We have experienced steady growth in membership and revenue in our dental products during the last five years. We attribute this growth to our broad provider networks, 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). The DentaSelect dental PPO product has been instrumental to our new sales in our operating territories.
Historically, healthcare services expense has generally increased for both the fully-insured dental segment and the self-insured dental segment. We have and continue to review and adjust our provider fee schedules where appropriate. Insurance expenses increased significantly in 2009 in connection with our expansion into Dayton, Ohio and Central Kentucky. In 2010, insurance expenses were lower than 2009 as a result of a variety of expense reduction initiatives. In 2011, insurance expenses increased by approximately 5.3% compared to 2010. 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 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 more closely 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 principally through technology improvements.
Our ratio of healthcare services expense to premium revenue (“loss ratio”) decreased by 1.8%, to 81.8% in 2011 from 83.6% in 2010. This loss ratio decrease is primarily due to an increase in fully-insured premium rates in 2011 compared to 2010, improved underwriting practices and a decrease in fully-insured healthcare services expense on a per member per month basis as a result of implementing a provider withhold on the dental PPO product effective April 1, 2011. The fully-insured dental segment represents approximately 68.4% of our total dental business.
Self-Insured Claim Revenue-Self-insured claim revenue increased approximately $593,000, or 2.7%, to $22,443,000 in 2011 from $21,850,000 in 2010. Self-insured claim revenue increased by approximately $1,024,000 due to new self-insured sales. This self-insured claims revenue increase was offset by a decrease of approximately $431,000 primarily due to a decrease in the self-insured claims revenue on a per member per month basis as a result of lower dental service utilization.
Self-insured healthcare services expense increased by approximately $519,000 in 2011. An increase of 4.7% in self-insured member month volume in 2011 compared to 2010 resulted in an increase in self-insured healthcare services expense of approximately $929,000. Self-insured dental healthcare services expense decreased by approximately $410,000 due to a decrease in dental service utilization level by our self-insured members in 2011 compared to 2010.
projects in 2011 that were delayed in 2010. Salaries and benefits increased by approximately $80,000, primarily as a result of higher management bonuses in 2011 compared to 2010. Commissions expense increased approximately $51,000, or 1.6%, due to the increase in total premium revenue in 2011 compared to 2010.
Our effective tax rate for 2011 was 37.9% compared to the 65.2% effective tax rate in 2010. Our 2011 effective tax rate was higher than the federal statutory rate primarily due to the impact of permanent tax differences related to meal and entertainment and legal fees. Our 2010 effective tax rate was much higher than the federal statutory rate primarily due to the low amount of our pre-tax income relative to the impact of permanent tax differences. See Note 5 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.
Our fully-insured membership increased approximately 18,200 in 2010. This membership increase is primarily attributable to an increase of approximately 9,600 fully-insured dental HMO members, an increase of approximately 8,700 fully-insured dental PPO members, and a decrease of approximately 100 fully-insured dental indemnity members underwritten by Dental Care Plus, Inc. (“DCP"). The increase in fully-insured dental HMO membership of 9,600 members is due to new sales in the Cincinnati and Northern Kentucky markets of approximately 9,900 members and the conversion of one large employer group with approximately 7,500 members from the self-insured DHMO to the fully insured DHMO effective January 1, 2010. These membership increases were offset by the loss of approximately 7,800 members due to employer groups that did not renew with the Company or reduced employee counts of retained employer groups. The increase in fully-insured dental PPO membership is primarily due to new sales in the new geographic areas in Ohio and Kentucky.
Fully-insured dental premium increased $6,675,000 in 2010. An increase in fully-insured membership volume in 2010 resulted in an increase in fully-insured dental premiums of $6,186,000. Approximately $2,083,000 of this volume-related fully-insured premium increase was the result of a large employer group converting from our self-insured dental HMO product to our fully-insured dental HMO product effective January 1, 2010. Approximately $4,535,000 of this related increase in fully-insured premium revenue is the result of new fully-insured group sales. Fully-insured dental premium rate increases negotiated with employer groups at their renewals resulted in a slight increase in fully-insured dental premium.
Total self-insured revenue decreased $1,680,000 in 2010 compared to 2009. Self-insured revenue decreased by $2,198,000 due to the conversion of the large employer group to the fully-insured dental HMO product discussed above. This decrease was offset by an increase in self-insured revenue of $343,000 due to higher other self-insured member month volume in 2010 compared to 2009 and by an increase of $175,000 attributable to an increase in dental service utilization by our self-insured members in 2010 compared to 2009 and a slight increase in self-insured ASO fee rates in 2010. The self-insured segment revenue has two components:
Fully-insured dental HMO healthcare services expense increased by $2,700,000, or 9.0%, to $32,632,000 in 2010 from $29,932,000 in 2009. This increase is attributable to the 9.0% increase in fully-insured dental HMO member months in 2010 compared to 2009 and an increase in fully-insured dental HMO healthcare services expense on a per member per month basis of approximately 0.1% in 2010 for both our new and existing fully-insured membership.
Self-insured healthcare services expense decreased by $1,462,000 in 2010. The conversion of the large employer group to the fully-insured dental HMO product effective January 1, 2010 resulted in a decrease in self-insured dental healthcare services expense of $1,894,000. This decrease is offset by an increase of $296,000 related to higher other self-insured member month volume in 2010 compared to 2009. Self-insured dental healthcare services expense also decreased by $136,000 due to a decrease in dental service utilization by our self-insured members in 2010 compared to 2009.
Consolidated insurance expenses decreased $217,000 in 2010. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 16.6% for 2010, decreasing 1.5% from the 2009 ratio of 18.1%. Board of Director expense decreased by $188,000, or 38.6%, primarily due to a 50% reduction in total director compensation, which consists of cash and deferred share awards compensation and was approved by the Board in August of 2010. In addition, advertising expense in 2010 decreased by $231,000, or 67.9%, and promotional expense decreased by $42,000, or 17.5%, as part of an initiative to reduce discretionary expenses. Legal fees decreased by $88,000, or 30.6%, after the completion of state insurance department filings in 2009. Professional consulting expense decreased by $81,000, or 28.1%, as a result of the delay of discretionary
projects. These expense reductions were offset by some expense increases. Salaries and benefits increased by $166,000, or 4.5%, due to staff pay increases implemented in 2010 and the addition of new employees in staff positions. Commissions expense increased $261,000, or 8.9%, due to the higher level of new membership sales in 2010.
In 2011, we generated approximately $1,571,000 of cash from operating activities. This level of cash flow from operating activities is higher than the cash flow generated from operating activities in 2010. We had a net income of approximately $552,000 in 2011 compared to a net income of $12,000 in 2010. In addition to our 2011 net income, we had non-cash depreciation and amortization expense of approximately $264,000, an increase in deferred compensation liabilities of $226,000, and an increase in claims payable of $25,000 and an increase in other payables and accruals of $276,000. The increase in deferred compensation liabilities is primarily due to the 11% increase in the book value of the common shares during 2011, while the increase in other payables and accruals is primarily the result of a higher management bonus liability for 2011. These sources of cash were offset by cash uses such as an increase in accounts receivable of approximately $61,000. A decrease in unbilled
In 2010, we generated approximately $876,000 of cash from operating activities. This level of cash flow from operating activities is higher than the cash flow generated from operating activities in 2009. We had a net income of approximately $12,000 in 2010 compared to a net loss of $(289,000) in 2009. In addition to our 2010 net income, other sources of cash include: non-cash depreciation and amortization expense of approximately $505,000, an increase in deferred compensation liabilities of $132,000, an increase in claims payable of $460,000, and an increase in unearned premium of $8,572,000 that was offset by an increase in unbilled accounts receivable of $8,076,000. Both unbilled accounts receivable and unearned premium increased as a result of the conversion of a large employer group from the self-insured segment to the fully-insured segment and the renewal of a large employer group on a multi-year contract, both effective January 1, 2010. The increase in our claims payable is primarily due to the fact that there was a significant increase in fully-insured membership at December 31, 2010 compared to December 31, 2009. These sources of cash were offset by cash uses such as an increase in accounts receivable of approximately $95,000, an increase in deferred policy acquisition costs of $877,000 and an increase in other assets of $99,000. Also, we had a non-cash tax benefit related to deferred income taxes of approximately $93,000.
In 2009, we generated approximately $37,000 of cash from operating activities. This level of cash flow from operating activities is lower than the cash flow generated from operating activities in 2008. We had a net loss of approximately $(289,000) in 2009, primarily due to a 2.5% increase in fully-insured healthcare services utilization. In addition to our 2009 net loss, other uses of cash include: a decrease in claims payable of approximately $315,000, and a decrease in unearned premium of $647,000 that was offset by a decrease in unbilled accounts receivable of $860,000. The decrease in our claims payable is primarily due to the fact that there was a provider withhold return liability of approximately $464,000 at December 31, 2008 and no provider withhold return liability at December 31, 2009. The decrease in unbilled accounts receivable and a corresponding decrease in unearned premium revenue of approximately $860,000 are the result of some large two-year fully insured dental contracts that expired December 31, 2009. The unearned premium decrease was offset by an increase in unearned premiums received in advance of approximately $213,000. Additional uses of cash included an increase in deferred acquisition costs and an increase in other assets totaling $180,000. Also, we had a non-cash tax benefit related to deferred income taxes of approximately $292,000. These uses of operating cash were offset by non-cash depreciation and amortization expense of approximately $468,000, an increase in deferred compensation liabilities of $275,000, along with a decrease in accrued investment income, a decrease in accounts receivable and an increase in other payables and accruals totaling $156,000.
In 2010, we invested approximately $151,000 in building improvements, office equipment and computer equipment and software. In December of 2010, we entered into a sale-leaseback transaction with a leasing company where we received approximately $323,000 in cash in exchange for certain fixed assets on our balance
In 2009, we invested approximately $245,000 in building improvements, office equipment and computer equipment and software. Also in 2009, approximately $19.2 million of our investments in FDIC insured certificates of deposit and money market funds either matured or were liquidated to fund operations. We also invested approximately $14.6 million in additional FDIC insured certificates of deposit and money market funds. Collectively, this resulted in an increase in cash from investment activities of approximately $4.3 million. Approximately $4.5 million of the increase in cash flows from investing activities was the result of our decision in the fourth quarter to move funds out of money market mutual funds yielding less than 0.1% interest to our checking account where the earnings credit of approximately 0.4% was used to minimize bank service fees.
In 2011, we paid approximately $120,000 of our outstanding mortgage balance and repaid approximately $104,000 related to the capital lease that we executed in December 2010. During 2011, we repurchased redeemable common shares of $128,000 from provider shareholders. In the fourth quarter of 2011, we exchanged the 330 outstanding Provider Preferred Shares with a book value of approximately $205,000 and received $22,000 in cash for 330 Class B Common Shares with a book value of $227,000.
In 2009, we paid approximately $120,000 of our outstanding mortgage balance and $19,000 in capital lease payments for our dental administration software. During 2009, we repurchased redeemable common shares of $172,000, which was offset by the issuance of redeemable common shares and provider preferred shares related to our 2009 share offerings of $222,000.
In most cases, our reimbursement to our directly contracted participating providers for covered dental services under the dental HMO, and also the dental PPO effective April 1, 2011, are subject to a 10% withhold. 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 any amounts withheld to be paid to the providers, and then vesting is only to the extent of such amounts authorized to be paid. Once authorized for payment by the Board, such amounts are recorded as claims payable liabilities until paid.
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 improvements to the 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 may 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 paid to such participating dental provider in relation to the total claims paid to 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. The Board did not authorize any return of withhold for the years ended December 31, 2011, 2010 or 2009. The Board authorized the return of withhold amounting to $464,000 for the year ended December 31, 2008 that was paid in 2009.
A summary of our future commitments as of December 31, 2011 is as follows:
(1) Includes swap interest payments based on a fixed rate of 4.95%. We estimate that we will incur swap interest payments totaling $12,000 based on a variable rate of LIBOR plus 1.75% or 2.03%.
We also entered into an interest rate swap agreement that effectively changed the interest rate related to $1,500,000 of the $1,800,000 mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.75% to a fixed rate of approximately 4.95% for the 10-year period through June 12, 2013. Our effective interest expense on the mortgage note was 3.83%, 3.97%, and 4.08% at December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, the carrying value of the mortgage note approximates fair value.
As of December 31, 2011, we believe our most significant other commitments are:
This increase in cash and short term investments from December 31, 2010 to December 31, 2011 is primarily due to the net cash provided by operating activities of approximately $1,571,000, offset by the cash used in investing activities of $309,000 and the cash used in financing activities of $347,000. In addition, there was a reinvestment of approximately $650,000 from short term investments to long term investments during this period.
In August 2011, we renewed an annually renewable agreement with a commercial bank for a $960,000 working capital line of credit, and the commercial bank also issued an irrevocable letter of credit in the amount of $40,000. Interest was payable at a variable rate of LIBOR plus 2.50% and was 2.88% at December 31, 2011. The Company did not have any interest expense for the line of credit in 2011 or 2010. As of December 31, 2011 and 2010 there was no amount outstanding on this line of credit.
Our largest subsidiary, Dental Care Plus, operates in states that regulate its payment of dividends and debt service on inter-company loans, as well as other inter-company cash transfers and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by Dental Care Plus, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Dividends cannot exceed in any one year the lesser of: (i) 10% of net worth (as of the preceding December 31), or (ii) net income for the prior year, and only if net worth exceeds $250,000 and only out of positive retained earnings. There were no dividends declared or paid by Dental Care Plus during 2011, 2010 or 2009. Even if prior approval is not required, prior notification must be provided to state agencies in Ohio, Kentucky and Indiana before paying a dividend.
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, 2011, 2010, and 2009, respectively, such changes increased or (decreased), net of related income tax effects, by the following amounts:
Our estimated liability for claims payable and corresponding healthcare services expense includes claims incurred but not reported (“IBNR”), claims reported but not yet processed and paid and other healthcare services expenses incurred, including estimated costs of processing outstanding claims and actual amounts of accrued but unpaid payments in respect of our Dental Care Plus provider withhold, if any, which is authorized by our Board of Directors. Our estimated liability for claims payable is based primarily on the average historical lag time between the date of service and the date the related claim is paid, taking into account recent trends in payment rates and the average number of incurred claims per covered individual over a rolling 12 month period.
Between December 31, 2010 and December 31, 2011, our IBNR estimate increased by approximately $66,000 or 3.8%, primarily due to a 1.3% increase in fully-insured dental HMO claims on a per member per month basis in 2011 compared to 2010. Also our IBNR estimate at December 31, 2011 has increased due to an increase in fully-insured dental HMO utilization in December 2011 compared to December 2010.
(a) Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for all months prior to December 31, 2011.
Fully-Insured premium revenue is recognized in the period during which dental or vision coverage is provided to the covered individuals. Payments received from customers in advance of the related period of coverage, as well as unbilled accounts receivable, are reflected on the accompanying consolidated balance sheets as unearned premium revenue. The Company’s unearned premium revenue was approximately $22,381,000 and $29,531,000 at December 31, 2011 and 2010, respectively, for the estimated premium revenue associated with the remaining contract periods and related amounts recorded in unbilled accounts receivable. Enrollment changes not yet reflected on employer group invoices, also known as retroactive membership adjustments, are estimated based on available data and are reflected in revenue in the current period. Self-insured premium revenue is recognized upon the payment of claims for self-insured members in accordance with contracts with self-insured employers. We provide administrative and claims processing services, benefit plan design, and access to its provider networks for an administrative fee to self-insured groups. The Company has no underwriting risk arising from the provision or cost of any services provided to the self-insured groups.
In September 2011, the FASB issued guidance relating to goodwill and intangibles. This guidance amends procedures to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amendment, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance applies to all companies that have goodwill reported in their financial statements. This guidance is effective for fiscal and interim periods beginning after December 15, 2011. The adoption of the guidance will not have a material impact on the consolidated financial statements.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, REDEEMABLE SHARES AND COMPREHENSIVE INCOME (LOSS)
The Company’s products consist primarily of dental HMO, PPO and indemnity plans, with fully-insured products constituting 68.4% of its total revenues. Substantially 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 the Company’s participating dentists. The dental benefit products the Company offers currently vary depending on geographic market.
Management follows a consistent and systematic process for recognizing impairments on securities that sustain other-than-temporary declines in value. The decision to record an impairment for a security incorporates both quantitative criteria and qualitative information. The Company considers the percentage loss on a security, duration of loss, duration of the investment, credit rating of the security, as well as payment performance and the Company’s intent or requirement to sell the investment before recovery when determining whether any impairment is other than temporary. The Company’s impairment policy for fixed-maturity securities states that other-than-temporary impairment is considered to have occurred (1) if the Company intends to sell the impaired fixed maturity security; (2) if it is more likely than not the Company will be required to sell the fixed maturity security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis.
Deferred Acquisition Costs- Deferred acquisition costs are those costs that vary with and are primarily related to the acquisition of new and renewal business. Such costs include commissions, costs of contract issuance and underwriting, premium taxes and other costs the Company incurs to acquire new business or renew existing business. The Company defers policy acquisition costs and amortizes them over the estimated lives of the contracts, which are short-duration in nature, in proportion to premiums earned. The Company capitalized deferred acquisition costs of approximately $3,401,000, $4,363,000 and $2,787,000 and amortized approximately $3,921,000, $3,487,000 and $2,742,000 of these capitalized costs for the years ended December 31, 2011, 2010 and 2009, respectively. These amounts are recorded in commission expense and other acquisition costs included in the consolidated statements of operations.
Investment Income and Realized Gains On Investments, Net-Investment income is comprised of interest income primarily earned from the Company’s certificates of deposit, investment grade corporate bonds and money market investments.
The cost of fully-insured healthcare services to members is accrued in the period such services are provided based on the accumulation of estimates of claims reported prior to the end of a reporting period and of estimates of dental services incurred but not reported to the Company, net of the amounts withheld, in accordance with the provider agreements.
Management’s estimates of dental services provided are based on the Company’s historical experience and current trends, with assistance from the Company’s consulting actuary. Estimated dental claims payable are reviewed monthly by management and are adjusted based on current information, actual paid claims data, dental utilization statistics and other pertinent information. However, final claim payments may differ from the established reserves. Any resulting adjustments are reflected in current operations.
Each year the Board evaluates the performance of the Company’s dental plans, capital and surplus requirements prescribed by the Ohio Department of Insurance, factors affecting the Company’s 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. There was no withhold return authorized by the Board for 2011, 2010 or 2009.
Reinsurance-In the normal course of business, the Company assumes premium revenue and related healthcare services expense from a third party insurance provider. Dental insurance premium assumed was approximately $259,000 and $148,000 for the years ended December 31, 2011 and 2010, respectively. The healthcare services expense assumed was approximately $220,000 and $135,000 for the years ended December 31, 2011 and 2010, respectively. The Company did not have any assumed dental insurance premium or healthcare services expense for the year ended December 31, 2009. As of December 31, 2011 and 2010, the Company had approximately $12,000 and $9,000 of reinsurance premium receivable, respectively, and claims payable of approximately $20,000 and $29,000, respectively.
In May 2011, the FASB issued guidance related to amendments to certain measurement principles and disclosures regarding fair value measurements. The amendments in this update improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of the guidance will not have a material impact on the consolidated financial statements and related disclosures.
Goodwill and intangible assets were recorded as a result of the acquisition of Adenta, Inc. in 2005 related to goodwill, an acquired contract, memberships and a provider network. Goodwill amounted to approximately $136,000 at December 31, 2011 and 2010. There has not been any impairment on goodwill. Identifiable and amortizable intangible assets amounted to approximately $127,000 net of approximately $113,000 of accumulated amortization at December 31, 2011 and to approximately $142,000 net of approximately $98,000 of accumulated amortization at December 31, 2010. Amortization expense was approximately $15,000 for each of the three years ended December 2011, 2010, and 2009. The provider network intangible asset of approximately $74,000 at December 31, 2011 is being amortized over a period of 20 years, a period during which the Company expects that all of these providers will have retired from the network. Membership intangible assets (net of
The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with an amortized cost of $1,200,000 and $1,000,000 as of December 31, 2011 and December 31, 2010, respectively. The certificates of deposit included in short-term and fixed maturities investments are classified as available-for-sale and are carried at fair value. The Company also invests in money market funds with a cost and fair value of $107,699 and $556,341 as of December 31, 2011 and December 31, 2010, respectively. The Company invests in investment grade corporate bonds with an amortized cost of approximately $2,727,000 and $2,316,000 as of December 31, 2011 and 2010, respectively. Effective August 2011, the investment grade corporate bonds included in fixed maturities investments are classified as available-for-sale and are carried at fair value. Prior to August 2011, the investment grade corporate bonds were classified as held-to-maturity and were recorded at amortized cost. At the transfer date to available-for-sale, the Company recorded approximately $42,000 of net unrealized gains, net of tax, in other accumulated comprehensive income.
Unrealized losses on investments are generally due to higher current market yields relative to the yields of the investments at their amortized cost. Unrealized losses due to credit risk associated with the underlying collateral of the investments, if any, are not material. All investments with unrealized losses are reviewed quarterly to determine if any impairment is other than temporary, requiring a write-down to fair market value. The Company considers the percentage loss on a security, duration of loss, duration of the investment, credit rating of the security, as well as payment performance and the Company’s intent or requirement to sell the
and tax years subsequent to 2006 remain open to other state and local tax authorities. As of December 31, 2011, the Company is under an examination with the IRS for the 2009 U.S. federal income tax return. The Company believes no uncertain tax positions exist for the tax years that are subject to examination.
The expected fair value of the nonvested and partially vested awards are calculated by applying the three year historical average growth rate of the book value per redeemable common share over the respective vesting period. The fair value of awards that are fully vested are based on the book value of redeemable common shares included in the consolidated financial statements as of each reporting period. The weighted average grant date fair value of the awards granted in the three years ended December 31, 2011, 2010 and 2009 were $639, $715 and $801, respectively. In 2011, there was one award payment of approximately $16,000. There were no award payments in 2010 or 2009. The total fair value of the awards that vested during the three years ended December 31, 2011, 2010 and 2009 were approximately $174,000, $85,000 and $232,000, respectively. At December 31, 2011 and 2010, the deferred compensation liability was approximately $1,196,000 and $1,092,000.
The maximum aggregate number share based awards that may be issued under the Plans are 15,000 Class B Common Shares. In January 2011, the non-employee members of the Board were granted a total of 168 share based awards. In 2011, key employees were granted 80 share awards. As of December 31, 2011, the Company granted a total of 1,590 share awards, net of forfeitures and rescinded share awards.
The following is a summary of activity of nonvested awards for the year ended December 31, 2011:
The following is a summary of activity of vested awards for the year ended December 31, 2011:
Detail supporting the computation of earnings (loss) per redeemable common share was as follows for the years ended December 31, 2011, 2010, and 2009:
There is one key employee who elected to receive seven Class B Redeemable Common Shares in lieu of deferring their stock-based compensation restricted share awards granted, which has a dilutive effect on the Company’s basic earnings per share for the year ended December 31, 2011. There were no share awards granted that have a dilutive effect on the Company’s basic earnings per share for the years ended December 31, 2010 and 2009.
The Board authorized and approved for issuance the Provider Preferred Shares-2009 Series that includes 5,000 preferred shares of the 100,000 authorized. These Provider Preferred Shares were purchased by participating dentists in the Company’s dental plans or retired participating dentists that own at least 12 Redeemable Common Shares. Redeemable Provider Preferred Shares are entitled to a cumulative cash dividend equal to 5% of the year end book value of the redeemable Provider Preferred Shares. During 2011, the Company exchanged an aggregate of 330 Class B Redeemable Common Shares for all outstanding Provider Preferred Shares and additional cash consideration of approximately $22,000. There were zero and 330 shares issued and outstanding at December 31, 2011 and 2010, respectively. At December 31, 2010 a dividend payable liability of approximately $10,000 was established in accordance with the Company’s Amended and Restated Articles of Incorporation for shareholders of record as of December 31, 2010 and is included in other payables and accruals in the accompanying consolidated balance sheets. There were no dividends accrued at December 31, 2011.
The Board of Directors authorized and approved the issuance of Redeemable Institutional Preferred Shares (“the Shares”) consisting of 300 preferred shares issued of the 100,000 authorized. The Company entered into a
In 2011, the Company renewed its revolving note with a commercial bank in the amount of $750,000 collateralized by a second mortgage on the office building. Under this revolving note, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year, and the Company was in compliance with this covenant at December 31, 2011 and 2010. There was a principal balance outstanding of $650,000 related to this revolving note at December 31, 2011 and 2010, respectively. At
December 31, 2011, the carrying value of the revolving note approximates fair value. This revolving note matures in December 2012 and is annually renewable and requires monthly interest payments at a variable rate of 30-day LIBOR plus 1.75%, which was 2.03% and 2.01% at December 31, 2011 and 2010.
In 2010, the Company entered into a sale-leaseback transaction with a leasing company for the sale of certain fixed assets for approximately $323,000. There was no gain or loss on the sale. The Company did not retain the benefits and risk to the property sold and the risk of ownership was transferred to the leasing company. The Company also entered into a capital lease agreement with the leasing company that obligates the Company to pay lease payments totaling approximately $339,000 related to these assets over a three year period. Under this capital lease agreement, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year, and the Company was in compliance with this covenant at December 31, 2011 and 2010. The net book value of these certain fixed assets is approximately $216,000 and $323,000 at December 31, 2011 and 2010, respectively.
At December 31, 2011, future required payments under the capital lease are as follows:
In 2003, the Company entered into an interest rate swap agreement (“Agreement”) (cash flow hedge) with an original 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 a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.75% 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 derivatives for speculative purposes. The notional amount decreases $10,000 per month in direct correlation to the principal reduction of the mortgage. The Company believes that the risk of nonperformance by the counter party in conjunction with this arrangement is not material to the financial statements. The fair value of this Agreement at December 31, 2011 and 2010 was a liability of approximately $16,000 and $28,000, respectively. These amounts are included in other payables and accruals in the accompanying consolidated balance sheets. The amount included in other comprehensive income (loss) related to the interest rate swap was $7,448, $(2,644), and $9,462, net of income tax expense (benefit) of $3,837, $(1,362), and $4,874 during 2011, 2010 and 2009, respectively. The agreement will terminate upon maturity of the mortgage loan payable (Note 11).
Employees of the Company are covered by a defined contribution 401(k) plan sponsored by the Company. Discretionary contributions of a certain percentage of each employee’s contribution, which may not exceed a limit set annually by the Internal Revenue Service, are contributed by the Company each year and vest ratably over a five-year period. Company contributions, including administration fees paid by the Company, amounted to approximately $52,000, $65,000, and $56,000 in 2011, 2010, and 2009, respectively.
The Company has an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50% and was 2.88% at December 31, 2011 and 2010. The Company did not have any interest expense or significant fees for the line of credit for the three years ended December 31, 2011. As of December 31, 2011 and 2010, there was no amount outstanding on this line of credit. The $500,000 working capital line of credit expires in July 2012.
The Company has an additional annually renewable working capital line of credit for $960,000. Interest is payable at a variable rate of LIBOR plus 2.50% and was 2.88% at December 31, 2011 and 2010. The Company did not have any interest expense or significant fees for the line of credit for the three years ended December 31, 2011. At December 31, 2011 and 2010, there was no amount outstanding on this line of credit. The $960,000 working capital line of credit expires in August 2012. In addition, the Company obtained an irrevocable letter of credit for $40,000, with interest payable on all outstanding amounts at a variable rate of the prime rate of borrowing plus 6.00%. The letter of credit will also have an annual fixed rate of 2.10% for access to the letter of credit obligation. The letter of credit expires in December 2012. At December 31, 2011 and 2010, there was no amount outstanding on the irrevocable letter of credit obligation.
The results of the fully-insured and self-insured dental segments are measured by gross profit. The Company does not allocate insurance expense, investment and other income, assets or liabilities to these segments. These items are assigned to the remainder of the Company’s business, which it identifies as corporate, all other. The Company’s gross profit was approximately $13,876,000, $12,373,000, and $12,169,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
Listed below is financial information required for each reportable segment for the years ended December 31, 2011, 2010 and 2009 (amounts in thousands):
The Company’s providers, who are also shareholders, submitted claims of approximately $40,218,000, $41,207,000 and $42,152,000 in 2011, 2010 and 2009, respectively. The Company had claims payable liability to related party providers of approximately $1,815,000 and $1,834,000 at December 31, 2011 and 2010, respectively.
Seven of our Board members are also participating providers and as a group received approximately $159,000, $141,000 and $155,000 in directors’ fees for the years ended December 31, 2011, 2010, and 2009, respectively.
The Company measures fair value using the following valuation methodologies. The Company uses quoted market prices to determine the fair value of the deferred compensation investments and certain state fund guarantee deposits; such items are classified as Level 1 of the fair-value hierarchy. Examples include government securities and exchange-traded equity securities. The Company primarily bases fair value for investments in fixed-maturity securities (including federally-insured certificates of deposits and investment grade corporate bonds) on quoted market prices or on prices from a pricing vendor, an outside resource that supplies global securities pricing, dividend, corporate action and descriptive information to support fund pricing, securities operations, research and portfolio management. The Company obtains and reviews the pricing service’s valuation methodologies and validates these prices using various inputs including quotes from other independent regulatory sources. When deemed necessary, the Company validates prices by replicating a sample using a discounted cash flow model. Such items are classified as Level 2 of the fair-value hierarchy. The Company obtains a price from an independent vendor to determine the fair value of the interest rate swap. The independent vendor uses a discounted cash flow method whereby the significant observable inputs include the replacement interest rates of similar swap instruments in the market and swap curves; such items are classified as Level 2 of the fair value hierarchy.
A summary of our unaudited quarterly results of operations for the years ended December 31, 2011 and 2010 is as follows (amounts in thousands, except for per share results):
Subsequent to December 31, 2011, the Company entered into a Preferred Shares Purchase Agreement (the “Stock Purchase Agreement”) with an investor. Pursuant to the Stock Purchase Agreement, the investor agreed to purchase 1,000 shares of Redeemable Institutional Preferred Shares (the “Shares”) at a purchase price of $1,000 per share, for an aggregate purchase price of $1,000,000. The annual dividend payable on each Share shall be (i) in respect of the dividend payable in 2012, 5% of the per share issue price, prorated based on the number of days which the Share was outstanding in 2012; and (ii) in respect of the dividends payable in 2013 and all years thereafter, 5% of the book value of the Share on December 31 of the preceding year, prorated based on the number of days which the Share was outstanding in the preceding year. In the event of any liquidation, dissolution or winding up of the Company, any merger or consolidation resulting in a change of control of the Company, or any sale, lease, transfer or other disposition of substantially all of the assets of Company, the investor will have the right to receive a cash payment in an amount equivalent to the consideration the investor would have otherwise received if the investor had the ability to convert each Share to 1.2 Class B Common
On March 14, 2012 the Company’s Board of Directors declared a $21.00 per share dividend for all Class A and Class B redeemable common shareholders of record on March 14, 2012, totaling approximately $177,000 payable on March 21, 2012. With the dividend, the holders of restricted share units will receive an equivalent share based dividend.