MAY 19, 2000
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 2003. Also
enclosed is the Company's 1999 Annual Report to Shareholders, the unaudited
financial statements for first quarter 2000, and the Ballot and Proxy for
voting.
The Ballot and Proxy must be received at the DAKOTACARE office and must be
postmarked by June 4, 2000.
If you have any questions, please call Bruce Hanson or Kirk Zimmer at
DAKOTACARE at (605) 334-4000.
Sincerely,
/s/__L. Paul Jensen___
L. Paul Jensen
Chief Executive Officer
LPJ: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 8, 2000
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 8, 2000, at the Rushmore Plaza Holiday Inn,
Rapid City, South Dakota, at 9:15 a.m., Rapid City, 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 2003.
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 May 19, 2000,
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 4, 2000 (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/__Ben_J._Henderson,_DO____
Ben J. Henderson, D.O.
Secretary
May 19, 2000
<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 8, 2000
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 8, 2000, at 9:15 a.m., Rapid City, South Dakota time, at the Rushmore
Plaza Holiday Inn, Rapid City, South Dakota, and at any adjournment or
postponement thereof.
At the Annual Meeting, the Company's Class A and B stockholders will be asked
to consider and vote upon the following proposals described in the enclosed
Notice of Annual Meeting:
1. To elect three directors of the Company for a three-year term expiring at
the Annual Meeting of Stockholders to be held in 2003.
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 19, 2000. NOTE: The Ballot and
Proxy must be received at the DAKOTACARE office and must be postmarked by
June 4, 2000 (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 May 19, 2000 (the "Record Date"), will be entitled to vote at the
Annual Meeting. At the close of business on the Record Date, a total of 1,163
shares of Class A Preferred Stock, 1,300 shares of Class B Preferred Stock,
and 1,432,948 shares of Class C Common Stock were outstanding. The holders of
a majority of the Class A Preferred Stock and Class B Preferred Stock issued
and outstanding and entitled to vote at the Annual Meeting, represented by
proxy, will constitute a quorum for the transaction of business. If a quorum
is not present, the Annual Meeting may be adjourned from time to time until a
quorum is present. The affirmative vote of the holders of a majority of the
shares of Class A Preferred Stock and Class B Preferred Stock (voting as one
class), represented at the Annual Meeting in person or by proxy, is necessary
for the election of directors and the approval of all other matters proposed
to the stockholders at the Annual Meeting. Each holder of the Company's
Class A Preferred Stock and Class B Preferred Stock is entitled to one vote for
each share held. There is a right to cumulate voting for the election of
directors. In the exercise of cumulative voting rights, each holder of
preferred shares is entitled to as many votes as shall equal the number of his
preferred shares multiplied by the number of directors to be elected, and by
giving written instructions to the Company they may cast all such votes for a
single director or may distribute them among the directors to be voted for as
he sees fit.
Expenses in connection with the solicitation of proxies by the Board of
Directors will be paid by the Company. Proxies are being solicited primarily
by mail, but, in addition, officers and regular employees of the Company who
will receive no extra compensation for their services may solicit proxies by
telephone or telecopier.
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<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. James Engelbrecht, Dr. K. Gene
Koob, and Dr. Frank Messner expire at the 2000 Annual Meeting of Stockholders;
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; and the terms of Dr. James Reynolds, Mr. Van Johnson, and Mr.
Bob Sutton expire at the 2002 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 directors are currently Mr. Van Johnson
and Mr. Bob Sutton. 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 2003 meeting of the
shareholders: James Engelbrecht, M.D.; K. Gene Koob, M.D.; and John
Sternquist, M.D. 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 unable to serve as a director for any reason, the
proxy may be voted for such other person
3
<PAGE>
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 May 19, 2000,
concerning the three nominees for election as directors of the Company with
terms expiring at the 2003 meeting of the shareholders:
Name Age Position with Company
Individuals Nominated by Board of Directors:
James Engelbrecht, M.D. 53 None
K. Gene Koob, M.D. 57 None
John Sternquist, M.D. 51 None
Dr. Engelbrecht became a director of the Company in June 1997. He is a member
of the South Dakota State Medical Association and has been engaged in the
practice of internal medicine and rheumatology in Rapid City, South Dakota,
since 1980.
Dr. Koob became a director of the Company in June 1994. He is a member of the
South Dakota State Medical Association and has been engaged as a neurologist
in Sioux Falls, South Dakota, since 1974.
Dr. Sternquist is a member of the South Dakota State Medical Association and
has been engaged as a general surgeon in Yankton, South Dakota, since 1980.
Existing Board of Directors
The following table sets forth certain information of the existing Board of
Directors, excluding those nominated above, as of May 19, 2000.
Name Age Position with Company
Ben Henderson, D.O. 58 Director
Thomas Krafka, M.D. 55 Director
John Rittmann, M.D. 62 Director
Stephan Schroeder, M.D. 49 Director
James Reynolds, M.D. 57 Director
Mr. Van Johnson 55 Director
Mr. Bob Sutton 31 Director
4
<PAGE>
Dr. Henderson became a director of the Company in June 1995. He is a member
of the South Dakota State Medical Association and has been engaged in the
practice of internal medicine in Mobridge, South Dakota, since 1972.
Dr. Krafka 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.
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.
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., K. Gene Koob, M.D., and Ben Henderson, D.O.; an Audit
Committee consisting of K. Gene Koob, M.D., Frank Messner, M.D., and Ben
Henderson, D.O.; a Nominating Committee; and a Credentialing Committee.
The Board of Directors held five meetings and two conference calls during
1999. 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 1999, and the Audit Committee
met once during 1999.
5
<PAGE>
The Nominating Committee consists of the President-Elect of the South Dakota
State Medical Association, one Class A stockholder, and one Director (Thomas
Krafka, M.D.). The Nominating Committee met once in 2000 to make the current
year nominations.
The Credentialing Committee consists of K. Gene Koob, M.D.; Ben Henderson,
D.O.; James Engelbrecht, M.D.; John Rittmann, M.D.; and Thomas Krafka, M.D.
The Credentialing Committee met four times in 1999.
Compensation Committee Report
The Board of Directors currently performs the functions of a Compensation
Committee. L. Paul Jensen participates in the deliberations of all officers'
compensation except for his own.
General Compensation Philosophy
In 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 1999 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
L. Paul Jensen 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. Jensen 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
1999 which totaled $30,312, including retirement plan contribution. Mr.
Jensen's salary for 1999 for the Company was $22,500.
Robert D. Johnson received compensation from the South Dakota State Medical
Association during 1999 which totaled $332,400, including retirement plan
contribution. Mr. Johnson's salary for 1999 for the Company was $106,630.
Compensation Committee Interlocks and Insider Participation
The Board of Directors currently performs the functions of a Compensation
Committee. L. Paul Jensen participates in the deliberation of all officers'
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>
EXECUTIVE COMPENSATION
<TABLE>
<S> <C> <C> <C>
Name and Principal All Other
Position Year Salary $ Compensation(1)
L. Paul Jensen 1999 $22,500 $5,943
Chief Executive Officer 1998 -- --
1997 -- --
Robert D. Johnson 1999 $106,630 $15,335
Chief Executive Officer 1998 $77,642 $15,138
1997 $76,367 $14,380
William Rossing, M.D. 1999 $110,055 $12,736
Vice President 1998 $106,603 $12,519
Medical Director 1997 $107,195 --
Kirk J. Zimmer 1999 $126,302 $16,684
Senior Vice President 1998 $116,095 $15,289
1997 $106,738 $14,000
Thomas N. Nicholson 1999 $130,055 $14,781
Vice President, Marketing 1998 $124,130 $14,473
1997 $120,101 --
</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 1999, 1998, or 1997.
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 L.
Paul Jensen and $188,700 on Kirk J. Zimmer.
In connection with employment contracts between the Company and certain
officers, provision has been made for 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. At December 31, 1999
and 1998, $97,131 and $58,274, respectively, was 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 1999, the Company has a one-year lease, which
automatically renews for one-year terms each January 1, unless terminated with
at least 30 days notice prior to the end of the lease term. The 2000 lease
requires minimum rental payments of $211,016. Total rental payments for
office space for the years December 31, 1999, 1998, and 1997 was $204,870,
$204,870, and $186,500, and 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, 1999, 1998, and 1997 was $48,330,
$47,721, and $42,517 respectively.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 2000, 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 9.31%
Class A Preferred James Engelbrecht, M.D. 1 .09%
Class C Common 1,160 .08%
Class A Preferred Ben J. Henderson, D.O. 1 .09%
Class C Common 1,060 .08%
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 1.16%
Class A Preferred Frank D. Messner, M.D. 1 .09%
Class C Common 8,800 .61%
Class A Preferred John Rittmann, M.D. 1 .09%
Class C Common 8,340 .58%
Class A Preferred Stephan D. Schroeder, M.D. 1 .09%
Class C Common 1,920 .13%
Class A Preferred James Reynolds, M.D. 1 .09%
Class C Common 50,440 3.52%
Class C Common Van Johnson -- --
Class C Common Bob Sutton -- --
Class C Common L. Paul Jensen(2) 5,760 .40%
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) 103,640 7.23%
</TABLE>
(1) The South Dakota State Medical Association is an affiliated company.
(2) L. Paul Jensen 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 1999
all other filing requirements were complied with.
OTHER MATTERS
The Board of Directors of the Company knows of no matters that 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 1999 and are serving in that capacity for 2000. 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 2001 Annual Meeting must be
received at the Company's principal executive offices, 1323 South Minnesota
Avenue, Sioux Falls, South Dakota 57105, addressed to Ben Henderson, D.O., the
Secretary of the Company, not later than January 31, 2001.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/_Ben_J._Henderson,_DO___
Ben J. Henderson, D.O.
Secretary
Dated: May 19, 2000
10
<PAGE>
DAKOTACARE
1999 DAKOTACARE ANNUAL REPORT
To our shareholders:
We would like to take this opportunity to review highlights from calendar year
1999 as it relates to the performance of DAKOTACARE. The financial results
for the first half of 1999 did not show positive results. After thoroughly
analyzing our medical loss information, it appears that DAKOTACARE experienced
the same trend seen on the national level, and when combining the operating
results for the last half of the year, DAKOTACARE ended 1999 with a statutory
loss of approximately $160,000. The favorable results seen in the last half
of 1999 have continued through the first quarter of 2000.
Another highlight from 1999 was an increase in enrollment. This trend has
carried over into the new year, and by the end of the first quarter of 2000,
DAKOTACARE's enrollment is at an all time high. As DAKOTACARE has regained
the enrollment lost from the dissolution of Dakota Health Plans, the total
number of groups sold the last quarter of 1999 is up 65% from the same time
period in 1998. We expect this enrollment growth to continue into the second
quarter of 2000.
DAKOTACARE worked diligently to keep the administrative expenses at an
acceptable level. Administrative expenses increased due to extensive costs
associated with Y2K updates and the expansion of DAKOTACARE's computer
hardware and software systems. The expansion of our computer systems will
enable us to move forward in preparing for an exciting future.
As we have all heard from the national scene, many US health insurers are
anticipating a return to a double-digit premium inflation cycle. Much of
these costs relate to medical inflation, with a large portion resulting from
the development of technology; most specifically, prescription costs for your
patients, our subscribers.
In our attempt to moderate the claims loss ratios incurred in the first half
of 1999, DAKOTACARE has taken a number of steps to improve its financial
results. DAKOTACARE has contracted with the South Dakota Foundation for Medical
Care to implement a comprehensive disease management program for the treatment
of diabetes. Another disease management program focusing on coronary artery
disease is also ready for introduction, and other disease management programs
will be developed to include other medical conditions in the upcoming months.
We are constantly reviewing and upgrading our contractual provider agreements,
and we have made modifications in our internal medical management to work with
physicians and other providers in the areas of medical management to assure
the proper utilization of services.
As we move into the next century, it is only appropriate that we recognize the
individuals that have given extensively to our organization. The commitment
of the Board of Directors and physicians of South Dakota, the DAKOTACARE
staff, and our dedicated agent force will advance your company into the next
century.
There are many new and exciting avenues as the health care environment is
constantly changing in South Dakota. Your staff and Board of Directors have
made a strong commitment to assure the continued success of your company. We
encourage you to review this Annual Report and if you have any questions
regarding any of its content, please feel free to contact our staff.
/s/_Frank_Messner___ /s/_L._Paul_Jensen___
Frank D. Messner, M.D. L. Paul Jensen
President Chief Executive Officer
South Dakota's Own DAKOTACARE | 1
<PAGE>
DESCRIPTION OF BUSINESS
South Dakota State Medical Holding Company, Incorporated (the Company,
Corporation or DAKOTACARE), was incorporated in the State of South Dakota on May
5, 1988. Its corporate offices are located at 1323 South Minnesota Avenue, Sioux
Falls, South Dakota, 57105. The Articles of Incorporation permit the Company to
engage in the development of quality comprehensive health care delivery systems;
to conduct, promote, or operate alternative health care delivery systems and
other contractual health service arrangements, including but not limited to,
traditional third party reimbursement systems, preferred provider organizations,
and health maintenance organizations (HMO).
The Company contracts with over 98% of the physicians in the State of South
Dakota, 100% of the hospitals in the State of South Dakota, and many other
health care providers to provide medical services to its enrollees. Physicians
who are members of the South Dakota State Medical Association and who complete
the Company's credentialing process may participate with the Company by
purchasing one share of Class A voting preferred stock of the Company for $10.
The fee for non-members is $1,000. The South Dakota State Medical Association
owns 100% of the Class B voting preferred stock of the Company, and through this
ownership, maintains voting control of the Company.
The Company's agreements with participating physicians stipulate compensation on
a fee-for-service basis utilizing a relative value schedule developed by the
Company. This schedule assigns a value (measured in number of units) for each
individual service for which a physician may perform and submit a bill. These
values are then multiplied by an overall value per unit assigned by the Company,
and the product is the maximum amount allowed for payment to the physician.
Actual reimbursement is at the lower of this product or the actual billed
amount. The Company, at least annually, reviews the unit values and makes
adjustments when considered necessary. The effect of this reimbursement
mechanism is to establish a maximum allowable reimbursement, which is not
dependent upon actual billed charges. Regardless of the physician bill,
reimbursement will never exceed the maximum amount established by the relative
value schedule. Physicians also may not bill patients for any excess of the
billed charge over the amount allowed by the Company, but instead have
contractually agreed to hold the patient harmless for any such amounts.
The Company's agreements with participating physicians provide that up to 20% of
fees for services provided, as submitted to and allowed by the Company, may be
withheld to provide a contingency reserve that may be used to fund operations or
meet other financial requirements of the Company. The percentage withheld for
years 1997 through 1999 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 $1,375,904 and $1,321,668
for the years ended December 31, 1999 and 1998, 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, 1999 and 1998,
was $2,723,351 and $2,690,568, respectively. The recorded liability is equal
to actual amounts withheld for the years ended December 31, 1999 and 1998, and
for the years ended December 31, 1998 and 1997, respectively.
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
<PAGE>
with DAS to perform substantially all TPA activities. During December
of 1998, DHP ceased business operations. Management expects to fully
dissolve DHP during 2000. 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.
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 630 employees. As of January 1, 2000,
DAKOTACARE and its subsidiaries provided health care services to approximately
81,000 individuals.
Approximately 11% 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 was relatively stable from
1990 to 1995 at approximately 20,000 enrollees, grew to nearly 25,000 in 1996
and 26,000 in 1997, declined to approximately 24,000 by the end of 1998 and
remained at 24,000 by the end of 1999. Commencing in 1993, the Company began
its TPA business and by January 1, 2000, had enrolled approximately 57,000 ASO
enrollees, bringing the total individuals served by the Company and its'
subsidiaries to approximately 81,000. 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.
The Company's policy is to reinsure that portion of risk in excess of $125,000
in 1999 and $85,000 in 1998 of covered hospital inpatient expenses of any
enrollee per contract year. The covered expenses are subject to a coinsurance
provision which ranged from 75% to 90% in 1999 and 50% to 90% in 1998 based on
average daily amounts specified in the plan. They are also subject to a
$2,000,000 lifetime maximum benefit per enrollee, with a $500,000 maximum plan
exposure per member per year in 1999. The Company would be liable for any
obligations that the reinsuring company is unable to meet under the
reinsurance agreement. The reinsurance agreement also provides for enrollee
benefits to be paid in the event the Company should cease operations or become
insolvent, and a conversion privilege for all enrollees in the event of plan
insolvency and for any enrollee that moves out of the service area of the
Company.
The Company operates under a license issued by the South Dakota Department of
Commerce and Regulation, Division of Insurance, for the operation of the health
maintenance organization. DAS and DHP are also registered as third party
administrators in South Dakota and several other states. The Company has also
received certification from the South Dakota Department of Labor as a workers'
compensation managed care plan.
The Company continually seeks out and evaluates opportunities for future growth
and expansion. These opportunities may include acquisitions or dispositions of
segments of its operations, marketing of insurance products underwritten by
other companies, the internal development of new products and techniques for the
containment of health care costs, and the measurement of the outcomes and
efficiency of health care delivered.
South Dakota's Own DAKOTACARE | 3
<PAGE>
ENROLLMENT BY COUNTY
DAKOTACARE 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
<PAGE>
<TABLE>
<S> <C>
Aurora 343
Beadle 1722
Bennett 59
Bon Homme 938
Brookings 5282
Brown 2848
Brule 526
Buffalo 2
Butte 473
Campbell 24
Charles Mix 617
Clark 829
Clay 1998
Codington 4256
Corson 53
Custer 483
Davison 3480
Day 307
Deuel 324
Dewey 48
Douglas 440
Edmunds 382
Fall River 297
Faulk 241
Grant 902
Gregory 199
Haakon 76
Hamlin 614
Hand 234
Hanson 474
Harding 20
Hughes 5552
Hutchinson 764
Hyde 47
Jackson 127
Jerauld 250
Jones 83
Kingsbury 952
Lake 1937
Lawrence 1235
Lincoln 930
Lyman 191
Marshall 249
McCook 353
McPherson 132
Mead 1055
Mellette 25
Miner 158
Minnehaha 25598
Moody 444
Pennington 4793
Perkins 109
Potter 230
Roberts 338
Sanborn 368
Shannon 36
Spink 1372
Stanley 722
Sully 124
Todd 38
Tripp 633
Turner 704
Union 730
Walworth 240
Yankton 2336
Ziebach 33
</TABLE>
South Dakota's Own DAKOTACARE | 5
<PAGE>
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, but a limited number of
exchanges of Class C shares have occurred directly between interested buyers
and sellers. 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 101,180 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 21, 2000, there were 1,130 holders of record of Class A preferred
stock, 1 holder of Class B preferred stock, and 690 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, 1999 and 1998 was $200,000 on a statutory basis of accounting,
which the Company significantly exceeded. During 1999 and 1998, the Company paid
dividends of $73,267 and $146,754, respectively, on Class C stock.
South Dakota's Own DAKOTACARE | 6
<PAGE>
STOCK REPURCHASE PLAN
As a service to the Company's shareholders to facilitate liquidity for Class C
common stock (Common Stock) in the event of death, disability, or retirement of
a shareholder, the Company's Board of Directors adopted a Stock Repurchase
Program (Program) which was implemented in February 1998. Participation in the
Program is voluntary. No shareholder is required to sell his or her shares of
Common Stock under the Program nor is the Company required to purchase any
Common Stock under the Program. During 1999 and 1998, 32,397 and 40,415
shares, respectively, were acquired for the treasury under the program. The
value per share was computed using guidelines established in 1995 by an
investment organization, and updated using audited consolidated 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. During 1999, the Company issued a total of 85 shares of
Class A Preferred Stock to physicians who entered into participation agreements
with the Company. To the extent that the registration provisions of the
Securities Act of 1933, as amended, were applicable to these transactions, the
Company relied on the exemption from registration contained in Section 4(2) of
that act.
South Dakota's Own DAKOTACARE | 7
<PAGE>
TOTAL ASSETS
1995 $11.4 million
1996 12.8 million
1997 14.0 million
1998 14.3 million
1999 13.7 million
TOTAL REVENUE
1995 $31.0 million
1996 34.1 million
1997 40.8 million
1998 41.4 million
1999 39.1 million
CASH & INVESTMENTS
1995 $ 8.3 million
1996 9.3 million
1997 10.4 million
1998 10.3 million
1999 9.8 million
South Dakota's Own DAKOTACARE | 8
<PAGE>
FINANCIAL REVIEW
Consolidated Balance Sheets Pages 10-11
Consolidated Statements of Operations 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
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
ASSETS 1999 1998
------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 5,494,336 $ 5,372,457
Investment in securities held to maturity
(Note 5) 431,570 405,094
Certificates of deposit 500,000 575,000
Receivables (Note 3) 929,028 1,252,780
Prepaids and other assets 140,513 153,930
Deferred income taxes (Note 8) 639,000 647,000
----------------------------
TOTAL CURRENT ASSETS 8,134,447 8,406,261
----------------------------
Long-Term Investments
Investment in securities held to maturity
(Note 5) 3,055,769 3,567,422
Investment in securities available for sale
(Note 5) 286,400 305,700
Pledged certificates of deposit (Note 5) 500,000 500,000
Certificate of deposit 50,000 50,000
Contracts with life insurance companies 107,089 100,000
----------------------------
3,999,258 4,523,122
----------------------------
Property and Equipment, at cost,
net of accumulated depreciation 1,110,477 913,006
Deferred Income Taxes (Note 8) 409,600 435,000
----------------------------
$13,653,782 $14,277,389
----------------------------
----------------------------
See Notes to Consolidated Financial Statements.
South Dakota's Own DAKOTACARE | 10
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------------------------------------------------
Current Liabilities
Reported and unreported claims payable (Note 7) $ 4,667,253 $ 4,409,622
Unearned premiums and administration fees 849,777 839,043
Accounts payable and accrued expenses 818,401 727,925
Contingency reserves payable (Note 6) 1,300,000 1,300,000
----------------------------
TOTAL CURRENT LIABILITIES 7,635,431 7,276,590
----------------------------
Contingency Reserves Payable (Note 6) 1,423,351 1,390,568
----------------------------
Minority Interest in Subsidiary 355,001 350,606
----------------------------
Commitments and Contingencies (Notes 4 and 13)
Stockholders' Equity (Note 9)
Class A preferred, voting, no par value, $10
stated value, 2,500 shares authorized; 1,148
and 1,105 shares issued at December 31, 1999
and 1998 11,480 11,050
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 1,076,912 1,771,993
Accumulated other comprehensive income (loss) (34,914) (8,638)
Less cost of Class C common treasury stock,
1999 72,812 shares, 1998 40,415 shares (579,179) (280,480)
----------------------------
4,239,999 5,259,625
----------------------------
$13,653,782 $14,277,389
----------------------------
----------------------------
</TABLE>
South Dakota's Own DAKOTACARE | 11
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
D/B/A DAKOTACARE
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
-------------------------------------------------------------------------------
Revenues:
Premiums $ 34,705,625 $ 36,157,947 $ 35,124,035
Less premiums ceded for reinsurance (457,120) (440,396) (369,888)
------------ ------------ ------------
34,248,505 35,717,551 34,754,147
Third party administration fees 3,060,583 3,080,947 3,628,131
Investment income 513,599 606,615 615,134
Other income 605,401 647,850 583,648
------------ ------------ ------------
TOTAL REVENUES 38,428,088 40,052,963 39,581,060
------------ ------------ ------------
Operating expenses:
Claims incurred 30,539,355 31,318,143 31,593,161
Less reinsurance recoveries (444,296) (703,563) (616,801)
------------ ------------ ------------
30,095,059 30,614,580 30,976,360
Personnel expenses 4,084,953 3,891,275 3,804,217
Commissions 1,385,917 1,425,808 1,513,054
Professional fees expenses 1,040,665 1,020,213 970,237
Office expenses 680,132 625,614 673,114
Occupancy expenses 693,391 657,207 656,951
State insurance taxes 418,872 458,519 421,622
Advertising expenses 386,280 378,638 378,310
Other general and administrative expenses457,181 378,000 309,286
------------ ------------ ------------
TOTAL OPERATING EXPENSES 39,242,450 39,449,854 39,703,151
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST (814,362) 603,109 (122,091)
Income taxes (benefit) (Note 8) (196,943) 123,625 (57,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST (617,419) 479,484 (65,091)
Minority interest in income (loss)
of subsidiary 4,395 (3,554) 45,017
------------ ------------ ------------
NET INCOME (LOSS) $ (621,814) $ 483,038 $ (110,108)
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per common share $ (0.43) $ 0.33 $ (0.07)
------------ ------------ ------------
------------ ------------ ------------
</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, 1999, 1998, AND 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Capital Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income(Loss) Stock Total
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 26,778 $3,749,342 $ 1,877,084 $(13,132) $250,000 $ 5,640,072
Issuance of Class A preferred stock 1,940 - - - - 1,940
Redemption of Class A preferred stock (1,670) - - - - (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 (loss) - - - - - (104,917)
-----------------------------------------------------------------------------------
Balance, December 31, 1997 27,048 3,749,342 1,435,709 (7,941) - 5,204,158
Issuance of Class A preferred stock 900 - - - - 900
Redemption of Class A preferred stock (540) - - - - (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 27,408 3,749,342 1,771,993 (8,638) (280,480) 5,259,625
Issuance of Class A preferred stock 850 - - - - 850
Redemption of Class A preferred stock (420) - - - - (420)
Dividends paid on Class C common stock - - (73,267) - - (73,267)
Purchase of treasury stock (Note 9) - - - - (298,699) (298,699)
Comprehensive income:
Net (loss) - - (621,814) - -
Net change in unrealized loss on securities
available for sale - - - (26,276) -
Comprehensive income (loss) - - - - - (648,090)
-----------------------------------------------------------------------------------
Balance, December 31, 1999 $ 27,838 $3,749,342 $ 1,076,912 $(34,914) $ (579,179)$ 4,239,999
-----------------------------------------------------------------------------------
-----------------------------------------------------------
</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, 1999, 1998 AND 1997
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
-------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) $(621,814) $ 483,038 $ (110,108)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 329,472 307,211 318,493
Minority interest in income (loss) of subsidiary 4,395 (3,554) 45,017
Amortization of discounts and premiums on
investments and certificates of deposit, net (130,662) (138,461) (139,675)
(Increase) decrease in receivables 323,752 (453,385) 36,969
(Increase) decrease in prepaids and other assets 13,417 (29,201) 13,758
(Increase) decrease in deferred income taxes 33,400 60,000 (284,000)
Increase in reported and unreported
claims payable 257,631 245,818 975,349
Increase in accounts payable
and accrued expenses 98,632 32,875 15,629
Increase (decrease) in unearned premiums
and administration fees 10,734 209,260 (225,122)
Increase (decrease) in contingency
reserves payable 32,783 (273,278) 858,552
------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 351,740 440,323 1,505,862
------------------------------------------
Cash Flows From Investing Activities
Purchase of securities available for sale (6,976) (6,397) (6,259)
Held to maturity securities:
Matured 560,000 985,000 525,000
Purchased - (367,364) (726,030)
Repayments on collateralized mortgage obligations 55,839 283,548 157,013
Proceeds from maturities of certificates
of deposit 1,075,000 1,447,000 1,470,000
Purchase of certificates of deposit (1,000,000) (1,175,000) (1,325,000)
(Increase) in contracts with life
insurance companies (15,245) (19,000) (12,000)
Purchase of property and equipment (526,943) (256,533) (231,238)
Proceeds from sale of property and equipment - - 18,711
------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 141,675 891,254 (129,803)
------------------------------------------
See Notes to Consolidated Financial Statements.
South Dakota's Own DAKOTACARE | 14
<PAGE>
1999 1998 1997
------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of capital stock $ 850 $ 900 $ 1,940
Redemption of capital stock (420) (540) (1,670)
Payment of dividends (73,267) (146,754) (331,267)
Purchase of treasury stock (298,699) (280,480) -
------------------------------------------
NET CASH (USED IN) FINANCING ACTIVITIES (371,536) (426,874) (330,997)
------------------------------------------
INCREASE IN CASH AND
CASH EQUIVALENTS 121,879 904,703 1,045,062
Cash and Cash Equivalents
Beginning 5,372,457 4,467,754 3,422,692
------------------------------------------
Ending $ 5,494,336 $ 5,372,457 $ 4,467,754
------------------------------------------
------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Income taxes, net of refunds $(250,000) $ 315,275 $ 2,000
Supplemental Disclosures of Noncash Investing
and Financing Activities
(Increase) decrease in unrealized loss on
securities available for sale (26,276) (697) 5,191
</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 2000 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 contingency reserves payable and 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. 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>
<S> <C> <C>
1999 1998
----------------------------------
Furniture, equipment and automobiles $ 2,740,214 $ 2,485,278
Building and building improvements 53,370 53,370
Other 134,818 134,818
----------------------------------
2,928,402 2,673,466
Less accumulated depreciation 1,817,925 1,760,460
----------------------------------
$1,110,477 $ 913,006
----------------------------------
----------------------------------
</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 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 1,448,600 in 1999, 1,482,635
in 1998, and 1,505,760 in 1997. All references to earnings (loss) per share
in the consolidated financial statements are to basic earnings (loss) per
share, as the Company has no potential common stock.
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.
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 established standards for related disclosures about products and
services, geographic areas, and major customers. 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.
Investments: Fair values for the Company's investment securities are based on
quoted market prices. At December 31, 1999, the carrying amount and fair value
of the Company's investment securities was $3,773,739 and $3,760,201,
respectively. 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.
Accrued interest receivable: The carrying amount approximates fair value due
to the nature of the balances recorded.
South Dakota's Own DAKOTACARE | 17
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. RECEIVABLES
Receivables consist of the following:
<TABLE>
<S> <C> <C>
1999 1998
-------- ----------
Commissions $ - $ 3,561
Drug manufacturer chargebacks 145,064 133,111
Premiums 86,667 61,055
Subrogation, net of recovery expenses 88,500 84,011
Interest 21,099 27,068
Reinsurance - 275,651
Income taxes 252,000 273,650
Funds withheld by ceding insurer 115,270 104,485
Other 220,428 290,188
---------- ----------
929,028 1,252,780
Less allowance for doubtful accounts -- --
---------- ----------
$ 929,028 $1,252,780
---------- ----------
---------- ----------
</TABLE>
NOTE 4. REINSURANCE
The Company's policy is to reinsure that portion of risk in excess of $125,000
in 1999 and $85,000 in 1998 of covered hospital inpatient expenses of any
enrollee per contract year, subject to a coinsurance provision which ranged
from 75% to 90% in 1999 and 50% to 90% in 1998 based on average daily amounts
specified in the plan, and a $2,000,000 lifetime maximum benefit per enrollee,
with a $500,000 maximum plan exposure per member per year in 1999. 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, 1999 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------------
Debt securities held to maturity:
Obligations of U.S. treasury, government
agencies and corporations $ 482,228 $ 4,530 $ (284) $ 486,474
Obligations of state and
political subdivisions 2,994,536 18,904 (36,364) 2,977,076
U.S. governmental agency collateralized
mortgage obligations 10,575 - (324) 10,251
--------------------------------------------------------
$3,487,339 $ 23,434 $ (36,972) $3,473,801
--------------------------------------------------------
--------------------------------------------------------
Equity securities available for sale:
Bond mutual funds $ 321,314 $ - $ (34,914) $ 286,400
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
South Dakota's Own DAKOTACARE | 18
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair values of debt securities, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because the borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<S> <C> <C>
December 31, 1999
------------------------------
Amortized Estimated
Cost Fair Value
------------------------------
Due in one year $ 431,570 $ 432,697
Due after one year through five years 1,990,566 2,002,787
Due after five years through ten years 981,258 951,391
Due after ten years 73,370 76,675
------------------------------
3,476,764 3,463,550
Collateralized mortgage obligations 10,575 10,251
------------------------------
$ 3,487,339 $ 3,473,801
------------------------------
------------------------------
</TABLE>
Investment securities at December 31, 1998 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
Debt securities held to maturity:
Obligations of U.S. treasury, government
agencies and corporations $ 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>
There were no sales of debt or equity securities during the years ended December
31, 1999, 1998 or 1997, and accordingly, no reclassification adjustments on
investment securities for the respective years. At December 31, 1999 and 1998,
no individual investments in obligations of state and political subdivisions
exceeded 10% of the Company's equity.
At December 31, 1999 and 1998, 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 1997 through 1999 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 at December 31, 1999,
is equal to actual amounts withheld for the years ended December 31, 1999 and
1998. In 1999, contingency reserve payments to physicians were $299,990.
During 1999, the Company's Board of Directors, with approval from the Division
of Insurance, voted to write off $1,043,131 of contingency reserves withheld in
1997, which reduced claims expense in 1999 and was accounted for as a change in
accounting estimate. This change had the effect of decreasing net loss for
1999 by $688,470, or $.48 per common share, net of income taxes.
South Dakota's Own DAKOTACARE | 19
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. REPORTED AND UNREPORTED CLAIMS PAYABLE
Activity in the liability for reported and unreported claims payable is
summarized as follows:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---------------------------------------------------
Balance at January 1 $ 4,409,622 $ 4,163,804 $ 3,188,455
---------------------------------------------------
Incurred related to:
Current year 30,226,506 30,197,890 30,237,417
Prior years 911,684 416,690 738,943
Contingency reserves written off (1,043,131) - -
---------------------------------------------------
Total incurred 30,095,059 30,614,580 30,976,360
---------------------------------------------------
Paid related to:
Current year 24,240,777 25,704,590 26,217,052
Prior years 5,321,000 4,710,337 3,920,866
---------------------------------------------------
Total paid 29,561,777 30,414,927 30,137,918
---------------------------------------------------
Less reinsurance recoverables at January 1 (275,651) (229,486) (92,579)
Plus reinsurance recoverables at December 31 - 275,651 229,486
---------------------------------------------------
Balance at December 31 $ 4,667,253 $ 4,409,622 $ 4,163,804
---------------------------------------------------
---------------------------------------------------
</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>
<S> <C> <C> <C>
1999 1998 1997
---------------------------------------
Current $(230,343) $ 63,625 $227,000
Deferred (benefit) 33,400 60,000 (284,000)
---------------------------------------
$(196,943) $ 123,625 $(57,000)
---------------------------------------
---------------------------------------
</TABLE>
Total income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35 percent to income before income taxes as a
result of the following:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---------------------------------------
Computed "expected" tax expense (benefit) $(285,000) $ 211,000 $ (42,700)
Tax exempt interest (42,788) (43,281) (38,861)
Lobbying 2,977 4,866 9,105
Reversal of overaccrual of prior year's taxes - (26,576) -
Change in valuation allowance for deferred
tax assets 108,400 - -
Effect of tax rate brackets and other 19,468 (22,384) 15,456
---------------------------------------
$(196,943) $ 123,625 $ (57,000)
---------------------------------------
---------------------------------------
</TABLE>
South Dakota's Own DAKOTACARE | 20
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
d/b/a DAKOTACARE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax assets consist of the following components at December 31:
<TABLE>
<S> <C> <C>
1999 1998
----------------------------
Deferred tax assets:
Contingency reserves payable $ 926,000 $ 915,000
Reported and unreported claims payable 45,500 44,000
Unearned premiums 50,800 50,000
Accrued expenses and other 83,300 95,000
Net unrealized loss on securities available for sale 11,900 -
Net operating loss carryforward of subsidiary 108,400 39,000
----------------------------
1,225,900 1,143,000
Less valuation allowance 120,300 -
----------------------------
1,105,600 1,143,000
----------------------------
Deferred tax liability:
Property and equipment (57,000) (61,000)
----------------------------
$ 1,048,600 $ 1,082,000
----------------------------
----------------------------
Reflected on the accompanying balance sheets as follows:
1999 1998
----------------------------
Current assets $ 639,000 $ 647,000
Noncurrent assets 409,600 435,000
----------------------------
$ 1,048,600 $ 1,082,000
----------------------------
----------------------------
</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 1999 and 1998,
32,397 and 40,415 shares, respectively, were acquired for the treasury 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 Division of Insurance at December 31,
1999 and 1998 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, 1999, 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). The Company has a one year lease which
automatically renews for one year terms each January 1, unless terminated
with at least 30 days notice prior to the end of the lease term. The 2000
lease renewal requires minimum rental payments of $211,016. Total rental
payments for this office space for the years ended December 31, 1999, 1998
and 1997 were $204,870, $204,870 and $186,500, 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, 1999, 1998 and 1997 was $48,330, $47,721, and $42,517,
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, 1999, 1998 and
1997. Retirement plan expense for the years ended December 31, 1999, 1998
and 1997 was $238,689, $233,483, and $216,364, 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, 1999 and 1998, $97,131 and $58,274, 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'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 depreciation on the
underlying assets.
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>
<S> <C> <C> <C> <C>
Year Ended December 31, 1999
------------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
Revenues from external customers $ 34,048,724 $ 3,259,507 $ 646,836 $ 37,955,067
Intersegment revenues - 241,325 - 241,325
Investment income 455,461 44,138 14,000 513,599
Depreciation expense 88,147 241,325 - 329,472
Segment (loss) (621,814) (267,738) (200,888) (1,090,440)
Equity in net (loss) of subsidiaries (473,021) - - (473,021)
Income tax (benefit) (55,950) (140,993) - (196,943)
Segment assets 12,905,809 1,699,895 457,870 15,063,574
Year Ended December 31, 1998
------------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
--------------------------------------------------------
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 (44,420) - - (41,420)
Income tax expense (benefit) 158,350 (34,725) - 123,625
Segment assets 13,607,488 1,953,572 475,006 16,036,066
Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------
HMO TPA Reinsurance Totals
----------------------------------------------------------
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 income of
subsidiaries (45,830) - - (45,830)
Income tax expense (benefit) (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
</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>
<S> <C> <C> <C>
1999 1998 1997
---------------------------------------------
Revenues
Total external revenues for reportable segments $ 37,955,067 $ 40,011,543 $ 39,535,230
Intersegment revenues for reportable segments 241,325 236,526 864,735
Elimination of intersegment revenues (241,325) (236,526) (864,735)
Elimination of net (loss) of subsidiaries (473,021) (41,420) (45,830)
---------------------------------------------
Total consolidated revenues $ 38,428,088 $ 40,052,963 $ 39,581,060
---------------------------------------------
---------------------------------------------
Income or Loss
Total income (loss) for reportable segments $ (1,090,440) $ 438,064 $ (110,921)
Elimination of equity in net (loss)
of subsidiaries (473,021) (41,420) (45,830)
Minority interest in income (loss) of subsidiary 4,395 (3,554) 45,017
---------------------------------------------
Total consolidated net income (loss) $ (621,814) $ 483,038 $ (110,108)
---------------------------------------------
---------------------------------------------
Assets
Total assets for reportable segments $ 15,063,574 $ 16,036,066 $ 15,654,729
Elimination of intercompany receivable (135,058) (100,922) (44,753)
Elimination of investment in subsidiaries (1,274,734) (1,657,755) (1,599,175)
---------------------------------------------
Total consolidated assets $ 13,653,782 $ 14,277,389 $ 14,010,801
---------------------------------------------
---------------------------------------------
</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 2000, 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.
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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ McGLADREY & PULLEN, LLP
Sioux Falls, South Dakota
March 7, 2000
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, 1999, 1998, 1997 and 1996. The
results indicated in the following tables are not indicative of future operating
results.
The combined ratio, which reflects underwriting results but not investment and
ancillary income, is a traditional measure of the underwriting performance of a
health maintenance organization. A combined ratio of less than 100% indicates
underwriting profitability while a combined ratio in excess of 100% indicates an
underwriting loss.
<TABLE>
<S> <C> <C> <C> <C>
Years Ended December 31,
-----------------------------
1999 1998 1997 1996
---- ---- ---- ----
Loss ratio 87.5% 85.9% 88.7% 81.7%
Expense ratio 15.8% 15.0 14.5 16.3
----- ----- ---- ----
Combined ratio 103.3% 100.9% 103.2% 98.0%
----- ----- ---- ----
----- ----- ---- ----
</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 increase in the loss ratio was due to increased utilization, increased
hospital costs and decreased premium income, but was offset by decreased
physicians costs in 1999. 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, 1999 and
December 31, 1998 and Comparison of Years December 31, 1998 and
December 31, 1997.
RESULTS OF OPERATIONS
GENERAL
The following results of operations include the operations of DAKOTACARE and its
subsidiaries for the years ended December 31, 1999, 1998, and 1997.
COMPARISON OF YEARS DECEMBER 31, 1999 AND DECEMBER 31, 1998
GENERAL
The Company's net income decreased $1,104,852 to a loss of $621,814 for the
year ended December 31, 1999, as compared to income of $483,038 for the year
ended December 31, 1998, representing a 228.7% decrease. This decrease was
primarily due to a decrease in net premium income of $1,469,046, a decrease in
other revenues of $155,829, and an increase in administrative expenses of
$312,117. These were offset by a decrease in net claims of $519,521 and a
decrease in income taxes of $320,568.
REVENUES
Total revenues decreased $1,624,875, or 4.1%, for the year ended December 31,
1999, as compared to December 31, 1998. Revenues from net premiums generated
by the health maintenance organization decreased $1,441,204. This decrease is
attributable to a 6.8% decrease in the number of enrollee months for the year
ended December 31, 1999, as compared to December 31, 1998, but was somewhat
offset by a 2.9% increase in the premiums earned per enrollee. The increase
in revenue per enrollee was needed to keep pace with rising claim costs per
enrollee. The decrease in enrollees was due to the competitive business climate
in the local marketplace. Revenues from the third party administration fees
decreased by $20,364 eventhough enrollees participating in the Company's
subsidiaries' TPA plans increased. This decrease in revenue per enrollee stems
from the competitive local marketplace, also. Investment income decreased
$93,016 due primarily to a decrease in the amount of average invested assets
used for operations.
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 $207,404, or 0.5%, for the year ended
December 31, 1999, as compared to December 31, 1998. The change was due
primarily to a decrease in claims incurred, commissions and state insurance
taxes, but was offset by an increase in personnel, professional fees, office,
occupancy and other general and administrative expenses.
Net claims expense decreased by $519,521, or 1.7%, for the year ended
December 31, 1999, as compared to December 31, 1998. Average claims per
enrollee increased by 4.4% while the number of enrollees decreased by 6.8%.
The enrollee decline caused the overall net claims expense to decrease.
Commissions expense and state insurance taxes decreased by $39,891 and $39,647,
respectively, in 1999 as compared to 1998 due to the decreased premium income
of the HMO. Personnel expenses increased $193,678, or 5.0%, in 1999 as compared
to 1998. This was due primarily to annual compensation adjustments and a
minimal amount of staff turnover. Professional fees expense increased $20,452,
or 2.0%, in 1999 as compared to 1998. This was primarily due to increased
actuarial services needed during the year. Office expense increased $54,518,
or 8.7%, in 1999 as compared to 1998 due primarily from additional postage and
printing expenses as a result of increased communications with enrollees.
Occupancy expense increased $36,184, or 5.5%, due to increased depreciation
expense resulting from the additional equipment purchased in 1999 as compared
to 1998. Other general and administrative expenses increased $79,181, or 20.9%,
in 1999 as compared to 1998. This was primarily due to the continued addition
of licenses and service fees in using computer databanks for information.
Insurance expenses also increased due to rising costs and coverage increases
elected.
INCOME TAXES
Income tax expense (benefit) represents 24.2% and 20.5% of income (loss) before
income taxes and minority interest for the years ended December 31, 1999 and
1998, respectively. In 1999, permanent tax differences and a valuation
allowance recorded against deferred income taxes reduced the amount of income
tax benefit. This reduced the percentage below the expected 34%. In 1998,
permanent tax differences and the effect on the tax rate brackets decreased the
estimated provision, thus decreasing the related percentage. See Note 8 of the
Notes to Consolidated Financial Statements.
COMPARISON OF YEARS DECEMBER 31, 1998 AND DECEMBER 31, 1997
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 | 27
<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 (benefit) represents 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash have been premium and fee revenue,
collection of premiums in advance of the claims costs associated with them, and
an agreement with participating physicians in which a percentage of fees for
services is withheld for cash flows of the Company. The Company in the past has
had borrowings from banks and affiliated companies, but currently does not need
to borrow for liquidity purposes.
Net cash provided by operating activities decreased by $88,583 to $351,740
for the year ended December 31, 1999, as compared to 1998. Net cash provided
by operating activities remained positive primarily due to the decrease in
receivables, an increase in reported and unreported claims payable and an
increase in accounts payable and accrued expenses since December 31, 1998. The
cash provided from these items were offset by the net loss for the year ended
December 31, 1999.
Other uses of cash and cash equivalents were for the payment of dividends, the
purchases of property and equipment and the purchase of treasury stock. 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, 1999, the Company has certificates of deposit of $500,000 on
deposit with the Division to meet the deposit requirements of state insurance
laws.
South Dakota's Own DAKOTACARE | 28
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (cont)
The Company is not contractually obligated to pay out contingency reserves
withheld but has historically elected to pay out a majority of amounts withheld.
In 1999, the Company paid $299,990 of the total $1,343,121 withheld for claims
incurred in 1997. The balance was claimed as a reduction of claims expense and
removed from the contingency reserves as directed by the Board of Directors.
The decision not to pay the full amount of contingent reserves withheld was
due to the net loss for the year resulting from the higher claims loss ratio.
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. Currently, the reserves withheld in 1999 and 1998 are the only
amounts remaining within the contingent reserve payable.
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.
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.
YEAR 2000
There were no adverse problems with the computer systems, data systems or any
other items which rely on using computer dates, during the conversion from
1999 to 2000. No additional costs were incurred or are expected to be
incurred in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk as defined by Item 305 of
Regulation S-K. The Company has market risk with its cash and investments, but
due to the conservative nature of the invested assets, management feels that
market risk is limited.
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, 1999, 1998, 1997, 1996 and 1995 (dollars in thousands, except per
share data):
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------ -------
Income Statement Data:
Net premiums $34,249 $35,718 $34,754 $28,688 $26,643
Third party administration fees 3,061 3,081 3,628 3,786 3,023
Investment income 514 607 615 552 489
Total revenues 38,428 40,053 39,581 33,425 30,513
Net claims incurred 30,095 30,615 30,976 23,425 20,305
Other operating expenses 9,147 8,835 8,727 8,393 7,587
Income (loss) before income taxes
and minority interest (814) 603 (122) 1,607 2,621
Net income (loss) (622) 483 (110) 1,041 1,790
======= ======= ======= ======= =======
Earnings (loss) per common share(1) $ (0.43) $ 0.33 $ (0.07) $ 0.69 $ 1.19
======= ======= ======= ======= =======
Balance Sheet Data:
Invested assets and cash $10,425 $10,876 $10,981 $ 9,874 $ 8,843
Total assets 13,654 14,277 14,011 12,777 11,425
Reported and unreported
claims payable 4,667 4,410 4,164 3,188 2,710
Contingency reserves payable 2,723 2,691 2,964 2,105 1,955
Total liabilities 9,414 9,017 8,807 7,137 6,545
Stockholders' equity 4,240 5,260 5,204 5,640 4,880
</TABLE>
(1) Earnings per common share for 1995 has 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: 1999 1,448,600; 1998
1,482,635 shares; 1997 1,505,760 shares; 1996 1,505,760 shares; 1995 1,505,760
shares.
South Dakota's Own DAKOTACARE | 30
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
---------
Frank D. Messner, M.D., President Yankton Radiology, Radiologist
K. Gene Koob, M.D., Vice President Neurology Associates, Neurologist
Ben J. Henderson, D.O., Secretary/Treasurer Mobridge Medical Center, Internist
Thomas L. Krafka, M.D., Radiology Associates, Radiologist
Stephan D. Schroeder, M.D., Hand County Clinic, Family Practitioner
John E. Rittmann, M.D., Brown Clinic, Family Practitioner
James A. Engelbrecht, M.D., Drs. Engelbrecht and Weaver, Rheumatologist
James R. Reynolds, M.D., North Central Heart Institute, Cardiac, Thoracic and
Vascular Surgeon
Bob L. Sutton, South Dakota Bankers Association, Executive Vice President
R. Van Johnson, South Dakota Automobile Dealers Association, Executive Vice
President; South Dakota Trucking Association, Executive Director
EXECUTIVE OFFICERS
------------------
L. Paul Jensen
Chief Executive Officer
Kirk J. Zimmer
Senior Vice President
William O. Rossing, M.D.
Vice President, Medical Director
Sharon K. Duncan
Vice President, System Operations
Dean M. Krogman
Vice President, External Operations
Barbara A. Smith
Vice President, Medical Services
Thomas N. Nicholson
Vice President, Sales and Marketing
Bruce E. Hanson
Vice President, Finance
Brian E. Meyer
Vice President, Information Systems
CORPORATE HEADQUARTERS
DAKOTACARE
123 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, PA
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:
Investors 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 in Rapid City, South Dakota, on Thursday June 8, 2000,
at 9:15 am.
INTERNET ADDRESS
To access information about DAKOTACARE including provider directories, product
and service information, and wellness issues, 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 23 DAKOTACARE sales agencies assures that our clients
receive the local attention to service that they desire.
1. KARLEN & ASSOCIATES, INC., Aberdeen SD (605)225-9011
2. JENSEN INSURANCE & REAL ESTATE, Beresford, SD (605)763-2675
3. DELLA TSCHETTER INSURANCE, Brookings, SD (605)692-2078
4. FLANAGAN AGENCY, Huron, SD (605)352-3512
5. KUNDERT-WILLIAMS INSURANCE AGENCY, Madison, SD (605)256-6608
6. DICE FINANCIAL SERVICES, Mitchell, SD (605)996-7171
7. OAHE AGENCY, Mobridge, SD (605)845-2649
8. INSURANCE ASSOCIATES, Platte, SD (605)337-2628
9. BOB CLARK INSURANCE, INC., Pierre, SD (605)224-4049
10. BOB CLARK INSURANCE, INC., Rapid City, SD (605)348-7410
11. TIMOTHY KATTKE, Redfield, SD (605)472-1445
12. ALLEN INSURANCE, Sioux Falls, SD (605)338-9794
13. BOEN AND ASSOCIATES, INC., Sioux Falls, SD (605)36-0425
14. NORTHWESTERN GROUP MARKETING SERVICES, Sioux Falls, SD (605)361-9788
15. OLSON & ASSOCIATEDS INSURORS, INC., Sioux Falls, SD (605)335-7777
16. DALE SHADE, Sioux Falls, SD (605)36-0460
17. TERRY TENDLER, Sioux Falls, SD (605)335-8841
18. WOLLMAN INSURANCE AGENCY, Sioux Falls, SD (605)334-0004
19. KEN ASHEIM INSURANCE, Spearfish, SD (605)644-0506
20. ROYAL F. KOCH AGENCY, Tyndall, SD (605)589-3572
21. KINSMAN INSURANCE AGENCY, Watertown, SD (605)886-4911
22. STOUDT'S INSURANCE AGENCY, INC., Watertown, SD (605)886-9719
23. CIHAK INSURANCE, Yankton, SD (605)665-9393
South Dakota's Own DAKOTACARE | 32
<PAGE>
DAKOTACARE
1323 South Minnesota Avenue
Sioux Falls, SD 57105
BALLOT AND PROXY
The undersigned hereby appoints Frank Messner, M.D., and Ben Henderson, D.O.,
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 8, 2000,
at 9:15 a.m., MDT, or any adjournment thereof, for holders of Class A voting
preferred stock as of May 19, 2000.
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 2003.
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 Engelbrecht, M.D.
_____ K. Gene Koob, M.D.
_____ John Sternquist, M.D.
Please return this ballot and proxy in the accompanying prepaid postage
envelope. The Ballot and Proxy must be received at the DAKOTACARE office and
must be postmarked no later than June 4, 2000.
Signature
Name (please print)
Date
<PAGE>
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<S> <C> <C>
March 31, December 31,
ASSETS 2000 1999
Cash and cash equivalents $ 7,656,310 $ 5,494,336
Investments in securities held to maturity 148,036 431,570
Certificates of deposit 500,000 500,000
Receivables 842,102 929,028
Prepaids and other assets 114,797 140,513
Deferred income taxes 665,000 639,000
------------- -------------
Total current assets $ 9,926,245 $ 8,134,447
------------- -------------
Investment in securities held to maturity $ 3,088,706 $ 3,055,769
Investments in securities available for sale 115,100 286,400
Pledged certificates of deposit 500,000 500,000
Certificate of deposit 50,000 50,000
Contracts with life insurance companies 105,079 107,089
------------- -------------
Total long-term investments $ 3,858,885 $ 3,999,258
------------- -------------
Property and equipment, net of accum. depreciation $ 1,064,307 $ 1,110,477
------------- -------------
Deferred income taxes $ 410,500 $ 409,600
------------- -------------
$ 15,259,937 $ 13,653,782
============= =============
LIABILITIES
Reported and unreported claims payable $ 4,718,278 $ 4,667,253
Unearned premiums and administration fees 1,198,648 849,777
Accounts payable and accrued expenses 1,026,969 818,401
Contingency reserves payable 1,300,000 1,300,000
------------- -------------
Total current liabilities $ 8,243,895 $ 7,635,431
Contingency reserves payable 1,711,714 1,423,351
------------- -------------
Total liabilities $ 10,206,859 $ 9,058,782
------------- -------------
Minority interest in subsidiary $ 355,746 $ 355,001
------------- -------------
STOCKHOLDERS' EQUITY
Class A preferred stock, issued 1,163 shares $ 11,630 $ 11,480
Class B preferred stock, issued 1,300 shares 1,300 1,300
Class C common stock, issued 1,505,760 shares 15,058 15,058
Additional paid-in capital 3,749,342 3,749,342
Retained earnings 1,756,146 1,076,912
Accumulated other comprehensive income (5,715) (34,914)
Treasury Stock, Class C common stock (579,179) (579,179)
------------- -------------
$ 4,948,582 $ 4,239,999
------------- -------------
$ 15,259,937 $ 13,653,782
============= =============
</TABLE>
See Notes to Consolidated Financial Statements. 2
<PAGE>
SOUTH DAKOTA STATE MEDICAL HOLDING
COMPANY, INCORPORATED d/b/a DAKOTACARE
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended March 31,
2000 1999
Revenues:
Premiums, net of reins. ceded $ 9,696,608 $ 8,281,038
Third party administration fees 826,684 772,650
Investment income 125,411 125,310
Other income 163,934 139,511
------------- -------------
Total revenues $ 10,812,637 $ 9,318,509
------------- -------------
Operating expenses:
Claims incurred,
net of reins. recoveries $ 7,380,452 $ 7,656,802
Personnel expense 1,009,817 1,024,092
Commissions 441,231 361,084
Professional fees expense 275,285 259,164
Office expense 108,256 175,807
Advertising 87,720 109,578
Occupancy expense 196,999 175,998
State insurance taxes 108,700 92,271
Other general and
administrative expenses 167,512 92,918
------------- -------------
Total operating expenses $ 9,775,972 $ 9,947,714
------------- -------------
Income (loss) before income taxes
and minority interest $ 1,036,665 $ (629,205)
Income taxes (benefit) 356,685 (251,000)
------------- -------------
Income (loss) before minority
interest $ 679,980 $ (378,205)
Minority interest in income
(loss) of subsidiary 746 1,480
------------- -------------
Net income (loss) $ 679,234 $ (379,685)
============= =============
Earnings (loss) per common share $ 0.47 $ (0.26)
============= =============
Weighted average number of
common shares outstanding 1,432,948 1,465,345
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
PLEASE BRING THIS WITH YOU TO THE MEETING
AGENDA
CORPORATE BODY MEETING OF
SD STATE MEDICAL HOLDING COMPANY, INC.
JUNE 8, 2000, 9:15 A.M. MDT
RUSHMORE PLAZA HOLIDAY INN & CIVIC CENTER
RAPID CITY, SD
<PAGE>
AGENDA
12TH ANNUAL MEETING
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INC.
9:15 A.M. Rushmore Plaza Holiday Inn
June 8, 2000 and Civic Center
Rapid City, SD
I. CALL TO ORDER
Frank Messner, M.D., President, Board of Directors
II. ORDER OF BUSINESS
A. Minutes of 1999 Annual Meeting
B. Report of Election Process
C. General Comments
D. Other
III. ADJOURNMENT
<PAGE>
ANNUAL MEETING MINUTES
SOUTH DAKOTA STATE MEDICAL HOLDING COMPANY, INCORPORATED
June 10, 1999 Ramkota Inn
9:05 A.M. Sioux Falls, SD
The 11th Annual Meeting of the South Dakota State Medical Holding Company,
Incorporated, was held on Thursday, June 10, 1999, at 9:05 a.m. at the
Ramkota Inn, Sioux Falls, South Dakota.
The meeting was called to order by President Frank Messner, M.D. The roll
call was taken and the following Class A stockholder members were present:
Rodney Parry, M.D.; K. Gene Koob, M.D.; Richard Holm, M.D.; James
Engelbrecht, M.D.; Mary Carpenter, M.D.; Stephen Gehring, M.D.; Charles
Hart, M.D.; Stephan Schroeder, M.D.; Paul Eckrich, M.D.; James Hovland, M.D.;
James Larson, M.D.; Steven Feeney, M.D.; Heather Christensen, M.D.; Tom
Johnson, M.D.; Robert Hohm, M.D.; Howard Saylor, M.D.; John Sall, M.D.;
Daniel Kennelly, M.D.; David Rossing, M.D.; Guy Tam, M.D.; C. Roger
Stoltz, M.D.; Karla Murphy, M.D.; Angelina Trujillo, M.D.; Jem Hof, M.D.;
H. Lee Ahrlin, M.D.; Victoria Herr, M.D.; H. Thomas Hermann, M.D.; Michael
Elston, M.D.; Douglas Traub, M.D.; Dale Gunderson, M.D.; Richard Kafka, M.D.;
Tony Berg, M.D.; James Collins, M.D.; Ben Henderson, D.O.; Kevin
Bjordahl, M.D.; Alan Bloom, M.D.; John Vidoloff, M.D.; Jeffrey Parker, M.D.;
Ed Wegner, M.D.; Roger Carter, M.D.; Leonard Kolodychuk, M.D.; M. George
Thompson, D.O.; Karl Blessinger, M.D.; John Berg, M.D.; David Bean, M.D.;
Donald Humphreys, M.D.; William O. Rossing, M.D.; Vernon Stensland, M.D.;
John Oliphant, M.D.; Donald Knudson, M.D.; Robert Talley, M.D.; Julie
Johnson, M.D.; David Hoversten, M.D.; J. Michael McMillin, M.D.; Dana
Windhorst, M.D.; Herb Saloum, M.D.; Frank Messner, M.D.; Myron Jerde, M.D.;
Wesley Sufficool, M.D.; Robert Ferrell, M.D.; Richard Renka, M.D.; Wayne
Anderson, M.D.; Jeanne Berry, M.D.; Dave Johnson, M.D.; Thomas Krafka, M.D.;
Vassilia Young, M.D.; John Barlow, M.D.; Scott Eccarius, M.D.; and Peter
Reynen, M.D. The number of Class A shareholders represented by proxy was 189.
The Class B stockholders were represented by the designee of the South Dakota
State Medical Association, K. Gene Koob, M.D.
The President declared a quorum present for the purpose of conducting business
of the corporation.
The President called for consideration of the minutes of the last annual
meeting. He referred the membership to the SDSMHC minutes in the printed
material furnished to each member. The minutes were accepted as published and
the reading thereof waived.
<PAGE>
Dr. Messner reported on the election results for the three vacant positions
on the Board of Directors. The following persons were nominated for the
election to the Board of Directors by the Nominating Committee: James
Reynolds, M.D.; Mr. Bob Sutton; and Mr. Van Johnson. Dr. Messner indicated
no other nominations had been received from the membership. There being no
further nominations, the following persons were declared elected to serve on
the Board of Directors: James Reynolds, M.D.; Mr. Bob Sutton; and Mr. Van
Johnson.
Dr. Messner expressed his thanks to outgoing Board members Guy Tam, M.D., and
Mr. Pat Beckman for their many years of service and dedication to DAKOTACARE.
Next, Dr. Messner referred the members to the 1998 DAKOTACARE Annual Report
that has been distributed to all Class A shareholders and the Class B
shareholder. He stated that DAKOTACARE has consolidated revenues of $40
million and assets of $14 million for 1998. DAKOTACARE also experienced
a 94% client renewal rate.
Dr. Messner inquired whether any member of the corporate body had any issues
or concerns he/she wished to bring to the attention of the corporate body.
A question was poised from the corporate body in regard to whether DAKOTACARE
had a plan to increase rates and decrease physician compensation. Mr. Jensen
stated that DAKOTACARE tries to keep its rates charged to subscribers
competitive and has a similar philosophy on its fee structure for all
providers. Mr. Jensen further indicated staff are currently negotiating with
the hospitals with respect to their reimbursement rates and these negotiations
will be important to efforts to control rate increases.
There being no further questions, the meeting was adjourned.
<PAGE>
