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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number _________
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DCP HOLDING COMPANY
(Exact name of Registrant as specified in its Charter)
Ohio 20-1291244
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
100 Crowne Point Place 45241
Sharonville, Ohio (Zip Code)
(Address of Principal Executive Office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (513) 554-1100
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated file, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of July 31, 2006 there were
683 of the Registrant's Class A Redeemable Common Shares outstanding and 7,411
of the Registrant's Class B Redeemable Common Shares outstanding.
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TABLE OF CONTENTS
INDEX TO DCP HOLDING COMPANY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2006
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Equity and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 18
i
ITEM 1. FINANCIAL STATEMENTS.
DCP HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2006 2005
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 5,503,320 $ 5,628,987
Short-term investments at fair value, cost of $1,500,000 and
$1,600,000 at June 30, 2006 and December 31, 2005, respectively 1,491,900 1,593,678
Accounts receivable, net of allowance of $56,000 and $83,000
at June 30, 2006 and December 31, 2005, respectively 411,300 337,330
Prepaid expense, deposits, and other 98,679 174,962
Deferred federal income tax 245,639 131,317
------------ ------------
Total current assets 7,750,838 7,866,274
------------ ------------
INVESTMENTS 297,845 199,182
------------ ------------
PROPERTY, PLANT, AND EQUIPMENT:
Land 364,000 364,000
Building and building improvements 2,164,751 2,160,534
Furniture and equipment 1,817,484 1,454,214
------------ ------------
Total property, plant, and equipment 4,346,235 3,978,748
Less accumulated depreciation and amortization (1,065,955) (854,902)
------------ ------------
Total property, plant, and equipment -- net 3,280,280 3,123,846
------------ ------------
INTANGIBLE ASSETS, net of accumulated amortization of
$104,000 and $50,000 at June 30, 2006 and December 31, 2005, respectively 345,721 399,639
------------ ------------
GOODWILL 136,355 66,990
------------ ------------
OTHER ASSETS 324,542 593,789
------------ ------------
TOTAL ASSETS $ 12,135,581 $ 12,249,720
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 419,209 $ 413,120
Accounts payable and accrued expenses 1,416,117 1,391,889
Claims payable 2,983,077 3,257,815
Unearned premium revenue 1,079,906 693,886
Federal income tax payable 28,651 104,278
Other current liabilities 58,188
------------ ------------
Total current liabilities 5,985,148 5,860,988
------------ ------------
LONG TERM LIABILITIES:
Mortgage loan payable 1,320,000 1,380,000
Capital lease obligation 349,712 453,363
Notes payable 7,917 55,417
Deferred federal income tax 106,031 117,205
Other liabilities 69,255
------------ ------------
Total long-term liabilities 1,852,915 2,005,985
------------ ------------
TOTAL LIABILITIES 7,838,063 7,866,973
------------ ------------
REDEEMABLE COMMON SHARES:
Class A, Redeemable Common Shares, no par value -- authorized, 7,500 shares;
issued, 709 and 709; and outstanding, 683 and 691 at June 30, 2006 and
December 31, 2005, respectively 362,640 357,976
Class B Redeemable Common Shares, no par value -- authorized, 100,000 shares;
issued, 7,806 and 7,803; and outstanding, 7,411 and 7,769 at June 30, 2006
and December 31, 2005, respectively 3,934,878 4,024,771
------------ ------------
Total redeemable common shares 4,297,518 4,382,747
------------ ------------
SHAREHOLDERS' EQUITY-
Preferred Shares; no par value, 100,000 shared authorized, none issued -- --
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,135,581 $ 12,249,720
============ ============
Share figures reflect the effects of a stock split effective to shareholders of
record on August 31, 2005.
See notes to unaudited condensed consolidated financial statements.
1
DCP HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Premium revenue $ 12,265,523 $ 10,812,526 $ 25,048,130 $ 21,659,472
------------ ------------ ------------ ------------
Operating expenses:
Healthcare services expense 9,744,067 8,924,110 20,287,249 17,727,944
Selling, general and administrative expense 2,416,910 1,784,403 4,963,107 3,972,550
------------ ------------ ------------ ------------
Total operating expenses 12,160,977 10,708,513 25,250,356 21,700,494
------------ ------------ ------------ ------------
Operating income (loss) 104,546 104,013 (202,226) (41,022)
Non-Operating Income (Expense):
Investment income 42,327 23,510 83,225 42,955
Other income 149,227 47,941 281,713 78,299
Interest expense (32,770) (32,884) (63,877) (62,894)
------------ ------------ ------------ ------------
Total non-operating income 158,784 38,567 301,061 58,360
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX 263,330 142,580 98,835 17,338
------------ ------------ ------------ ------------
PROVISION (BENEFIT) FOR INCOME TAX:
Current 160,079 11,000 140,507 47,132
Deferred (74,676) 36,080 (114,322) (8,843)
------------ ------------ ------------ ------------
Total 85,403 47,080 26,185 38,289
------------ ------------ ------------ ------------
NET INCOME (LOSS) ON REDEEMABLE COMMON SHARES $ 177,927 $ 95,500 $ 72,650 $ (20,951)
============ ============ ============ ============
BASIC EARNINGS PER REDEEMABLE COMMON SHARE $ 21.44 $ 11.27 $ 8.75 $ (2.47)
============ ============ ============ ============
Per share amounts reflect the effects of a stock split effective to shareholders
of record on August 31, 2005.
See notes to unaudited condensed consolidated financial statements.
2
DCP HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
REDEEMABLE COMMON SHARES
--------------------------------------------
CLASS A CLASS B
-------------------- ----------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
BALANCE -- DECEMBER 31, 2005 691 $ 357,976 7,769 $ 4,024,771
Net income
Change in fair value of interest rate swap
(net of income tax of $8,093)
Unrealized loss on investments
(net of income tax benefit of $1,059)
Total comprehensive income
Class A Common Shares exchanged for Class B
Common Shares (3) (1,555) 3 1,555
Common shares redeemed or repurchased (5) (2,344) (361) (169,191)
Accretion of common shares to redemption value 8,563 77,743
--------- --------- --------- -----------
BALANCE -- JUNE 30, 2006 683 $ 362,640 7,411 $ 3,934,878
========= ========= ========= ===========
SHAREHOLDERS' EQUITY
-------------------------------------
OTHER ACCUMULATED
RETAINED COMPREHENSIVE COMPREHENSIVE
EARNINGS INCOME (LOSS) TOTAL INCOME (LOSS)
BALANCE -- DECEMBER 31, 2005
Net income $ 72,650 $ 72,650 $ 72,650
Change in fair value of interest rate swap
(net of income tax of $8,093) $ 15,709 15,709 15,709
Unrealized loss on investments
(net of income tax benefit of $1,059) (2,053) (2,053) (2,053)
-------------
Total comprehensive income $ 86,306
=============
Class A Common Shares exchanged for Class B
Common Shares
Common shares redeemed or repurchased
Accretion of common shares to redemption value (72,650) (13,656) (86,306)
-------- ----------------- --------
BALANCE -- JUNE 30, 2006 $ $ $
======== ================= ========
Share figures reflect the effects of a stock split effective to shareholders of
record on August 31, 2005.
See notes to unaudited condensed consolidated financial statements.
3
DCP HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) on redeemable common shares $ 72,650 $ (20,951)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 264,970 128,440
Deferred income taxes (114,322) (8,843)
Effects of changes in operating assets and liabilities, net of acquired
assets and liabilities:
Accounts receivable (102,277) 103,218
Prepaid expenses, deposits, and other 76,283 24,165
Other assets (37,765) 50,942
Claims payable (274,737) 55,458
Unearned premium revenue 360,429 589,044
Accounts payable and accrued expenses 15,553 23,138
Federal income tax payable (75,627) (252,868)
Other liabilities 69,255
----------- -----------
Net cash provided by operating activities 254,412 691,743
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (36,672) (51,822)
Acquisition of business, net of acquired cash (25,000) 23,216
Purchases of investments (800,000) (1,000,000)
Sale of investments 800,000 800,000
----------- -----------
Net cash used in investing activities (61,672) (228,606)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage loan repayments (60,000) (60,000)
Repayment of capital lease (97,560) (76,716)
Repayments of note (47,500) (909)
Repurchase of redeemable common shares (113,347) (12,431)
----------- -----------
Net cash used in financing activities (318,407) (150,056)
----------- -----------
INCREASE (DECREASE) IN CASH (125,667) 313,081
CASH -- Beginning of period 5,628,987 4,304,797
----------- -----------
CASH -- End of period $ 5,503,320 $ 4,617,878
=========== ===========
NON-CASH FINANCING ACTIVITIES
Redeemed common shares in other current liabilities $ 58,188 $
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
4
DCP HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated interim financial statements included in this
report have been prepared by DCP Holding Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the
"Commission"). In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation are reflected in
the interim financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited 2005
financial statements and notes thereto as included in Amendment No. 1 of the DCP
Holding Company Form 10. These unaudited condensed consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America for interim financial statements.
Certain financial information that is required in the annual financial
statements may not be required for interim financial reporting purposes and has
been condensed or omitted. Operating results for the six months ended June 30,
2006 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2006.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued SFAS
123R, which requires companies to expense the fair value of employee stock
options and other forms of stock-based compensation. This requirement represents
a significant change because fixed-based stock option awards, a predominant form
of stock compensation for us, were not recognized as compensation expense under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires that the cost of the award, as determined on the
date of grant at fair value, be recognized over the period during which an
employee is required to provide service in exchange for the award (usually the
vesting period). The grant-date fair value of the award is estimated using
option-pricing models. SFAS 123R also requires that we estimate the expected
forfeitures under each stock compensation plan and only recognize compensation
expense for those awards which are expected to vest. In addition, certain tax
effects of stock option exercises are reported as a financing activity rather
than an operating activity in the statements of cash flows. We considered SFAS
123R in evaluating the accounting treatment for our deferred compensation plan
and expensed $32,000 related to stock-based compensation (see Note 4).
In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements as
"more-likely-than-not" to be sustained by the taxing authority. The recently
issued literature also provides guidance on the derecognition, measurement and
classification of income tax uncertainties, along with any related interest and
penalties. FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
The differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption
will be accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. We have not yet determined the impact,
if any, of adopting the provisions of FIN 48 on our financial position, results
of operations and liquidity.
3. ACQUISITION
On June 2, 2005 the Company acquired Adenta, Inc., or Adenta, pursuant to
a merger. The Company paid cash consideration of $250,000, assumed interest
bearing debt of $241,985, and incurred transaction costs of $47,361, resulting
in a total preliminary purchase price of $539,346. The Company deposited $50,000
of the $250,000 of cash
5
consideration into an escrow account pending the results of the net asset
valuation analysis prescribed in the escrow agreement completed in May of 2006.
After completing the required net asset valuation analysis in May of 2006,
the Company and the representatives of the former Adenta shareholders negotiated
an agreement whereby the former Adenta shareholders were paid the $50,000 held
in escrow plus additional cash consideration of $25,000. Under the terms of the
negotiated agreement, the Company is no longer obligated to pay the former
Adenta shareholders any portion of its tax savings resulting from the use of
certain tax loss carry forwards. With the completion of the final purchase price
allocation in June of 2006, the goodwill was determined to be $136,355. The
following table summarizes the preliminary and final purchase price allocation.
Preliminary Adjustments Final
----------- ----------- ---------
Cash consideration $ 250,000 $ 25,000 $ 275,000
Interest bearing debt assumed 241,985 3,666 245,651
Transaction costs 47,361 47,361
----------- ----------- ---------
Total purchase price $ 539,346 $ 28,666 $ 568,012
=========== =========== =========
Current assets (includes cash of $279,954) $ 354,516 $ (28,307) $ 326,209
Fixed assets 4,336 4,336
Other assets 59,320 59,320
Intangible assets 450,000 450,000
Goodwill 66,990 69,365 136,355
Current liabilities assumed (358,659) (30,600) (389,259)
Deferred tax liability (37,157) 18,208 (18,949)
----------- ----------- ---------
Net assets acquired $ 539,346 $ 28,666 $ 568,012
=========== =========== =========
With the acquisition of Adenta the Company obtained a network lease
agreement with Humana Dental, approximately 10,000 dental members and a provider
network consisting of approximately 500 dentists in Kentucky. Of the $450,000
allocated to intangible assets, $210,000 was allocated to the Humana Dental
network lease contract with a 3-year useful life, $130,000 was allocated to
Adenta memberships with a 12-year useful life, and $110,000 was allocated to the
Adenta provider network with a 20-year useful life. For the six months ended
June 30, 2006, we recorded amortization expense of approximately $54,000 related
to these identifiable intangible assets. The results of operations of Adenta are
included in the Company's consolidated financial statements since June 2, 2005.
4. DEFERRED COMPENSATION PLAN
In accordance with the 2006 Dental Care Plus Management Equity Incentive
Plan and the Dental Care Plus, Inc. and DCP Holding Company Deferred
Compensation Plan (the "Plans"), Company directors and certain key employees
elected to defer portions of their director fees and employee compensation, as
applicable. The Plans provide for the directors and key employees to elect to
receive awards based on the book value of the redeemable common shares and to
defer receiving such amounts until termination of board membership or employment
and vesting requirements are met. Under the terms of these plans, these deferred
amounts will be paid in cash. An individual director's award will vest 100% at
the end of each year if the director meets the board meeting attendance
requirements. The key employee awards will vest 10%, 20%, 30% and 40% at the end
of each respective year in a four-year period following the grant date. The
deferred compensation expense related to these awards is recorded on a
straight-line basis during the applicable vesting period. For the six months
ended June 30, 2006, the Company recorded deferred compensation expense of
approximately $69,000 that is included in other long-term liabilities in the
accompanying June 30, 2006 unaudited condensed consolidated balance sheet.
6
5. EARNINGS PER REDEEMABLE COMMON SHARE
Detail supporting the computation of basic earnings per redeemable common
share was as follows for the three and six months ended June 30, 2006 and 2005,
respectively:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2006 2005 2006 2005
Net income (loss) accretive to (dilutive to) redeemable
common shareholders $ 177,927 $ 95,500 $ 72,650 $ (20,951)
=========== ========== ============ ============
Weighted average outstanding redeemable common shares used to
compute basic earnings per redeemable common share 8,299 8,496 8,307 8,483
=========== ========== ============ ============
Basic earnings per redeemable common share $ 21.44 $ 11.27 $ 8.75 $ (2.47)
=========== ========== ============ ============
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 June 30, 2006, no employee
stock options or share awards had been issued that would have a dilutive effect
on the Company's basic earnings per share.
6. SEGMENT INFORMATION
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.
The results of the fully insured and self insured HMO segments are
measured by gross profit. We do not allocate selling, general and administrative
expenses, investment and other income, interest expense, goodwill, or other
assets or liabilities, to these segments. These items are assigned to the
remainder of our business, which we identify as Corporate, All Other. We combine
all gross profit and apply that amount as a contribution to selling, general and
administrative expenses, resulting in a consolidated income before taxes.
Listed below is financial information required to be reported for each
industry segment. Operating segment information is as follows for the three and
six months ended June 30, 2006 and 2005, respectively (amounts in thousands):
7
Fully-Insured Self-Insured Corporate,
DHMO DHMO All Other Total
------------- ------------ ---------- --------
THREE MONTHS ENDED JUNE 30, 2006
Revenues from external customers $ 9,361 $ 2,860 $ 44 $ 12,265
Healthcare services expense 7,302 2,442 9,744
Net investment income 42 42
Interest expense 33 33
Depreciation and amortization 138 138
Income before taxes 263 263
Income tax provision 85 85
Acquisition of fixed assets 29 29
Identifiable assets 12,136 12,136
THREE MONTHS ENDED JUNE 30, 2005
Revenues from external customers $ 8,481 $ 2,311 $ 20 $ 10,812
Healthcare services expense 6,960 1,964 8,924
Net investment income 24 24
Interest expense 33 33
Depreciation and amortization 65 65
Income before taxes 143 143
Income tax provision 47 47
Acquisition of fixed assets 7 7
Identifiable assets 11,060 11,060
Fully-Insured Self-Insured Corporate,
DHMO DHMO All Other Total
------------- ------------ ---------- --------
SIX MONTHS ENDED JUNE 30, 2006
Revenues from external customers $ 18,786 $ 6,196 $ 66 $ 25,048
Healthcare services expense 14,976 5,311 20,287
Net investment income 83 83
Interest expense 64 64
Depreciation and amortization 265 265
Income before taxes 99 99
Income tax provision 26 26
Acquisition of fixed assets 37 37
Identifiable assets 12,136 12,136
SIX MONTHS ENDED JUNE 30, 2005
Revenues from external customers $ 16,607 $ 5,013 $ 39 $ 21,659
Healthcare services expense 13,442 4,286 17,728
Net investment income 43 43
Interest expense 63 63
Depreciation and amortization 128 128
Income before taxes 17 17
Income tax provision 38 38
Acquisition of fixed assets 52 52
Identifiable assets 11,060 11,060
Inter-segment revenues were not significant for the three and six months ended
June 30, 2006 and 2005.
******
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Portions of this report, including this discussion and the information
contained in the condensed notes to the consolidated financial statements
contain forward-looking statements under the Private Securities Litigation
Reform Act of 1995. You can identify forward-looking statements by terminology
such as "may," "might," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "project," "predict," "intend,"
"potential," "likely will result," or the negative of such terms or similar
expressions. These forward-looking statements reflect our current expectations
and views about future events and speak only as of the date of this report. The
forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual events or results to differ materially from those
expressed or implied by the forward-looking statements. Important factors that
could cause actual results to differ materially from those in the
forward-looking statements, include, among others: claims costs exceeding our
estimates, a downgrade in our financial strength rating, competitive pressures,
changes in demand for dental benefits and other economic conditions, the loss of
a significant customer or broker, the occurrence or non-occurrence of
circumstances beyond our control and those items described in Item 1A - Risk
Factors of the Company's Form 10/A filed with the SEC on August 11, 2006. We do
not undertake any obligation to publicly update or revise any forward-looking
statements to reflect future events, information or circumstances that arise
after the date of this report.
OVERVIEW
Headquartered in Cincinnati, Ohio, we offer to employer groups of all
sizes dental HMO, dental PPO, dental indemnity and vision PPO benefit plans and
related services. As of June 30, 2006, we had approximately 200,900 members in
our dental and vision benefit programs with approximately 1,783 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.
The results of our fully-insured and self-insured HMO segments are
measured by gross profit. We do not measure the results of our corporate, all
other segment. We do not allocate selling, general and administrative expenses,
investment and other income, interest expense, goodwill, or other assets or
liabilities to our fully-insured and self-insured segments. These items are
retained in our corporate, all other segment. Our segments do not share overhead
costs and assets. We do, however, measure the contributions of each of our
fully-insured and self-insured segments to costs retained in our corporate, all
other segment.
Many factors have an impact on our results, but most notably our results
are influenced by our ability to establish and maintain a competitive and
efficient cost structure and to accurately and consistently establish
competitive premiums, administrative services only, or ASO, fees, and plan
benefit levels that are commensurate with our dental and administrative costs.
Dental costs are subject to a high rate of inflation due to many forces,
including new higher priced technologies and dental procedures, increasing
capacity and supply of dental services, new dental service techniques and
therapies, an aging population, lifestyle challenges including obesity and
smoking, the tort liability system, and government regulations.
PROFITABILITY STRATEGY
Our strategy to drive profitability focuses on providing solutions for
employers to the rising cost of dental care by leveraging our growing networks
of participating dentists and deploying a variety of products that give employer
groups and members more choices. Additionally, we have increased the
diversification of our membership base, not only through our newer products, but
also by entering new geographic territories. Although we expect our dental PPO
and indemnity products to be important drivers of growth in the years ahead, we
expect to migrate a substantial number of members from those products to our
flagship Dental Care Plus HMO products.
9
In our markets, there has been limited growth in recent years in the
number of individuals enrolled in dental benefit plans. However, there has been
a shift of membership out of the more expensive dental indemnity products into
the dental PPO products that offer both less expensive in-network benefits and
out-of-network benefits as well. At the same time, members have migrated away
from dental HMO products with very limited provider networks. While these dental
HMO products are the least expensive, employers and members have focused their
attention on the dental PPO products that offer broad provider access with the
cost control associated within a contracted provider network for the in-network
portion of the dental services rendered.
In our original eight-county service area, our provider network analysis
indicates that our dental HMO provider network includes participation by over
80% of the licensed 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.
We have experienced steady growth in membership and revenue in both the
fully-insured and self-insured dental HMO product during the last five years. We
attribute this growth to our broad provider network, competitive premium rates
for our fully-insured business and ASO fees for our self-insured business, and
our commitment to providing outstanding customer service to all of our
constituencies (employer groups, members, insurance brokers, and dentists).
Healthcare services expense has increased for both the fully-insured
dental HMO segment and the self-insured dental HMO segment. We have increased
our provider fee schedule at the beginning of each of the last five years; these
fee schedule increases contribute to an increase in the healthcare services
expense on a per-member per-month basis.
The introduction of the DentaPremier dental indemnity product in 2003 has
created new business opportunities for us with employer groups in our original
eight-county service area that have a portion of their employees who reside
outside the Cincinnati area. The introduction of the DentaSelect dental PPO
product has been instrumental to our new sales in the Dayton, Ohio and Central
Kentucky markets.
Selling, general and administrative expenses increased significantly in
2005 and the first six months of 2006 in connection with our expansion into
Dayton, Ohio and Central Kentucky with new dental indemnity and dental PPO
products and the Adenta product. We also incurred additional expenses in 2005
preparing to implement the new dental benefits administration and billing system
that became operational in February 2006.
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.
HIGHLIGHTS
- We generated net income of approximately $178,000 in the three
months ended June 30, 2006, an increase of $82,000, or 86.3%,
compared to the three months ended June 30, 2005.
- Our dental and vision products grew by 11,800 members, or 6.2%, from
December 31, 2005 to June 30, 2006, including 5,100 members from
sales related to our new DentaSelect PPO offering.
- We successfully implemented our new fully integrated dental benefits
administration system in February of 2006.
10
COMPARISON OF RESULTS OF OPERATIONS
The following discussion primarily deals with our results of operations
for the three months ended June 30, 2006, or the 2006 quarter, the three months
ended June 30, 2005, or the 2005 quarter, the six months ended June 30, 2006, or
the 2006 period, and the six months ended June 30, 2005, or the 2005 period.
11
The following table presents certain membership and financial data for our
three segments (dollar amounts in thousands):
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2005 CHANGE
------------- ------------- ------
Premium revenue:
Fully-insured DHMO $ 9,361 $ 8,481 10.4%
Self-insured DHMO 2,860 2,311 23.8%
Corporate, All Other 44 20 120.0%
------------- ------------- ------
Total premium revenue 12,265 10,812 13.4%
------------- ------------- ------
Healthcare service expense:
Fully-insured DHMO 7,302 6,960 4.9%
Self-insured DHMO 2,442 1,964 24.3%
------------- ------------- ------
Total healthcare service expense 9,744 8,924 9.2%
------------- ------------- ------
Selling, general & administrative expenses:
Corporate, All Other 2,417 1,784 35.5%
------------- ------------- ------
Investment income:
Corporate, All Other 42 24 75.0%
------------- ------------- ------
Other income:
Corporate, All Other 149 48 210.4%
------------- ------------- ------
Interest expense:
Corporate, All Other (33) (33) 0.0%
------------- ------------- ------
Income tax provision:
Corporate, All Other 85 47 80.9%
------------- ------------- ------
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2005 CHANGE
------------- ------------- ------
Membership:
Fully-insured DHMO 137,400 127,000 8.2%
Self-insured DHMO 50,000 41,500 20.5%
Corporate, All Other 13,500 2,100 542.9%
------------- ------------- ------
Total membership 200,900 170,600 17.8%
------------- ------------- ------
Premium revenue:
Fully-insured DHMO $ 18,786 $ 16,607 13.1%
Self-insured DHMO 6,196 5,013 23.6%
Corporate, All Other 66 39 69.2%
------------- ------------- ------
Total premium revenue 25,048 21,659 15.6%
------------- ------------- ------
Healthcare service expense:
Fully-insured DHMO 14,976 13,442 11.4%
Self-insured DHMO 5,311 4,286 23.9%
------------- ------------- ------
Total healthcare service expense 20,287 17,728 14.4%
------------- ------------- ------
Selling, general & administrative expenses:
Corporate, All Other 4,963 3,973 24.9%
------------- ------------- ------
Investment income:
Corporate, All Other 83 43 93.0%
------------- ------------- ------
Other income:
Corporate, All Other 282 78 261.5%
------------- ------------- ------
Interest expense:
Corporate, All Other (64) (63) 1.6%
------------- ------------- ------
Income tax provision:
Corporate, All Other 26 38 -31.6%
------------- ------------- ------
12
SUMMARY
Net income on redeemable common shares was $178,000, or $21.11 per
redeemable common share, in the 2006 quarter compared to a net income of
$96,000, or $11.27 per redeemable common share, in the 2005 quarter. Net income
on redeemable common shares was $73,000, or $8.61 per redeemable common share,
in the 2006 period compared to a net loss of $(21,000), or $(2.47) per
redeemable common share, in the 2005 period. The increase in net income for the
2006 quarter was primarily due to a $19,000 increase in investment income and a
$101,000 increase in other income as compared to the 2005 quarter. This increase
in other income during the 2006 quarter is due to an increase in dental PPO
administrative fees of approximately $42,000, vision administrative fees of
approximately $21,000, and network lease revenue of approximately $38,000. The
increase in net income for the 2006 period is the result of an operating loss
increase of $124,000 that was offset by a $40,000 increase in investment income
and a $204,000 increase in other income as compared to the 2005 period. This
increase in other income during the 2006 period is due to an increase in dental
PPO administrative fees of approximately $77,000, vision administrative fees of
approximately $34,000, and network lease revenue of approximately $93,000.
MEMBERSHIP
Our fully-insured dental HMO membership increased approximately 10,400
members, or 8.2% from June 30, 2005 to June 30, 2006. The majority of this
membership increase is attributable to new fully insured dental HMO sales in the
Cincinnati / Northern Kentucky market. Also, with the acquisition of Adenta, we
added approximately 10,000 members in the Adenta discount dental program. As of
June 30, 2006, approximately 700 members remained in the Adenta discount dental
plan.
Our self-insured dental HMO membership increased by approximately 8,500
members or 20.5%, from approximately 41,500 members as of June 30, 2005 to
approximately 50,000 members as of June 30, 2006 as a result of our adding a
number of large new self-insured groups in Southwestern Ohio and Northern
Kentucky.
Dental indemnity membership increased 61.9%, to approximately 3,400
members as of June 30, 2006 from approximately 2,100 members as of June 30,
2005. The dental indemnity members represent the out-of-area members for
employer groups based in Ohio and Kentucky, and our ability to offer out-of-area
dental coverage has allowed us to sell new employer groups with out-of-area
employees. At June 30, 2006, there were approximately 7,600 members in the
fully-insured dental PPO product, most of which had converted from the Adenta
dental product. Additionally, as of June 30, 2006 we had obtained approximately
2,500 members in the fully-insured Vision Care Plus product. The dental
indemnity product, the dental PPO product and the fully-insured vision product
are all underwritten by third party insurance carriers.
REVENUE
Fully-insured dental HMO premium revenue for the 2006 quarter increased
approximately $880,000, or 10.4%, compared to the 2005 quarter. Approximately
$480,000 of this premium revenue increase is attributable to membership volume
increases in the dental HMO product line and approximately $300,000 of this
premium revenue increase is associated with premium rate increases negotiated
with employer groups at their annual renewals. Adenta premium revenue accounted
for approximately $100,000 of the $880,000 revenue increase in the 2006 quarter.
Fully-insured dental HMO premium revenue for the 2006 period increased
approximately $2.2 million, or 13.1%, compared to the 2005 period. Approximately
$1.4 million of this premium revenue increase is attributable to membership
volume increases in the dental HMO product line and approximately $600,000 of
this premium revenue increase is associated with premium rate increases
negotiated with employer groups at their annual renewals. Adenta premium revenue
accounted for approximately $200,000 of the $2.2 million revenue increase in the
2006 period.
Total self-insured revenue for the 2006 quarter increased approximately
$550,000, or 23.8%, compared to the 2005 quarter. This increase is attributable
to the 20.5% increase in self-insured HMO membership and a provider fee schedule
increase implemented at the beginning of 2006. Total self-insured revenue for
the 2006 period increased approximately $1.2 million, or 23.6%, compared to the
2005 period. Both increases are attributable to the 20.5% 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 Claim Revenue - Self-insured claim revenue for the 2006
quarter increased approximately $500,000, or 23.7%, compared to the 2005
quarter. Self-insured claim revenue for the 2006 period increased approximately
$1.1 million, or 23.7%, compared to the 2005 period. Both of these increases are
due to increased self-insured dental HMO membership along with a fee schedule
increase implemented in 2006.
13
Self-Insured ASO Fees - Self-insured ASO fees for the 2006 quarter
increased approximately $28,000, or 19.9%, compared to the 2005 quarter.
Self-insured ASO fees for the 2006 period increased approximately $60,000, or
22.2%, compared to the 2005 period. This increase is primarily attributable to
the 20.5% 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 fully-insured
dental indemnity product. The dental indemnity product is underwritten by a
third party insurance carrier and we are paid a portion of its premium in the
form of administrative fees that cover our administrative costs, brokers
commissions, and profit. These dental indemnity administrative fees in the 2006
quarter increased by approximately $24,000, or 120%, compared to the 2005
quarter. These dental indemnity administrative fees in the 2006 period increased
by approximately $27,000, or 69.2%, compared to the 2005 period. This
significant growth is the result of new employer customers with out-of-area
employees contracting with us given we now have a dental indemnity product for
these employees.
HEALTHCARE SERVICE EXPENSES
Fully-insured healthcare services expense for the 2006 quarter increased
approximately $340,000, or 4.9%, compared to the 2005 quarter. This increase is
comprised of a $650,000 increase in ongoing healthcare service expense offset by
a non-recurring provider withhold payout of $310,000 authorized by the board and
paid in June 2005. Fully-insured healthcare services expense for the 2006 period
increased approximately $1.5 million, or 11.4%, compared to the 2006 period.
This increase is attributable to both the 8.2% increase in dental HMO membership
and the provider fee schedule increase implemented at the beginning of 2006.
Dental member utilization remained relatively constant between the 2006 period
and the 2005 period. The fully-insured healthcare services expense attributable
to the Adenta, Inc. membership was approximately $78,000 and $189,000 for the
2006 and 2005 quarters, respectively.
Self-insured healthcare services expense for the 2006 quarter increased
approximately $478,000, or 24.3%, compared to the 2005 quarter. Self-insured
healthcare services expense for the 2006 period increased approximately $1.0
million, or 23.9%, compared to the 2005 period. Both of these increases are
attributable to both the 20.5% increase in self-insured dental HMO membership
and the provider fee schedule increase implemented at the beginning of 2006.
Dental member utilization remained relatively constant between the 2006 period
and the 2005 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative, or SG&A, expenses for
the 2006 quarter increased approximately $633,000, or 35.5%, compared to the
2005 quarter. For the 2006 period, consolidated SG&A expenses increased
approximately $990,000, or 24.9%, compared to the 2005 period. Total SG&A
expenses as a percentage of total premium revenue, or SG&A expense ratio, was
19.7% for the 2006 quarter, increasing 320 basis points from the 2005 quarter
ratio of 16.5%. For the 2006 period, the SG&A expense ratio was 19.8%,
increasing 150 basis points when compared to the 2005 period of 18.3%. These
SG&A expense increases are primarily attributable to: 1) salaries and benefits
increases due to the addition of sales and marketing and provider relations
staff for the expansion in the Dayton, Louisville and Lexington markets and the
addition of finance staff to support our expanded activities; 2) commission
expense increases due to the increases in membership and the higher prevailing
commission rates in the Kentucky markets and; 3) professional services expense
increases including accounting fees, legal fees, and other professional
consulting fees.
Depreciation and amortization expense for the 2006 quarter increased
approximately $73,000, or 112.3%, compared to the 2005 quarter. For the 2006
period, depreciation and amortization totaled $265,000 compared to $128,000 for
the 2005 period, an increase of $137,000 or 103.8%. These increases were due
primarily to the amortization of the identifiable assets acquired in the
acquisition of Adenta and depreciation associated with our computer system that
was placed in service in February of 2006.
INVESTMENT INCOME
Investment income for the 2006 quarter increased approximately $18,000, or
75.0%, compared to the 2005 quarter. For the 2006 period, investment income was
approximately $83,000, increasing $40,000, or 93.0%, compared to $43,000 for the
2005 period. These increases are primarily attributable to an increase in the
amount invested in short term investments such as FDIC insured bank certificates
of deposit and U.S. Government security mutual funds in the 2006 period compared
to the 2005 period. An increase in prevailing interest rates also contributed to
this increase.
14
OTHER INCOME
Other income for the 2006 quarter increased approximately $101,000, or
210.4%, compared to the 2005 quarter. For the 2006 period, other income was
$282,000, an increase of $204,000, or 261.5%, compared to the 2005 period. These
increases for the 2006 quarter and the 2006 period were primarily due to the
administrative fees we earned associated with the DentaSelect dental PPO product
and the Vision Care Plus vision product, both of which were introduced in July
of 2005. Dental provider network leasing revenue also increased primarily due to
the revenue associated with the leasing of Adenta provider network acquired in
June of 2005. Other revenue also includes rental revenue earned from leasing a
portion of the office building owned by our subsidiary Dental Care Plus.
INTEREST EXPENSE
Interest expense for the 2006 quarter was $33,000, consistent with the
2005 quarter. For the 2006 period, interest expense was $64,000, an increase of
approximately $1,000, or 1.6%, compared to the 2005 period. The increase for the
2006 period is primarily attributable to an increase in the prevailing interest
rates associated with our variable rate contractual obligations.
INCOME TAXES
Due to the variability of our earnings, we calculated our provisions for
federal, state and local income taxes at the end of each quarter in lieu of
using an estimated annual effective tax rate. Our provision for income taxes for
the 2006 quarter was approximately $85,000 with an effective tax rate of
approximately 32.4%, compared to approximately $47,000 with an effective tax
rate of approximately 33.0% for the 2005 quarter. For the 2006 period, our
provision for income taxes was approximately $26,000 with an effective tax rate
of approximately 26.5%. The effective tax rate for the 2006 period reflects the
favorable impact of state and local tax credits at the parent company. The
provision for income taxes for the 2005 period was approximately $6,000 with an
effective tax rate of approximately 34.8%. After including a tax charge of
approximately $32,000 for a discreet item related to prior tax years, the total
provision for the 2005 period was approximately $38,000.
LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Our primary sources of cash include receipts of 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 affected during a period of shrinking enrollment. We
have recently been experiencing improving operating cash flows associated with
growth in both fully-insured and self-insured dental HMO enrollment.
Cash decreased approximately $126,000, or 2.2% for the 2006 period to
approximately $5.50 million from $5.63 million as of December 31, 2005. The
change in cash for the 2006 and 2005 periods is summarized as follows (in
thousands):
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2006 JUNE 30, 2005
---------------- ----------------
Net cash provided by operating activities $ 254 $ 692
Net cash used in investing activities (62) (229)
Net cash used in financing activities (318) (150)
---------------- ----------------
Increase (decrease) in cash $ (126) $ 313
================ ================
CASH FLOW FROM OPERATING ACTIVITIES
In the six months ended June 30, 2006, approximately $254,000 of cash was
provided by operating activities. During this period, we reported net income of
approximately $73,000. Non-cash depreciation and amortization expense was
approximately $265,000 in the 2006 period compared to approximately $128,000 in
the 2005 period. This increase is primarily associated with the amortization of
the Adenta intangible assets acquired in June of 2005. In addition,
approximately $114,000 of cash was used related to deferred income taxes.
15
For the 2006 period, accounts receivable increased by approximately
$102,000 due to an increase in monthly billings compared to the 2005 period and
delays in receiving premium payments from certain customers. This increase in
accounts receivable represents a temporary increase. Our claims payable
liability decreased by approximately $280,000 in the 2006 period, from $3.26
million at December 31, 2005 to $2.98 million at June 30, 2006. This decrease is
primarily due to a $300,000 board-approved payment to our Dental Care Plus
participating providers in respect of claim amounts withheld in 2004 and 2005.
The increase in our unearned premium liability of approximately $360,000 is also
associated with an increase in monthly billings along with the earlier payment
of premiums by employer groups in March of 2006 compared to December of 2005.
The remaining effects of changes in operating assets and liabilities represent
fluctuations in these assets and liabilities that are not unusual and are
consistent with the 2005 period.
CASH FLOW FROM INVESTING ACTIVITIES
In the six months ended June 30, 2006, we invested approximately $37,000
in building improvements and computer equipment. We also negotiated a settlement
agreement with the former Adenta, Inc. shareholders whereby we will pay an
additional $25,000 in cash consideration related to the Adenta, Inc.
acquisition. In addition, four of the FDIC insured certificates of deposit
matured and the proceeds were reinvested.
CASH FLOW FROM FINANCING ACTIVITIES
In the six months ended June 30, 2006, we made the scheduled principal
payments of $60,000 related to our office building mortgage, approximately
$98,000 related to our capital lease financing for our new dental administration
system, and approximately $48,000 related to our Adenta note payable. We also
repurchased and retired 3 Class A redeemable common shares and 243 Class B
Redeemable Common Shares during this period for approximately $113,000. These
transactions resulted in our net cash used in financing activities of
approximately $318,000 for the six months ended June 30, 2006.
PROVIDER WITHHOLD FUNDS
In most cases, the fees of our participating providers for covered dental
services under the dental HMO are subject to a 10% withhold by us. Accordingly,
our dental HMO network providers are paid 90% of the agreed fees for covered
services as set forth on applicable fee schedule. The amounts withheld are not
retained in a separate fund and we have no obligation to pay any portion of the
amounts withheld to the providers. The dental providers have no vested rights in
the amounts withheld unless our Board of Directors authorizes that any amounts
withheld shall be paid to the providers, and then vesting is only to the extent
of such amounts authorized to be paid by the Board. Once authorized for payment
by the Board, such amounts are recorded as claims payable liabilities until
paid.
In the 2006 period, we paid $300,000 to participating providers that was
authorized by the Board in December of 2005. In the 2005 period, we paid
$310,354 to participating providers that was authorized by the Board in June of
2005.
FINANCIAL CONDITION
Our consolidated cash and short-term investments were approximately $7.0
million at June 30, 2006. Our consolidated cash and short term investments
decreased by approximately $0.2 million from approximately $7.2 million as of
December 31, 2005. Based on total expenses for the six months ended June 30,
2006, we estimate that we had approximately 50 days of cash and short-term
investments on hand at June 30, 2006.
This decrease in cash and short-term investments from December 31, 2005 to
June 30, 2006 is primarily due to the $318,000 of cash used in financing
activities offset by the $254,000 provided by operating activities discussed
above along with a shift of approximately $100,000 in FDIC insured certificate
of deposit investment from short term investments to long term investments
during this period. We expect to generate positive cash flow from operations
during the balance of 2006.
On January 3, 2006 we 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 that was 8.25% as of June 30, 2006. No amounts have been
drawn on this credit line through June 30, 2006.
Together our cash, short term investments and working capital line of
credit we believe are sufficient to meet our short term and long term liquidity
needs. In the short term, we are obligated to make payments related to our
contractual obligations such as our building mortgage, computer system capital
lease, and our operating leases and other commitments (see contractual
obligations and other commitments). In the long term, we will continue to be
obligated to make payments related to our contractual obligations delineated
above. We will also be obligated in certain circumstances to repurchase the
redeemable shares of our provider shareholders who die, are permanently
disabled, or
16
retire. Our Board of Directors establishes limitations on the amount of share
redemptions each year. While we are not able to estimate future redeemable
common share redemptions, we repurchased approximately $113,000 worth of
redeemable common shares in the six months ended June 30, 2006. We believe our
cash balances, investment securities, operating cash flows, and borrowing
capacity, taken together, provide adequate resources to fund ongoing operating
and regulatory requirements and fund future expansion opportunities and capital
expenditures in the foreseeable future.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk that we will incur investment losses or increased
interest expense due to adverse changes in market rates and prices. Our market
risk exposures are substantially related to our investment portfolio and the
impact of interest rate changes on these securities. In addition, interest rate
changes can impact future interest expense for debt obligations that have a
variable rate of interest associated with them.
At March 31, 2006 and December 31, 2005, our investment portfolio
consisted solely of FDIC insured bank certificates of deposit and U.S.
government security mutual funds. We have evaluated the impact on the fixed
maturity portfolio's fair value considering an immediate 100 basis point change
in interest rates. A 100 basis point increase in interest rates would result in
an approximate $1,135 decrease in fair value, whereas a 100 basis point decrease
in interest rates would result in an approximate $1,117 increase in fair value.
While the certificates of deposit with a cost of $1,800,000 at March 31, 2006
and December 31, 2005 are all classified as available for sale, our practice has
been to hold these certificates of deposit to their maturity dates, thus
avoiding the realization of any unrealized losses associated with these
investments due to recent interest rate increases.
At March 31, 2006 and December 31, 2005, we had a mortgage note with a
bank with an outstanding principal balance of $1,470,000 and $1,500,000,
respectively, with a variable rate based on LIBOR plus 1.75%. However, in June
of 2003 we entered into a variable to fixed interest rate swap contract that
effectively eliminated the interest rate risk exposure on all but $300,000 of
the outstanding loan principal. Management estimates that a 100 basis point
increase in interest rates would decrease our annual pre-tax earnings by $3,000
vis a vis the note.
At March 31, 2006 and December 31, 2005, we had an outstanding note
payable with a bank related to the acquisition of Adenta in the amount of
approximately $135,000 and $150,000, respectively, with a variable rate based on
LIBOR plus 1.75%. Management estimates that a 100 basis point increase in
interest rates would decrease the Company's annual pre-tax earnings by $1,504
vis a vis the note.
There have been no material changes in our exposures to market risk for
the period ended June 30, 2006.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures (as defined in Securities and Exchange Act Rules
13a-15(e) and 15d-15(e)) as of June 30, 2006. Based on the evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company's disclosure controls and procedures were
effective as of June 30, 2006.
There were no changes in the Company's internal control over financial
reporting during the quarter ended June 30, 2006 that materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings that we believe
would, individually or in the aggregate, have a material adverse effect on our
financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to the factors disclosed in Item
1A. Risk Factors in our Registration Statement on Form 10 filed on May 1, 2006,
as amended pursuant to Amendment No. 1 to Form 10 filed on August 11, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered equity securities during the quarter
for which this report is filed.
We repurchased and retired 3 Class A Redeemable Common Shares and 243
Class B Redeemable Common Shares during the six months ended June 30, as
follows:
Total Class A Total Class B Average price paid
Month purchased shares purchased shares purchased per share Total amount paid
- ------------------------ ---------------- ---------------- ------------------ -----------------
March 1 - March 31, 2006 1(a) 11(a) $442.55 $ 5,310.60
May 1 - May 30, 2006 1(a) 35(a) $454.00 $16,344.08
June 1 - June 30, 2006 0 198(b) $463.08 $91,689.84
- ----------
(a) Repurchased from provider shareholder retirees in accordance with the
Company's obligations under its Amended and Restated Code of Regulations.
(b) Repurchased pursuant to the Company's authority to repurchase its
Common Shares from time to time.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on April 26,
2006. Three proposals were submitted to a vote of security holders as follows:
a) The shareholders approved increasing the number of directors
from 12 to 13.
For Against Abstain
- --- ------- -------
311 56 46
b) The shareholders approved the election of the following
persons as directors of the Company:
Name For Withhold
- --------------------- --- --------
Michael J. Carl 326 87
Ross. A. Geiger 321 92
Roger M. Higley 325 88
David A. Kreyling 317 96
James E. Kroeger 326 87
Donald J. Peak 325 88
Sanford S. Scheingold 317 96
18
c) The shareholders approved the appointment of Deloitte & Touche
LLP as the Company's independent registered public accounting
firm for the year ended December 31, 2006. This proposal
received votes as follows:
For Against Abstain
- --- ------- -------
379 4 30
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits
- --------
31.1 CEO certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2 CFO certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32 CEO and CFO certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned therein to duly authorized.
DCP HOLDING COMPANY
By: /s/ Robert C. Hodgkins, Jr.
------------------------------------------
Robert C. Hodgkins, Jr.
Vice President and Chief Financial Officer
19
INDEX TO EXHIBITS
Exhibit No. Item
- ----------- --------------------------------------------------------------------------------------------
31.1 Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
1