SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INC., d/b/a DAKOTACARE
------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
-----------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
MAY 11, 1998
TO ALL CLASS A PREFERRED STOCKHOLDERS:
Enclosed is the Notice of Annual Meeting of Stockholders, Proxy Statement,
Ballot and Proxy to: elect four directors of South Dakota State Medical
Holding Company, Incorporated ("DAKOTACARE" or the "Company") for a three-year
term expiring at the Annual Meeting of Stockholders to be held in 2001. Also
enclosed is the Company's 1997 Annual Report to Shareholders, the Ballot and
Proxy for voting, and the interim unaudited consolidated financial statements
for the quarter ended March 31, 1998.
The Ballot and Proxy must be received at the DAKOTACARE office and must be
postmarked by May 31, 1998.
If you have any questions, please call Kirk Zimmer at DAKOTACARE at
(605)334-4000.
Sincerely,
/s/Robert D. Johnson
Robert D. Johnson
Chief Executive Officer
RDJ:sj
Enc.
<PAGE>
SOUTH DAKOTA STATE MEDICAL
HOLDING COMPANY, INCORPORATED
1323 South Minnesota Avenue
Sioux Falls, SD 57105
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
June 4, 1998
TO THE CLASS A AND B PREFERRED STOCKHOLDERS OF SOUTH DAKOTA
STATE MEDICAL HOLDING COMPANY, INCORPORATED:
Notice is hereby given that the Annual Meeting of Stockholders of South
Dakota State Medical Holding Company, Incorporated ("DAKOTACARE" or the
"Company"), will be held on Thursday, June 4, 1998, at the Rushmore Plaza
Holiday Inn and Civic Center, Rapid City, South Dakota, at 9:15 a.m., Rapid
City, South Dakota time, for the following purposes:
1. To elect four directors of the Company for a three-year term expiring at
the Annual Meeting of Stockholders to be held in 2001.
2. To consider such other business as may properly come before the
stockholders for vote at the Annual Meeting.
Only the stockholders of record of the Company's Class A Voting Preferred
Stock and Class B Voting Preferred Stock at the close of business on April 20,
1998, will be entitled to receive notice of and to vote at the meeting or any
adjournment thereof.
A form of Ballot and Proxy and Proxy Statement containing more detailed
information with respect to the matters to be considered at the Annual
Meeting accompany this notice.
NOTE: The Ballot and Proxy must be received at the DAKOTACARE office
and must be postmarked by May 31, 1998 (the "Deadline").
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. WHETHER OR NOT YOU PLAN
TO BE PERSONALLY PRESENT AT THE MEETING, PLEASE COMPLETE, DATE, AND SIGN THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IF YOU LATER
DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS EXERCISED.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/Guy E. Tam, M.D.
Guy E. Tam, M.D.
Secretary
May 11, 1998
<PAGE>
SOUTH DAKOTA STATE MEDICAL
HOLDING COMPANY, INCORPORATED
1323 South Minnesota Avenue
Sioux Falls, South Dakota 57105
PROXY STATEMENTFOR
ANNUAL MEETING OF STOCKHOLDERS
JUNE 4, 1998
This Proxy Statement is furnished in connection with the solicitation of the
enclosed proxy by the Board of Directors of South Dakota State Medical Holding
Company, Incorporated (the "Company" or "DAKOTACARE") for use at an Annual
Meeting of Stockholders (the "Annual Meeting") to be held on Thursday, June 4,
1998, at 9:15 a.m., Rapid City, South Dakota time, at the Rushmore Plaza
Holiday Inn and Civic Center, Rapid City, South Dakota, and at any adjournment
or postponement thereof.
At the Annual Meeting, the Company's Class A and B stockholders will be asked
to consider and vote upon the following proposals described in the enclosed
Notice of Annual Meeting:
1. To elect four directors of the Company for a three-year term expiring at
the Annual Meeting of Stockholders to be held in 2001.
2. To consider such other business as may properly come before the
stockholders for vote at the Annual Meeting.
This Proxy Statement and the form of Ballot and Proxy enclosed are being
mailed to stockholders commencing on or about May 11, 1998. NOTE: The Ballot
and Proxy must be received at the DAKOTACARE office and must be postmarked by
May 31, 1998 (the "Deadline").
VOTING AND PROXY INFORMATION
Shares of the Company's Class A Preferred Stock and Class B Preferred Stock
represented by ballots and proxies in the form solicited will be voted in the
manner directed by a stockholder. If no direction is made by a stockholder,
the proxy will be treated as present for purposes of a quorum, but not voted
for the election of directors. If no direction is made by a stockholder, at the
discretion of the proxy holders, the proxy will be voted for any other matters
that properly come before the stockholders for vote at the Annual Meeting.
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<PAGE>
A stockholder may revoke his or her Ballot and Proxy at any time before the
Deadline by delivering to the Secretary of the Company a written notice of
termination of the proxy's authority or by filing with the Secretary of the
Company another timely Ballot and Proxy bearing a later date.
Votes are cast by ballot and proxy for the Annual Meeting and will be
tabulated by the inspectors of election appointed by the Company for the
meeting, and the number of stockholders voting by proxy will determine whether
or not a quorum is present. The inspectors of election will treat abstentions
as shares that are present and entitled to vote for purposes of determining the
presence of a quorum for all matters. Shares abstaining with respect to any
matter will be treated as unvoted.
Only the holders of the Company's Class A Preferred Stock and Class B
Preferred Stock whose names appear of record on the Company's books at the close
of business on April 20, 1998 (the "Record Date"), will be entitled to vote at
the Annual Meeting. At the close of business on the Record Date, a total of
1,115 shares of Class A Preferred Stock, 1,300 shares of Class B Preferred
Stock, and 1,505,760 shares of Class C Common Stock were outstanding. The
holders of a majority of the Class A Preferred Stock and Class B Preferred
Stock issued and outstanding and entitled to vote at the Annual Meeting,
represented by proxy, will constitute a quorum for the transaction of business.
If a quorum is not present, the Annual Meeting may be adjourned from time to
time until a quorum is present. The affirmative vote of the holders of a
majority of the shares of Class A Preferred Stock and Class B Preferred Stock
(voting as one class), represented at the Annual Meeting in person or by proxy,
is necessary for the election of directors and the approval of all other
matters proposed to the stockholders at the Annual Meeting. Each holder of the
Company's Class A Preferred Stock and Class B Preferred Stock is entitled to
one vote for each share held. There is a right to cumulate voting for the
election of directors. In the exercise of cumulative voting rights, each
holder of preferred shares is entitled to as many votes as shall equal the
number of his preferred shares multiplied by the number of directors to be
elected, and by giving written instructions to the Company they may cast all
such votes for a single director or may distribute them among the directors to
be voted for as he sees fit.
Expenses in connection with the solicitation of proxies by the Board of
Directors will be paid by the Company. Proxies are being solicited primarily
by mail, but, in addition, officers and regular employees of the Company who
will receive no extra compensation for their services may solicit proxies by
telephone or telecopier.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and is required to file
periodic reports, proxy statements, and other information with the Securities
and Exchange Commission (the "SEC") relating to its business, financial
statements, and other matters. Such reports, proxy statements, and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street Northwest, Washington, DC
20549, and at the SEC's regional offices located at Seven World Trade Center,
Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can also be obtained at
prescribed rates from the public reference section of the SEC at 450 Fifth
Street Northwest, Washington, DC 20549. In addition, the Commission maintains
a web site (address http://www.sec.gov) on the Internet that contains reports,
proxy statements, and other information for companies like the Company which
file electronically.
ELECTION OF DIRECTORS
Nominees and Voting
Pursuant to the Company's Bylaws, the Board of Directors consists of eight
directors who are elected for three-year terms expiring at each successive
Annual Meeting of Stockholders. Currently, no director may serve more than
three consecutive terms. The terms of Dr. Robert L. Ferrell, Dr. Ben J.
Henderson, and Dr. John E. Rittmann expire at the 1998 Annual Meeting of
Stockholders; the terms of Dr. Guy E. Tam and Mr. Patrick Beckman expire at
the 1999 Annual Meeting of Stockholders; and the terms of Dr. K. Gene Koob,
Dr. Frank Messner, and Dr. James Engelbrecht expire at the 2000 Annual Meeting
of Stockholders. The Bylaws currently require that eight of the directors be
holders of Class A Voting Preferred Stock of the Company and two of the
directors be consumers. The Articles of Incorporation restrict ownership of
Class A Voting Preferred Stock to medical or osteopathic physicians who have
executed Participating Physician Agreements with the Company. To assure equal
eligibility and opportunity throughout the state of South Dakota and avoid
domination of the Board of Directors by any geographic area or areas, the
number of physician directors from any one District Medical Society of the
South Dakota State Medical Association cannot exceed two. The consumer
directors may be from any geographic location which is served by South Dakota
State Medical Holding Company and their residence does not affect the geographic
restriction for physician directors. The consumer director is currently Mr.
Patrick Beckman. The officers of the Company are appointed by the Board of
Directors and hold office until their successors are chosen and qualified.
The Board of Directors has nominated the following four (4) individuals to
serve as directors with terms expiring at the 2001 meeting of the shareholders:
Ben J. Henderson, D.O.; Thomas L. Krafka, M.D.; John E. Rittmann, M.D.; and
Stephan D. Schroeder, M.D. By write-in nomination, Robert Rietz, M.D., has
also been nominated as a director with a term expiring at the 2001 meeting of
the shareholders. The Board of Directors has been informed that each of the
five (5) nominees is willing to serve as a director; however, if any nominee
3
<PAGE>
should decline or become unable to serve as a director for any reason, the proxy
may be voted for such other person as the proxies shall, in their discretion,
determine unless otherwise directed on the ballot and proxy.
Nominee Information
The following table sets forth certain information as of April 30, 1998,
concerning the five nominees for election as directors of the Company with
terms expiring at the 2001 meeting of the shareholders:
<TABLE>
<S> <C> <C>
Name Age Position with Company
Individuals Nominated by Board of Directors:
Ben J. Henderson, D.O. 56 Director
Thomas L Krafka, M.D. 52 None
John E. Rittmann, M.D. 60 Director
Stephan D. Schroeder, M.D. 47 None
Individual Nominated by Write-In:
Robert R. Rietz, M.D. 52 None
</TABLE>
Dr. Henderson became a director of the Company in June 1995. He is a member
of the South Dakota State Medical Association and has been engaged in the
practice of internal medicine in Mobridge, South Dakota, since 1972.
Dr. Krafka is a member of the South Dakota State Medical Association and has
been engaged in the practice of radiology in Rapid City, South Dakota,
since 1976.
Dr. Rittmann became a director of the Company in June 1997. He is a member of
the South Dakota State Medical Association and has been engaged in practice as
a family practitioner in Watertown, South Dakota, since 1973.
Dr. Schroeder is the President of the South Dakota State Medical Association
and has been engaged in practice as a family practitioner in Miller, South
Dakota, since 1980.
Dr. Rietz is a member of the South Dakota State Medical Association and has
been engaged in the practice of otology, laryngology, and rhinology in
Brookings, South Dakota, since 1983.
4
<PAGE>
Existing Board of Directors
The following table sets forth certain information of the existing Board of
Directors, excluding those nominated above, as of April 30, 1998.
<TABLE>
<S> <C> <C>
Name Age Position with Company
Frank D. Messner, M.D. 54 President and Director
Mr. Patrick Beckman 54 Vice President and Director
Guy E. Tam, M.D. 59 Secretary/Treasurer and
Director
James Engelbrecht, M.D. 50 Director
K. Gene Koob, M.D. 55 Director
</TABLE>
Dr. Messner became a director of the Company in June 1994. He is a member
of the South Dakota State Medical Association and has been engaged as a
radiologist in Yankton, South Dakota, since 1974.
Mr. Beckman became a director of the Company in June 1991. Mr. Beckman has
been engaged in the real estate business in Sioux Falls, South Dakota, since
1969. Mr. Beckman was a principal in Beckman-Zea Realty, Inc., from 1979 to
1992. Since then he is the sole owner of Beckman Realty and Development
Corporation.
Dr. Tam became a director of the Company in May 1990, and became Secretary
in September 1990. Dr. Tam is a member of the South Dakota State Medical
Association and has been engaged in practice as a family practitioner in Sioux
Falls, South Dakota, since 1968.
Dr. Engelbrecht became a director of the Company in June 1997. He is a member
of the South Dakota State Medical Association and has been engaged in the
practice of internal medicine and rheumatology in Rapid City, South Dakota,
since 1980.
Dr. Koob became a director of the Company in June 1994. He is a member of
the South Dakota State Medical Association and has been engaged as a
neurologist in Sioux Falls, South Dakota, since 1974.
Director Compensation
Each Director receives $250 per Board meeting attended and is reimbursed for
costs associated with the attendance of such meetings. The Company currently
has no stock options or other equity-based compensation for its directors,
officers, or other employees.
5
<PAGE>
Committees and Meetings of the Board of Directors
The Board of Directors of the Company has an Executive Committee consisting
of Frank Messner, M.D., Mr. Pat Beckman, and Guy Tam, M.D.; an Audit Committee
consisting of Guy Tam, M.D., Chairman, K. Gene Koob, M.D., and Frank
Messner, M.D.; a Nominating Committee; and a Credentialing Committee.
The Board of Directors held four meetings during 1997. All incumbent
directors attended at least 75% of the meetings of the Board and Committees
of which they were members.
The Executive Committee held no meetings during 1997, and the Audit Committee
met once during 1997.
The Nominating Committee consists of the President-Elect of the South Dakota
State Medical Association, one Class A stockholder, and one Director (James
Engelbrecht, M.D.). The Nominating Committee met once in 1998 to make the
current year nominations.
The Credentialing Committee consists of Robert Ferrell, M.D.; K. Gene Koob,
M.D.; Guy Tam, M.D.; Ben Henderson, D.O.; and James Engelbrecht, M.D. The
Credentialing Committee met three times in 1997.
Compensation Committee Report
The Board of Directors currently performs the functions of a Compensation
Committee. Robert D. Johnson participates in the deliberations of all
officer's compensation except for his own.
General Compensation Philosophy
During 1997, the Company adopted an executive compensation philosophy under
which total compensation was based on pay practices in the Company's
geographical region and a person's experience and responsibilities to the
Company. Currently, the executive compensation program does not include
long-term incentive or equity compensation. Total compensation for 1997 was
based on the median pay practices of comparably sized companies in DAKOTACARE's
geographic region, the individual's years of experience, and level of
responsibility.
CEO Compensation
Robert D. Johnson does not have an employment contract, but the Company has
established a deferred compensation agreement with him. A provision has been
made for the future compensation which is payable upon the completion of the
earlier of 25 years or any earlier retirement age specified by the Board of
Directors by resolution. Mr. Johnson generally devotes a portion of his time
to the Company and to the South Dakota State Medical Association. He received
separate compensation from the South Dakota State Medical Association during
1997 which totaled $104,210, including retirement plan contribution. Mr.
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<PAGE>
Johnson's salary for 1997 for the Company was based on a cost of living
adjustment from his 1996 salary and a subjective review by the Board of
Directors of his 1997 performance.
Compensation Committee Interlocks and Insider Participation
The Board of Directors currently performs the functions of a Compensation
Committee. Robert D. Johnson participates in the deliberation of all officer's
compensation except for his own. There are no Compensation Committee
interlocks with other companies and none of the nonemployee directors has been
an officer, employee, or insider of the Company or its subsidiaries.
7
<PAGE>
EXECUTIVE COMPENSATION
<TABLE>
<S> <C> <C> <C>
Name and Principal All Other
Position Year Salary $ Compensation(1)
Robert D. Johnson 1997 $ 76,367 $14,380
Chief Executive Officer 1996 $ 58,632 $12,373
1995 $ 41,330 $13,968
William Rossing, M.D. 1997 $107,195 --
Vice President 1996 $ 39,230 --
Medical Director 1995 -- --
Kirk J. Zimmer 1997 $106,738 $14,000
Senior Vice President 1996 $ 95,025 $12,176
1995 $ 72,492 $ 8,436
Thomas N. Nicholson 1997 $120,101 --
Vice President, Marketing 1996 $ 57,558 --
1995 -- --
</TABLE>
(1) Consists of retirement plan contribution and premiums paid on the
deferred compensation plan.
No other officer received total annual salary and bonus in excess of $100,000
during 1997, 1996, or 1995.
The Company intends to enter into indemnification agreements with each
executive officer and director. The Company has employment agreements with its
executive officers and maintains key person insurance of $250,000 on Robert D.
Johnson and $188,700 on Kirk J. Zimmer.
In connection with employment contracts between the Company, the Chief
Executive Officer, and the Senior Vice President, provision has been made for
the future compensation which is payable upon the completion of the earlier of
25 years ofservice or any earlier retirement age specified by the Board of
Directors by resolution. The contracts only provide compensation incentives
for the executives. At December 31, 1997, $49,164 has been accrued under
these contracts.
PERFORMANCE GRAPH
No graph is presented because there has been no established market or exchange
for the trading of the Class C Voting Common Stock or Class A Preferred Stock.
8
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases office space from the Association. During 1997, the
Company signed a one year lease, which expired December 31, 1997. Under the
terms of the lease, the lease automatically renewed for a successive one year
term and will renew for successive one year terms thereafter unless terminated
with at least 30 days notice prior to the end of the lease term. The 1998
lease requires minimum rental payments of $204,870. Total rental payments for
office space for the years December 31, 1997, 1996, and 1995 was $186,500,
$158,400, and $144,650, respectively.
The Company provides group health insurance coverage for employees of the
Association. Total premium income from the affiliate for the years ended
December 31, 1997, 1996, and 1995 was $42,517, $45,535, and $52,125,
respectively.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1998, regarding
the beneficial ownership of securities of the Company by (i) each person or
group who is known by the Company to be the beneficial owner of more than 5%
of the outstanding voting securities, (ii) all directors of the Company and
nominees for directors, (iii) each individual named in the Summary Compensation
Table, and (iv) all directors and executive officers of the Company as a group.
The Company believes that the beneficial owners of the securities listed below,
based on information furnished by such owners, have sole voting and investment
power (or shares such powers with his or her spouse), subject to the terms of
the respective classes of securities of the Company and the information
contained in the notes to the table.
9
<PAGE>
<TABLE>
<S> <C> <C> <C>
Amount & Nature
Title Name and Address of of Beneficial Percent
of Class Beneficial Owner Ownership of Class
Class B Preferred South Dakota State 1,300 100%
Medical Association(1)
1323 South Minnesota Avenue
Sioux Falls, SD 57105
Class A Preferred Lloyd Solberg, M.D. 1 .10%
Class C Common P. O. Box 5054 133,360 8.86%
Sioux Falls, SD 57117-5054
Class C Common Patrick Beckman -- --
Class A Preferred James Engelbrecht, M.D. 1 .10%
Class A Preferred Robert L. Ferrell, M.D. 1 .10%
Class C Common 31,840 2.11%
Class A Preferred Ben J. Henderson, D.O. 1 .10%
Class C Common 1,060 .07%
Class A Preferred K. Gene Koob, M.D. 1 .10%
Class A Preferred Thomas L. Krafka, M.D. 1 .10%
Class C Common 8,000 .53%
Class A Preferred Frank D. Messner, M.D. 1 .10%
Class C Common 8,800 .58%
Class A Preferred Robert R. Rietz, M.D. 1 .10%
Class C Common 2,000 .13%
Class A Preferred John Rittmann, M.D. 1 .10%
Class C Common 8,340 .55%
Class A Preferred Stephan D. Schroeder, M.D. 1 .10%
Class C Common 1,120 .07%
Class A Preferred Guy E. Tam, M.D. 1 .10%
Class C Common 4,360 .29%
Class C Common Robert D. Johnson(2) 14,560 .97%
1323 South Minnesota Avenue
Sioux Falls, SD 57105
Class C Common Thomas Nicholson -- --
Class C Common William Rossing, M.D. 8,720 .58%
Class C Common Kirk J. Zimmer 800 .05%
Class A Preferred All Directors and Executive 7 .63%
Officers as a Group
Class C Common (10 people) 78,480 5.21%
(1) The South Dakota State Medical Association is an affiliated company.
(2) Robert D. Johnson is the Chief Executive Officer of the South Dakota State
Medical Association.
</TABLE>
10
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers and directors, and persons who beneficially own more than ten percent
(10%) of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC"), and furnish copies of those reports to the Company. During 1997, one
Form 4 was filed late for Dr. Henderson and three Form 3s were filed late for
Dr. Rittmann, Dr. Engelbrecht, and Mr. Meyer. Based solely on a review of the
copies of such reports furnished to the Company, and written representations
from the executive officers and directors, the Company believes that during
1997 all other filing requirements were complied with.
OTHER MATTERS
The Board of Directors of the Company knows of no matters which may come
before the Annual Meeting other than those referred to above. However, if any
procedural or other matters should properly come before the Annual Meeting
calling for a vote of the stockholders, it is the intention of the persons
named in the enclosed proxy to vote such proxy in accordance with their best
judgment.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
McGladrey & Pullen served as the Company's independent certified public
accountants for 1997 and are serving in that capacity for 1998. It is not
expected that representatives of McGladrey & Pullen will attend the Annual
Meeting of Stockholders or have the opportunity to make a statement or respond
to questions.
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
Any proposal by a stockholder to be presented at the 1999 Annual Meeting must
be received at the Company's principal executive offices, 1323 South Minnesota
Avenue, Sioux Falls, South Dakota 57105, addressed to Guy E. Tam, M.D., the
Secretary of the Company, not later than January 31, 1999.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/Guy E. Tam, M.D.
Guy E. Tam, M.D.
Secretary
Dated: May 11, 1998
11
<PAGE>
DAKOTACARE
1323 South Minnesota Avenue
Sioux Falls, SD 57105
BALLOT AND PROXY
The undersigned hereby appoints Frank Messner, M.D., and Guy E. Tam, M.D., or
either of them as proxy of the undersigned, with full power of substitution,
for and in the name of the undersigned at the Annual Meeting of Shareholders
of DAKOTACARE to be held on June 4, 1998, at 9:15 a.m., MDT, for holders as
of April 30, 1998.
Election of Directors
You have a total of four (4) votes to cast. Please vote below for any of the
five (5) individuals nominated for directors with terms expiring in 2001. You
may vote for NO MORE THAN four (4) individuals. Your four (4) votes may all be
cast for one (1) individual or a combination of up to four (4) individuals.
Indicate beside the nominee the number of votes you wish to cast for that
individual. If you indicate more than four (4) votes in total, your ballot
will be disqualified.
Individuals Nominated by Individual Nominated by
Board of Directors Write-In
_____ Ben J. Henderson, D.O. _____ Robert R. Rietz, M.D.
_____ Thomas L. Krafka, M.D.
_____ John E. Rittmann, M.D.
_____ Stephan D. Schroeder, M.D.
Please return this ballot and proxy in the accompanying prepaid postage
envelope. The Ballot and Proxy must be received at the DAKOTACARE office and
must be postmarked no later than May 31, 1998.
___________________________________
Name
___________________________________
Date
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<S> <C> <C>
March 31, December 31,
1998 1997
ASSETS
Cash and cash equivalents $ 4,290,600 $ 4,467,754
Investments in debt securities 718,483 901,599
Certificates of deposit 744,632 843,559
Receivables 1,059,714 799,395
Prepaids and other assets 108,833 124,729
Deferred tax asset 488,000 720,000
------------- -------------
Total current assets $ 7,410,262 $ 7,857,036
------------- -------------
Investments in debt securities $ 3,888,545 $ 3,887,081
Investments in equity securities 300,500 300,000
Pledged certificates of deposit 500,000 500,000
Cash surrender value of life insurance 87,000 81,000
------------- -------------
Total long-term investments $ 4,776,045 $ 4,768,081
------------- -------------
Property and equipment, net $ 953,931 $ 963,684
------------- -------------
Deferred income taxes $ 605,000 $ 422,000
------------- -------------
$13,745,238 $14,010,801
============= =============
LIABILITIES
Reported and unreported medical claims liab. $ 4,169,625 $ 4,163,804
Unearned subscriber premiums and admin. fees 195,668 629,783
Accounts payable and accrued expenses 882,564 695,050
Contingency reserve payable 1,150,000 1,627,000
------------- -------------
Total current liabilities $ 6,397,857 $ 7,115,637
------------- -------------
Contingency reserve payable 1,711,212 1,336,846
Total liabilities $ 8,109,069 $ 8,452,483
------------- -------------
Minority interest in subsidiary $ 352,361 $ 354,160
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,115 shares $ 11,150 $ 10,690
Class B preferred stock, issued 1,300 shares 1,300 1,300
Class C common stock, issued 1,505,760 shares 15,058 15,058
Additional paid in capital 3,749,342 3,749,342
Retained Earnings 1,515,832 1,435,709
Unrealized loss on equity securities (8,874) (7,941)
------------- -------------
$ 5,283,808 $ 5,204,158
------------- -------------
$13,745,238 $14,010,801
============= =============
</TABLE>
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended March 31,
<TABLE>
<S> <C> <C>
1998 1997
REVENUES:
Premiums, net of reinsurance ceded $ 9,220,983 $ 8,473,058
Third party administration fees 827,294 961,217
Net investment income 147,631 131,702
Other income 154,643 143,453
------------- -------------
Total revenues $10,350,551 $ 9,709,430
------------- -------------
OPERATING EXPENSES:
Claims incurred, net of reinsurance recoveries $ 8,003,850 $ 7,045,461
Personnel expense 942,705 958,781
Commissions 395,930 435,319
Professional fees expense 257,551 254,509
State insurance taxes 113,774 115,580
Advertising 138,413 110,247
Occupancy expense 161,937 167,224
Office expense 137,168 155,600
Other general and administrative expenses 80,900 67,633
------------- -------------
Total operating expenses $10,232,228 $ 9,310,354
------------- -------------
Income before income taxes and minority int. $ 118,323 $ 399,076
Income taxes 40,000 132,000
------------- -------------
Income before minority interest in earnings
of subsidiary $ 78,323 $ 267,076
Minority interest in earnings of subsidiary (1,800) 11,751
------------- -------------
Net income $ 80,123 $ 255,325
============= =============
Earnings per common share $ 0.05 $ 0.17
============= =============
Weighted average number of common
shares outstanding 1,505,760 1,505,760
============= =============
</TABLE>
<PAGE>
A LETTER TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS
TO OUR SHAREHOLDERS:
1997 was a year of growth for DAKOTACARE in many respects. Financially,
total assets, total revenues, total investments, and net worth all
reached record levels. While net profits were slowed by the effects of
increased claims utilization and medical prices, the Company reduced its
administrative expense ratio by nearly two percent. Realizing the
cyclical nature of underwriting losses, we are confident that these cost
control measures will pay dividends when the claims cycle returns to a
more profitable level.
DAKOTACARE has also expanded its infrastructure - strengthening our
information systems, the expertise of our staff, and the breadth and
strength of our provider network. Three new products were developed and
introduced to the marketplace in 1997. The uniqueness of at least one
of these products has led to a great deal of customer interest, and
early sales results have been extremely encouraging. We continue to
cultivate growth both from the acquisition of new clients as well as new
product sales to existing clients. In a period of increased competition
in a crowded marketplace, DAKOTACARE has a distinct advantage in the
breadth of its product line.
Although we are proud of our past accomplishments, we have not taken a
"business as usual" approach to the market or the future. DAKOTACARE
has led the managed care movement in South Dakota since 1986, and we
strive to capitalize on the uniqueness of our organization today. On a
national scale, the pace of physician-sponsored managed care
organization start-ups has slowed due to marketplace competition and
poor operating results, and hospital-owned plans continue to struggle
financially. While these organizations wrestle with the challenge of
aligning traditional structures and goals with the demands of managed
care and risk management, DAKOTACARE has demonstrated continued success
that has received national attention. The physicians of South Dakota
are in the enviable position of exercising a measure of control over the
delivery of healthcare to their patients. Ownership in DAKOTACARE means
independence, freedom, and the best available solution for high quality
services at fair prices for your patients and our customers.
DAKOTACARE is poised to respond to the ever-increasing aspect of
consumer participation in health care decisions and information
sharing. By embracing the philosophies of maximum freedom of choice for
our members, significant and meaningful involvement of our physicians in
the establishment of practice guidelines and performance measurement,
and consumer-friendly design of our products and services, we welcome
the rapidly advancing age of "participatory healthcare."
As we step again toward the future, it is only fitting to acknowledge
the hundreds of individuals who have contributed so much to the success
of this organization. To the dedicated physicians of South Dakota, the
exceptional DAKOTACARE staff, and our committed agent force we owe an
immense debt of gratitude. Our success is your success as we continue
toward our unique destiny.
We encourage you to learn more about your company from this annual
report. We invite you to know and understand who we are and what we
do. Our commitment to our shareholders is unwavering, and we appreciate
your interest, participation, and support.
Frank D. Messner, M.D. Robert D. Johnson
/s/Frank D. Messner, M.D. /s/Robert D. Johnson
President Chief Executive Officer
South Dakota's Own DAKOTACARE 1
<PAGE>
DESCRIPTION OF BUSINESS
South Dakota State Medical Holding Company, Incorporated (the
Company, Corporation or DAKOTACARE), was incorporated in the State of
South Dakota on May 5, 1988. Its corporate offices are located at
1323 South Minnesota Avenue, Sioux Falls, South Dakota, 57105. The
Articles of Incorporation permit the Company to engage in the
development of quality comprehensive health care delivery systems; to
conduct, promote, or operate alternative health care delivery systems
and other contractual health service arrangements, including but not
limited to, traditional third party reimbursement systems, preferred
provider organizations, and health maintenance organizations (HMO).
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. Physicians who are members of the South Dakota State
Medical Association and who complete the Company's credentialing
process may participate with the Company by purchasing one share of
Class A voting preferred stock of the Company for $10. The fee for
non-members is $1,000. The South Dakota State Medical Association
owns 100% of the Class B voting preferred stock of the Company, and
through this ownership, maintains voting control of the Company.
The Company's agreements with participating physicians stipulate
compensation on a fee-for-service basis utilizing a relative value
schedule developed by the Company. This schedule assigns a value
(measured in number of units) for each individual service for which a
physician may perform and submit a bill. These values are then
multiplied by an overall value per unit assigned by the Company, and
the product is the maximum amount allowed for payment to the
physician. Actual reimbursement is at the lower of this product or
the actual billed amount. The Company, at least annually, reviews
the unit values and makes adjustments when considered necessary. The
effect of this reimbursement mechanism is to establish a maximum
allowable reimbursement, which is not dependent upon actual billed
charges. Regardless of the physician bill, reimbursement will never
exceed the maximum amount established by the relative value schedule.
Physicians also may not bill patients for any excess of the billed
charge over the amount allowed by the Company, but instead have
contractually agreed to hold the patient harmless for any such
amounts.
The Company's agreements with participating physicians provide that
up to 20% of fees for services provided, as submitted to and allowed
by the Company, may be withheld to provide a contingency reserve that
may be used to fund operations or meet other financial requirements
of the Company. Currently, the Company is withholding 15% of fees as
set by the Board of Directors. The contingency reserve withholding
is also designed to encourage efficient medical practice by the
physicians. Less expensive medical outcomes enhance net income and
consequently, an increased likelihood of contingency reserve payouts
to the physicians. The amounts withheld may be paid to the
participating physicians at the discretion of the Board of Directors
of the Company, although the Company is not contractually obligated
to pay out amounts withheld. The recorded liability was an estimate
of the projected payouts for prior amounts withheld. Management
estimates the expected amount of contingency reserves and records a
liability based upon factors such as cash flow needs, net income, and
accumulations of amounts withheld. Payments to physicians are made
at such times as the Board of Directors approves. The recorded
liability for contingency reserves at December 31, 1997 and 1996, was
$2,963,846 and $2,105,294, respectively. The Company withheld from
payment to the participating physicians $1,336,156 and $1,120,049 for
the years ended December 31, 1997 and 1996, respectively. The
liability recorded was equal to the actual amounts withheld for 1997
and 1996. The recorded liability for prior years was the estimate of
the projected payouts for the prior amounts withheld.
In 1992, the Company incorporated DAKOTACARE Administrative Services,
Incorporated (DAS), a wholly owned subsidiary of the Company. In
1994, the Company organized and then purchased a 50.11% interest in
South Dakota's Own DAKOTACARE 2
<PAGE>
DESCRIPTION OF BUSINESS (cont.)
Dakota Health Plans, Incorporated (DHP). The Articles of
Incorporation of DAS and DHP permit them to engage in the development
of third party administration (TPA) services for health and welfare
plans. DHP has subcontracted with DAS to perform substantially all
TPA activities. In January 1996, the Company incorporated DAKOTACARE
Insurance, Ltd. (DIL), a wholly owned subsidiary of the Company. DIL
was formed to accept reinsurance risk on stop-loss policies of DAS
and DHP customers, and other insurance risks.
Products and Marketing
The Company markets its products under the trade name of DAKOTACARE.
Its products include group managed health care products such as HMO
products, in addition to managed care and claims administration
services for self-insured employer groups. Also, cafeteria plan
administration and workers compensation managed care services are
offered. The Company markets its products through an exclusive
network of independent insurance agents throughout South Dakota.
The Company markets its products to employer groups with a minimum of
two covered employees and its' customers range in size from employers
of this size to its largest customer with over 2,500 employees. As
of January 1, 1998, DAKOTACARE and its subsidiaries provided health
care services to approximately 75,000 individuals.
Approximately 10.6% of the state's population and approximately 18%
of DAKOTACARE's target market of approximately 425,000 is served by
DAKOTACARE and its subsidiaries, which does not include Medicare and
Medicaid populations, federal employee groups, the individual policy
market, and other potential populations. The Company's HMO
enrollment, which had remained relatively stable from 1990 to 1995 at
approximately 20,000 enrollees, grew to nearly 25,000 in 1996 and
26,000 in 1997. Commencing in 1993, the Company began its
Administrative Services Only (ASO) business and by January 1, 1998,
had enrolled approximately 50,000 ASO enrollees, bringing the total
individuals served by the Company and its' subsidiaries to
approximately 75,000. The Company's HMO client disenrollment rate is
lower than the industry rate as a whole. All underwriting and
pricing decisions are made by the DAKOTACARE underwriting department
and reviewed by senior management. DAKOTACARE's underwriters
evaluate the prior loss history, the inherent risk characteristics,
and the demographic makeup of the applicants where appropriate.
Through a specific excess liability reinsurance agreement with
Lincoln National Health and Casualty Insurance Company, the Company
reinsures that portion of its risk in excess of $85,000 of covered
hospital inpatient expenses of any enrollee per contract year. The
policy is subject to a coinsurance provision which ranges from 50% to
90% based on average daily amounts specified in the subscriber plan,
and a $2,000,000 lifetime maximum benefit per enrollee. The Company
would be liable for any obligations that the reinsuring company is
unable to meet under the reinsurance agreement. The reinsurance
agreement also provides for enrollee benefits to be paid in the event
the Company should cease operations or become insolvent, and a
conversion privilege for all enrollees in the event of plan
insolvency and for any enrollee that moves out of the service area of
the Company.
The Company operates under a license issued by the South Dakota
Department of Commerce and Regulation, Division of Insurance, for the
operation of the health maintenance organization. DAS and DHP are
also registered as third party administrators in South Dakota and
several other states. The Company has also received certification
from the South Dakota Department of Labor as a workers' compensation
managed care plan.
The Company continually seeks out and evaluates opportunities for
future growth and expansion. These opportunities may include
acquisitions or dispositions of segments of its operations, marketing
of insurance products underwritten by other companies, the internal
development of new products and techniques for the containment of
health care costs, and the measurement of the outcomes and efficiency
of health care delivered.
South Dakota's Own DAKOTACARE 3
<PAGE>
ENROLLMENT BY COUNTY
DAKOTACARE provides an unmatched level of coverage for South Dakotans through
its several products and services and statewide sales and service locations.
<TABLE>
<S> <C>
Aurora 413
Beadle 1649
Bennett 45
Bon Homme 721
Brookings 4448
Brown 2525
Brule 462
Buffalo 6
Butte 387
Campbell 21
Charles Mix 429
Clark 419
Clay 2030
Codington 3987
Corson 54
Custer 455
Davison 3250
Day 652
Deuel 354
Dewey 46
Douglas 179
Edmunds 169
Fall River 209
Faulk 79
Grant 921
Gregory 204
Haakon 93
Hamlin 428
Hand 113
Hanson 253
Harding 21
Hughes 5098
Hutchinson 476
Hyde 34
Jackson 106
Jerauld 153
Jones 71
Kingsbury 824
Lake 1492
Lawrence 997
Lincoln 914
Lyman 174
Marshall 604
McCook 585
McPherson 53
Mead 725
Mellette 21
Miner 350
Minnehaha 17206
Moody 699
Pennington 4134
Perkins 110
Potter 161
Roberts 321
Sanborn 413
Shannon 32
Spink 1155
Stanley 621
Sully 102
Todd 40
Tripp 534
Turner 694
Union 719
Walworth 252
Yankton 2371
Ziebach 31
</TABLE>
South Dakota's Own DAKOTACARE 4
<PAGE>
PROVIDERS BY CITY
DAKOTACARE contracts with over 1800 participating providers in over 125
communities across South Dakota, as well as our national network of Centers
of Excellence which provides transplant and trauma services not available in
the state. We also have contracts with medical and pharmacy networks across
the United States which enable us to serve our clients' employees who live
outside the state.
DAKOTACARE's Provider Network is unequaled in its ability to provide true
savings to employers and freedom of choice to members.
South Dakota's Own DAKOTACARE 5
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Stock Prices
There is no active trading for shares of stock of the Company and the
stock is not listed on any exchange or over-the-counter market.
However, limited infrequent exchanges of Class C shares have occurred
directly between interested buyers and sellers and in across the desk
stock transactions with a brokerage firm. The Company does not
regularly receive price information on these transactions. The
amended and restated Articles of Incorporation of the Company
currently restrict the ownership of shares as follows: (i) the
ownership of the Company's Class A voting preferred stock is
restricted to medical or osteopathic physicians who have executed
participating agreements with the Company and may not be issued to or
held by any hospital, (ii) the ownership of the Company's Class B
voting preferred stock is restricted to the South Dakota State
Medical Association, and (iii) the ownership of the Company's Class C
non-voting common stock is restricted to (a) medical or osteopathic
physicians who have executed participating physician agreements with
the Company, (b) a trust or self-directed individual retirement
account controlled by such physicians, (c) professional corporations,
partnerships, or other entities domiciled in the state of South
Dakota, and in which a participating physician is a shareholder,
partner, or employee in the practice of medicine, (d) management
employees or agents of the Company, the South Dakota State Medical
Association, the South Dakota Foundation for Medical Care, or (e) a
spouse or child of a shareholder of the Company, if such shares were
first held by one of the persons or entities entitled to own Class C
common stock. In addition, the Class C non-voting common stock may
not be issued or transferred to any hospital or to any natural person
or entity who is not a resident or domiciliary of the state of South
Dakota.
Shares Eligible for Future Sale
The Company's Class A voting preferred stock is nontransferable and
ownership of the Company's Class B voting preferred stock is
restricted to the South Dakota State Medical Association.
Approximately 92,410 shares of the Company's Class C non-voting stock
are currently owned by the officers and directors of the Company.
All of the remaining Class C shares are eligible for resale under
Rule 144(k) of the Securities Act of 1933, as amended, subject to the
ownership restrictions contained in the Company's Amended and
Restated Articles of Incorporation. The Company intends to register
under the Act the officers' and directors' outstanding Class C non-
voting common stock to enable the public resale of such shares by the
holders thereof, subject to the ownership restrictions contained in
the Company's Amended and Restated Articles of Incorporation.
Holders
As of March 20, 1998, there were 1,069 holders of record of Class A
preferred stock, 1 holder of Class B preferred stock, and 673 holders
of record of Class C common stock. There are no options or warrants
outstanding.
Dividends
The Class A and B preferred stock are not entitled to dividends. As
approved by the stockholders at a special meeting held on December
28, 1995, the Company is not required to pay annual cumulative
dividends to its Class C common stock. The Board of Directors, at
its discretion, can elect to pay dividends in any amount subject to
availability of funds and regulatory requirements on reserves. As
long as the Company exceeds required regulatory capital as required
by the Division, there are no dividend restrictions. At December 31,
1997, the Company exceeded this requirement by approximately
$6,654,000. During 1997 and 1996, the Company paid dividends of
$331,267 and $271,037, respectively, on Class C shares.
South Dakota's Own DAKOTACARE 6
<PAGE>
Stock Repurchase Plan
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) which was
implemented 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.
Unregistered Sales of Securities
Ownership of the Company's Class A Voting Preferred Stock is
restricted to medical or osteopathic physicians who have executed
participating physician agreements with the Company. Class A
Preferred Stock is nontransferable and holders of these shares do not
receive dividends. Each such physician is issued one share of Class
A Voting Preferred Stock upon execution of his or her participation
agreement and the payment of $10 per share. Upon the termination of
a physician's participation agreement, his or her share of Class A
Preferred Stock is canceled without compensation. During 1997, the
Company issued a total of 194 shares of Class A Preferred Stock to
physicians who entered into participation agreements with the
Company. To the extent that the registration provisions of the
Securities Act of 1933, as amended, were applicable to these
transactions, the Company relied on the exemption from registration
contained in Section 4(2) of that act.
South Dakota's Own DAKOTACARE 7
<PAGE>
South Dakota's Own DAKOTACARE 8
<PAGE>
FINANCIAL REVIEW
<TABLE>
<S> <C>
Consolidated Balance Sheets Pages 10-11
Consolidated Statements of Income Page 12
Consolidated Statements of Stockholders' Equity Page 13
Consolidated Statements of Cash Flows Pages 14-15
Notes to Consolidated Financial Statements Pages 16-23
Independent Auditor's Report
on the Financial Statement Page 24
Managements Discussion and Analysis of Financial
Condition and Results of Operations Pages 25-28
Selected Financial Data Page 29
</TABLE>
South Dakota's Own DAKOTACARE 9
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a
DAKOTACARE CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
<TABLE>
<S> <C> <C>
ASSETS 1997 1996
Current Assets
Cash and cash equivalents $ 4,467,754 $ 3,422,692
Investment in securities held
to maturity (Note 5 901,599 524,511
Certificates of deposit 843,559 875,000
Receivables (Note 3) 799,395 836,364
Prepaids and other assets 124,729 138,487
Deferred income taxes (Note 8) 720,000 518,000
------------- -------------
Total current assets 7,857,036 6,315,054
------------- -------------
Long-Term Investments
Investment in securities held
to maturity (Note 5) 3,837,081 4,034,271
Investment in securities available
for sale (Note 5) 300,000 288,550
Pledged certificates of deposit (Note 5) 500,000 500,000
Certificates of deposit 50,000 159,765
Cash surrender value of life insurance 81,000 69,000
------------- -------------
4,768,081 5,051,586
------------- -------------
Property and Equipment, at cost,
net of accumulated depreciation 963,684 1,070,650
Deferred Income Taxes (Note 8) 422,000 340,000
------------- -------------
$14,010,801 $12,777,290
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
South Dakota's Own DAKOTACARE 10
<PAGE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
Current Liabilities
Reported and unreported
claims payable (Note 7) $ 4,163,804 $ 3,188,455
Unearned premiums and administration fees 629,783 854,905
Accounts payable and accrued expenses 695,050 679,421
Contingency reserves payable (Note 6) 1,627,000 950,000
------------- -------------
Total current liabilities 7,115,637 5,672,781
------------- -------------
Contingency Reserves Payable (Note 6) 1,336,846 1,155,294
------------- -------------
Minority Interest in Subsidiary 354,160 309,143
------------- -------------
Commitments and Contingencies
(Notes 4, 12 and 14)
Stockholders' Equity (Notes 9 and 15)
Class A preferred, voting, no par value,
$10 stated value, 2,500 shares authorized;
issued and outstanding 1,069 and 1,042
shares at December 31, 1997 and 1996 10,690 10,420
Class B preferred, voting, no par value,
$1 stated value, 2,500 shares authorized;
issued and outstanding 1,300 shares at
December 31, 1997 and 1996 1,300 1,300
Class C common, nonvoting, $.01 par value,
10,000,000 shares authorized; issued and
outstanding 1,505,760 shares 15,058 15,058
Additional paid-in capital 3,749,342 3,749,342
Retained earnings 1,435,709 1,877,084
Unrealized loss on securities available
for sale (7,941) (13,132)
------------- -------------
5,204,158 5,640,072
------------- -------------
$14,010,801 $12,777,290
============= =============
</TABLE>
South Dakota's Own DAKOTACARE 11
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Revenues:
Premiums $35,124,035 $29,071,245 $27,056,671
Less premiums ceded for reinsurance (369,888) (383,408) (413,420)
------------ ------------ ------------
34,754,147 28,687,837 26,643,251
Third party administration fees 3,628,131 3,786,427 3,023,384
Investment income 615,134 551,734 489,253
Other income 583,648 399,203 356,895
------------ ------------ ------------
Total revenues 39,581,060 33,425,201 30,512,783
------------ ------------ ------------
Operating expenses:
Claims incurred 31,593,161 23,528,141 20,667,382
Less reinsurance recoveries (616,801) (102,780) (362,644)
------------ ------------ ------------
30,976,360 23,425,361 20,304,738
Personnel expenses 3,804,217 3,703,067 3,224,087
Commissions 1,513,054 1,225,271 1,109,817
Professional fees expenses 970,237 1,082,816 901,026
Office expenses 673,114 713,964 680,229
Occupancy expenses 656,951 625,541 518,527
State insurance taxes 421,622 330,574 319,837
Advertising expenses 378,310 386,174 519,907
Other general and administrative
expenses 309,286 325,541 313,152
------------ ------------ ------------
Total operating expenses 39,703,151 31,818,309 27,891,320
------------ ------------ ------------
Income (loss) before income
taxes and minority interest (122,091) 1,606,892 2,621,463
Income taxes (credits) (Note 8) (57,000) 535,000 819,000
------------ ------------ ------------
Income (loss) before minority interest (65,091) 1,071,892 1,802,463
Minority interest in income of subsidiary 45,017 31,251 12,298
------------ ------------ ------------
Net income (loss) $ (110,108) $ 1,040,641 $ 1,790,165
============ ============ ============
Earnings (loss) per common share $(0.07) $0.69 $1.19
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
South Dakota's Own DAKOTACARE 12
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<S> <C> <C> <C> <C>
Unrealized
Loss on
Additional Retained Securities
Capital Paid-In Earnings Available
Stock Capital (Deficit) for Sale
Balance, December 31, 1994 $47,844 $3,726,756 $ (372,122) $(30,589)
Issuance of Class A common stock 910 - - -
Redemption of Class A
common stock (350) - - -
Dividends paid on Class C
preferred stock - - (310,563) -
Adjustment to reflect
recapitalization effective
December 29, 1995 (Note 9) (22,586) 22,586 - -
Decrease in unrealized loss on
securities available for sale - - - 27,540
Net income - - 1,790,165 -
-------- ----------- ----------- ---------
Balance, December 31, 1995 25,818 3,749,342 1,107,480 (3,049)
Issuance of Class A
preferred stock 990 - - -
Redemption of Class A
preferred stock (330) - - -
Issuance of Class B
preferred stock 300 - - -
Dividends paid on Class C common
stock - - (271,037) -
Increase in unrealized loss on
securities available for sale - - - (10,083)
Net income - - 1,040,641 -
-------- ----------- ----------- ---------
Balance, December 31, 1996 26,778 3,749,342 1,877,084 (13,132)
Issuance of Class A preferred
stock 1,940 - - -
Redemption of Class A preferred
stock (1,670) - - -
Dividends paid on Class C
common stock - - (331,267) -
Decrease in unrealized loss on
securities available for sale - - - 5,191
Net (loss) - - (110,108) -
-------- ----------- ----------- ---------
Balance, December 31, 1997 $27,048 $3,749,342 $1,435,709 $ (7,941)
</TABLE>
See Notes to Consolidated Financial Statements.
South Dakota's Own DAKOTACARE 13
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Cash Flows From Operating Activities
Net income (loss) $ (110,108) $ 1,040,641 $ 1,790,165
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation 319,493 318,297 251,222
Loss on disposal of property and equipment - 1,664 -
Minority interest in income of subsidiary 45,017 31,251 12,298
Amortization of discounts and premiums
on investments and certificates of
deposit, net (139,675) (103,151) (100,888)
(Increase) decrease in receivables 36,969 (301,794) (68,892)
(Increase) decrease in prepaids
and other assets 13,758 (66,530) (6,111)
(Increase) in deferred income taxes (284,000) (57,000) (120,000)
Increase (decrease) in reported and
unreported claims payable 975,349 478,455 (154,000)
Increase (decrease) in accounts payable
and accrued expenses 15,629 (107,587) (21,028)
Increase (decrease) in unearned premiums
and administration fees (225,122) 39,252 3,692
Increase in contingency reserves payable 858,552 150,625 257,744
------------ ------------ ------------
Net cash provided by operating activities 1,505,862 1,424,123 1,844,202
------------ ------------ ------------
Cash Flows From Investing Activities
Purchase of securities available for sale (6,259) (5,933) (5,660)
Held to maturity securities:
Matured 525,000 1,200,000 1,147,884
Purchased (726,030) (1,983,309) (1,386,995)
Repayments on collateralized
mortgage obligations 157,013 133,471 45,409
Proceeds from maturities of certificates
of deposit 1,470,000 1,104,900 1,200,000
Purchase of certificates of deposit (1,325,000) (1,531,959) (1,604,900)
(Increase) in cash surrender value of
life insurance (12,000) (18,000) (11,000)
Purchase of property and equipment (231,238) (216,720) (637,994)
Proceeds from sale of property
and equipment 18,711 - -
------------ ------------ ------------
Net cash (used in) investing activities (129,803) (1,317,550) (1,253,256)
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
South Dakota's Own DAKOTACARE 14
<PAGE>
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Cash Flows From Financing Activities
Proceeds from issuance of capital stock $ 1,940 $ 1,290 $ 910
Redemption of capital stock (1,670) (330) (350)
Payment of dividends (331,267) (271,037) (310,563)
Minority investment in subsidiary - - 15,000
Net cash (used in) financing activities (330,997) (270,077) (295,003)
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents 1,045,062 (163,504) 295,943
Cash and Cash Equivalents
Beginning 3,422,692 3,586,196 3,290,253
------------ ------------ ------------
Ending $ 4,467,754 $ 3,422,692 $ 3,586,196
============ ============ ============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Income taxes, net of refunds $ 2,000 $ 790,000 $ 881,008
Supplemental Disclosures of Noncash
Investing and Financing Activities
(Increase) decrease in unrealized loss
on securities available for sale 5,191 (10,083) 27,540
(Decrease) in Class C common stock due
to recapitalization - - (22,586)
Increase in additional paid-in capital
due to recapitalization - - 22,586
</TABLE>
South Dakota's Own DAKOTACARE 15
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: South Dakota State Medical Holding Company,
Incorporated (the Company), is a South Dakota licensed health
maintenance organization (HMO) d/b/a DAKOTACARE. The Company has
contracted with hospitals, physicians and other providers to provide
health care services to policyholders. Policyholders are employee
groups located in South Dakota.
A summary of the Company's significant accounting policies follows:
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company, its wholly-owned
subsidiaries, DAKOTACARE Administrative Services, Incorporated (DAS),
and DAKOTACARE Insurance, LTD. (DIL), and its 50.11% owned
subsidiary, Dakota Health Plans, Incorporated (DHP). DAS & DHP's
primary activity is as third party administrators of health care
plans for independent employer companies. DIL's primary activity is
in providing reinsurance quota share excess medical stop loss
coverage to DAS and DHP's self funded customers. All intercompany
balances and transactions have been eliminated in consolidation.
Basis of financial statement presentation: The consolidated
financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet. Actual results could differ significantly
from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
liabilities for reported and unreported claims payable.
Cash and cash equivalents: For purposes of reporting the statements
of cash flows, the Company includes as cash equivalents all cash
accounts and highly liquid debt instruments which are not subject to
withdrawal restrictions or penalties. Certificates of deposit are
considered investments as all have been purchased with maturities in
excess of ninety days.
Investment securities: Investment securities classified as held to
maturity are those debt securities that the Company has both the
intent and ability to hold to maturity regardless of changes in
market condition, liquidity needs, or changes in general economic
conditions. These securities are stated at amortized cost.
Investment securities classified as available for sale are marketable
equity securities and those debt securities that the Company intends
to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available
for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Investment securities
available for sale are carried at fair value. Unrealized gains or
losses are reported as increases or decreases in equity, net of the
related deferred tax effect.
Premiums and discounts on investments in debt securities are amortized over
their contractual lives, except for collateralized mortgage obligations, for
which prepayments are probable and predictable, which are amortized over
the estimated expected repayment terms of the underlying mortgages.
The method of amortization results in a constant effective yield on
those securities (the interest method). Interest on debt securities
is recognized in income as accrued. Realized gains and losses on the
sale of investment securities are determined using the specific
identification method.
Depreciation: Building and building improvements are depreciated
using straight-line methods over the estimated useful lives of the
assets, which are twenty to thirty-nine years. Depreciation on
furniture, equipment and automobiles is computed using straight-line
methods based upon the estimated useful lives of the respective
assets, which is principally five to seven years. A summary of
property and equipment is as follows:
<TABLE>
<S> <C> <C>
1997 1996
Furniture, equipment and automobiles $ 2,253,358 $ 2,190,608
Building and building improvements 62,609 -
Other 131,967 72,817
------------- -------------
2,447,934 2,263,425
Less accumulated depreciation 1,484,250 1,192,775
------------- -------------
$ 963,684 $ 1,070,650
============= =============
</TABLE>
South Dakota's Own DAKOTACARE 16
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue recognition: Premiums are billed in advance of their
respective coverage periods. Income from such premiums is recorded
as earned during the coverage period; the unearned portion of
premiums received prior to the end of the coverage period is recorded
as unearned premiums. Revenue is reduced by reinsurance premiums
ceded to reinsurance companies. Third party administration fees are
recorded as earned in the period in which the related services are
performed. The unearned portion of fees received but not earned
prior to the end of the contract is recorded as unearned
administration fees.
Reported and unreported claims payable: The coverage offered by the
Company is on an occurrence basis which provides for payment of
claims which occur during the period of coverage regardless of when
the claims are reported. Reported and unreported claims payable
consist of actual claims reported to be paid and estimates of health
care services rendered but not reported and to be paid. The
liabilities for reported and unreported claims payable have been
estimated by utilizing statistical information developed from
historical data, current enrollment, health service utilization
statistics and other related information. In addition, the Company
uses the services of an independent actuary in the determination of
its year end liabilities. The accruals are continually monitored and
reviewed and as adjustments to the estimated liabilities become
necessary, such adjustments are reflected in current operations.
Income taxes: Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
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. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
Earnings (loss) per common share: Earnings per common share for 1995
has been restated from the amount previously reported to give
retroactive effect to the recapitalization discussed in Note 9.
Earnings (loss) per common share is calculated in accordance with the
provisions of FASB Statement No. 128, "Earnings Per Share", which was
effective for 1997. This Statement establishes standards for
computing and presenting earnings (loss) per share (EPS). It
replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on
the face of an income statement for all entities with complex capital
structures. This Statement requires restatement of all prior-period
EPS data presented. All references to earnings (loss) per share in
the consolidated financial statements are to basic earnings (loss)
per share. No restatement of EPS was necessary as a result of the
application of Statement No. 128. Earnings (loss) per common share
was calculated by dividing net income (loss) by the weighted average
number of Class C common shares outstanding during each period. The
weighted average number of Class C common shares outstanding was
1,505,760 in 1997, 1996 and 1995, respectively.
Note 2. Fair Value of Financial Instruments
Financial Accounting Standards Board (FASB) Statement No. 107,
"Disclosures About Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments from
its disclosure requirements.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and cash equivalents and certificates of deposit: The carrying
amount approximates fair value because of the relative short maturity
of those instruments.
Investments: Fair values for the Company's investment securities are
based on quoted market prices. At December 31, 1997, the carrying
amount and fair value of the Company's investment securities was
$5,038,680 and $5,141,045, respectively. At December 31, 1996, the
carrying amount and fair value of the Company's investment securities
was $4,847,332 and $4,872,684, respectively.
Accrued interest receivable: The carrying amount approximates fair
value due to the nature of the balances recorded.
South Dakota's Own DAKOTACARE 17
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Receivables
Receivables are recorded at net estimated collectible amounts and
consist of the following:
<TABLE>
<S> <C> <C>
1997 1996
Commissions $ 4,300 $ 31,250
Drug manufacturer chargebacks 68,850 86,547
Premiums 151,298 120,363
Subrogation, net of recovery expenses 75,000 75,000
Interest 30,367 34,689
Reinsurance (Note 4) 229,486 92,579
Income taxes 22,000 223,000
Funds withheld by ceding insurer 118,804 77,455
Other 99,290 95,481
------------ -------------
799,395 836,364
Less allowance for doubtful accounts - -
------------ -------------
$ 799,395 $ 836,364
============ =============
</TABLE>
Note 4. Reinsurance
The Company's policy is to reinsure that portion of risk in excess of
$85,000 of covered hospital inpatient expenses of any enrollee per
contract year, subject to a coinsurance provision which ranges from
50% to 90% based on average daily amounts specified in the plan, and
a $2,000,000 lifetime maximum benefit per enrollee. The Company
would be liable for any obligations that the reinsuring company is
unable to meet under the reinsurance agreement.
This reinsurance agreement also provides for enrollee benefits to be
paid in the event the Company should cease operations or become
insolvent, and a conversion privilege for all enrollees in the event
of plan insolvency and for any enrollee that moves out of the service
area of the Company.
Note 5. Investment Securities
Investment securities at December 31, 1997 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
Debt securities held to maturity:
Obligations of U.S. treasury,
Government agencies and
corporations $1,630,630 $ 36,001 $ - $1,666,631
Obligations of state and political
subdivisions 2,760,837 69,718 (483) 2,830,072
U.S. governmental agency
collateralized mortgage
obligations 347,213 151 (3,022) 344,342
----------- ---------- ---------- -----------
$4,738,680 $ 105,870 $ (3,505) $4,841,045
Equity securities available
for sale:
Bond mutual funds $ 307,941 $ - $ (7,941) $ 300,000
</TABLE>
South Dakota's Own DAKOTACARE 18
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair values of debt securities, by
contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<S> <C> <C>
December 31, 1997
Amortized Estimated
Cost Fair Value
Due in one year $ 901,599 $ 903,074
Due after one year through five years 2,093,776 2,126,987
Due after five years through ten years 1,322,886 1,388,931
Due after ten years 73,206 77,711
----------- -----------
4,391,467 4,496,703
Collateralized mortgage obligations 347,213 344,342
----------- -----------
$4,738,680 $4,841,045
=========== ===========
</TABLE>
Investment securities at December 31, 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
Debt securities held to maturity:
Obligations of U.S. treasury,
Government agencies and
corporations $1,966,481 $ 17,480 $ (491) $1,983,470
Obligations of state and political
subdivisions 2,090,031 37,004 (19,136) 2,107,899
U.S. governmental agency
collateralized mortgage
obligations 502,270 - (9,505) 492,765
----------- ---------- ---------- -----------
$4,558,782 $ 54,484 $ (29,132) $4,584,134
Equity securities available
for sale:
Bond mutual funds $ 301,682 $ - $ (13,132) $ 288,550
</TABLE>
There were no sales of debt or equity securities during the years
ended December 31, 1997, 1996 or 1995. At December 31, 1997 and
1996, no individual investments in obligations of state and political
subdivisions exceeded 10% of the Company's equity.
At December 31, 1997 and 1996, the Company had certificates of
deposit of $500,000 on deposit with the South Dakota Department of
Commerce and Regulation, Division of Insurance (Division of
Insurance), to meet the deposit requirement of state insurance laws.
Note 6. Contingency Reserves Payable
The Company's agreements with participating physicians provide that
up to 20% of fees for services provided, as submitted to the Company,
may be withheld to provide a contingency reserve that may be used to
fund operations or meet other financial requirements of the Company.
Effective January 1, 1994, the percentage withheld from participating
physicians was reduced from 20% to 15%. The amounts withheld may be
paid to the participating physicians at the discretion of the Board
of Directors of the Company, although the Company is not
contractually obligated to pay out amounts withheld. Management
estimates the expected amount of contingency reserves to be paid to
participating physicians and records a liability based upon factors
such as cash flow needs, net income, and accumulations of amounts
withheld. Payments to physicians are made at such times as the Board
of Directors approves payouts. The recorded liability is equal to
actual amounts withheld for the years ended December 31, 1997 and
1996. The recorded liability for years prior to 1996 was an estimate
of the projected payouts for corresponding amounts withheld.
Payments to physicians in 1996 exceeded amounts accrued by $71,253,
which was accounted for as a change in accounting estimate.
South Dakota's Own DAKOTACARE 19
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Reported and Unreported Claims Payable
Activity in the liability for reported and unreported claims payable
is summarized as follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Balance at January 1 $ 3,188,455 $ 2,710,000 $ 2,864,000
------------ ------------ ------------
Incurred related to:
Current year 30,237,417 23,350,462 20,309,552
Prior years 738,943 74,899 (4,814)
------------ ------------ ------------
Total incurred 30,976,360 23,425,361 20,304,738
------------ ------------ ------------
Paid related to:
Current year 26,217,052 20,247,806 17,425,015
Prior years 3,920,866 2,776,707 2,980,476
------------ ------------ ------------
Total paid 30,137,918 23,024,513 20,405,491
------------ ------------ ------------
Less reinsurance recoverables at
January 1 (92,579) (14,972) (68,219)
Plus reinsurance recoverables at
December 31 229,486 92,579 14,972
------------ ------------ ------------
Balance at December 31 $ 4,163,804 $ 3,188,455 $ 2,710,000
============ ============ ============
</TABLE>
F-14
<PAGE>
Note 8. Income Tax Matters
The Company is taxable as a property and casualty insurance company
under section 831 of the Internal Revenue Code. The code prescribes
certain adjustments to book income to arrive at taxable income which
include adjustments to unearned premiums, discounting of loss
reserves and proration of tax-exempt income. In addition, increases
in contingency reserves, which are included as claims expenses, are
not allowable as tax deductions until actually paid. The Company
files a consolidated income tax return with its wholly-owned
subsidiaries, DAS and DIL.
The components of income tax expense as of December 31 are as
follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Current $ 227,000 $ 592,000 $ 939,000
Deferred (credits) (284,000) (57,000) (120,000)
----------- ----------- -----------
$ (57,000) $ 535,000 $ 819,000
=========== =========== ===========
</TABLE>
Total income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 35 percent to income
before income taxes as a result of the following:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Computed "expected" tax expense (credits) $ (42,700) $ 562,400 $ 917,500
Tax exempt interest (38,861) (30,771) (28,760)
Lobbying 9,105 6,825 5,664
Effect of tax rate brackets and other 15,456 (3,454) (75,404)
----------- ----------- -----------
$ (57,000) $ 535,000 $ 819,000
=========== =========== ===========
</TABLE>
South Dakota's Own DAKOTACARE 20
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax assets consist of the following components at
December 31:
<TABLE>
<S> <C> <C>
1997 1996
Deferred tax assets:
Contingency reserves payable $ 1,008,000 $ 716,000
Reported and unreported claims payable 42,000 62,000
Unearned premiums 43,000 53,000
Accrued expenses 65,000 78,000
Net operating loss carryforward of subsidiary 47,000 -
------------ ------------
1,205,000 909,000
Less valuation allowance - -
------------ ------------
1,205,000 909,000
------------ ------------
Deferred tax liability:
Property and equipment (63,000) (51,000)
------------ ------------
$ 1,142,000 $ 858,000
============ ============
</TABLE>
Reflected on the accompanying balance sheets as follows:
<TABLE>
<S> <C> <C>
1997 1996
Current assets $ 720,000 $ 518,000
Noncurrent assets 422,000 340,000
------------ ------------
$ 1,142,000 $ 858,000
============ ============
</TABLE>
Note 9. Capital Stock
On December 28, 1995, the holders of Class A, B, and C stock approved
a recapitalization plan which became effective December 29, 1995.
Under the recapitalization plan, the former Class A voting common
stock became Class A voting preferred stock. The Class A preferred
stock is not entitled to receive dividends or other distributions,
except for redemption by the Company. In the event of a liquidation,
each share of Class A preferred stock would be given priority over
Class B and C stock and would be entitled to receive a preferential
payment in an amount up to (and not to exceed) its stated value of
$10 per share. The Class A preferred stock continues to be
restricted to ownership by medical and osteopathic physicians who
have executed a participating physician agreement with the Company
and may not be issued to or held by a hospital.
Also under the recapitalization plan, the former Class B voting
common stock became Class B voting preferred stock. The Class B
preferred stock continues to be restricted to ownership by the South
Dakota State Medical Association, an affiliated company, and is not
entitled to receive dividends.
Pursuant to the recapitalization plan, the former Class C nonvoting
preferred stock became Class C nonvoting common stock. The former
Class C preferred stock had been entitled to cumulative dividends of
a minimum of $6.00 each year and had preference in a liquidation. As
of December 31, 1997, there were no cumulative unpaid dividends. As
a result of the recapitalization, the new Class C common stock is not
entitled to cumulative dividends and has no preference in a
liquidation. The Class C common stock is restricted to ownership by
the following persons or entities: (1) physicians entitled to
ownership of Class A stock, (2) a trust or self-directed individual
retirement account controlled by a physician entitled to ownership of
Class A stock, (3) a professional corporation, partnership or other
entity domiciled in the State of South Dakota and in which a
physician entitled to ownership of Class A stock is a shareholder,
partner, or employee in the practice of medicine, (4) management,
employees or agents of the Company, the South Dakota State Medical
Association, or the South Dakota Foundation for Medical Care, or (5)
the spouse or children of such physician or other person set forth in
(1) or (4) above.
South Dakota's Own DAKOTACARE 21
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 29, 1995, the Company reduced the par value of its Class
C common stock from $1 per share to $.01 per share and issued the
1,468,116 additional shares necessary to effect a 40-for-1 common
stock split. The earnings per common share for the year ended
December 31, 1995 has been retroactively adjusted for this split as
if it occurred on January 1, 1995.
Regulatory capital as required by the Division of Insurance at
December 31, 1997 and 1996 was $200,000 on a statutory basis of
accounting, which the Company exceeded by approximately $6,654,000
and $6,513,000, respectively. As long as the Company exceeds
required regulatory capital, it is not restricted by the Division of
Insurance in the amount of dividends it may pay.
Note 10. Transactions With Affiliate
The Company leases office space from the South Dakota State Medical
Association (Association). During 1997, the Company signed a one
year lease which expired on December 31, 1997. Under the terms of
the lease, the lease automatically renewed for a successive one year
term and will renew for successive one year terms thereafter unless
terminated with at least 30 days notice prior to the end of the lease
term. The 1998 lease requires minimum rental payments of $204,870.
Total rental payments for office space for the years ended December
31, 1997, 1996 and 1995 were $186,500, $158,400 and $144,650,
respectively.
The Company provides group health insurance coverage for employees of
the Association. Total premium income from the affiliate for the
years ended December 31, 1997, 1996 and 1995 was $42,517, $45,535 and
$52,125, respectively.
Note 11. Retirement Plan and Deferred Compensation
The Company is included in a qualified money-purchase pension plan
with the South Dakota State Medical Association and the South Dakota
Foundation for Medical Care. This multiple-employer plan covers
employees who have attained age 21, and have completed one year of
service. Contributions, which are discretionary by the Board of
Directors, were an amount equal to 11.5% of the participants'
compensation for the twelve-month periods ending September 1, 1997,
1996 and 1995. Retirement plan expense for the years ended December
31, 1997, 1996 and 1995 was $216,364, $245,104 and $182,175,
respectively.
In connection with employment contracts between the Company and
certain officers, provision has been made for the future compensation
which is payable upon the completion of the earlier of 25 years of
service to the Company and related organizations or attainment of the
age of 65 or any earlier retirement age specified by the Board of
Directors by resolution. At December 31, 1997 and 1996, $49,164 and
$40,851, respectively, was accrued under these contracts.
Note 12. Year 2000 Issue
The Year 2000 issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. The Company is
heavily dependent on computer processing in its business activities
and the Year 2000 issue creates risk for the Company from unforeseen
problems in the Company's computer system and from third parties with
whom the Company processes financial information. Such failures of
the Company's computer system and/or third parties' computer systems
could have a material impact on the Company's ability to conduct its
business. In accordance with its remediation plan to resolve the
Year 2000 issue, the Company has substantially completed a
preliminary review of its computer systems to identify the systems
that could be affected by the Year 2000 issue. Based on the
Company's review of its computer systems, management believes the
cost of the remediation effort to make the systems year 2000
compliant is approximately $45,000. Management expects $30,000 and
$15,000 to be incurred in 1998 and 1999, respectively. Such costs
will be charged against income as they are incurred.
Note 13. FASB Statements
The FASB issued Statement No. 130, "Reporting Comprehensive Income".
This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.
This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement
requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This Statement is
effective for fiscal years beginning after December 15, 1997, and
will require financial statements of earlier periods that are
presented for comparative purposes to be reclassified.
South Dakota's Own DAKOTACARE 22
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The FASB issued Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This Statement establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
This Statement supersedes FASB Statement No. 14, "Financial Reporting
for Segments of a Business Enterprise", but retains the requirement
to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries",
to remove the special disclosure requirements for previous
unconsolidated subsidiaries. This Statement is effective for
financial statements for periods beginning after December 15, 1997.
Note 14. Litigation
The Company is involved in legal actions in the ordinary course of
its business. Although the outcome of any such legal actions cannot
be predicted, in the opinion of management, there is no legal
proceeding pending against or involving the Company for which the
outcome is likely to have a material adverse effect upon the
consolidated financial position or results of operations of the
Company.
Note 15. Subsequent Event
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) which was
implemented 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 of the Program in compliance with applicable laws.
South Dakota's Own DAKOTACARE 23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
South Dakota State Medical Holding Company, Incorporated
d/b/a DAKOTACARE
Sioux Falls, South Dakota
We have audited the accompanying consolidated balance sheets of South
Dakota State Medical Holding Company, Incorporated d/b/a DAKOTACARE
and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of South Dakota State Medical Holding Company, Incorporated
d/b/a DAKOTACARE and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
_/s/_McGladrey & Pullen, LLP
Sioux Falls, South Dakota
March 18, 1998
South Dakota's Own DAKOTACARE 24
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following operating statistics are presented for DAKOTACARE's
operation as a health maintenance organization only and do not
include the operations of its subsidiaries for the years ended
December 31, 1997, 1996, 1995, and 1994. The results indicated in
the following tables are not indicative of future operating results.
The combined ratio, which reflects underwriting results but not
investment and ancillary income, is a traditional measure of the
underwriting performance of a health maintenance organization. A
combined ratio of less than 100% indicates underwriting profitability
while a combined ratio in excess of 100% indicates an underwriting
loss.
<TABLE>
<S> <C> <C> <C> <C>
Year Ended December 31,
1997 1996 1995 1994
Loss ratio 88.7% 81.7% 76.2% 74.4%
Expense ratio 14.5 16.3 18.4 17.1
------ ----- ----- -----
Combined ratio 103.2% 98.0% 94.6% 91.6%
====== ===== ===== =====
</TABLE>
The loss ratio is computed by dividing the net claims expense into
net premium revenue. The Company's results of operations will be
affected by the changes in the loss ratio. The loss ratio may vary
from period to period depending principally on claims experience.
The expense ratio is computed by taking the sum of the remaining
operating expenses of the health maintenance organization divided by
net premium revenue.
The increase in the loss ratio was due to increased utilization,
increased costs for physicians and hospitals in 1997, and lower
premium increases due to competitive market forces. The decrease in
expense ratio is due to increased premium volume and decreased
expenses in many areas due to concentrated cost-cutting efforts. See
- - Comparison of Years Ended December 31, 1997 and December 31, 1996
and Comparison of Years Ended December 31, 1996 and December 31,
1995.
RESULTS OF OPERATIONS
General
The following results of operations include the operations of
DAKOTACARE and its subsidiaries for the years ended December 31,
1997, 1996, and 1995.
COMPARISON OF YEARS DECEMBER 31, 1997 AND DECEMBER 31, 1996
General
The Company's net income decreased $1,150,749 to a loss of $110,108
for the year ended December 31, 1997, as compared to income of
$1,040,641 for the year ended December 31, 1996, representing a
110.6% decrease. This decrease was primarily due to an increase in
claims expenses of $7,550,999 which was offset by an increase of
$6,155,859 in total revenues and a $592,000 decrease in income taxes.
Revenues
Total revenues increased $6,155,859, or 18.4%, for the year ended
December 31, 1997, as compared to December 31, 1996. Revenues from
net premiums generated by the health maintenance organization
increased $5,858,240. This increase is attributable to a 19.4%
increase in the number of enrollees for the year ended December 31,
1997, as compared to December 31, 1996, and a 1.1% increase in the
premiums earned per enrollee. The increase in revenue per enrollee
was in line with national averages. The increase in enrollees was
due to the continued emphasis on small group (2 to 50 employees)
business and competitive rates in relation to the local marketplace.
Revenues from the third party administration fees decreased by
$158,296 as enrollees participating in the Company's subsidiaries'
TPA plans decreased. Investment income increased $63,400 due
primarily to an increase in the amount of assets invested.
South Dakota's Own DAKOTACARE 25
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont.)
Operating Expenses
Total operating expenses increased $7,884,842, or 24.8%, for the year
ended December 31, 1997, as compared to December 31, 1996. The
change was due primarily to an increase in claims incurred and
commission expenses, but was offset by a reduction of professional
fees.
Net claims expense increased by $7,550,999, or 32.2%. Average claims
per enrollee increased by 10.4% in 1997 as compared to 1996 while the
number of enrollees increased by 19.4%. Unusually high dollar claims
incurred in late 1996 were paid in 1997, which caused the average
claims per enrollee, claims expense and unreported claims payable to
increase more than expected. Commissions expense increased by
$287,783, or 23.5%, in 1997 as compared to 1996 due to the increased
activity of the HMO. The Company's subsidiaries decreased the number
of enrollees covered under various contracts from approximately
64,000 at January 1, 1997, to approximately 50,000 at January 1,
1998. Substantially all of the decrease occurred on renewals for
January 1, 1998, which kept the 1997 overall member months similar to
the member months for 1996. Professional fees expense decreased
$112,579, or 10.4%, in 1997 as compared to 1996. This was primarily
due to state legislation passed in 1997, which spread the cost of
each five-year exam for domiciled companies to all insurance
companies registered in the State. This caused a reduction in the
amount of accrued exam fees needed and thus reduced the overall
expense. Also, professional fees decreased by using consultants less
and by performing more duties in house.
Income Taxes
Income tax expense (credits) represents 46.7% and 33.3% of income
(loss) before income taxes and minority interest for the years ended
December 31, 1997 and 1996, respectively. In 1997, permanent tax
differences and the effect on the tax rate brackets increased the
estimated credits, thus increasing the related percentage. As a
result of previous levels of pretax earnings and the availability of
recoverable income taxes paid in recent years, no valuation allowance
is required for recorded deferred tax assets. See Note 8 of the
Notes to Consolidated Financial Statements.
COMPARISON OF YEARS DECEMBER 31, 1996 AND DECEMBER 31, 1995
General
The Company's net income decreased $749,524 to $1,040,641 for the
year ended December 31, 1996, as compared to $1,790,165 for the year
ended December 31, 1995, representing a 41.9% decrease. This
decrease was primarily due to an increase in claims expenses of
$3,120,623 which was offset by an increase of $2,912,418 in total
revenues and a $284,000 decrease in income taxes.
Revenues
Total revenues increased $2,912,418, or 9.5%, for the year ended
December 31, 1996, as compared to December 31, 1995. Revenues from
net premiums generated by the health maintenance organization
increased $2,044,586. This increase is attributable to a 23.1%
increase in the number of enrollees for the year ended December 31,
1996, as compared to December 31, 1995, and a 2.1% increase in the
premiums earned per enrollee. The increase in revenue per enrollee
was in line with national averages. The increase in enrollees was
primarily due to an emphasis on small group (2 to 50 employees)
business and competitive rates in relation to the local marketplace.
Revenues from the third party administration fees increased by
$763,043 as the Company's subsidiaries increased the number of
enrollees participating in these plans. Net investment income
increased $62,481 due primarily to an increase in the amount of
assets invested.
South Dakota's Own DAKOTACARE 26
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont.)
Operating Expenses
Total operating expenses increased $3,926,989, or 14.1%, for the year
ended December 31, 1996, as compared to December 31, 1995. This was
due to an increase in claims incurred, personnel expense,
professional fees expense, and office expense.
Net claims expense increased by $3,120,623, or 15.4%. Average claims
per enrollee increased by 9.6% in 1996 as compared to 1995 while the
number of enrollees increased by 23.1%. During 1996, the Company
paid out $71,253 in contingency reserve payments in excess of the
amount originally estimated. This amount was expensed in 1996.
Personnel expense increased by $478,980, or 14.9%, in 1996 as
compared to 1995 due to the increased activity of its subsidiaries
and additional employees for the Company as it expands its business.
The Company's subsidiaries have increased the number of enrollees
covered under various contracts from approximately 60,000 at January
1, 1996, to approximately 64,000 at January 1, 1997. Professional
fees expense increased $181,790, or 20.2%, in 1996 as compared to
1995. This was primarily due to increased consulting work being
performed and an increase in utilization review by outside companies
with increased enrollment. Office expense increased $33,735, or 5.0%,
primarily due to increases for printing, postage, and telephone
expenses as a result of the increase in enrollment in DAS and DHP.
Income Taxes
Income tax expense represents 33.3% and 31.24% of income before
income taxes and minority interest for the years ended December 31,
1996 and 1995, respectively. As a result of existing levels of
pretax earnings and the availability of recoverable income taxes paid
in recent years, no valuation allowance is required for recorded
deferred tax assets. See Note 8 of the Notes to Consolidated
Financial Statements.
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 cost
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 $81,739 to
$1,505,862 for the year ended December 31, 1997, as compared to 1996.
Net cash provided by operating activities increased primarily due to
an increase in reported and unreported claims payable and an increase
in contingency reserves payable since December 31, 1996. The net
cash provided by operating activities was offset by a net loss, an
increase in deferred income taxes receivable, and a decrease in
unearned premiums and administration fees since December 31, 1996.
Other uses of cash and cash equivalents were for the payment of
dividends and purchases of leasehold improvements and equipment. The
Company has invested cash not currently needed in operations into
intermediate-term bonds, consisting primarily of municipal bonds and
U.S. government securities. At December 31, 1997, the Company has
<PAGE>16
certificates of deposit of $500,000 on deposit with the Division to
meet the deposit requirements of state insurance laws.
The Company is not contractually obligated to pay out contingency
reserves withheld but has historically elected to pay out a majority
of amounts withheld. Typically, two years lapse from the date the
contingency reserves are withheld to the date which the corresponding
amounts are paid to the participating physicians.
The Company believes that cash flows generated by operations,
withholding of contingency reserves, cash on hand, and short-term
investment balances will be sufficient to fund operations, pay out
projected contingency reserves payable, and pay dividends on the
Class C common stock.
South Dakota's Own DAKOTACARE 27
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (cont.)
INFLATION
A substantial portion of the Company's operating expenses consist of
health care costs, which, in the general economy, have been rising at
a rate greater than that of the overall Consumer Price Index. The
Company believes that its cost control measures and risk sharing
arrangements reduce the effect of inflation on such costs.
Historically, market conditions and the regulatory environment in
which the Company operates have permitted the Company to offset a
portion or all of the impact of inflation on the cost of health care
benefits through premium increases. If the Company was not able to
continue to increase premiums, a material adverse impact on the
Company's operations could result. Inflation does not have a material
effect on the remainder of the Company's operating expenses.
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.
The Year 2000 issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. The Company is
heavily dependent on computer processing in its business activities
and the Year 2000 issue creates risk for the Company from unforeseen
problems in the Company's computer system and from third parties with
whom the Company processes financial information. Such failures of
the Company's computer system and/or third parties' computer systems
could have a material impact on the Company's ability to conduct its
business. In accordance with its remediation plan to resolve the
Year 2000 issue, the Company has substantially completed a
preliminary review of its computer systems to identify the systems
that could be affected by the Year 2000 issue. Based on the
Company's review of its computer systems, management believes the
cost of the remediation effort to make the systems year 2000
compliant is approximately $45,000. Management expects $30,000 and
$15,000 to be incurred in 1998 and 1999, respectively. Such costs
will be charged against income as they are incurred.
South Dakota's Own DAKOTACARE 28
<PAGE>
SELECTED FINANCIAL DATA
The following information for the Company is as of and for the years
ended December 31, 1997, 1996, 1995, 1994, and 1993 (dollars in
thousands, except per share data):
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1997 1996 1995 1994 1993
Income Statement Data:
Net premiums $34,754 $28,688 $26,643 $26,790 $24,936
Third party administration fees 3,628 3,786 3,023 1,143 462
Investment income 615 552 489 321 208
Total revenues 39,581 33,425 30,513 28,497 25,790
Net claims incurred 30,976 23,425 20,305 19,937 19,046
Other operating expenses 8,727 8,393 7,587 5,609 4,640
Income (loss) before
income taxes (122) 1,607 2,621 2,951 2,103
Net income (loss) (110) 1,041 1,790 1,906 1,433
======== ======== ======== ======== ========
Earnings (loss) per common share(1) $ (.07) $ 0.69 $ 1.19 $ 1.27 $ 1.08
======== ======== ======== ======== ========
Balance Sheet Data:
Invested assets and cash $10,981 $ 9,874 $ 8,843 $ 7,804 $ 5,882
Total assets 14,011 12,777 11,425 9,803 7,568
Reported and unreported
claims payable 4,164 3,188 2,710 2,864 2,558
Contingency reserves payable 2,964 2,105 1,955 1,697 1,635
Long-term debt (including
current maturities) -- -- -- -- 572
Total liabilities 8,807 7,137 6,545 6,432 5,667
Stockholders' Equity 5,204 5,640 4,880 3,372 1,901
</TABLE>
(1) Earnings per common share for 1995 and prior years have been restated
from amounts previously reported to give retroactive effect to the
recapitalization discussed in Note 9 of the Notes to Consolidated Financial
Statements. Earnings(loss) per common share is calculated in accordance
with the provisions of Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share", which was effective for 1997. This Statement
establishes standards for computing and presenting earnings(loss) per
share (EPS). It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on
the face of an income statement for all entities with complex capital
structures. This Statement requires restatement of all prior-period EPS data
presented. All references to earnings (loss) per share are to basic earnings
(loss) per share. No restatement of EPS was necessary as a result of the
application of Statement No. 128. Earnings (loss) per common share was
calculated by dividing net income by the weighted average number of Class C
common shares outstanding during each period as follows: 1997 1,505,760
shares; 1996 1,505,760 shares; 1995 1,505,760 shares; 1994 1,505,760 shares;
and 1993 1,329,373 shares.
South Dakota's Own DAKOTACARE 29
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
<TABLE>
<S> <C>
FRANK D. MESSNER, M.D., President BEN J. HENDERSON, D.O.
Yankton Radiology, Radiologist Mobridge Medical Center, Internist
MR. PATRICK BECKMAN, Vice President K. GENE KOOB, M.D.
Beckman Realty and Development Neurology Associates, Neurologist
Corporation, Owner
GUY E. TAM, M.D., Secretary/Treasurer JOHN E. RITTMANN, M.D.
Central Plains Clinic, Family Practioner Brown Clinic, Family Practitioner
JAMES ENGELBRECHT, M.D. MR. JEFFREY J. RODMAN
Drs. Engelbrecht & Weaver, South Dakota Bankers Association,
Rheumatologist Executive Vice President
ROBERT L. FERRELL, M.D.
Drs. Ferrell and Gunderson, Otology,
Laryngology, Rhinology
</TABLE>
EXECUTIVE OFFICERS
<TABLE>
<S> <C>
MR. ROBERT D. JOHNSON, MS. ELIZABETH MENDELSON,
Chief Executive Officer Vice President, Underwriting
MR. KIRK J. ZIMMER, Ms. BARBARA A. SMITH,
Senior Vice President Vice President, Operations
WILLIAM O. ROSSING, M.D., MR. THOMAS N. NICHOLSON,
Vice President, Medical Director Vice President, Sales and Marketing
MS. SHARON DUNCAN, MR. BRUCE E. HANSON,
Vice President, System Operations Vice President, Finance
MR. DEAN KROGMAN, MR. BRIAN E. MEYER,
Vice President, External Operations Vice President, Information Systems
</TABLE>
South Dakota's Own DAKOTACARE 30
<PAGE>
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
DAKOTACARE
1323 South Minnesota Avenue
Sioux Falls, SD 57105
(605) 334-4000
INDEPENDENT PUBLIC ACCOUNTANTS
McGladrey & Pullen, LLP
Sioux Falls, South Dakota
CORPORATE COUNSEL
Securities Matters:
Gray, Plant, Mooty, Mooty & Bennett, P.A.
Minneapolis, Minnesota
General Matters:
Zimmer, Duncan and Cole
Parker, South Dakota
TRANSFER AGENT
The First National Bank in Sioux Falls
Sioux Falls, South Dakota
FORM 10-K
The Company has filed an annual report with the Securities and Exchange
Commission on form 10-K. Shareholders may obtain a copy of this report,
without charge, by writing:
Inverstors Relations
DAKOTACARE
1323 South Minnesota Avenue
Sioux Falls, SD 57105
ANNUAL MEETING
The annual meeting of shareholders will be held at the Rushmore Plaza Holiday
Inn and Civic Center, Rapid City, South Dakota, on Thursday June 4, 1998, at
9:15 a.m.
INTERNET ADDRESS
To access information about DAKOTACARE, including directories and product and
service information, visit our home page via the internet. Our address is
www.dakotacare.com
South Dakota's Own DAKOTACARE 31
<PAGE>
AGENT DIRECTORY
Our statewide network of 18 exclusive DAKOTACARE sales agencies assures that
our clients receive the local attention to service that they desire.
<TABLE>
<S> <C>
1 KARLEN AND ASSOCIATES 10 BOB CLARK INSURANCE, INC.
Aberdeen, SD (605)225-9011 Pierre, SD (605)224-4049
2 JENSEN INSURANCE AND REAL ESTATE 11 BOB CLARK INSURANCE, INC.
Beresford, SD (605)763-2675 Rapid City, SD (605)348-7410
3 DELLA TSCHETTER 12 TIMOTHY KATTKE
Brookings, SD (605)692-2078 Redfield, SD (605)472-1445
4 FLANAGAN AGENCY 13 WILLIAMS INSURANCE AGENCY
Huron, SD (605)352-3512 Sioux Falls, SD (605)336-0940
5 KUNDERT-WILLIAMS INSURANCE AGENCY 14 WOLLMAN INSURANCE AGENCY
Madison, SD (605)256-6608 Sioux Falls, SD (605)334-0004
6 INVESTMENT CENTERS OF SOUTH DAKOTA 15 ROYAL F. KOCH AGENCY
Mitchell, SD (605)996-7171 Tyndall, SD (605)589-3572
7 OAHE AGENCY 16 KINSMAN INSURANCE AGENCY
Mobridge, SD (605)845-2649 Watertown, SD (605)886-4911
8 INSURANCE ASSOCIATES 17 STOUDT'S INSURANCE AGENCY, INC.
Platte, SD (605)337-2628 Watertown, SD (605)886-9719
9 ASHEIM & ASSOCIATES INSURANCE AGENCY 18 CIHAK INSURANCE
Pierre, SD (605)224-1633 Yankton, SD (605)665-9393
</TABLE>
South Dakota's Own DAKOTACARE 32
<PAGE>
