ended June 30, 2003,
while total operating expenses increased $1,729,119 for the same period. This
was somewhat offset by the increase in the provision for income taxes of
$255,588 for the three months ended June 30, 2003 as compared to June 30, 2002.
Revenues
Total revenues increased $2,969,055, or 14.5%, for the three months ended
June 30, 2003, as compared to June 30, 2002. The revenues from the
net premiums generated by the health maintenance organization increased
$2,267,083, or 12.0%. This increase is attributable to a 18.9% increase
in the premiums earned per enrollee and a decrease in the enrollment of 5.8%
for the three months ended June 30, 2003, as compared to June 30, 2002.
Revenues from the TPA fees increased by $396,561, or 36.7%, due to an
increase in enrollment, additional fees generated per enrollee and an increase
in pharmacy rebates associated with the enrollment. Investment income
decreased by $34,911 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, 2002.
8
Operating Expenses
Total operating expenses increased $1,729,119, or 8.2%, for the three months
ended June 30, 2003, as compared to June 30, 2002. This was due to
an increase in claims incurred, personnel expense, commissions, professional
fees, office expenses, state insurance taxes, and occupancy expenses, but was
somewhat offset by a decrease in other general and administrative expenses.
Net claims expense generated by the health maintenance organization increased
$973,106, or 5.5%. Average claims expense per enrollee increased 11.9%
for the three months ended June 30, 2003, as compared to June 30, 2002,
while the number of enrollees decreased 5.8%. Personnel expense increased
$222,405, or 15.7% for the three months ended June 30, 2003, as compared
to June 30, 2002. This is due to the increased number of personnel and the
annual salary adjustments made June of each year. Some of the increase in
personnel was needed to eliminate and reduce expenses for temporary help. This
was seen by the reduction in temporary help expenses within the professional
fees. Commissions and state insurance taxes increased $145,807, or 15.2%, due
to the increase in net premiums and TPA fees for the three months ended
June 30, 2003 as compared to June 30, 2002. Professional fees expense increased
$58,682, or 26.6%, due to the additional consulting used in the implementation
of HIPAA and the use of specialists in examining pharmacy rebates and contracts
to save costs for the future. Office expenses increased by $31,216, or 12.7%,
for the three months ended June 30, 2003 as compared to June 30, 2002. This
increase was mostly attributable to an increase in postage costs during the
current quarter. Occupancy expense increased $43,528, or 22.3% due to
increased depreciation expense. Other general and administrative expenses
decreased $52,997 for the three months ended June 30, 2003, as compared to
June 30, 2002. This decrease was attributable to the write down in the second
quarter of 2002, of an investment in subsidiary. This resulted from an
increase in ownership percentage of cumulative losses. Insurance expense
increased for the three months ended June 30, 2003 as compared to
June 30, 2002, which somewhat offset the decrease due to the adjustment.
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 three months
ended June 30,2003, income tax benefit represented 0.9% of the income before
taxes and minority interest. The valuation allowance for deferred tax assets
exists due to the fact that the recoverable amount of deferred taxes is
limited to the amount paid by the Company to the Internal Revenue Service and
is available to be recovered if taxable losses occur. The valuation allowance
is also effected by the losses incurred by a subsidiary which 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.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
General
The Company's net income increased $739,654 to $14,533 for the six months
ended June 30, 2003, as compared to a net loss of $725,121 for the six
months ended June 30, 2002. This increase in net income was primarily due
to the increase in total revenues over the increase in total operating expenses.
Total revenues increased $5,832,485 for the six months ended June 30, 2003,
while total operating expenses increased $4,916,137 for the same period. This
net increase in operating income was somewhat offset by the increase in the
provision for income tax of $165,388 for the six months ended June 30, 2002 as
compared to June 30, 2002.
9
Revenues
Total revenues increased $5,832,485, or 14.5%, for the six months ended
June 30, 2003, as compared to June 30, 2002. The revenues from the
net premiums generated by the health maintenance organization increased
$4,785,797, or 13.0%. This increase is attributable to a 17.0% increase
in the premiums earned per enrollee and a decrease in the enrollment of 3.4%
for the six months ended June 30, 2003, as compared to June 30, 2002.
Revenues from the TPA fees increased by $483,331 due to a 4.8% increase
in enrollment and additional fees generated with existing enrollment.
Investment income decreased by $51,503 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 six month period ended June 30, 2002.
Operating Expenses
Total operating expenses increased $4,916,137, or 11.9%, for the six months
ended June 30, 2003, as compared to June 30, 2002. This was due to
an increase in claims incurred, personnel expense, commissions, occupancy
expense, state insurance taxes, and other general and administrative expense,
but was somewhat offset by a decrease in advertising. Professional fees
expense remained relatively constant in total, but there were some
fluctuations within the account when comparing the six months ended
June 30, 2003 against June 30, 2002.
Net claims expense generated by the health maintenance organization increased
$3,789,602, or 11.1%. Average claims expense per enrollee increased 15.0%
for the six months ended June 30, 2003, as compared to June 30, 2002,
while the number of enrollees decreased 3.4%. Personnel expense increased
$385,654, or 13.8% for the six months ended June 30, 2003, as compared
to June 30, 2002. This is due to the increased number of personnel and the
annual salary adjustments made June of each year. Some of the increase in
personnel was needed to eliminate and reduce expenses for temporary help.
Commissions and state insurance taxes increased $210,122, or 10.7%, due to the
increase in net premiums and TPA fees for the six months ended June 30, 2003
as compared to June 30, 2002. Occupancy expense increased $71,854, or 18.8%
due to increased depreciation expense. Other general and administrative
expenses increased $49,206 for the six months ended June 30, 2003, as compared
to June 30, 2002. Insurance expense continued to increase as policies renew.
The largest increase occurred in the policy for professional liability and
Officer and Director Liability. This increase was offset somewhat by a decrease
resulting from an adjustment to the write down in the second quarter of 2002,
of an investment in subsidiary. This writeoff resulted from an increase in
ownership percentage of cumulative losses. Advertising somewhat offset the
overall operating expense increases by decreasing $40,335, or 12.7% for the
six months ended June 30, 2003, as compared to June 30, 2002. The overall
advertising budget was increased for the year, but the advertising agency is
responsible in determining when the money is spent. The reduction is simply
the timing of the advertising and by the end of the year, there should be a
small increase compared to last year. Professional fees expense increased due
to the additional consulting used in the implementation of HIPAA and the use of
specialists in examining pharmacy rebates and contracts to save costs for
the future. These increased costs were offset by the reduction in temporary
help, which kept overall costs within the professional fees account
similar to the prior year's amount.
10
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, 2003, income tax benefit represented 118.9% of the loss
before taxes and minority interest. The change in the valuation allowance had
a large percentage effect on this ratio. The valuation allowance for deferred
tax assets exists due to the fact that the recoverable amount of deferred
taxes is limited to the amount paid by the Company to the Internal Revenue
Service and is available to be recovered if taxable losses occur. The
valuation allowance is also effected by the losses incurred by a subsidiary
which 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.
Net cash provided by operating activities decreased by $3,039 to $1,111,229
for the three months ended June 30, 2003, as compared to June 30, 2002.
Cash provided by operations was mainly attributed to the decrease in
receivables and an increase in contingency reserves payable. The cash provided
by this increase was somewhat offset by an increase in deferred income taxes
and a decrease in reported and unreported claims payable. Receivables decreased
due to a decrease in income tax receivables since the prior year end. There
was no payment of contingency reserves to physicians for the six months ended
June 30, 2003, which caused the increase in contingency reserves payable.
Deferred income taxes increased primarily due to the increase in contingency
reserves payable, which are not deductible until paid to the physicians.
Reported and unreported claims payable decreased due to the decrease in
enrollment and thus a decrease in reserves needed on the HMO and Reinsurance
segments.
Cash flows provided by(used in) investing and financing activities were minimal.
The HMO segment had a bond mature, while the reinsurance segment used cash on
hand to purchase a short term treasury security. Equity securities were
purchased with the reinvestment of dividends from those equity securities.
Equipment was also purchased in the normal course of business. Five
Certificates of Deposit matured and were invested into new Certificates of
Deposit which generated no cash flow.
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, 2003. 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.
11
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in the footnotes to our
financial statements for our latest Annual Report on Form 10K which we filed
March 29, 2003.
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 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. Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this
evaluation, the principal executive officer and principal financial officer
concluded that the Compnay's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There was no change in the Company's
internal control over financial reporting during the Company's most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
12
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
At the Company's Annual Meeting of Shareholders held on June 5, 2003, the
following directors were elected to serve a term of three years expiring at the
Annual Meeting of Shareholders to be held in 2006:
Dr. Vance Thompson Dr. James Engelbrecht Dr. John Sternquist
The other continuing directors are as follows:
Dr. Ben Henderson Mr. Van Johnson Dr. Thomas Krafka
Dr. James Reynolds Dr. John Rittmann Dr. Stephen Schroeder
Mr. Bobby Sutton
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31.1 Section 302(a) Certification of Chief Executive Officer
Exhibit 31.2 Section 302(a) Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
South Dakota State Medical Holding Company, Incorporated
(Registrant)
Date:_08/14/2003___ By: _/s/ L. Paul Jensen____
L. Paul Jensen
Chief Executive Officer
(Duly Authorized Officer)
Date:_08/14/2003___ By: _/s/ Kirk J. Zimmer____
Kirk J. Zimmer
Senior Vice President
(Principal Financial Officer)
13
EXHIBIT 31.1
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision
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 report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting; and
/s/__L. Paul Jensen_
L. Paul Jensen
Chief Executive Officer
August 14, 2003
14
EXHIBIT 31.2
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision
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 report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting; and
/s/__Bruce E. Hanson_
Bruce E. Hanson
Chief Finance Officer
August 14, 2003
15
Exhibit 32.1
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, 2003, 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 14, 2003
A signed original of this written statement required by Section 906 has been
provided to South Dakota State Medical Holding Co., Inc. and will be retained
by South Dakota State Medical Holding Co., Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
16
Exhibit 32.2
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, 2003, 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 14, 2003
A signed original of this written statement required by Section 906 has been
provided to South Dakota State Medical Holding Co., Inc. and will be retained
by South Dakota State Medical Holding Co., Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
17