MAY 14, 1999
TO ALL CLASS A PREFERRED STOCKHOLDERS:
Enclosed is the Notice of Annual Meeting of Stockholders, Proxy Statement,
Ballot and Proxy to: elect three 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 2002. Also enclosed is the Company's 1998 Annual Report to Shareholders
and the Ballot and Proxy for voting.
The Ballot and Proxy must be received at the DAKOTACARE office and must be
postmarked by June 6, 1999.
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 10, 1999
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 10, 1999, at the Ramkota Inn,
Sioux Falls, South Dakota, at 9:15 a.m., Sioux Falls, South Dakota time, for
the following purposes:
1. To elect three directors of the Company for a three-year term expiring at
the Annual Meeting of Stockholders to be held in 2002.
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,
1999, 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 June 6, 1999 (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 14, 1999
<PAGE>
SOUTH DAKOTA STATE MEDICAL
HOLDING COMPANY, INCORPORATED
1323 South Minnesota Avenue
Sioux Falls, South Dakota 57105
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
JUNE 10, 1999
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 10, 1999, at 9:15 a.m., Sioux Falls, South Dakota time, at the Ramkota
Inn, Sioux Falls, 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 three directors of the Company for a three-year term expiring at
the Annual Meeting of Stockholders to be held in 2002.
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 14, 1999. NOTE: The
Ballot and Proxy must be received at the DAKOTACARE office and must be
postmarked by June 6, 1999 (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, 1999 (the "Record Date"), will be entitled to
vote at the Annual Meeting. At the close of business on the Record Date, a
total of 1,090 shares of Class A Preferred Stock, 1,300 shares of Class B
Preferred Stock, and 1,465,345 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.
2
<PAGE>
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 ten
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. Guy Tam, Mr. Patrick Beckman, and
the vacant position previously held by Mr. Jeff Rodman expire at the 1999
Annual Meeting of Stockholders; the terms of Dr. K. Gene Koob, Dr. Frank
Messner, and Dr. James Engelbrecht expire at the 2000 Annual Meeting of
Stockholders; and the terms of Dr. Ben J. Henderson, Dr. Thomas L. Krafka,
Dr. John E. Rittmann, and Dr. Stephan D. Schroeder expire at the 2001 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 three (3) individuals to
serve as directors with terms expiring at the 2002 meeting of the
shareholders: James Reynolds, M.D.; Mr. Van Johnson; and Mr. Bob Sutton.
The Board of Directors has been informed that each of the three (3) nominees
is willing to serve as a director; however, if any nominee should decline or
become
3
<PAGE>
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, 1999,
concerning the three nominees for election as directors of the Company with
terms expiring at the 2002 meeting of the shareholders:
<TABLE>
<S> <C> <C>
Name Age Position with Company
Individuals Nominated by Board of Directors:
James Reynolds, M.D. 56 None
Mr. Van Johnson 54 None
Mr. Bob Sutton 30 None
</TABLE>
Dr. Reynolds is a member of the South Dakota State Medical Association and
has been engaged in the practice of cardiac surgery in Sioux Falls, South
Dakota, since 1978.
Mr. Johnson has been employed as the Chief Executive Officer of the South
Dakota Auto Dealers Association in Sioux Falls, South Dakota, since 1987.
Mr. Sutton has been employed as the Executive Director of the South Dakota
Banker's Association in Pierre, South Dakota, since 1998, having previously
served as Executive Director of the South Dakota Petroleum Council since 1995.
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, 1999.
<TABLE>
<S> <C> <C>
Name Age Position with Company
Frank D. Messner, M.D. 54 President and Director
James Engelbrecht, M.D. 50 Director
Ben Henderson, D.O. 57 Director
K. Gene Koob, M.D. 55 Director
Thomas Krafka, M.D. 53 Director
John Rittmann, M.D. 61 Director
Stephan Schroeder, M.D. 48 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.
4
<PAGE>
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. 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. 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.
Dr. Krafka became a director of the Company in June 1998. He 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 1977. 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 became a director of the Company in June 1998. He is a
member of the South Dakota State Medical Association and has been engaged in
practice as a family practitioner in Miller, South Dakota, since 1980.
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.
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., and two other directors to be appointed; an Audit
Committee consisting of K. Gene Koob, M.D., Frank Messner, M.D., and another
director to be appointed; a Nominating Committee; and a Credentialing
Committee.
The Board of Directors held three meetings and two conference calls
during 1998. 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 1998, and the Audit
Committee met once during 1998.
5
<PAGE>
The Nominating Committee consists of the President-Elect of the South
Dakota State Medical Association, one Class A stockholder, and one Director
(Ben Henderson, D.O.). The Nominating Committee met once in 1999 to make
the current year nominations.
The Credentialing Committee consists of K. Gene Koob, M.D.; Ben
Henderson, D.O.; James Engelbrecht, M.D.; and John Rittmann, M.D. The
Credentialing Committee met three times in 1998.
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 1998 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 1998 which totaled $110,860, including retirement plan
contribution. Mr. Johnson's salary for 1998 for the Company was based on a
cost of living adjustment from his 1997 salary and a subjective review by the
Board of Directors of his 1998 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.
6
<PAGE>
<TABLE>
<S> <C> <C> <C>
EXECUTIVE COMPENSATION
Name and Principal All Other
Position Year Salary $ Compensation(1)
Robert D. Johnson 1998 $ 77,642 $15,138
Chief Executive Officer 1997 $ 76,367 $14,380
1996 $ 58,632 $12,373
William Rossing, M.D. 1998 $106,603 --
Vice President 1997 $107,195 --
Medical Director 1996 $ 39,230 --
Kirk J. Zimmer 1998 $116,095 $15,289
Senior Vice President 1997 $106,738 $14,000
1996 $ 95,025 $12,176
Thomas N. Nicholson 1998 $124,130 --
Vice President, Marketing 1997 $120,101 --
1996 $ 57,558 --
</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 1998, 1997, or 1996.
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 of service 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, 1998, $58,274
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.
7
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases office space from the South Dakota State Medical
Association. During 1998, the Company signed a one year lease, which expired
December 31, 1998. 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 1999 lease requires minimum rental payments
of $211,016. Total rental payments for office space for the years
December 31, 1998, 1997, and 1996 was $204,870, $186,500, and $158,400,
respectively.
The Company provides group health insurance coverage for employees of the
South Dakota State Medical Association. Total premium income from the
affiliate for the years ended December 31, 1998, 1997, and 1996 was $47,721,
$42,517, and $45,535, respectively.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1999, 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.
8
<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)
Class A Preferred Lloyd Solberg, M.D. 1 .09%
Class C Common 133,360 9.10%
Class C Common Patrick Beckman -- --
Class A Preferred James Engelbrecht, M.D. 1 .09%
Class A Preferred Ben J. Henderson, D.O. 1 .09%
Class C Common 1,060 .07%
Class A Preferred K. Gene Koob, M.D. 1 .09%
Class A Preferred Thomas L. Krafka, M.D. 1 .09%
Class C Common 16,640 1.14%
Class A Preferred Frank D. Messner, M.D. 1 .09%
Class C Common 8,800 .60%
Class A Preferred John Rittmann, M.D. 1 .09%
Class C Common 8,340 .57%
Class A Preferred Stephan D. Schroeder, M.D. 1 .09%
Class C Common 1,120 .08%
Class A Preferred Guy E. Tam, M.D. 1 .09%
Class C Common 4,360 .30%
Class A Preferred James Reynolds, M.D. 1 .09%
Class C Common 10,440 .71%
Class C Common Van Johnson -- --
Class C Common Bob Sutton -- --
Class C Common Robert D. Johnson(2) 14,560 .99%
Class C Common Thomas Nicholson -- --
Class C Common William Rossing, M.D. 8,720 .60%
Class C Common Kirk J. Zimmer 800 .05%
Class A Preferred All Directors and Executive 8 .71%
Officers as a Group
Class C Common (13 people) 64,400 4.39%
</TABLE>
(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.
9
<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. 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 1998 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, LLP, served as the Company's independent certified
public accountants for 1998 and are serving in that capacity for 1999. It
is not expected that representatives of McGladrey & Pullen, LLP, 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 2000 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, 2000.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Guy E. Tam, M.D.
Guy E. Tam, M.D.
Secretary
Dated: May 14, 1999
10
<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 in the election of
directors and such other business as may properly come before the Annual
Meeting of Shareholders of DAKOTACARE to be held on June 10, 1999,
at 9:15 a.m., CDT, or any adjournment thereof, for holders of Class A voting
preferred stock as of April 30, 1999.
Election of Directors
You have a total of three (3) votes to cast. Please vote below for any of
the three (3) individuals nominated for directors with terms expiring
in 2002. You may vote for NO MORE THAN three (3) individuals. Your
three (3) votes may all be cast for one (1) individual or a combination of
up to three (3) individuals. Indicate beside the nominee the number of
votes you wish to cast for that individual. If you indicate more than
three (3) votes in total, your ballot will be disqualified.
Individuals Nominated by Board of Directors
_____ James Reynolds, M.D.
_____ Mr. Van Johnson
_____ Mr. Bob Sutton
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 June 6, 1999.
____________________________
Name
____________________________
Date
<PAGE>
TO OUR SHAREHOLDERS:
We are happy to present you with our annual report for 1998, a year in which
the profitability of DAKOTACARE, and much of the HMO industry in general,
returned to positive levels. We have begun to see the shift in the cyclical
underwriting cycle and while medical inflation, both locally and nationally,
has been rising, DAKOTACARE has positioned itself to compete in a profitable
manner.
From a financial standpoint, total revenues and total assets reached record
levels in 1998 as DAKOTACARE and its subsidiaries reached the $40 million
plateau in consolidated revenues. Of DAKOTACARE's $14.3 million in total
assets, nearly $10.9 million is held in cash and investments, while the
Company remains debt-free. The Company's claims loss ratio was reduced over
3.4% from the 1997 ratio to 85.7%, while its HMO operating expense ratio
remained at an efficient 15%. Other income increased over 10% as DAKOTACARE
continued to develop and market several lines of ancillary services and
insurance products.
Commitment to South Dakota physicians has always been one of the hallmarks of
the DAKOTACARE program. As evidence of this, DAKOTACARE returned nearly $1.6
million in contingency reserves to its participating physicians in 1998, and
paid dividends to its Class C shareholders of approximately $150,000. In the
first year of the Stock Repurchase Program adopted by shareholders in 1998,
DAKOTACARE repurchased over 40,000 shares of Class C stock of retired,
disabled, or deceased shareholders. These expenditures were accomplished
while maintaining a stable book value for DAKOTACARE Class C shares and
without the need to infuse additional capital resources.
Despite intensified competition in the marketplace, the Company was proud to
claim a 94% client renewal rate and stable enrollment figures throughout 1998.
DAKOTACARE has steadfastly adhered to sound underwriting and pricing
practices, giving us an extremely stable, consistent premium book. Our
customers continue to appreciate the comprehensiveness of the DAKOTACARE
Provider Network, the simplicity of our system, and the friendly,
professional service which we provide. One of our current advertising themes
is "The best surprise is no surprise," and we take pride in the quality and
consistency of our rates, network and service. While other carriers may
attempt to enter the marketplace by skimping on one or more of these items,
we believe that customers will ultimately be drawn to the carrier with a
large, comprehensive provider network and the highest quality, most
consistently priced products and services.
As always, we thankfully acknowledge those individuals who contributed in
large part to this organization's success. The intensely committed
physicians of South Dakota, the exceptionally dedicated DAKOTACARE staff,
and the outstanding agent force have all played a large part in the
accomplishments of the Company.
Nearly fifteen years ago, DAKOTACARE was just an idea, a dream, an intriguing
and promising response to a perceived shift in the delivery of healthcare in
this state. Today, as we race toward the millenium, rest assured that your
company is poised to deliver on that promise and capitalize on the
opportunities before us.
Frank D. Messner, M.D. Robert D. Johnson
/s/ Frank D. Messner /s/ Robert D. Johnson
President Chief Executive Officer
South Dakota's Own DAKOTACARE | 1
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. The
percentage withheld for years 1996 through 1998 was 15%. 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.
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. The Company withheld from payment to the
participating physicians $1,321,668 and $1,336,156 for the years ended
December 31, 1998 and 1997, respectively. Payments to physicians are made at
such times as the Board of Directors approves payouts. The recorded liability
for contingency reserves at December 31, 1998 and 1997, was $2,690,568 and
$2,963,846, respectively. The recorded liability is equal to actual amounts
withheld for the years ended December 31, 1998, 1997 and 1996.
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 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
South Dakota's Own DAKOTACARE | 2
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, reinsurance risk on group term life insurance coverage of
DAKOTACARE and DAS customers and other insurance risks.
DESCRIPTION OF BUSINESS CONTINUED
Products and Marketing
The Company markets its products under the trade name of DAKOTACARE. The
Company has three reportable segments as defined by FASB Statement No. 131.
The segments' products include group managed health care products (HMO),
managed care and claims administration services for self-insured employer
groups (TPA) and the reinsurance segment, which provides excess medical
stop-loss coverage to the self insured employer groups. A detailed analysis of
the various segments is contained in the Notes to the Consolidated Financial
Statements-Note 12. 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 550 employees. As of January 1, 1999,
DAKOTACARE and its subsidiaries provided health care services to
approximately 78,000 individuals.
Approximately 11.0% of the state's population and approximately 17% of
DAKOTACARE's target market of approximately 450,000 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, but has since declined to
approximately 24,000 by the end of 1998. Commencing in 1993, the Company
began its TPA business and by January 1, 1999, had enrolled approximately
56,000 ASO enrollees, bringing the total individuals served by the Company
and its' subsidiaries to approximately 78,000. 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 based on underwriting policy and guidelines established 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 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
ENROLLMENT BY COUNTY
DAKOTACARE supports its statewide enrollment with sales and service locations
throughout South Dakota. As a DAKOTACARE member, you're never far away from a
helpful voice.
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 | 4
<TABLE>
<S> <C>
Aurora 348
Beadle 1704
Bennett 53
Bon Homme 914
Brookings 4868
Brown 2730
Brule 567
Buffalo 2
Butte 483
Campbell 27
Charles Mix 589
Clark 743
Clay 2049
Codington 4406
Corson 52
Custer 510
Davison 3302
Day 554
Deuel 317
Dewey 59
Douglas 390
Edmunds 350
Fall River 278
Faulk 230
Grant 863
Gregory 200
Haakon 67
Hamlin 591
Hand 197
Hanson 438
Harding 24
Hughes 5383
Hutchinson 730
Hyde 38
Jackson 105
Jerauld 247
Jones 69
Kingsbury 898
Lake 1839
Lawrence 1080
Lincoln 843
Lyman 183
Marshall 680
McCook 340
McPherson 141
Mead 982
Mellette 24
Miner 162
Minnehaha 19978
Moody 437
Pennington 4380
Perkins 101
Potter 180
Roberts 376
Sanborn 352
Shannon 34
Spink 1441
Stanley 690
Sully 105
Todd 44
Tripp 610
Turner 687
Union 710
Walworth 312
Yankton 2504
Ziebach 36
</TABLE>
South Dakota's Own DAKOTACARE | 5
MARKET FOR REGISTRANT'S 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 63,900 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 22, 1999, there were 1,090 holders of record of Class A preferred
stock, 1 holder of Class B preferred stock, and 684 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. 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.
As long as the Company exceeds required regulatory capital as required by the
Division, there are no dividend restrictions. Regulatory capital as required
by the Division at December 31, 1998 and 1997 was $200,000 on a statutory
basis of accounting, which the Company significantly exceeded. During 1998
and 1997, the Company paid dividends of $146,754 and $331,267, respectively,
on Class C stock.
South Dakota's Own DAKOTACARE | 6
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. In 1998, the Board
of Directors approved the purchase of 40,415 shares, or $280,480. The value
per share was computed using guidelines established in 1995 by an investment
organization, and updated using the December 31, 1998 audited financial
statements. These calculations are tested for accuracy and consistency by an
independent accounting firm. 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 1998, the
Company issued a total of 90 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
TOTAL ASSETS
1994 9803405
1995 11424813
1996 12777290
1997 14010801
1998 14277389
BOOK VALUE PER CLASS C SHARE
1994 2.24
1995 3.24
1996 3.75
1997 3.46
1998 3.59
TOTAL REVENUE
1994 29015000
1995 31016916
1996 34147309
1997 40801344
1998 41420418
CASH & INVESTMENTS
1994 7263762
1995 8292395
1996 9304789
1997 10399993
1998 10275673
South Dakota's Own DAKOTACARE | 8
FINANCIAL REVIEW
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 16-24
Independent Auditor's Report
on the Financial Statements Page 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations Pages 26-29
Selected Financial Data Page 30
Directors and Executive Officers Page 31
Shareholder Information Page 31
Agent Directory Page 32
South Dakota's Own DAKOTACARE | 9
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- - --------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,372,457 $ 4,467,754
Investment in securities held to maturity
(Note 5) 405,094 901,599
Certificates of deposit 575,000 843,559
Receivables (Note 3) 1,252,780 799,395
Prepaids and other assets 153,930 124,729
Deferred income taxes (Note 8) 647,000 720,000
----------------------------
TOTAL CURRENT ASSETS 8,406,261 7,857,036
----------------------------
Long-Term Investments
Investment in securities held to maturity
(Note 5) 3,567,422 3,837,081
Investment in securities available for sale
(Note 5) 305,700 300,000
Pledged certificates of deposit (Note 5) 500,000 500,000
Certificate of deposit 50,000 50,000
Cash surrender value of life insurance 100,000 81,000
----------------------------
4,523,122 4,768,081
----------------------------
Property and Equipment, at cost,
net of accumulated depreciation 913,006 963,684
Deferred Income Taxes (Note 8) 435,000 422,000
----------------------------
$14,277,389 $14,010,801
----------------------------
----------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
South Dakota's Own DAKOTACARE | 10
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- - ----------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Reported and unreported claims payable (Note 7) $ 4,409,622 $ 4,163,804
Unearned premiums and administration fees 839,043 629,783
Accounts payable and accrued expenses 727,925 695,050
Contingency reserves payable (Note 6) 1,300,000 1,627,000
----------------------------
TOTAL CURRENT LIABILITIES 7,276,590 7,115,637
----------------------------
Contingency Reserves Payable (Note 6) 1,390,568 1,336,846
----------------------------
Minority Interest in Subsidiary 350,606 354,160
----------------------------
Commitments and Contingencies (Notes 4, 13 and 14)
Stockholders' Equity (Note 9)
Class A preferred, voting, no par value, $10
stated value, 2,500 shares authorized; 1,105
and 1,069 shares issued at December 31, 1998
and 1997 11,050 10,690
Class B preferred, voting, no par value,
$1 stated value, 2,500 shares authorized;
issued and outstanding 1,300 shares 1,300 1,300
Class C common, nonvoting, $.01 par value,
10,000,000 shares authorized; issued
1,505,760 shares 15,058 15,058
Additional paid-in capital 3,749,342 3,749,342
Retained earnings 1,771,993 1,435,709
Accumulated other comprehensive income (8,638) (7,941)
Less cost of Class C common treasury stock,
40,415 shares (280,480) -
----------------------------
5,259,625 5,204,158
----------------------------
$14,277,389 $14,010,801
----------------------------
----------------------------
</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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums $ 36,157,947 $ 35,124,035 $ 29,071,245
Less premiums ceded for reinsurance (440,396) (369,888) (383,408)
------------ ------------ ------------
35,717,551 34,754,147 28,687,837
Third party administration fees 3,080,947 3,628,131 3,786,427
Investment income 606,615 615,134 551,734
Other income 647,850 583,648 399,203
------------ ------------ ------------
TOTAL REVENUES 40,052,963 39,581,060 33,425,201
------------ ------------ ------------
Operating expenses:
Claims incurred 31,318,143 31,593,161 23,528,141
Less reinsurance recoveries (703,563) (616,801) (102,780)
------------ ------------ ------------
30,614,580 30,976,360 23,425,361
Personnel expenses 3,891,275 3,804,217 3,703,067
Commissions 1,425,808 1,513,054 1,225,271
Professional fees expenses 1,020,213 970,237 1,082,816
Office expenses 625,614 673,114 713,964
Occupancy expenses 657,207 656,951 625,541
State insurance taxes 458,519 421,622 330,574
Advertising expenses 378,638 378,310 386,174
Other general and administrative expenses 378,000 309,286 325,541
------------ ------------ ------------
TOTAL OPERATING EXPENSES 39,449,854 39,703,151 31,818,309
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST 603,109 (122,091) 1,606,892
Income taxes (credits) (Note 8) 123,625 (57,000) 535,000
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST 479,484 (65,091) 1,071,892
Minority interest in income (loss)
of subsidiary (3,554) 45,017 31,251
------------ ------------ ------------
NET INCOME (LOSS) $ 483,038 $ (110,108) $ 1,040,641
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per common share $ 0.33 $ (0.07) $ 0.69
------------ ------------ ------------
------------ ------------ ------------
</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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Capital Paid-In
Stock Capital
- - ---------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1995 $ 25,818 $ 3,749,342
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 - -
Comprehensive income:
Net income - -
Net change in unrealized loss on securities
available for sale - -
Comprehensive income - -
----------------------------
Balance, December 31, 1996 26,778 3,749,342
Issuance of Class A preferred stock 1,940 -
Redemption of Class A preferred stock (1,670) -
Dividends paid on Class C common stock - -
Comprehensive income:
Net (loss) - -
Net change in unrealized loss on securities
available for sale - -
Comprehensive income - -
----------------------------
Balance, December 31, 1997 27,048 3,749,342
Issuance of Class A preferred stock 900 -
Redemption of Class A preferred stock (540) -
Dividends paid on Class C common stock - -
Purchase of treasury stock (Note 9) - -
Comprehensive income:
Net income - -
Net change in unrealized loss on securities
available for sale - -
Comprehensive income - -
----------------------------
Balance, December 31, 1998 $ 27,408 $ 3,749,342
----------------------------
----------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive Treasury
Earnings Income Stock Total
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 1,107,480 $ (3,049) - $ 4,879,591
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) - - (271,037)
Comprehensive income:
Net income 1,040,641 - -
Net change in unrealized loss on securities
available for sale - (10,083) -
Comprehensive income - - - 1,030,558
-----------------------------------------------------------
Balance, December 31, 1996 1,877,084 (13,132) - 5,640,072
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) - - (331,267)
Comprehensive income:
Net (loss) (110,108) - -
Net change in unrealized loss on securities
available for sale - 5,191 -
Comprehensive income - - - (104,917)
-----------------------------------------------------------
Balance, December 31, 1997 1,435,709 (7,941) - 5,204,158
Issuance of Class A preferred stock - - - 900
Redemption of Class A preferred stock - - - (540)
Dividends paid on Class C common stock (146,754) - - (146,754)
Purchase of treasury stock (Note 9) - - (280,480) (280,480)
Comprehensive income:
Net income 483,038 - -
Net change in unrealized loss on securities
available for sale - (697) -
Comprehensive income - - - 482,341
-----------------------------------------------------------
Balance, December 31, 1998 $ 1,771,993 $ (8,638) $ (280,480) $ 5,259,625
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $483,038 $ (110,108) $ 1,040,641
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 307,211 319,493 318,297
Loss on disposal of property and equipment - - 1,664
Minority interest in income (loss) of subsidiary (3,554) 45,017 31,251
Amortization of discounts and premiums on
investments and certificates of deposit, net (138,461) (139,675) (103,151)
(Increase) decrease in receivables (453,385) 36,969 (301,794)
(Increase) decrease in prepaids and other assets (29,201) 13,758 (66,530)
(Increase) decrease in deferred income taxes 60,000 (284,000) (57,000)
Increase in reported and unreported
claims payable 245,818 975,349 478,455
Increase (decrease) in accounts payable
and accrued expenses 32,875 15,629 (107,587)
Increase (decrease) in unearned premiums
and administration fees 209,260 (225,122) 39,252
Increase (decrease) in contingency
reserves payable (273,278) 858,552 150,625
------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 440,323 1,505,862 1,424,123
------------------------------------------
Cash Flows From Investing Activities
Purchase of securities available for sale (6,397) (6,259) (5,933)
Held to maturity securities:
Matured 985,000 525,000 1,200,000
Purchased (367,364) (726,030) (1,983,309)
Repayments on collateralized mortgage obligations 283,548 157,013 133,471
Proceeds from maturities of certificates
of deposit 1,447,000 1,470,000 1,104,900
Purchase of certificates of deposit (1,175,000) (1,325,000) (1,531,959)
(Increase) in cash surrender value
of life insurance (19,000) (12,000) (18,000)
Purchase of property and equipment (256,533) (231,238) (216,720)
Proceeds from sale of property and equipment - 18,711 -
------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 891,254 (129,803) (1,317,550)
------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
South Dakota's Own DAKOTACARE | 14
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Proceeds from issuance of capital stock $ 900 $ 1,940 $ 1,290
Redemption of capital stock (540) (1,670) (330)
Payment of dividends (146,754) (331,267) (271,037)
Purchase of treasury stock (280,480) - -
------------------------------------------
NET CASH (USED IN) FINANCING ACTIVITIES (426,874) (330,997) (270,077)
------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 904,703 1,045,062 (163,504)
Cash and Cash Equivalents
Beginning 4,467,754 3,422,692 3,586,196
------------------------------------------
Ending $ 5,372,457 $ 4,467,754 $ 3,422,692
------------------------------------------
------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Income taxes, net of refunds $ 315,275 $ 2,000 $ 790,000
Supplemental Disclosures of Noncash Investing
and Financing Activities
(Increase) decrease in unrealized loss on
securities available for sale (697) 5,191 (10,083)
</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 and DHP are 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. During December of 1998, DHP
ceased business operations. Management expects to formally dissolve DHP
during 1999 with no material effect on the consolidated financial statements.
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. Cash and cash
equivalents as of December 31, 1998 and 1997 includes approximately $631,000
and $572,000, respectively, in money market funds which are not federally
insured. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
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 comprehensive income, 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>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Furniture, equipment and automobiles $ 2,485,278 $ 2,253,358
Building and building improvements 53,370 62,609
Other 134,818 131,967
----------------------------------
2,673,466 2,447,934
Less accumulated depreciation 1,760,460 1,484,250
----------------------------------
$ 913,006 $ 963,684
----------------------------------
----------------------------------
</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 (loss) per common share is
calculated in accordance with the provisions of Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings Per Share", which was
adopted in 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 1,482,635 in 1998 and
1,505,760 in both and 1997 and 1996.
NEW ACCOUNTING STANDARDS: Effective January 1, 1998, the Company adopted FASB
Statement No. 130, which establishes new rules for the reporting and display of
comprehensive income and its components, but has no effect on the Company's net
income (loss) or total stockholders' equity. Statement No. 130 requires
unrealized gains and losses on the Company's securities available for sale,
which prior to adoption were reported separately in stockholders' equity, to be
included in comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement No. 130.
Effective January 1, 1998, the Company adopted FASB Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information. Statement
No. 131 superseded FASB Statement No. 14, Financial Reporting for Segments of a
Business Enterprise. Statement No. 131 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. Statement
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of Statement No.
131 did not affect results of operations or financial position, but did affect
the disclosure of segment information. See Note 12 for disclosures about the
Company's operating segments.
NOTE 2. FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
South Dakota's Own DAKOTACARE | 17
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------
Investments: Fair values for the Company's investment securities are based on
quoted market prices. At December 31, 1998, the carrying amount and fair value
of the Company's investment securities was $4,278,216 and $4,549,012,
respectively. 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.
Accrued interest receivable: The carrying amount approximates fair value due to
the nature of the balances recorded.
NOTE 3. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- ----------
<S> <C> <C>
Commissions $ 3,561 $ 4,300
Drug manufacturer chargebacks 133,111 68,850
Premiums 61,055 151,298
Subrogation, net of recovery expenses 84,011 75,000
Interest 27,068 30,367
Reinsurance 275,651 229,486
Income taxes 273,650 22,000
Funds withheld by ceding insurer 104,485 118,804
Other 290,188 99,290
---------- ----------
1,252,780 799,395
Less allowance for doubtful accounts -- --
---------- ----------
$1,252,780 $ 799,395
---------- ----------
---------- ----------
</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, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities held to maturity:
Obligations of U.S. treasury, government
agencies and corporations $ 949,781 $ 58,506 - $1,008,287
Obligations of state and
political subdivisions 2,957,539 213,510 (1,833) 3,169,216
U.S. governmental agency collateralized
mortgage obligations 65,196 904 (291) 65,809
--------------------------------------------------------
$3,972,516 $ 272,920 $ (2,124) $4,243,312
--------------------------------------------------------
--------------------------------------------------------
Equity securities available for sale:
Bond mutual funds $ 314,338 $ 1,431 $ (10,069) $ 305,700
--------------------------------------------------------
--------------------------------------------------------
</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>
<CAPTION>
December 31, 1998
------------------------------
Amortized Estimated
Cost Fair Value
------------------------------
<S> <C> <C>
Due in one year $ 405,094 $ 408,477
Due after one year through five years 2,018,403 2,089,552
Due after five years through ten years 1,410,538 1,601,087
Due after ten years 73,285 78,387
------------------------------
3,907,320 4,177,503
Collateralized mortgage obligations 65,196 65,809
------------------------------
$ 3,972,516 $ 4,243,312
------------------------------
------------------------------
</TABLE>
Investment securities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
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>
There were no sales of debt or equity securities during the years ended December
31, 1998, 1997 or 1996, and accordingly, no reclassification adjustments on
investment securities for the respective years. At December 31, 1998 and 1997,
no individual investments in obligations of state and political subdivisions
exceeded 10% of the Company's equity.
At December 31, 1998 and 1997, 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. The percentage withheld for the
years 1996 through 1998 was 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, 1998, 1997 and 1996.
Payments to physicians in 1996 exceeded amounts accrued in 1995 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>
<CAPTION>
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 4,163,804 $ 3,188,455 $ 2,710,000
---------------------------------------------------
Incurred related to:
Current year 30,197,890 30,237,417 23,350,462
Prior years 416,690 738,943 74,899
---------------------------------------------------
Total incurred 30,614,580 30,976,360 23,425,361
---------------------------------------------------
Paid related to:
Current year 25,704,590 26,217,052 20,247,806
Prior years 4,710,337 3,920,866 2,776,707
---------------------------------------------------
Total paid 30,414,927 30,137,918 23,024,513
---------------------------------------------------
Less reinsurance recoverables at January 1 (229,486) (92,579) (14,972)
Plus reinsurance recoverables at December 31 275,651 229,486 92,579
---------------------------------------------------
Balance at December 31 $ 4,409,622 $ 4,163,804 $ 3,188,455
---------------------------------------------------
---------------------------------------------------
</TABLE>
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>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Current $ 63,625 $ 227,000 $592,000
Deferred (credits) 60,000 (284,000) (57,000)
---------------------------------------
$123,625 $ (57,000) $535,000
---------------------------------------
---------------------------------------
</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>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense (credits) $ 211,000 $ (42,700) $ 562,400
Tax exempt interest (43,281) (38,861) (30,771)
Lobbying 4,866 9,105 6,825
Reversal of overaccrual of prior year's taxes (26,576) - -
Effect of tax rate brackets and other (22,384) 15,456 (3,454)
---------------------------------------
$ 123,625 $ (57,000) $ 535,000
---------------------------------------
---------------------------------------
</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>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Deferred tax assets:
Contingency reserves payable $ 915,000 $ 1,008,000
Reported and unreported claims payable 44,000 42,000
Unearned premiums 50,000 43,000
Accrued expenses and other 95,000 65,000
Net operating loss carryforward of subsidiary 39,000 47,000
----------------------------
1,143,000 1,205,000
Less valuation allowance - -
----------------------------
1,143,000 1,205,000
----------------------------
Deferred tax liability:
Property and equipment (61,000) (63,000)
----------------------------
$ 1,082,000 $ 1,142,000
----------------------------
----------------------------
Reflected on the accompanying balance sheets as follows:
1998 1997
----------------------------
<S> <C> <C>
Current assets $ 647,000 $ 720,000
Noncurrent assets 435,000 422,000
----------------------------
$ 1,082,000 $ 1,142,000
----------------------------
----------------------------
</TABLE>
NOTE 9. CAPITAL STOCK
The Class A voting 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 is 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.
The Class B voting preferred stock is restricted to ownership by the South
Dakota State Medical Association, an affiliated company, and is not entitled
to receive dividends.
The Class C nonvoting 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.
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. During 1998, 40,415
shares were acquired under the Program.
South Dakota's Own DAKOTACARE | 21
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ---------------------------------------------------------------------------
Regulatory capital as required by the South Dakota Department of Commerce and
Regulation, Division of Insurance (Division of Insurance) at December 31,
1998 and 1997 was $200,000 on a statutory basis of accounting, which the
Company significantly exceeded. 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.
The Company is also subject to risk based capital (RBC) requirements
promulgated by the National Association of Insurance Commissioners (NAIC).
The RBC standards establish uniform minimum capital requirements for
insurance companies. The RBC formula applies various weighting factors to
financial balances or various levels of activities based on the perceived
degree of risk. At December 31, 1998, the Company's stockholders' equity
exceeded the minimum levels required by the RBC standards.
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 automatically renewed for a one year term through December 31, 1998,
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 1999
lease renewal requires minimum rental payments of $211,016. Total rental
payments for this office space for the years ended December 31, 1998, 1997
and 1996 were $204,870, $186,500 and $158,400, 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, 1998, 1997 and 1996 was $47,721, $42,517 and $45,535,
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
required under the plan, were an amount equal to 11.5% of the participants'
compensation for the twelve-month periods ending September 1, 1998, 1997 and
1996. Retirement plan expense for the years ended December 31, 1998, 1997
and 1996 was $233,483, $216,364 and $245,104, 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, 1998 and 1997, $58,274 and $49,164, respectively, was accrued
under these contracts.
NOTE 12. SEGMENT INFORMATION
The Company has three reportable segments: Health Maintenance Organization
(HMO), Third Party Administration (TPA) and Reinsurance. The HMO segment
consists of the operations of the Company. The Company is a South Dakota
licensed HMO engaged in the development of comprehensive health care delivery
systems. The TPA segment consists of the operations of DAS and DHP. DAS and
DHP are TPA's of health care plans for independent employer companies. The
reinsurance segment consists of the operations of DIL. DIL's primary
activity is in providing reinsurance quota share excess medical stop loss
coverage to DAS and DHP's self funded customers.
The Company evaluates performance and allocates resources based on net income
determined under general accepted accounting principles. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. The Company allocates payroll
costs incurred based on the activities of admitting new enrollees and in
adjudicating claims. The HMO segment profit includes the equity in earnings
(loss) of the TPA and reinsurance segments. Intersegment revenues primarily
relate to equipment rental charges which are based on the respective
segment's underlying cost.
The Company's reportable segments are derived from the operations of the
Company and subsidiaries that offer different products. The reportable
segments are managed separately because they provide distinct services.
South Dakota's Own DAKOTACARE | 22
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998
- -------------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 35,796,765 $ 3,540,988 $ 673,790 $ 40,011,543
Intersegment revenues - 236,526 - 236,526
Investment income 538,170 55,333 - 593,503
Depreciation expense 85,787 221,424 - 307,211
Segment profit (loss) 483,038 (68,319) 23,345 438,064
Equity in net (loss) of subsidiaries (41,420) - - (41,420)
Income tax expense (credits) 158,350 (34,725) - 123,625
Segment assets 13,607,488 1,953,572 475,006 16,036,066
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- - -------------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 34,718,343 $ 4,121,995 $ 694,892 $ 39,535,230
Intersegment revenues - 864,735 - 864,735
Investment income 546,562 58,247 10,325 615,134
Depreciation expense 85,284 234,209 - 319,493
Segment profit (loss) (110,108) 111,235 (112,048) (110,921)
Equity in net (loss) of subsidiaries (45,830) - - (45,830)
Income tax expense (credits) (98,142) 41,142 - (57,000)
Segment assets 13,455,364 1,854,251 345,114 15,654,729
Expenditures for long-lived assets
(land and building) 59,150 - - 59,150
Year Ended December 31, 1996
- - ------------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 28,829,498 $ 4,248,500 $ 483,471 $ 33,561,469
Intersegment revenues - 802,996 - 802,996
Investment income 500,341 44,419 6,974 551,734
Depreciation expense 84,536 233,761 - 318,297
Segment profit (loss) 1,040,641 196,705 (29,186) 1,208,160
Equity in net income of
subsidiaries 136,268 - - 136,268
Income tax expense 452,000 83,000 - 535,000
Segment assets 12,188,065 1,848,406 269,615 14,306,086
</TABLE>
South Dakota's Own DAKOTACARE | 23
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Revenues
Total external revenues for reportable segments $ 40,011,543 $ 39,535,230 $ 33,561,469
Intersegment revenues for reportable segments 236,526 864,735 802,996
Elimination of intersegment revenues (236,526) (864,735) (802,996)
Elimination of net income (loss) of subsidiaries (41,420) (45,830) 136,268
---------------------------------------------
Total consolidated revenues $ 40,052,963 $ 39,581,060 $ 33,425,201
---------------------------------------------
---------------------------------------------
Income or Loss
Total income (loss) for reportable segments $ 438,064 $ (110,921) $ 1,208,160
Elimination of equity in net income (loss)
of subsidiaries (41,420) (45,830) 136,268
Minority interest in income (loss) of subsidiary (3,554) 45,017 31,251
---------------------------------------------
Total consolidated net income (loss) $ 483,038 $ (110,108) $ 1,040,641
---------------------------------------------
---------------------------------------------
Assets
Total assets for reportable segments $ 16,036,066 $ 15,654,729 $ 14,306,086
Elimination of intercompany receivable (100,922) (44,753) (33,791)
Elimination of investment in subsidiaries (1,657,755) (1,599,175) (1,495,005)
---------------------------------------------
Total consolidated assets $ 14,277,389 $ 14,010,801 $ 12,777,290
---------------------------------------------
---------------------------------------------
</TABLE>
NOTE 13. LITIGATION
During 1998, a substantial claim was filed against the Company in circuit
court which alleges wrongful non-renewal of a sales agency contract and seeks
compensatory and punitive damages. As of March 1999, the lawsuit is in the
discovery stage. Management believes the lawsuit is without merit and the
Company will vigorously defend itself in this matter.
In addition, the Company is involved in other 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 14. YEAR 2000 ISSUE AND MANAGEMENT INFORMATION SYSTEM COMMITMENT
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.
Based on the Company's review of its computer systems, management believes
the remaining cost of the remediation effort to make the systems year 2000
compliant is approximately $225,000. Such costs will be charged against
income as they are incurred.
In addition, in January 1999, the Company entered into a sales licenses and
service agreement (Agreement) to purchase certain computer equipment and
other related items, and to obtain a license for certain software and
programs. Total amounts committed under this Agreement are approximately
$215,000.
South Dakota's Own DAKOTACARE | 24
<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, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ McGLADREY & PULLEN, LLP
Sioux Falls, South Dakota
March 22, 1999
South Dakota's Own DAKOTACARE | 25
<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, 1998, 1997, 1996, and 1995. 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>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss ratio 85.9% 88.7% 81.7% 76.2%
Expense ratio 15.0 14.5 16.3 18.4
----- ----- ---- ----
Combined ratio 100.9% 103.2% 98.0% 94.6%
----- ----- ---- ----
----- ----- ---- ----
</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 net decrease in the loss ratio was due to decreased utilization and higher
premium increases, but was offset by increased costs for physicians and
hospitals in 1998. The increase in the expense ratio is due to additional costs
incurred to upgrade existing systems and obtain data sources to help maximize
efficiencies. See Comparison of Years December 31, 1998 and December 31, 1997
and Comparison of Years December 31, 1997 and December 31, 1996.
RESULTS OF OPERATIONS
COMPARISON OF YEARS DECEMBER 31, 1998 AND DECEMBER 31, 1997
GENERAL
The following results of operations include the operations of DAKOTACARE and its
subsidiaries for the years ended December 31, 1998, 1997, and 1996.
GENERAL
The Company's net income increased $593,146 to income of $483,038 for the year
ended December 31, 1998, as compared to a loss of $110,108 for the year ended
December 31, 1997, representing a 538.7% increase. This increase was primarily
due to an increase in net premium income of $963,404 which was offset by a
decrease of $547,184 in third party administration fee revenues and a $180,625
increase in income taxes.
REVENUES
Total revenues increased $471,903, or 1.2%, for the year ended December 31,
1998, as compared to December 31, 1997. Revenues from net premiums generated by
the health maintenance organization increased $987,293. This increase is
attributable to an 8.6% increase in the premiums earned per enrollee for the
year ended December 31, 1998, as compared to December 31, 1997, but a 5.1%
decrease in the number of enrollees limited the net premium growth. The increase
in revenue per enrollee was needed to keep pace with rising claim costs. The
decrease in enrollees was due to the competitive business climate in the local
marketplace. Revenues from the third party administration fees decreased by
$547,184 as enrollees participating in the Company's subsidiaries' TPA plans
decreased. Investment income decreased $8,519 due primarily to a decrease in the
average yield earned on invested assets, but was offset by an increase in
average invested assets.
South Dakota's Own DAKOTACARE | 26
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT.)
OPERATING EXPENSES
Total operating expenses decreased $253,297, or 0.6%, for the year ended
December 31, 1998, as compared to December 31, 1997. The change was due
primarily to a decrease in claims incurred and commission expenses, but was
offset by an increase in personnel, professional fees and other general and
administrative expenses.
Net claims expense decreased by $361,780, or 1.2%. Average claims per enrollee
increased by 5.3% in 1998 as compared to 1997 while the number of enrollees
decreased by 5.1%. An unusually high dollar claim that was incurred and paid in
late 1998, caused the average claims per enrollee and claims expense to remain
higher than expected, but claims expense as a whole declined due primarily to
the decreased enrollment. Commissions expense decreased by $87,246, or 5.8%, in
1998 as compared to 1997 due to the decreased enrollees of the HMO. The
Company's subsidiaries increased the number of enrollees covered under various
contracts from approximately 50,000 at January 1, 1998, to approximately 56,000
at January 1, 1999. Membership decreased initially on the January 1, 1998
renewals, but membership increased on July 1, 1998 due to one large group. As a
result, overall HMO membership decreased in 1998 as compared to 1997, even
though the membership numbers were higher in 1998 compared to 1997.
Personnel expenses increased $87,058, or 2.3% in 1998 as compared to 1997.
This was due primarily to the employment of additional technical staff.
Professional fees expense increased $49,976, or 5.2%, in 1998 as compared to
1997. This was primarily due to increased legal costs incurred during the
year. Other general and administrative expenses increased $68,714, or 22.2%
in 1998 as compared to 1997. This was primarily due to the addition of
licenses and service fees in using computer databanks for information.
INCOME TAXES
Income tax expense (credits) represent 20.5% and 46.7% of income (loss) before
income taxes and minority interest for the years ended December 31, 1998 and
1997, respectively. In 1998, permanent tax differences and the effect on the tax
rate brackets decreased the estimated provision, thus decreasing 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, 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 | 27
<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.
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 decreased by $1,065,539 to $440,323
for the year ended December 31, 1998, as compared to 1997. Net cash provided by
operating activities increased primarily due to net income, an increase in
reported and unreported claims payable, a decrease in deferred taxes and an
increase in unearned premiums and administration fees. The cash provided from
these items were offset by an increase in receivables and a decrease in
contingency reserves payable since December 31, 1997.
Other uses of cash and cash equivalents were for the payment of dividends and
purchases of property 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, 1998,
the Company has 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 | 28
<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 completed a review of its computer systems to identify the systems
that could be affected by the Year 2000 issue. In 1999, the Company installed
new operations systems software which the vendor has represented to be
Year 2000 compliant. Final Year 2000 compliance testing is expected to be
completed April 1999 for mission critical systems and by September 1999 for
non-mission critical systems.
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 $225,000, which includes approximately 2,400 to 2,700 hours
expected to be incurred by Company personnel related to Year 2000 issues with
a projected cost of approximately $136,000. Such costs will be charged against
income as they are incurred. Total Year 2000 costs incurred through
December 31, 1998 were approximately $86,000.
Currently, no contingency plan has been finalized, but planning is in process.
A finalized plan is estimated to be in place by July, 1999.
South Dakota's Own DAKOTACARE | 29
<PAGE>
SELECTED FINANCIAL DATA
The following information for the Company is as of and for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994 (dollars in thousands, except per
share data):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net premiums $35,718 $34,754 $28,688 $26,643 $26,790
Third party administration fees 3,081 3,628 3,786 3,023 1,143
Investment income 607 615 552 489 321
Total revenues 40,053 39,581 33,425 30,513 28,497
Net claims incurred 30,615 30,976 23,425 20,305 19,937
Other operating expenses 8,835 8,727 8,393 7,587 5,609
Income (loss) before income taxes
and minority interest 603 (122) 1,607 2,621 2,951
Net income (loss) 483 (110) 1,041 1,790 1,906
======= ======= ======= ======= =======
Earnings (loss) per common share(1) $ 0.33 $ (0.07) $ 0.69 $ 1.19 $ 1.27
======= ======= ======= ======= =======
Balance Sheet Data:
Invested assets and cash $10,876 $10,981 $ 9,874 $ 8,843 $ 7,804
Total assets 14,277 14,011 12,777 11,425 9,803
Reported and unreported
claims payable 4,410 4,164 3,188 2,710 2,864
Contingency reserves payable 2,691 2,964 2,105 1,955 1,697
Total liabilities 9,017 8,807 7,137 6,545 6,432
Stockholders' equity 5,260 5,204 5,640 4,880 3,372
</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.
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 adopted in 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: 1998 1,482,635 shares;
1997 1,505,760 shares; 1996 1,505,760 shares; 1995 1,505,760 shares; and 1994
1,505,760 shares.
South Dakota's Own DAKOTACARE | 30
<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 THOMAS L. KRAFKA, M.D.
Central Plains Clinic, Family Practioner Radiology Associates, Radiologist
JAMES ENGELBRECHT, M.D. JOHN E. RITTMANN, M.D.
Drs. Engelbrecht & Weaver, Brown Clinic, Family Practitioner
Rheumatologist
STEPHEN D. SCHROEDER, M.D.
Hand County Clinic, Family Practitioner
</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>
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 20 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 BILL MARKVE & ASSOCIATES 14 BOEN AND ASSOCIATES, INC.
Dakota Dunes, SD (605)232-3333 Sioux Falls, SD (605)336-0425
5 FLANAGAN AGENCY 15 WOLLMAN INSURANCE AGENCY
Huron, SD (605)352-3512 Sioux Falls, SD (605)334-0004
6 KUNDERT-WILLIAMS INSURANCE AGENCY 16 OLSON & ASSOCIATES INSURORS, INC.
Madison, SD (605)256-6608 Sioux Falls, SD (605)334-7777
7 DICE FINANCIAL SERVICES GROUP 17 ROYAL F. KOCH AGENCY
Mitchell, SD (605)996-7171 Tyndall, SD (605)589-3572
8 OAHE AGENCY 18 KINSMAN INSURANCE AGENCY
Mobridge, SD (605)845-2649 Watertown, SD (605)886-4911
9 INSURANCE ASSOCIATES 19 STOUDT'S INSURANCE AGENCY, INC.
Platte, SD (605)337-2628 Watertown, SD (605)886-9719
10 ASHEIM & ASSOCIATES INSURANCE AGENCY 20 CIHAK INSURANCE
Pierre, SD (605)224-1633 Yankton, SD (605)665-9393
</TABLE>
South Dakota's Own DAKOTACARE 33
<PAGE>
