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 March 31, 2005
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, including 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 May 4, 2005
Class C Non-Voting 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
March 31, 2005 and December 31, 2004 2
Consolidated Statements of Operations for the Three
Months Ended March 31, 2005 and 2004 3
Consolidated Statement of Stockholders' Equity
for the Three Months Ended March 31, 2005 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2005 and 2004 5
Condensed Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-12
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. Unregistered Sales of Equity 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 13
Signatures 13
Certifications
1
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2005 2004
(Unaudited) (Audited)
- --------------------------------------------------------------------------------------
Cash and cash equivalents $ 15,725,445 $ 17,819,826
Investment in securities held to maturity 684,113 408,803
Certificates of deposit 1,500,000 1,600,000
Receivables 1,583,391 1,395,187
Prepaids and other assets 275,000 175,000
Deferred income taxes 1,334,700 1,291,600
------------- -------------
Total current assets 21,102,649 22,690,416
------------- -------------
Mortgage loan on real estate with related party 3,482,649 --
Investment in securities held to maturity 4,010,017 4,468,534
Investment in securities available for sale 154,100 153,900
Certificates of deposit 600,000 600,000
Contracts with life insurance companies and other 109,175 106,175
------------- -------------
Total long-term investments 8,355,941 5,328,609
------------- -------------
Property and equipment, net of accum. depreciation 504,723 470,699
------------- -------------
Deferred income taxes 834,356 1,021,400
------------- -------------
$ 30,797,669 $ 29,511,124
============= =============
LIABILITIES
Reported and unreported claims payable $ 9,646,844 $ 9,651,340
Unearned premiums and administration fees 3,098,033 2,780,976
Accounts payable and accrued expenses 1,392,046 1,288,828
Contingency reserves payable 2,891,167 2,891,167
------------- -------------
Total current liabilities 17,028,090 16,612,311
Contingency reserves payable 3,057,697 2,413,523
------------- -------------
Total liabilities 20,085,787 19,025,834
------------- -------------
STOCKHOLDERS' EQUITY
Class A Voting Preferred Stock, $10 par value, 2,500 shares
authorized; 1,542 and 1,523 shares issued and outstanding
at March 31, 2005 and December 31, 2004; liquidation
preference of outstanding shares of $15,420 and $15,230
at March 31, 2005 and December 31, 2004, respectively 15,420 15,230
Class B Voting Preferred Stock, $1.00 par value, 2,500 shares
authorized; 1,800 shares issued and outstanding;
liquidation preference of outstanding shares of $1,800 1,800 1,800
Class C Non-Voting Common Stock, $.01 par value, 10,000,000
shares authorized; 1,505,760 shares issued and outstanding 15,058 15,058
Additional paid-in capital 3,749,342 3,749,342
Retained Earnings 8,259,066 8,031,148
Accumulated other comprehensive income 375 1,891
Less cost of Class C Non-Voting Common treasury
stock, 140,156 shares (1,329,179) (1,329,179)
------------- -------------
10,711,882 10,485,290
------------- -------------
$ 30,797,669 $ 29,511,124
============= =============
See Condensed 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
March 31,
2005 2004
- ---------------------------------------------------------------------
Revenues:
Premiums, net of reins. ceded $ 21,020,225 $ 20,766,562
Third party administration fees 1,406,485 1,323,914
Investment income 161,934 95,159
Other income 377,013 361,024
------------- -------------
Total revenues 22,965,657 22,546,659
------------- -------------
Operating expenses:
Claims incurred,
net of reins. recoveries 18,426,914 16,572,922
Personnel expense 1,643,484 1,570,096
Commissions 803,172 831,684
Professional fees expense 247,341 312,037
Office expense 266,762 291,263
Advertising 52,856 130,530
Occupancy expense 193,807 231,938
State insurance taxes 265,997 237,911
Other general and
administrative expenses 580,941 439,484
------------- -------------
Total operating expenses 22,481,274 20,617,865
------------- -------------
Income before income taxes
and minority interest 484,383 1,928,794
Income taxes 256,465 85,300
------------- -------------
Income before minority
interest 227,918 1,843,494
Minority interest in loss
of subsidiary -- 4,093
------------- -------------
Net income $ 227,918 $ 1,847,587
============= =============
Earnings per common share $ 0.17 $ 1.35
============= =============
Comprehensive income $ 226,402 $ 1,848,925
============= =============
Weighted average number of Class C
Non-Voting Common Shares outstanding 1,365,604 1,365,604
============= =============
See Condensed Notes to Consolidated Financial Statements.
3
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2005
(Unaudited)
Accumulated
Additional Other
Capital Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
- --------------------------------------------------------------------------------------------
Balance,
December 31, 2004 $32,088 $3,749,342 $ 8,031,148 $ 1,891 $(1,329,179) $10,485,290
Issuance of Class A
Voting Preferred Stock 190 -- -- -- -- 190
Comprehensive income:
Net income -- -- 227,918 -- --
Net change in un-
realized gain on
securities avail-
able for sale -- -- -- (1,516) --
Comprehensive income -- -- -- -- -- 226,402
-------- ----------- ------------ --------- ------------ -----------
Balance, March 31, 2005 $32,278 $3,749,342 $ 8,259,066 $ 375 $(1,329,179) $10,711,882
======== =========== ============ ========= ============ ===========
See Condensed Notes to Consolidated Financial Statements.
4
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2005 2004
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 227,918 $ 1,847,587
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 47,158 73,424
Minority interest in (loss) of subsidiary -- (4,093)
Amortization of discounts and premiums on investments, net (21,793) (28,538)
(Increase) decrease in receivables (188,204) 319,201
(Increase) in prepaids and other assets (100,000) (45,000)
(Increase) decrease in deferred income taxes 143,944 (606,300)
(Decrease) in reported and unreported
claims payable (4,496) (2,405,801)
Increase in unearned premiums and administration fees 317,057 570,444
Increase in accounts payable and
accrued expenses 103,218 336,848
Increase in contingency reserves payable 644,174 539,243
------------- -------------
Net cash provided by operating activities $ 1,168,976 $ 597,015
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale $ (1,716) $ (1,362)
Held to maturity securities:
Matured 205,000 45,000
Purchased -- (800,000)
Purchase of investment loan on real estate (3,482,649) --
Proceeds from maturities of certificates of deposit 400,000 400,000
Purchase of certificates of deposit (300,000) (900,000)
(Increase) in contracts with life
insurance companies (3,000) (3,000)
Purchase of property and equipment (81,182) (7,795)
------------- -------------
Net cash (used in) investing activities $ (3,263,547) $(1,267,157)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock $ 190 $ 110
Increase in minority investment of subsidiary -- 158
------------- -------------
Net cash provided by financing activities $ 190 $ 268
------------- -------------
(Decrease) in cash and cash equivalents $ (2,094,381) $ (669,874)
CASH AND CASH EQUIVALENTS
Beginning 17,819,826 14,518,442
------------- -------------
Ending $ 15,725,445 $ 13,848,568
============= =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Income taxes, net of (refunds) $ 109,421 $ 420,000
Supplemental Disclosures of Noncash Investing
And Financing Activities
Increase (decrease) in unrealized gain on
securities available for sale $ (1,516) $ 1,338
See Condensed 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"), its
wholly-owned subsidiaries, DAKOTACARE Administrative Services, Incorporated
("DAS"), and DAKOTACARE Insurance Ltd. ("DIL"), 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. The
results of operations for the three months ended March 31, 2005, are not
necessarily indicative of the results to be expected for the full year or any
other interim period. This report should be read in conjunction with the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004.
2. EARNINGS PER COMMON SHARE
Earnings per common share is calculated by dividing net income by the
weighted average number of shares of the Class C Non-Voting Common Stock
("Common Stock") outstanding during the period. All references to earnings
per share in the consolidated financial statements are to basic earnings
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 the
Common Stock in the event of death, disability, or retirement of a shareholder,
the Company's Board of Directors has a Stock Repurchase Program, which was
publicly announced on March 4, 1998 (the "Program"). 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.
There were no shares repurchased through March 31, 2005 or during the
year ended December 31, 2004.
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, which is the TPA
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 Note 1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2004. The Company allocates payroll costs
incurred based on the activities of admitting new enrollees and in adjudicating
claims.
6
The HMO segment income includes the equity in net income 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.
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 March 31, 2005
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 21,394,331 $ 1,527,214 $ 102,378 $ 23,023,923
Intersegment revenues -- 31,609 -- 31,609
Segment income 227,918 52,527 5,739 286,184
Segment assets 29,978,637 2,768,208 571,630 33,318,475
The total segment income is more than the consolidated net income by
$58,266 because the equity in net income of subsidiaries has not been
eliminated from the individual segment amounts.
For the Three Months Ended March 31, 2004
- ---------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external sources $ 20,662,353 $ 1,441,858 $ 296,100 $ 22,400,311
Intersegment revenues -- 63,167 -- 63,167
Segment income(loss) 1,847,587 (61,124) (85,224) 1,701,239
Segment assets 25,932,042 1,872,885 862,509 28,667,436
The total segment income is less than the consolidated net income by
$146,348 because the equity in net loss of subsidiaries has not been
eliminated from the individual segment amounts.
5. COMPREHENSIVE INCOME
Comprehensive income was $226,402 and $1,848,925 for the three months ended
March 31, 2005 and 2004, respectively. The difference between comprehensive
income and net income presented in the Consolidated Statements of Operations
is attributed solely to the change in unrealized gains and losses on
securities available for sale during the periods presented.
6. MORTGAGE LOAN ON REAL ESTATE
The Company lent $3,482,649 to the South Dakota State Medical Association for
the purpose of allowing the South Dakota State Medical Association to purchase
land and a building that will house the main office of the Company, the South
Dakota State Medical Association, and the South Dakota Foundation for Medical
Care. The loan is secured by a real estate mortgage with repayment over 22.5
years at a rate of 4.5% annual interest. Prior to the occupancy of the
building, the Company will negotiate lease terms with the South Dakota State
Medical Association. The mortgage is carried at the unpaid balance plus
unamortized loan origination fees, if any.
7
7. OTHER EVENTS
On April 7, 2005, the Board of Directors of the Company approved a going private
transaction in which the Company will (i) effect a 1-1000 reverse stock split
of its Class C Non-Voting Common Stock, and (ii) redeem all of the issued and
outstanding shares of its Class A Voting Preferred Stock. Completion of the
reverse stock split of the Common Stock and the redemption of the Class A Stock
will result in the Company having less than 300 holders of each of its Class C
Non-Voting Common Stock and Class A Voting Preferred Stock, enabling it to
elect to terminate the registration of its Class C Non-Voting Common Stock and
Class A Voting Preferred Stock pursuant to the Securities Exchange Act of 1934.
Under the terms of the proposed reverse stock split, holders of Class C
Non-Voting Common Stock will receive one whole share of Class C Non-Voting
Common Stock for each 1,000 shares of Class C Non-Voting Common Stock held
immediately prior to the effective time of the reverse stock split. In lieu of
issuing fractional shares following the reverse stock split, holders
of Common Stock that would otherwise hold fractional shares after giving effect
to the reverse stock split will receive cash equal to $20.15 per pre-split
share of Common Stock that would otherwise be converted into a fractional
share. The Board received a written fairness opinion from an independent
investment bank that states that in the opinion of the investment bank, subject
to the limitations and qualifications set forth in the opinion, as of May 10,
2005, the cash consideration in the amount of $20.15 to be paid to the holders
of Class C Non-Voting Common Stock for their fractional shares is fair, from a
financial point of view, to the shareholders of the Company who own less than
1,000 shares of Class C Non-Voting Common Stock.
In connection with the redemption of the Class A Voting Preferred Stock, and
pursuant to the terms of the Class A Voting Preferred Stock as set forth in
the Company's Amended and Restated Articles of Incorporation, the Company
will pay a redemption price of $10.00 per share of Class A Voting Preferred
Stock on the redemption date of June 16, 2005 to holders of the Class A Voting
Preferred Stock as of the close of business on May 10, 2005.
8
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.
The Company's subsidiary, DAS, provides managed care and claims administration
services for self-insured employer groups. The Company's subsidiary, DIL,
accepts reinsurance risk on certain of DAS's self-funded and insured customers'
life and stop-loss insurance policies. The Company and its DAS subsidiary
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
March 31, 2005, the Company's HMO medical care enrollment was approximately
29,900, while its DAS subsidiary had medical care enrollment of approximately
70,700. The Company also offers ancillary products and the resulting
exclusive enrollment under the HMO was approximately 1,700, while its DAS
subsidiary had combined ancillary product exclusive enrollment of approximately
5,800. The resulting total population served by the Company through any of its
products resulted in approximately 108,100 members at March 31, 2005.
This discussion and analysis contains certain forward-looking terminology such
as "believes," "anticipates," "will," "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 MARCH 31, 2005 AND MARCH 31, 2004
General
The Company's net income was $227,918 for the three months ended
March 31, 2005 as compared to $1,847,587 for the three months ended
March 31, 2004, which represents a decrease of $1,619,669, or 87.7%. The
resulting decrease in net income was primarily due to the increase in total
operating expenses to a greater amount than the increase in revenues. Total
revenues increased $418,998 for the three months ended March 31, 2005, as
compared to March 31, 2004, while total operating expenses increased
$1,863,409 for the same comparable periods. The provision for income taxes
increased $171,165 for the three months ended March 31, 2005, as compared
to March 31, 2004.
Revenues
Total revenues increased $418,998, or 1.9%, for the three months ended
March 31, 2005, as compared to March 31, 2004. The revenues from the
net premiums generated by the HMO segment increased $446,555, or 2.2%. This
increase is attributable to a increase in the premiums earned per enrollee of
9.2%, but was partially offset by a 6.4% decrease in the number of enrollment
months for the three months ended March 31, 2005, as compared to March 31, 2004.
Revenues from the TPA fees increased by $82,571, or 6.2%, due to an increase in
enrollment months of approximately 3.6% and the increase of fees generated per
employee and additional services provided for the groups.
Operating Expenses
Total operating expenses increased $1,863,409, or 9.0%, for the three months
ended March 31, 2005, as compared to March 31, 2004. This was due to
an increase in claims incurred, personnel expenses, state insurance taxes,
and other general and administrative expenses. These increases were partially
offset by decreases in commissions, professional fees, advertising, occupancy
and office expenses.
9
Net claims expense generated by the HMO segment increased $2,088,370, or 12.8%.
Average claims expense per enrollee increased 20.6% for the three months ended
March 31, 2005, as compared to March 31, 2004, while the number of enrollment
months decreased 6.4%. Personnel expense increased $73,388, or 4.7% for the
three months ended March 31, 2005, as compared to March 31, 2004. This is due
primarily to annual pay increases of approximately 5%, which were effective as
of June 1, 2004. Commissions decreased $28,512, or 3.4%, for the three months
ended March 31, 2005 as compared to March 31, 2004. The commissions earned in
the HMO and TPA lines of business increased slightly. The HMO segment's
commissions were 3.54% and 3.60% of net premiums, for the three months ended
March 31, 2005 and 2004, respectively. The TPA segment's commissions were 3.26%
and 3.10% for the three months ended March 31, 2005 and 2004, respectively. The
reinsurance segment's commissions were 16.07% and 18.00% for the three months
ended March 31, 2005 and 2004, respectively. The reinsurance segment's revenues
decreased 65.3% for the three months ended March 31, 2005, as compared to March
31, 2004. Since the rate of commission is higher in the reinsurance segment,
the resulting overall consolidated commission expense decreased even though
higher consolidated revenues are being reported for the three months ended March
31, 2005 as compared to March 31, 2004. State insurance taxes, which only
apply to the HMO segment as a percentage of premium revenue, increased partially
due to the increase in premium revenue for the three months ended March 31, 2005
as compared to March 31, 2004. Part of the increase was due to a credit from the
South Dakota Division of Insurance (Division) for the quarter ended March 31,
2004, and thus reduced the state insurance taxes for the prior year's quarter
when comparing it to the current year's quarter. The resulting percentage of
state insurance taxes as a percentage of net premium revenue was 1.26% and 1.13%
for the three months ended March 31, 2005 and 2004, respectively. Professional
fees decreased $64,696, or 20.7%, for the three months ended March 31, 2005 as
compared to March 31, 2004, due primarily to the decrease in fees within the TPA
business. In December, 2004, Carewest, Inc., which was a TPA operating in
western South Dakota, had its operations moved into DAS resulting in operational
expense savings. Legal and accounting fee increases partially offset the other
decreases. Occupancy expense decreased $38,131, or 16.4%, due to decreases in
depreciation expense for the three months ended March 31, 2005 as compared to
March 31, 2004. Office expense decreased $24,501, or 8.4% due to a combination
of decreased postage and office supply costs. Advertising costs decreased by
$77,674 for the three months ended March 31, 2005 as compared to March 31, 2004.
Although the overall 2005 advertising budget increased, the spending and timing
of the advertising is dependent on the advertising agency's decisions for
specific placements of ads. Management expects that the overall fees for the
fiscal year will increase despite the decrease for the first three months.
Other general and administrative expenses increased $141,457 when compared to
the prior year's quarter due to increased license and service fees. The Company
continues to invest monies in computer service contracts and database rights,
which increase the Company's initial costs, but increase efficiencies, quality
and system capabilities. Management expects to continue to investigate and
consider options which advance the Company's overall technological throughput.
Income Taxes
Income tax expense or benefit should represent 35.0% of income, but fluctuates
each period due to adjustments for a valuation allowance for deferred tax assets
and permanent tax differences. For the three months ended March 31, 2005, the
income tax provision represented 52.9% of the income before taxes and minority
interest. The changes in the components of the deferred tax assets accounted
for the provision to vary as a percentage. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The valuation allowance is also effected by the income or 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. A significant portion of the Company's
valuation allowance was reversed in 2004 and the Company anticipates that future
income tax expense will be closer to a 35% effective tax rate.
10
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash have been premium and fee revenue,
collection of premiums in advance of the claims costs associated with them, and
an agreement with participating physicians in which a percentage of fees for
services is withheld for cash flows of the Company. The Company in the past has
had borrowings from banks and affiliated companies, but currently does not need
to borrow for liquidity purposes.
Net cash provided by operating activities increased by $571,961 to $1,168,976
for the three months ended March 31, 2005, as compared to March 31, 2004.
Cash provided by operations was mainly attributed to net income, the decrease in
deferred income taxes and the increase in unearned premiums and administration
fees, accounts payable and accrued expenses, and contingency reserves payable.
The increases in cash were partially offset by decreases in cash due to the
increase in receivables and prepaids and other assets. The decrease in deferred
income taxes resulted from the change in deferred items expected to be realized
and the net change from the prior year. The increase in unearned premiums and
administration fees and accounts payable and accrued expenses from the prior
year end relate to fluctuations that occur throughout the year. Contingency
reserve payables increased from the continued withholding of 15% of physicians'
claims expenses. No contingency reserves payments have been made in 2005.
Receivables increased since December 31, 2004, and were due to normal business
fluctuations in the accounts. Prepaids and other assets increased since the
prior year end due to the payment of insurance premiums in January for which
coverage extends through September, 2005.
Cash flows used in investing activities increased from $1,267,157 to $3,263,547
for the three months ended March 31, 2005 as compared to March 31, 2004. The
investment of funds to the South Dakota State Medical Association as a real
estate mortgage investment increased the use of funds by approximately
$3,490,000. The purchase of bonds and CD's decreased by $1,400,000, while the
related maturities of bonds and CD's increased by $160,000 for the first
quarter of 2005 as compared to the first quarter of 2004. Equipment purchases
also increased the use of funds by approximately $75,000 for the three months
ended March 31, 2005, as compared to March 31, 2004.
The Company is not contractually obligated to pay out the contingency reserves
Withheld. No dividends have been declared or paid for the three months
ended March 31, 2005. 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 determines the amounts to be
paid, subject to approval from the Division. Risk based capital requirements,
budgeted cash expenditures and a number of other factors may influence the
Board's decision for these payments.
The Company has a pending event as indicated in detail in Note 7. The Company
will pay approximate $5.15 million to complete the transaction and expects to
do so without any outside financing. The Company does not expect this
transaction to effect its ability to satisfy is operating cash requirements
as indicated previously.
11
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.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in Note 1 to the
Company's 2004 Annual Consolidated Financial Statements included in its Annual
Report on Form 10-K for the year ended December 31, 2004.
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. There were no material
changes made to the Company's critical accounting estimates or assumptions or
the judgments affecting the application of those estimates and assumptions.
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
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 Company'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. Unregistered Sales of Equity Securities and Use of Proceeds
Although the Company has in place a Stock Repurchase Program, which was
publicly announced on March 4, 1998, no shares of Common Stock were
repurchased during the Company's first quarter of its fiscal year ending
December 31, 2005.
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
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Senior Vice President and Chief Operating Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.3 Certification of Vice President Finance and Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Senior Vice President and Chief Operating Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.3 Certification of Vice President Finance and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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:_05/13/2005___ By: _/s/ L. Paul Jensen____
L. Paul Jensen
Chief Executive Officer
(Duly Authorized Officer)
Date:_05/13/2005___ By: _/s/ Kirk J. Zimmer____
Kirk J. Zimmer
Senior Vice President and Chief Operating Officer
(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, Incorporated.;
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 officers 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 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 that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers 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:
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.
/s/__L. Paul Jensen_____
L. Paul Jensen
Chief Executive Officer
Date: May 13, 2005
Exhibit 31.2
CERTIFICATIONS
I, Kirk J. Zimmer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of South Dakota State
Medical Holding Company, Incorporated.;
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 officers 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 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 that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers 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:
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.
/s/__Kirk J. Zimmer____
Kirk J. Zimmer
Senior Vice President and Chief Operating Officer
Date: May 13, 2005
Exhibit 31.3
CERTIFICATIONS
I, Bruce E. Hanson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of South Dakota State
Medical Holding Company, Incorporated.;
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 officers 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 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 that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers 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:
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.
/s/__Bruce E. Hanson_______
Bruce E. Hanson
Vice President Finance and Chief Financial Officer
Date: May 13, 2005
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 March 31, 2005, 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
Date: May 13, 2005
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
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 March 31, 2005, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Kirk Zimmer, Senior Vice
President and Chief Operating 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/ Kirk J. Zimmer_____
Senior Vice President and Chief Operating Officer
Date: May 13, 2005
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
Exhibit 32.3
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 March 31, 2005, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Bruce Hanson, Vice President
Finance and 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____
Vice President Finance and Chief Financial Officer
Date: May 13, 2005
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.