The following table sets forth selected consolidated financial information for the Company and its subsidiaries for the periods indicated. The financial information for the period prior to July 2, 2004 relates solely to Dental Care Plus. The financial information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this registration statement.
(All amounts in thousands, except for basic and diluted earnings per Redeemable Common Share.)
Includes a $3,022 increase in fully-insured dental HMO revenue and a $3,441 increase in self-insured dental HMO revenue.
Total assets increased to approximately $12,250 in 2005 from approximately $9,668 in 2004 due to an increase in membership in our dental HMO segments and the addition of the Adenta tangible and intangible assets.
In 2003, the Company acquired its headquarters building and incurred approximately $1.8 million of indebtedness in connection with such acquisition.
Headquartered in Cincinnati, Ohio, the Company offers to employer groups of all sizes dental HMO, dental PPO, dental indemnity and vision PPO benefit plans and related services. As of December 31, 2006, we had approximately 216,700 members in our dental and vision benefit programs with approximately 1,832 dentists participating in our networks of providers.
We manage our business with three segments, fully-insured dental HMO, self-insured dental HMO, and corporate, all other. Corporate, all other consists primarily of three additional product lines: DentaSelect PPO, DentaPremier indemnity and Vision Care Plus PPO. Our dental HMO products and all of our other product lines are marketed to employer groups. We identified our segments in accordance with the aggregation provisions of Statement of Financial Accounting Standards (“SFAS”) 131. Disclosures About Segments of an Enterprise and Related Information which is consistent with information used by our Chief Executive Officer in managing our business. The segment information aggregates products with similar economic characteristics. These characteristics include the nature of customer groups and pricing, benefits and underwriting requirements.
In our original eight county service area, our dental HMO provider network includes approximately over 85% of the dental providers in the market. In that market our dental HMO provides the broad provider access of a dental PPO along with effective utilization and cost control features. Because of the broad provider network, our fully-insured dental HMO is priced higher than other dental HMOs and has premium rates more equivalent to competitor dental PPOs.
Other important factors that have an impact on our profitability are both the competitive pricing environment and market conditions. With respect to pricing, there is a tradeoff between sustaining or increasing underwriting margins versus increasing or decreasing enrollment. With respect to market conditions, economies of scale have an impact on our administrative overhead. As a result of a decline in preference for tightly-managed dental HMO products, dental costs have become increasingly comparable among our larger competitors. Product design and consumer involvement have become more important drivers of dental services consumption, and administrative expense efficiency is becoming a more significant driver of margin sustainability. Consequently, we continually evaluate our administrative expense structure and attempt to realize administrative expense savings through productivity gains.
Our dental and vision products grew by approximately 27,600 members, or 14%, from December 31, 2005 to December 31, 2006, including approximately 4,500 members from sales primarily related to our new DentaSelect PPO offering.
Our fully-insured dental HMO membership remained relatively constant in 2006 as compared to 2005. As of December 31, 2006 and 2005, we had approximately 137,100 and 137,000 fully insured members, respectively.
Self-insured dental HMO membership increased by approximately 16,500 members, or 35.9%. The increase is primarily the result of one new self-insured dental HMO employer group obtained in July 2006 with approximately 10,000 members.
Fully-insured dental HMO premium revenue increased approximately $3.0 million, or 9.6% in 2006 as compared to 2005. This premium revenue increase is attributable a shift of membership volume from the Adenta dental HMO product to the Dental Care Plus dental HMO product with higher premium rates and increases in negotiated premium rates with employer groups at their annual renewals.
Total self-insured revenue increased approximately $3.4 million, or 34.3% in 2006 as compared to 2005. This increase is attributable to the 35.9% increase in self-insured HMO membership and a provider fee schedule increase implemented at the beginning of 2006. The self-insured segment revenue has two components.
Self-insured ASO Fees - Self-insured ASO fees increased approximately $176,000, or 31.8% in 2006 as compared to 2005. This increase is primarily attributable to the 34.8% increase in self-insured HMO membership and is also attributable to a slight increase in average ASO fee rates. We provide access to our Dental Care Plus provider network for an administrative fee, generally to self-insured groups. Our ASO fee revenue is recognized monthly when earned and is normally based on annual contracts with the self-insured groups.
Corporate, all other premium revenue is derived from our administrative fees related to our dental indemnity, dental PPO and vision products that are underwritten by third party insurance carriers, as well as premium revenue from our dental PPO product underwritten by Dental Care Plus. As of September 2006, we began offering the Dental Care Plus dental PPO in Kentucky only; the Dental Care Plus dental PPO premium accounts for approximately $53,000 of this revenue increase in 2006. The remaining dental and vision products are underwritten by third party insurance carriers. We are paid a portion of premium in the form of administrative fees that cover our administrative costs, brokers commissions, and profit. These administrative fees increased in 2006 by approximately $266,000 or 213.2%.
Investment income increased approximately $94,000, or 90.4% in 2006 as compared to 2005. This increase is primarily attributable to a shift of funds from short term to higher yield long term investments, higher interest bearing cash balances, and an increase in prevailing interest rates.
Our effective tax rate for 2006 of 45.5% increased 4.8% compared to the 40.7% effective tax rate in 2005. Our 2006 effective tax rate is higher than the federal statutory rate due to applicable state and local taxes and certain non-deductible reorganization costs associated with obtaining the Dental Care Plus life insurance license. See Note 6 to the consolidated financial statements included in Item 8 - Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate.
Net income on Redeemable Common Shares was approximately $467,000, or $55.14 per Redeemable Common Share, in 2005 compared to approximately $518,000, or $60.90 per Redeemable Common Share, in 2004. The decrease in net income on Redeemable Common Shares primarily resulted from increased healthcare services expense and increased selling, general and administrative expenses.
Our fully-insured dental HMO membership increased approximately 14,000 members, or 11.4% in 2005 as compared to 2004. With the acquisition of Adenta, we added approximately 10,000 members in the Adenta discount dental program. During the remainder of 2005, approximately half of these members were transitioned to the fully-insured dental HMO product or the fully-insured dental PPO product. As of December 31, 2005, 5,061 members remained in the Adenta discount dental program.
Self-insured dental HMO membership increased by approximately 5,000 members, or 12.2% in 2005 as compared to 2004. During the years ended December 31, 2005 and 2004, respectively, we had approximately 46,000 and 41,000 self-insured members.
Dental indemnity membership increased 36.8%, to approximately 2,600 members at the end of 2005 from approximately 1,900 members at the end of 2004. The dental indemnity members represent the out-of-area members for employer groups based in Ohio and Kentucky. At December 31, 2005, there were approximately 2,400 members in the fully-insured dental PPO product, all of which had converted from the Adenta dental product. Additionally, during 2005, we obtained approximately 1,100 members in the fully-insured Vision Care Plus product. In 2005, the dental indemnity product, the dental PPO product and the fully-insured vision product were all underwritten by third party insurance carriers.
Total self-insured revenue increased approximately $1.2 million, or 13.0% in 2005 as compared to 2004. This increase is attributable to the 12.2% increase in self-insured HMO membership and a provider fee schedule increase implemented at the beginning of 2005. The self-insured segment revenue has two components
Self-insured ASO Fees - Self-insured ASO fees increased approximately $66,000, or 13.5% in 2005 as compared to 2004. This increase is primarily attributable to the 12.2% increase in self-insured HMO membership and is also attributable to a slight increase in average ASO fee rates. We provide access to our Dental Care Plus provider network for an administrative fee, generally to self-insured groups. Our ASO fee revenue is recognized monthly when earned and is normally based on annual contracts with the self-insured groups.
Fully-insured healthcare services expense increased approximately $3.0 million, or 12.1% in 2005 as compared to 2004. This increase is attributable to both the increase in dental HMO membership and the provider fee schedule increase implemented at the beginning of 2005. Member utilization remained relatively constant between 2004 and 2005. The fully-insured healthcare services expense attributable to the Adenta acquisition represented approximately $0.8 million of the $3.0 million increase from 2004.
In 2005 and 2004, because our dental PPO and vision PPO products are underwritten by third party insurance carriers, we do not recognize any premium revenue or healthcare services expense associated with these products.
Other income increased approximately $63,000, or 39.9% in 2005 as compared to 2004. Dental provider network leasing revenue increased to approximately $144,000 in 2005 from approximately $73,000 in 2004 primarily due to the revenue associated with the acquisition of Adenta. Building rental revenue increase by approximately $20,000 and miscellaneous income decreased approximately $28,000.
Interest expense increased $47,000, or 57.3%, to approximately $129,000 in 2005 from approximately $82,000 in 2004. The increase is primarily attributable to the interest expense associated with our capital lease obligation related to new dental administration software.
Our primary sources of cash are premiums, ASO fees, investment and other income, as well as the proceeds from the sale or maturity of our investment securities and from borrowings. Our primary uses of cash include disbursements for claims payments, selling, general and administrative expenses, interest expense, taxes, purchases of investment securities, capital expenditures, acquisitions, and payments on borrowings. Because premiums are collected in advance of claims payments, our business should normally produce positive cash flows during a period of increasing enrollment. Conversely, cash flows would be negatively impacted during a period of shrinking enrollment. Cash increased approximately $600,000 or 10.7% for the year ended December 31, 2006 to approximately $6.2 million at December 31, 2006 from approximately $5.6 million at December 31, 2005. Cash increased approximately $1.3 million or 30.2%, to approximately $5.6 million at December 31, 2005 from approximately
$4.3 million at December 31, 2004. The change in cash for the years ended December 31, 2006, 2005 and 2004 is summarized as follows (in thousands):
In 2004, we generated net income of approximately $518,000. Combined with non-cash depreciation and amortization charges of approximately $230,000, and minor changes in other current assets and liabilities, we produced cash flow from operations of approximately $708,000.
proprietary, web-based employer group enrollment system and some additional office furniture and equipment. Also we invested approximately $1.6 million in FDIC insured bank certificates of deposits and U.S. government security money market funds in order to earn higher interest rate yields.
In 2006, we paid $120,000 of our outstanding mortgage balance, $171,000 of our capital lease obligation for our dental administration software, and $95,000 of the principal balance of the Adenta debt assumed in 2005. During 2006, we repurchased Redeemable Common Shares with a value of approximately $141,000, which was partially offset by the issuance of Redeemable Common Shares with a value of approximately $35,000. There were no new financing commitments executed in 2006.
In 2005, we refinanced approximately $190,000 of debt we assumed in the acquisition of Adenta under more favorable terms and conditions with a commercial bank in Ohio. We also paid $120,000 of our outstanding mortgage balance, $171,000 of our capital lease obligation for our new dental administration software, and $92,000 of the principal balance of the assumed Adenta debt. This represents a total payment of approximately $383,000 in debt and capital lease obligations in 2005.
In 2004, we repaid $120,000 of our outstanding mortgage balance assumed in 2003.
In December of each year our Board evaluates the projected pre-tax income of our dental HMO plans, capital and surplus requirements prescribed by the Ohio Department of Insurance and factors impacting our A.M. Best financial strength rating, such as the ratio of our projected fully insured premium revenue to our projected capital and surplus level. In addition, the Board considers the capital expenditures needed to support strategic objectives for the coming years (such as the implementation of the new dental plan administration system, expansion of office space and acquisition of office equipment for new employees) and our estimated federal income tax liability. After considering these and any other factors deemed relevant, the Board determines the amount of the provider withhold that should be paid to participating dental providers, if any. Each participating dental provider’s share of the provider withhold payment is based on the proportionate amount of claims submitted by such participating dental provider in relation to the total claims submitted by all participating dental providers in a given year, expressed as a percentage, and is not related to or dependent upon any such provider’s holdings of shares in the Company. Payments authorized by the Board are accrued in the fourth quarter of the fiscal year upon Board resolution.
Commencing in 2006, our annual determination of the amount of withhold payments to be made are now limited to amounts withheld in the year in which the determination is made, and payments authorized by the Board will be made on or before March 15 of the following year. Based on historical experience, management expects the
Board may authorize an aggregate provider withhold payment between 0% and 45% of the approximate $4.9 million provider withhold expected for 2007, or a maximum of $2.2 million. We also expect that the Board may authorize aggregate provider withhold payments for calendar years 2008 through 2010 in amounts between 0% and 45% of the total provider withhold amounts for those years and that the level of provider withhold payments for 2008 through 2010 could be greater than 45% depending upon the Company’s performance. However, the Board will not authorize an aggregate provider withhold payment for any year that would result in an operating loss for the year in question. These forecasted amounts are based on projections of future claims revenues and certain planning assumptions and estimates currently being made with respect to future application of the factors historically considered by the Board in making its determination to authorize the payment of withhold amounts. These planning assumptions reflect management’s current expectations and views about future events and are subject to risks, uncertainties and other factors that could cause actual withhold payment amounts to differ materially from these stated assumptions. Important factors that could cause actual results to differ materially from those being planned for, include, among others: claims exceeding or not meeting our estimates, a threatened or actual downgrade in our financial strength rating, the loss of a significant customer or broker, the loss of a large employer group and an unexpected increase or decrease in dental service utilization by our dental members.
A summary of our future commitments as of December 31, 2006 is as follows:
Our swap interest payments are based on a fixed rate of 4.95%. We estimate that we will receive swap interest payments totaling approximately $319,000 based on a variable rate of LIBOR plus 1.75% or 7.07%, as of December 31, 2006.
Our consolidated cash and short term investments were approximately $7.3 million at December 31, 2006. Our consolidated cash and short term investments increased by approximately $100,000 from approximately $7.2 million as of December 31, 2005.
and financing activities of approximately $300,000 and $500,000, respectively. This increase in cash of approximately $600,000 was offset by a shift of approximately $500,000 in FDIC insured certificate of deposit investment from short term investments to long term investments during this period.
On January 3, 2006 we entered into an agreement with Fifth Third Bank for a $500,000 working capital line of credit. Interest is payable based on the prime borrowing rate that was 7.75% as of January 3, 2006. The Company paid interest expense of $158 in 2006 related to this line of credit. As of December 31, 2006, there was no amount outstanding on this line of credit.
We operate as a holding company in a highly regulated industry. We are primarily dependent upon management fees that we receive from our subsidiaries. We receive over 97% of our management fees from our subsidiary Dental Care Plus. We also receive dividends from our subsidiaries from time to time. The dividends from our subsidiary, Dental Care Plus, are subject to regulatory restrictions. Our holding company cash decreased approximately $80,000 to approximately $250,000 at December 31, 2006 compared to approximately $330,000 at December 31, 2005 primarily due to the following: in 2006, we generated approximately $51,000 of net cash from non-subsidiary operating activities and collected approximately $35,000 from the issuance of Class B Redeemable Common Shares. In 2006, we invested an additional $25,000 in the Adenta acquisition and repurchased approximately $141,000 of our issued and outstanding common shares.
On December 18, 2006, the Ohio Department of Insurance approved Dental Care Plus, Inc.’s application for a life and health insurance license. As an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation, Dental Care Plus is now able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health oriented products in Ohio. Accordingly, the required capital and surplus for Dental Care Plus licensed as a life and health insurance company in Ohio was $2.5 million at December 31, 2006. The required capital and surplus for Dental Care Plus in Kentucky and Indiana was approximately $1.0 million at December 31, 2006.
The differences between our net income and comprehensive income include the changes in the unrealized gains or losses on marketable securities and changes in the fair value of our interest rate swap agreement. For the years ended December 31, 2006, 2005 and 2004, respectively, such changes increased or (decreased), net of related income tax effects, by the following amounts:
The fair market value of the variable to fixed interest rate swap contract (net of income tax effects) decreased by $3,953 in 2006 due to a decrease in expected future interest rates during 2006. The fair value of the variable to fixed interest rate swap contract (net of income tax effects) increased by $15,429 in 2005 and by $794 in 2004 due to the increase in prevailing interest rates. The fair market value of the variable to fixed interest rate swap contract was $72,609 and $78,599 at December 31, 2006 and 2005, respectively and is included in other assets.
statement of operations, instead of in a separate caption of stockholders’ equity. The Company maintains its cash in bank deposit accounts, which at times exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant risks with respect to its cash.
Accounts receivable represent uncollected premiums related to coverage periods prior to the balance sheet date, and are stated at the estimated collectible amounts, net of an allowance for bad debts. We continuously monitor the timing and amount of our premium collections, and maintain a reserve for estimated bad debt losses. The amount of the reserve is based primarily on our historical experience and any customer-specific collection issues that are identified.
At December 31, 2005, our estimated total claims payable liability included approximately $2.8 million for Dental Care Plus, comprised of IBNR of approximately $1.3 million and reported claims in process of approximately $1.5 million. Other healthcare services expenses at December 31, 2005 included approximately $60,000 for the estimated cost of processing outstanding claims and an accrued but unpaid provider withhold payment of $300,000. The provider withhold liability was recognized in December 2005 when it was authorized by our Board of Directors.
Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for months prior to the most recent month.
The annual provider withhold payment authorized by the Board is recorded in December of the applicable year, resulting in a corresponding increase of claims expense and claims payable liability. Depending on the amount of the provider withhold payment authorized, there may be a material increase in the claims payable liability at year end. At December 31, 2006, our claims payable liability increased by approximately 29% after recording the $900,000 provider withhold payment authorized by the Board. Safeguarding the financial condition and liquidity of the Company is a material factor considered in the provider withhold payment practices adopted by the Board.
In October 2005, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1, which provides accounting guidance for deferred policy acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. Internal replacement contracts are those that are substantially changed from the replaced contract and are accounted for as an extinguishment of the replaced contract. Nonintegrated contract features are accounted for as separately issued contracts. Modifications resulting from the election of a feature or coverage within a contract or from an integrated contract feature generally do not result in an internal replacement contract subject to SOP 05-1 provided certain conditions are met. The provisions of SOP 05-1 are effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We do not expect this statement to have a material impact on our results of operations or financial position as we do not have any contracts subject to this statement.
As discussed in Note 1 to the consolidated financial statements, in 2005 the Company changed its reporting for Redeemable Common Shares as a result of becoming a Securities and Exchange Commission registrant.
For each of the three years in the period ended December 31,
Per share amounts reflect the effects of a 6 for 1 stock split effective to shareholders of record on August 31, 2005.
Share figures reflect the effects of a 6 for 1 stock split effective to shareholders of record on August 31, 2005.
As of December 31, 2006 and 2005 and for Each of the Three Years in the Period
DCP Holding Company (the “Company”) is the parent holding company of three wholly-owned subsidiaries which include Dental Care Plus, Inc., or Dental Care Plus, an Ohio corporation, Insurance Associates Plus, Inc., or Insurance Associates, an Ohio corporation, and Adenta, Inc., or Adenta, a Kentucky corporation. The Company is owned and controlled primarily by approximately 681 dentists who participate in our Dental Care Plus plans. The Company offers to employer groups of all sizes health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity plans for dental care services. As of December 31, 2006, the Company had approximately 212,200 members in its dental benefits programs with approximately 1,832 dentists participating in its two provider networks in Southwestern Ohio, Northern Kentucky, Central Kentucky and Southeastern Indiana. In addition, the Company had approximately 4,500 members in our vision benefit programs. The Company markets its products through a network of independent brokers.
The Company’s products consist primarily of dental HMO, PPO and indemnity plans, with dental HMO products constituting 99% of our total revenues. All of the Company’s products are marketed to employer groups. The Company’s business model allows it to offer dental benefit products including broad networks of participating dentists while at the same time promoting the use of private practice fee-for-service dentistry, a primary interest of our participating dentists. The dental benefit products the Company offers currently vary depending on geographic market.
Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company and subsidiaries, each of which is wholly-owned, and have been prepared in conformity with accounting principles generally accepted in the United States of America. All significant intercompany accounts and balances have been eliminated in consolidation.
Cash and Cash Equivalents - The Company considers highly liquid investments with maturities of three months or less at the date of acquisition as cash equivalents in the accompanying financial statements.
Investments - The Company places its investments primarily in certificates of deposit. The Company classified all investments as available-for-sale. Such investments are recorded at fair value, with unrealized gains and losses recorded as a component of other comprehensive income. The Company recognizes gains and losses when these securities are sold using the specific identification method.
assets. The building and the building improvements have useful lives of 27 years and 15 years, respectively. Furniture and fixtures have a useful life of 5 years, and computer equipment and software have useful lives of up to 3 years. Maintenance and repair costs are expensed as incurred.
Goodwill and Intangible Assets - Goodwill arises in business combinations when the purchase price of assets acquired exceeds the appraised value. As with tangible and other intangible assets, periodic impairment reviews are required, at least annually, as well as when events or circumstances change. Management uses judgment in assessing goodwill for impairment. We review the recorded value of our goodwill annually at the of the fiscal year, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. The review for impairment requires management to predict the estimated cash flows that will be generated by the long-lived asset over its remaining estimated useful life. Considerable judgment must be exercised in determining future cash flows and their timing and, possibly, choosing business value comparables or selecting discount rates to be used in any value computations.
The Company recorded policy acquisition costs of approximately $1,900,000, $1,600,000 and $1,300,000 in selling, general and administrative expenses in the years ended December 31, 2006, 2005 and 2004, respectively.
The Company incurred claim costs related to such dental care providers amounting to approximately $42,026,000, $36,249,000, and $32,293,000 for the years ended December 31, 2006, 2005, and 2004, respectively. These incurred claims cost include approximately $36,972,000, $33,476,000, and $30,897,000 made to participating providers who are also holders of Redeemable Common Shares in 2006, 2005, and 2004, respectively. These incurred claim costs also include provider withhold payment of $900,000, $610,000, and $300,000 in 2006, 2005 and 2004, respectively.
Each year the Company’s Board of Directors (the “Board”) evaluates the performance of the dental HMO plan, capital and surplus requirements prescribed by the Ohio Department of Insurance, factors impacting our financial strength rating, funding needed to support strategic objectives for the coming years and any other factors deemed relevant by the Board and, based on that evaluation, determines whether or not to authorize the payment to the providers of any portion of the provider withhold. Once authorized by the Board, such amounts are recorded as additional healthcare services expense in the period authorized and shown as additional claims payable liability until paid. Commencing in 2006, the Company’s annual determination of the amount of withhold payments to be made is limited to amounts withheld in the year in which the determination is made, and payments authorized by the Board are accrued in the fourth quarter of the fiscal year upon Board resolution and will be paid on or before March 15 of the following year.
In December 2006, the Board authorized $900,000 in respect to amounts withheld in 2006 and such amount was paid in March 2007. In December 2005, the Board of Directors adopted a policy that no further withhold payment will be paid related to years prior to and including 2005. In December 2005, the Board authorized $300,000 in respect to amounts withheld in 2005 and 2004, and such amount was paid in March 2006. In May of 2005, the Board authorized that $310,354 be paid to participating providers in respect to amounts withheld in 2003, and such amount was paid to providers in June of 2005. In December 2004, the Board authorized $300,000 in respect to amounts withheld in 2003 to be paid to participating providers, and such amount was paid in December 2004.
Non-Operating Income - Investment income of approximately $198,000, $104,000, and $32,000 during 2006, 2005, and 2004, respectively, is comprised of approximately $73,000, $42,000, $30,000, of interest income earned from cash in operating accounts in 2006, 2005 and 2004, respectively, and approximately $125,000, $62,000, and $2,000 of investment income earned from short-term and long-term investments in 2006, 2005, and 2004, respectively.
Federal Income Tax - Deferred federal income tax is provided in the accompanying financial statements for the tax effects of temporary differences between the carrying values and tax bases of assets and liabilities. Differences result primarily from items such as loss reserve discounting, unrealized gains or losses on invested assets and partial recognition of the unearned premiums.
Earnings Per Share - Basic and diluted earnings per share is computed by dividing net income on Redeemable Common Shares by the weighted average number of Redeemable Common Shares outstanding during the period.
At December 31, 2006 and 2005, premiums receivable from one customer totaled approximately 8% and 13%, respectively, of the premiums receivable balance.
Fair Value of Financial Instruments - The cost of any financial instruments included in other assets approximates their fair values principally because of the short-term nature of these items.
Statement of Cash Flows - The Company defines cash as cash held in operating accounts at financial institutions. Cash paid for interest totaled approximately $121,000, $129,000, and $82,000 during 2006, 2005, and 2004, respectively. During 2006, 2005, and 2004, respectively the Company paid approximately $218,000, $375,000, and $213,000 for income taxes. The Company entered into a capital lease for certain equipment during 2005 with a value of approximately $602,000 (See Note 10).
New Accounting Standards - In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections - a Replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement applies to all voluntary changes in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This Statement carries forward without changing the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This Statement also carries forward the guidance in Opinion 20 requiring justification of a change in accounting principle on the basis of preferability. The Company has adopted SFAS No. 154. There were no accounting changes in the year ended December 31, 2006 and management will apply the provisions to any future accounting changes.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”), which establishes a framework for measuring fair value and expands disclosure about fair value measurements. This Statement
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108 to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. SAB 108 is effective as of December 31, 2006, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006, for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. The impact of adopting SAB No. 108 did not result in a material effect on our results of operations and financial position.
statements since June 2, 2005. The Company estimates amortization expense on remaining identifiable intangible assets will be approximately $15,000 in each of the fiscal years 2007-2011.
Gross unrealized losses and fair value aggregated by investment category, all of which are less than twelve months, that individual investments have been in a continuous unrealized loss position at December 31, 2006 and 2005 were as follows:
Effective January 1, 2006, the Company adopted the provisions of SFAS 123R, which replaced SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123R requires the Company to record compensation costs relating to share-based payment transactions in its financial statements. Under the fair value recognition provisions of SFAS 123R, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the vesting period .
Detail supporting the computation of basic and diluted earnings per Redeemable Common Share was as follows for the years ended December 31, 2006, 2005, and 2004:
The weighted average outstanding Redeemable Common Shares used to compute basic earnings per Redeemable Common Share have been adjusted for the stock split that occurred effective August 31, 2005. As of December 31, 2006, no employee stock options had been issued or restricted share awards granted that would have a dilutive effect on the Company’s basic earnings per share.
Kenton and Pendleton counties in Kentucky. All participating providers along with Company directors and employees have the option to purchase one or more non-voting Class B Redeemable Common Shares of Company. Accordingly, prospective shareholders may make a subscription payment equal to the book value of one share of common share, which was $532 and $518 at December 31, 2006 and 2005, respectively. The Company’s Board of Directors review each common share subscriber, and once approved, the common share is issued.
Generally accepted accounting principles differ in certain respects from the accounting practices prescribed or permitted by state insurance regulatory authorities (“statutory-basis”). The statutory-basis net income of DCP was approximately $175,000, $311,000, and $561,000 for the years ended December 31, 2006, 2005, and 2004, respectively. Statutory-basis net worth was approximately $4,171,000 and $3,896,000 at December 31, 2006 and 2005, respectively.
In 2003, the Company purchased land and an office building and in connection therewith, the Company executed a mortgage note, secured by the land and the office building, with a bank in the amount of $1,800,000. Interest is payable based on the 30-day LIBOR rate plus 175 basis points and was 7.07% and 6.11% at December 31, 2006 and 2005, respectively. At the maturity date of the mortgage note in 2013, the expected outstanding balance of the note must be repaid, amounting to $600,000.
The fair value of the capital lease obligation approximates the present value of minimum lease payments at December 31, 2006.
In 2003, the Company entered into an interest rate swap agreement (“Agreement”) (cash flow hedge) with a total notional amount of $1,500,000. The Agreement is used to manage the Company’s interest rate risk. The swap agreement effectively changed the interest rate related to $1,500,000 of the Company’s $1,800,000 mortgage note with Fifth Third Bank from a variable rate based on the 30-day LIBOR rate plus 175 basis points to a fixed rate of approximately 4.95% for the 10-year period through June 12, 2013. The Company’s risk management policy is to not enter into any trading activities related to the Agreement. The Company believes that the risk of
nonperformance by the other party in conjunction with this arrangement is not material to the financial statements. The fair value of this Agreement included other assets in the accompanying balance sheet was approximately $73,000 and $79,000 at December 31, 2006 and 2005, respectively. The amount included in other comprehensive (loss) income related to the interest rate swap was ($3,953), $15,429, and $794 (net of income tax expense (benefit) of ($2,037), $7,949, and $408) during 2006, 2005, and 2004, respectively.
At December 31, 2006, future approximate minimum annual lease payments under noncancellable operating leases are as follows: 2007 - $209,000; 2008 - $149,000; 2009 - $142,000; 2010 - $134,000, and 2011 - $31,023.
On January 3, 2006, DCP Holding Company entered into an agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable based on the prime borrowing rate and was 7.75% at December 31, 2006. The Company paid $158 of interest expense for the line of credit in 2006.
The Company manages its business with three segments, fully-insured dental HMO, self-insured dental HMO and Corporate, All Other. Corporate, All Other consists primarily of three additional product lines: DentaSelect PPO, DentaPremier indemnity, and Vision Care Plus. We identified our segments in accordance with the aggregation provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosure about Segments of an Enterprise and Related Information. These segments are consistent with information used by our Chief Executive Officer (the chief decision maker) in managing our business. The segment information aggregates products with similar economic characteristics. These characteristics include the nature of customer groups and pricing, benefits and underwriting requirements.
Listed below is financial information required to be reported for each industry segment. Operating segment information is based on how it is reviewed by the Company and is as follows for the years ended December 31, 2006, 2005, and 2004 (amounts in 000’s):
Inter-segment revenues were not significant for 2006, 2005, or 2004. See Note 1 for a discussion of major customers - “Concentrations of Credit Risk”.
All of the Company’s Class A and Class B Redeemable Common Shareholders are related parties, either as a participating provider, director or an employee of the Company.
Seven of our Board members are also participating providers and as a group received approximately $160,000, $104,000 and $55,000 in directors fees for the years ended December 31, 2006, 2005 and 2004, respectively.