We currently maintain our principal place of business at 100 Crowne Point Place, Sharonville, Ohio 45241, which is owned by our wholly-owned subsidiary, Dental Care Plus. We occupy approximately 60% of this property. The remaining amount, approximately 40%, is leased to a third party tenant. We believe that our existing facility is adequate to support our business.
Includes approximately $1,237 from acquisition of Adenta, Inc. in June of 2005.
The Company reorganized into a holding company structure in July of 2004 and Insurance Associates Plus, Inc. was formed in August of 2004.
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, 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, 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, new dental service techniques and therapies, an aging population, lifestyle challenges including obesity and smoking, the tort liability system, and government regulations.
Selling, general and administrative expenses increased significantly in 2004, 2005 and 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 of 2006.
We successfully implemented our new fully integrated dental benefits administration system in February of 2006.
The following chart shows membership totals and revenues and expenses for our three business segments for the years ended December 31, 2006 and 2005 (in thousands, except for membership data and percentage change):
Corporate, all other membership increased by approximately 11,000 members, or 180.3%. The increase is primarily attributable to the increase membership in our dental PPO product from approximately 2,400 members at December 31, 2005 to 8,900 members at December 31, 2006. Dental indemnity membership increased 36.8%, to approximately 3,700 members at December 31, 2006 from approximately 2,600 members at December 31, 2005. The dental indemnity members represent the out-of-area members for employer groups based in Ohio and Kentucky. The remaining increase is attributed to an increase in the membership in the fully-insured Vision Care Plus product from approximately 1,100 at December 31, 2005 to approximately 4,500 at December 31, 2006. Except for approximately 1,000 Dental Care Plus dental PPO members at December 31, 2006, the dental indemnity product, the dental PPO product and the fully-insured vision product are all underwritten by third party insurance carriers.
Fully-insured healthcare services expense increased approximately $2.5 million, or 9.0% in 2006 as compared to 2005. This increase is attributable to both the increase in dental HMO membership and the provider fee schedule increase implemented at the beginning of 2006. Member utilization remained relatively constant between 2005 and 2006.
Corporate, all other healthcare services expense was approximately $40,000 for the Dental Care Plus dental PPO product that was introduced in September of 2006. Because our other dental indemnity, dental PPO and vision PPO products are underwritten by third party insurance carriers, we do not recognize any premium revenue or healthcare services expense associated with these products.
Consolidated selling, general and administrative expenses increased approximately $1.7 million, or 21.7% in 2006 as compared to 2005. Salaries and benefits increased by approximately $420,000 due to the addition of sales and marketing provider relations staff for the expansion in the Dayton, Louisville and Lexington markets as well as additional operational and finance staff to support our expanded activities. Commissions expense increased approximately $326,000 due to the increases in membership and the fact that the prevailing commission rates in the Kentucky markets are higher than the prevailing rates in Southwestern Ohio. Professional services expense increased approximately $291,000, or 35.5%. This increase was primarily due to the an increase in legal and accounting expense associated with becoming a SEC reporting company. Depreciation and amortization expense increased approximately $301,000, or 95.57%, to approximately $616,000 in 2006 from approximately $315,000 in 2005. This increase was due to the amortization of the identifiable assets acquired in the acquisition of Adenta. Amortization recorded in 2006 includes an impairment charge recorded in July of approximately $128,000 to eliminate the remaining balance associated with the Humana Dental network lease agreement intangible asset. See Note 3 of the consolidated financial statements included in Item 8. In 2006, computer maintenance expensed increased approximately $108,000 due to the monthly service agreement for the new dental administration software that was implemented in February 2006. Board of Directors fees increased approximately $115,000 as a result of the new DCP Holding Company Deferred Compensation Plan as well as an additional director added in 2006. The remaining amount of approximately $139,000 is due to various operating expense increases in 2006 as compared to 2005.
Interest expense decreased $8,000, or 6.2%, to approximately $121,000 in 2006 from approximately $129,000 in 2005. The decrease is primarily attributable to the interest expense associated with the reduction of our capital lease obligation related to dental administration software.
The following chart shows membership totals and revenues and expenses for our three business segments for the years ended December 31, 2005 and 2004 (in thousands, except for membership data and percentage change):
Fully-insured dental HMO premium revenue increased approximately $4.2 million, or 13.8% in 2005 as compared to 2004. This premium revenue increase is attributable to both membership volume increases in the dental HMO product line and premium rate increases negotiated with employer groups at their annual renewals. The acquisition of Adenta accounted for approximately $1.2 million of the $4.2 million revenue increase in 2005.
Self-insured Claim Revenue - Self-insured claim revenue increased approximately $1.1 million, or 13.0% in 2005 as compared to 2004 is due to increased self-insured dental HMO membership along with a fee schedule increase implemented in
Corporate, all other premium revenue is derived from our administrative fees related to our dental PPO, vision and dental indemnity products. These products are underwritten by third party insurance carriers and we are paid a portion of premium in the form of administrative fees that cover our administrative costs, brokers commissions, and profit. These administrative fees increased by approximately $90,000, or 257% in 2005 as compared to 2004.
Self-insured healthcare services expense increased approximately $1.0 million or 12.9% in 2005 as compared to 2004. This increase is attributable to both the increase in self-insured dental HMO membership and the provider fee schedule increase implemented at the beginning of 2005. Member utilization remained relatively constant between 2004 and 2005.
Consolidated selling, general and administrative expenses increased approximately $1.6 million, or 25.3% in 2005 as compared to 2004. Approximately $400,000 of this increase is associated with the operating expenses incurred by Adenta since its acquisition and during the last seven months of 2005. Salaries and benefits increased by approximately $800,000 due to the addition of sales and marketing and provider relations staff for the expansion in the Dayton, Louisville and Lexington markets. In addition, finance staff was added to support our expanded
activities. Commissions expense increased approximately $400,000 due to the increases in membership and the fact that the prevailing commission rates in the Kentucky markets are higher than the prevailing rates in Southwestern Ohio. Marketing expense decreased approximately $332,000, or 43.6%. Included in 2004 were approximately $300,000 in costs associated with the television and radio advertising campaign in Southwestern Ohio that was discontinued in 2005. Professional services expense increased approximately $300,000, or 60.0%. This increase was primarily due to the IT consulting costs associated with the implementation of the new dental plan administration computer system that became fully operational in February of 2006. Depreciation and amortization expense increased $85,000, or 37%, to approximately $315,000 in 2005 from approximately $230,000 in 2004. This increase was due to the depreciation of the dental administration software in 2005 and the amortization of the identifiable assets acquired in the acquisition of Adenta.
Investment income increased approximately $72,000, or 225.0% in 2005 as compared to 2004. This increase is 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. An increase in prevailing interest rates also contributed to this increase.
Our effective tax rate for 2005 of 40.7% increased 4.2% compared to the 36.5% effective tax rate in 2004. Our 2005 effective tax rate is higher than the federal statutory rate due to newly applicable state and local taxes and certain non-deductible reorganization costs associated with our acquisition of Adenta. See Note 6 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate.
In 2006, we generated approximately $1.4 million of cash by operating activities and realized net income of approximately $103,000. The decrease in net cash provided by operating activities of approximately $622,000 is primarily due to a decrease in net income in 2006 as compared to 2005. The increase in claims payable of approximately $700,000, from approximately $3.3 million at December 31, 2005 to approximately $4.0 million at December 31, 2006, is primarily attributable to an increase in the provider withhold payable of $600,000. The remaining $100,000 increase is due to continued growth in our fully insured segment. In addition, our growth in 2006 contributed to an increase in accounts payable, accrued expenses and other liabilities totaling approximately $538,000. Non-cash depreciation and amortization expense was approximately $615,000. These increases in cash provided by operating activities were offset by an increase in account receivable and other assets and a decrease in unearned premium totaling approximately $484,000.
In 2005, we generated approximately $2.0 million of cash by operating activities and realized net income of approximately $467,000. Continued growth and the Adenta acquisition led to an increase in claims payable of approximately $419,000, an increase in accounts payable and accrued expense of approximately $625,000 and an increase in unearned premium of approximately $260,000. These increases in current liabilities resulted in a corresponding increase in our cash balances. In addition, non-cash depreciation and amortization increased to approximately $315,000 in 2005.
In 2006, we invested approximately $160,000 in building improvements, office equipment and computer equipment. During 2006, we completed the required net asset valuation analysis for the Adenta acquisition in 2005, and the Company and the representatives of the former Adenta shareholders negotiated an agreement whereby the former Adenta shareholders were paid $25,000 in additional cash consideration. Also in 2006, we invested an additional $100,000 of our excess cash in FDIC insured bank certificates of deposits in order to earn higher interest rate yields.
In 2004, we invested approximately $243,000 in building improvements of our home office building to make certain space suitable for leasing to our third party tenant. In addition, we invested approximately $220,000 in a
In December 2006, the Board authorized $900,000 in respect to amounts withheld in 2006 and such amount was paid in March 2007. In December 2005, the Board of Directors adopted a policy that no further withhold payment will take place related to years prior to and including 2005. In December 2005, the Board authorized $300,000 in respect to amounts withheld in 2005 and 2004, and such amount was paid in March 2006. In May of 2005, the Board authorized that $310,354 be paid to participating providers in respect to amounts withheld in 2003, and such amount was paid to providers in June of 2005. In December 2004, the Board authorized $300,000 in respect of amounts withheld in 2003 to be paid to participating providers, and such amount was paid in December 2004.
We lease facilities, computer hardware and other equipment under long-term operating leases that are non-cancelable and expire on various dates through 2011.
We are not a party to off-balance sheet arrangements. However, from time to time we enter into certain types of contracts that contingently require us to indemnify parties against third party claims, including indemnification obligations under our contracts with third party insurance carriers.
Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, no liabilities have been recorded for these obligations on our consolidated balance sheets for any of the periods presented.
This increase in cash and short term investments from December 31, 2005 to December 31, 2006 is primarily due to the cash provided by operating activities of approximately $1.4 million, offset by net cash used in investing
Together our cash, short term investments and working capital line of credit 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 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 $141,000, $12,000, and $8,000 worth of Redeemable Common Shares in the years ended December 31, 2006, 2005 and 2004, respectively. 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.
Most states rely on risk-based capital requirements, or RBC, to define the required levels of equity. RBC is a model developed by the National Association of Insurance Commissioners to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. RBC has been adopted by Ohio, Kentucky and Indiana, the three states in which we currently do business. We file our annual statement and RBC reporting with the Ohio Department of Insurance and the NAIC. Copies are also filed with the Kentucky Office of Insurance and the Indiana Department of Insurance. At December 31, 2006 and December 31, 2005, we had approximately $4.2 million of aggregate capital and surplus, which exceeded the required level in Ohio by approximately $1.7 million and the required levels in Kentucky and Indiana by approximately $3.2 million.
Goodwill arises in business combinations when the purchase price of assets acquired exceeds the appraised value. As with tangible and other intangible assets, periodic impairment reviews are required, at least annually, as well as when events or circumstances change. Management uses judgment in assessing goodwill for impairment. We review the recorded value of our goodwill annually at the of the fiscal year, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. The review for impairment requires management to predict the estimated cash flows that will be generated by the long-lived asset over its remaining estimated useful life. Considerable judgment must be exercised in determining future cash flows and their timing and, possibly, choosing business value comparables or selecting discount rates to be used in any value computations.
Business acquisitions often result in recording intangible assets. Intangible assets are recognized at the time of an acquisition, based upon their fair value. Similar to long-lived tangible assets, intangible assets are subject to amortization and periodic impairment reviews whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As with tangible assets, considerable judgment must be exercised.
The following table shows our total claims payable liability for the periods indicated and its three components. IBNR represents a substantial portion of our claims payable liability.
At December 31, 2006, our estimated total claims payable liability included approximately $4.0 million for Dental Care Plus, comprised of IBNR of approximately $1.5 million and reported claims in process of approximately $1.5 million. Other healthcare services expenses at December 31, 2006 included approximately $71,000 for the estimated cost of processing outstanding claims and an accrued but unpaid provider withhold payment of $900,000. The provider withhold liability was recognized in December 2006 when it was authorized by our Board of Directors.
Between December 31, 2005 and December 31, 2006, our IBNR estimate increased by approximately $243,000 or 19%, primarily due to a fully insured membership increase of 11.3%, a 0.8% increase in the use of dental care services by members in 2006 compared to 2005, a 3.0% increase in the average cost per dental service rendered, and a decrease in the number of days of reported claims outstanding at December 31, 2006. Reported claims in process decreased by approximately $124,000, or 7.6%, from December 31, 2005 to December 31, 2006 due to a decrease in the number of days of reported claims in process from 15 days at December 31, 2005 to 14 days at December 31, 2006. The number of days of reported claims in process at year end varies with the timing of our bi-weekly provider claim payment cycle. Other healthcare services expense payable increased by approximately $611,000, primarily due to the unpaid provider withhold payment of $900,000 that was authorized by our Board of Directors in December of 2006 that was $600,000 greater than that authorized in December of 2005.
We estimate liabilities for both IBNR and reported claims in process by employing actuarial methods that are commonly used by health insurance actuaries and meet actuarial standards of practice. These actuarial standards of practice require that claim liabilities estimates be adequate under moderately adverse circumstances. An independent actuary assists us in making these estimates.
Since our liability for claims payable is based on actuarial estimates, the amount of claims eventually paid for services provided prior to the balance sheet date could differ from the estimated liability. Any such differences are recognized in the consolidated statement of income for the period in which the differences are identified.
We develop our estimate for claims payable liability using actuarial methodologies and assumptions, primarily based on historical claim payments and claim receipt patterns, as well as historical dental cost trends. Depending on the period for which incurred claims are estimated, we apply a different method in determining our estimate. For periods prior to the most recent month, we calculate a “completion factor” which indicates the percentage of claims payable estimated for a prior period that have been paid as of the end of the current reporting period. We use the completion factor to determine historical patterns over a rolling 12-month period, made consistent period over period by making adjustments for known changes in claim inventory levels and known changes in claim payment processes. For the most recent month, we calculate a “claims trend factor” that estimates incurred claims primarily from a trend analysis based upon per member per month claims trends developed from our historical experience in the preceding months, adjusted for known provider contracting changes, changes in benefit levels and seasonality.
The table set forth below illustrates how our operating results are impacted when there is a variance between estimated claims expense and actual claims expense. The table shows the sensitivity of the estimated fully insured incurred claims payable liability to fluctuations in the expected completion factors and claims trend factors that were used to estimate the claims payable liability as of December 31, 2006 within variance ranges historically experienced.
Based on historical experience, the completion factors we use to estimate outstanding IBNR and reported claims in process are highly reliable for predicting actual claims paid at future times, with a variance range of approximately one-quarter of one percent, plus or minus. The claims trend factors we use to estimate outstanding IBNR and reported claims in process for the most recent month are somewhat less reliable based on historical experience, with a variance range of approximately one percent, plus or minus. We have found that the estimated claims trend factor can be higher or lower than what the paid claims data indicates with the passage of time primarily because of factors beyond our control, such as the level of utilization of services by dental members and the expected and actual mix of the types of services received by dental members.
We do not estimate an accrued liability on a quarterly basis for provider withhold payments because we have no obligation to pay any portion of the amount withheld to the providers and providers have no vested rights in the amounts withheld unless our Board of Directors authorizes a payment to them. Our Board makes a decision annually in December as to whether or not to authorize any payment in respect of the withhold amount for the current year at which time the Company records a liability for the authorized withhold amount. Given the uncertainties associated with the factors considered by the Board and the discretionary nature of these payments, we are not able to estimate the liability for provider withhold payments prior to Board authorization. The actual amount authorized by our Board for payment to the providers is added to the accrued liability for claims payable in the month the authorization occurs (see further discussion of Provider Withhold Payments set forth above).
employees are eligible to own the Class B non-voting Redeemable Common Shares. As of December 31, 2005 to comply with the requirements of EITF D-98, the Company changed its reporting related to its Redeemable Common Shares as a result of becoming a Securities and Exchange Commission registrant. The Company’s Class A and Class B common shares are now considered to be Redeemable Common Shares due to the fact that the shareholders have the option to require the Company to repurchase these shares upon their death, permanent disability or retirement. The Company now records Class A and Class B common shares as Redeemable Common Shares in the consolidated balance sheet outside of permanent shareholders’ equity at the redemption value of the common shares. Accordingly, the Company records any net income (loss) or other comprehensive income (loss) that formerly was recorded as a change to retained earnings as a change to the redemption value of the Redeemable Common Shares to accrete the carrying value of the Redeemable Common Shares to the redemption value at the end of each reporting period. Under this method, the end of the reporting period is treated as if it were also the redemption date for the security.
Our accounting for income taxes is in accordance with SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that are recognized in our financial statements in different periods than those in which the events are recognized in our tax returns. The measurement of deferred tax liabilities and assets is based on current tax laws as of the balance sheet date. We record a valuation allowance related to deferred tax assets in the event that available evidence indicates that the future tax benefits related to deferred tax assets may not be realized. A valuation allowance is required when it is more likely than not that the deferred tax assets will not be realized. Our determination of whether a valuation allowance is required is subject to change based on future estimates of the recoverability of our net deferred tax assets.
In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections - a Replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement applies to all voluntary changes in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This Statement carries forward without changing the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This Statement also carries forward the guidance in Opinion 20 requiring justification of a
change in accounting principle on the basis of preferability. The Company has adopted SFAS No. 154. There were no accounting changes in the year ended December 31, 2006 and management will apply the provisions to any future accounting changes.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”), which establishes a framework for measuring fair value and expands disclosure about fair value measurements. This Statement applies under other accounting pronouncements that permit or require fair measurement. This Statement does not require any new fair value measurements. The provisions of SFAS 157 will be effective for the Company beginning January 1, 2008. The Company is in the process of determining the effect, if any, the adoption of SFAS 157 will have on its financial statements.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 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.
The accounting policies of the Company conform to accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accompanying financial statements include estimates for items such as claims payable, income taxes and various other liability accounts. Actual results could differ from those estimates. Policies that affect the more significant elements of the financial statements are summarized below.
The Company reviews property, plant, and equipment for impairment whenever events or changes in circumstances, such as significant decreases in market values of assets, changes in legal factors or in the business climate, and accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset, or other such factors indicated that the carrying amount may not be recoverable.
State Guarantee Fund Deposits - The Company maintains funds on deposit with state insurance departments in those states where the Company is licensed to do business. These non-current funds amounted to approximately $357,000 and $175,000 at December 31, 2006 and 2005, respectively. These funds are restricted and not available to the Company for normal operations and are included in other non-current assets in the accompanying consolidated balance sheets.
Capital Lease Funds Held in Escrow - In 2004, the Company entered into a Master Equipment Lease Agreement with a leasing company related to the computer hardware and software for its new dental insurance administration system. Given that the implementation of this new dental insurance administration was delayed, in February of 2005 the Company instructed the leasing company to place the final installment of approximately $331,000 in an escrow account for payment to the software vendor when the implementation was substantially complete. The funds held in escrow were included in other assets at December 31, 2005. In February of 2006, the final installment of approximately $331,000 was paid to the software vendor.
Policy Acquisition Cost - Policy acquisition costs, which consist of commissions and other costs incurred in connection with acquiring new business, are charged to selling, general and administrative expenses as incurred under accounting principles generally accepted in the United States (“GAAP”) for providers of prepaid healthcare services.
Redeemable Common Shares - The Company’s Class A and Class B Redeemable Common Shares are owned by participating providers and Company directors. Only participating providers in the original eight county area are eligible to own Class A voting Redeemable Common Shares (See Note 9). All participating providers, Company directors and Company employees are eligible to own the Class B non-voting Redeemable Common Shares. As of December 31, 2005 to comply with the requirements of EITF D-98, the Company changed its reporting related to its Redeemable Common Shares as a result of becoming a Securities and Exchange Commission
registrant. The Company’s Class A and Class B common shares are now considered to be Redeemable Common Shares due to the fact that the shareholders have the option to require the Company to repurchase these shares upon their death, permanent disability or retirement. The Company now records Class A and Class B common shares as Redeemable Common Shares in the consolidated balance sheet outside of permanent shareholders’ equity at the redemption value of the common shares. Accordingly, the Company records any net income (loss) or other comprehensive income (loss) that formerly was recorded as a change to retained earnings as a change to the redemption value of the Redeemable Common Shares to accrete the carrying value of the Redeemable Common Shares to the redemption value at the end of each reporting period. Under this method, the end of the reporting period is treated as if it were also the redemption date for the security.
Fully Insured - Membership contracts are written on an annual basis and subject to cancellation by the employer group or the Company upon thirty days written notice. Management has determined that as of December 31, 2006, 2005, and 2004, respectively, no cancellation reserve is required. Premiums are due monthly in advance and are recognized evenly as revenue during the period in which the Company is obligated to provide services to members. Any premiums received prior to the beginning of a reporting period are recognized as unearned premium revenue. Any amounts not received by the end of a reporting period are recorded as accounts receivable by the Company.
Self Insured - The Company provides access to its provider network for an administrative fee, generally to “self-insured” groups. During the years ended December 31, 2006, 2005, and 2004, respectively, the Company provided service to approximately 62,000, 46,000, and 41,000 self insured participants and provided approximately 669,000, 518,000, and 469,000 of self insurance participant months of coverage. Self-insured premium revenue is based on the claims incurred by self-insured members in accordance with agreements with self-insured employers. The Company has no underwriting risk arising from the provision or cost of any services provided to the self-insured groups. Consistent with provisions of EITF 99-19, “Recording Revenue Gross as a Principal Versus Net as an Agent,” the Company recognizes and records self-insured premium on a gross basis because: (i) the Company is the primary obligor in the contractual relationship, (ii) the Company establishes the pricing for the services provided, (iii) the Company controls the relationship with the dental service providers, and (iv) the Company has credit risk in these contractual relationships. Self-insured premium revenue is recorded when the self-insured claims are incurred. Amounts withheld on claims processed for self-insured contracts and under third-party administration arrangements amounted to approximately $1,199,000, $952,000 and $843,000 for the years ended December 31, 2006, 2005 and 2004, respectively, and is included in premium revenue in the accompanying consolidated statements of income.
Healthcare Service Expense - The Company compensates its providers based on agreed-upon fees for various services and retains 10% of these fees (including payments on self-insured claims) in accordance with the Company’s provider agreement. Under the terms of the Company’s provider agreement, the Company is not obligated to return to providers any withheld amounts. Amounts withheld are a reduction of healthcare service expense in the accompanying consolidated statements of income. Withheld amounts are retained by the Company but not reserved or retained in a separate fund. Participating providers have no interest in the amounts withheld unless the Company’s Board of Directors authorizes any amount to be paid to the providers.
The cost of health care services provided 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 provided but not reported to the Company, net of the amounts withheld in accordance with the provider agreement.
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 regularly by management and are adjusted based on current information, adjusted based on 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.
Derivative Instruments - All derivative financial instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives that are designated as fair value hedges are recognized in earnings as offsets to the changes in fair values of the exposures being hedged. The changes in fair value of derivatives that are designated as cash flow hedges are recorded in accumulated other comprehensive income, as a component of the consolidated balance sheet, with subsequent reclassification to earnings when the hedged transaction asset or liability impacts earnings. Any ineffectiveness is recognized in earnings immediately.
Other income is comprised primarily of rental income from the rental of space in the building owned and partially occupied by the Company (See Note 13) as well as revenues earned from the leasing of the Company’s dental provider network to other dental benefit providers.
The Company continually reviews the deferred tax assets to determine the necessity of a valuation allowance. The Company files a consolidated federal income tax return which includes all subsidiaries.
Concentrations of Credit Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of premiums receivable. Other than as discussed below, concentrations of credit risk with respect to premiums receivable are limited because of the large number of employee groups comprising the Company’s client base and contracts are cancelled if premiums are not paid within 90 days.
During 2006, 2005, and 2004, four customers accounted for approximately 27%, 21%, and 33%, respectively, of the Company’s fully insured premiums revenue. Additionally, two customers accounted for 65%, 69%, and 80% of the Company’s net self-insured administration and claims revenue at December 31, 2006, 2005, and 2004, respectively.
applies under other accounting pronouncements that permit or require fair measurement. This Statement does not require any new fair value measurements. The provisions of SFAS 157 will be effective for the Company beginning January 1, 2008. The Company is in the process of determining the effect, if any, the adoption of SFAS 157 will have on its financial statements.
In July 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of SFAS No. 109, Accounting for Income Taxes. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 were effective for the Company January 1, 2007. In connection with the adoption of FIN 48, we will record a cumulative effect adjustment of a change in accounting principle as prescribed by FIN 48, in the first quarter of 2007. We do not expect FIN 48 to have a material effect on our results of operations or financial position.
In October 2005, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1, which provides accounting guidance for deferred policy acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. Internal replacement contracts are those that are substantially changed from the replaced contract and are accounted for as an extinguishment of the replaced contract. Nonintegrated contract features are accounted for as separately issued contracts. Modifications resulting from the election of a feature or coverage within a contract or from an integrated contract feature generally do not result in an internal replacement contract subject to SOP 05-1 provided certain conditions are met. The provisions of SOP 05-1 are effective for internal replacements occurring in fiscal years beginning after December 15, 2006. This statement will not have a material impact on our results of operations or financial position as we do not have any contracts subject to this statement.
On June 2, 2005 the Company acquired Adenta, Inc. 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 consideration into an escrow account pending the results of the net asset valuation analysis prescribed in the escrow agreement completed in May of 2006.
With the acquisition of Adenta’s the Company obtained a network lease agreement with Humana Dental, consisting of 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. The results of operations of Adenta are included in the Company’s consolidated financial statements since June 2, 2005.
Intangibles assets amounting to approximately $586,000 were recorded as a result of the acquisition of Adenta, Inc. (See Note 2), such intangibles were related to an acquired contract, memberships, a provider network and goodwill. Identifiable and amortizable intangible assets amounted to $450,000. Amortization expense for 2006 and 2005 was approximately $196,000 and $50,000, respectively. The provider access contract and the provider network intangible assets are being amortized on a straight-line basis with amortization periods of 3 years and 20 years, respectively. The membership intangible asset is being amortized with an accelerated amortization in the first year and then on a straight-line basis for the remaining 11 years of its 12 year useful life in accordance with the Company’s expectation for the membership retention. The weighted-average amortization period for these intangible assets is approximately 9 years.
On July 25, 2006, Humana Dental provided the Company with written notice of termination of the network lease agreement effective October 23, 2006. Accordingly the Company recorded an impairment charge of approximately $128,000 (included in amortization expense) to eliminate the remaining balance associated with the Humana Dental network lease agreement intangible asset in July of 2006. For the year ended December 31, 2006, the Company recorded amortization expense of approximately $196,000 related to these identifiable intangible assets. The results of operations of Adenta are included in the Company’s consolidated financial
The Company owned FDIC insured certificates of deposit with a cost of $1,900,000 and $1,800,000 as of December 31, 2006 and 2005, respectively. Each certificate of deposit with an original cost of $100,000 is invested with a separate FDIC-insured financial institution. As of December 31, 2006, eight certificates of deposit with a cost of $800,000 and a fair value of $796,189 have maturities of between 12 and 15 months. As of December 31, 2005, two certificates of deposit with a cost of $200,000 and a fair value of $199,182 had maturities of between 12 and 15 months. These short-term and long-term investments are classified as available-for-sale and are carried at fair value, which is based on quoted market prices. The unrealized losses on investment activity are due to a decrease in the quoted market prices for these certificates of deposit caused by an increase in prevailing interest rates since they were purchased.
Investments classified at December 31, 2006 and 2005, as short term and long term assets were as follows:
The components of the provision for income taxes are summarized as follows as of December 31, 2006, 2005 and 2004, respectively:
The Company had $291,000 and $316,881 of net operating loss carry forwards to utilize in future years at December 31, 2006 and 2005, respectively. These losses will expire between 2010 and 2024. The Company did not have any operating loss carry forwards to utilize in future years at December 31, 2004.
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 Company recorded deferred compensation expense of approximately $73,000 related to deferred director fees and employee compensation for the year ended December 31, 2006. No deferred compensation expense was recognized in 2005 related to deferred director fees and employee compensation. The Plans also 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 Company considered SFAS 123(R) in evaluating the accounting treatment for our deferred compensation plan and recorded deferred compensation expense of approximately $54,000 related to deferred share awards for the years ended December 31, 2006. No deferred compensation expense was recognized in 2005 related to deferred share awards.
The outstanding Redeemable Common Shares in 2006, 2005, and 2004 have been adjusted for the stock split that occurred effective August 31, 2005.
Effective on July 2, 2004, new providers in the original eight county area have the option to purchase one share of voting Class A Redeemable Common Shares of the Company. This area, which we refer to as our original eight county service area, includes Butler, Clermont, Hamilton and Warren counties in Ohio, and Boone, Campbell,
The Company has authorized 100,000 preferred shares, without par value. As of December 31, 2006 and 2005, no preferred shares were issued or are outstanding. The preferred shares do not have voting rights except to the extent required by law or designated by the Board of Directors.
On August 10, 2005, the Company’s Board of Directors approved and declared a stock split in the form of a stock dividend of five Class B Redeemable Common Shares for each Class A Redeemable Common Shares and five Class B Redeemable Common Shares for each Class B Redeemable Common Share outstanding as of August 31, 2005. After the 2005 repurchases and conversion of Class A Redeemable Common Shares to Class B Redeemable Common Shares with provider retirements, there were 681 and 691 Class A Redeemable Common Shares, 7,438 and 7,769 Class B Redeemable Common Shares issued and outstanding as of December 31, 2006 and 2005, respectively.
At December 31, 2006, the fair value of the mortgage note is approximately $1,300,000.
In 2004, the Company entered into a Master Equipment Lease Agreement with a leasing company related to the computer hardware and software for its new dental insurance administration system. The Master Equipment Lease Agreement includes four year capital lease for computer software and implementation costs which totaled approximately $823,000. The net book value of the equipment under the capital lease is approximately $658,000 and $492,000 at December 31, 2006 and 2005, respectively. In addition at December 31, 2005 there was approximately $331,000 of cash held in escrow for payment to the software vendor included in other non-current assets in the accompanying consolidated balance sheets.
In 2005, with the acquisition of Adenta, the Company assumed debt of $241,985. Thereafter, the Company refinanced $190,000 of this debt with a note payable with a commercial bank. Interest is payable based on the 30-day LIBOR rate plus 175 basis points and was 7.07% and 6.11% at December 31, 2006 and 2005, respectively.
Required principal repayments for the note payable at December 31, 2006 is $55,416 which is payable within one year.
Litigation - Various litigation and claims against the Company are in process and pending. Based on a review of open matters with legal counsel, management believes that the outcome of such matters will not have a material effect on the Company’s financial position or results of operations.
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 $30,000, $26,000, and $23,000 in 2006, 2005, and 2004, respectively.
The results of the fully insured and self-insured HMO segments are measured by gross profit. The Company does 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. The Company combines all gross profit and apply that amount as a contribution to selling, general and administrative expenses, resulting in a consolidated income before taxes.
The Company paid providers who are also shareholders approximately $36,972,000, $33,476,000 and $30,897,000 in healthcare service expense in 2006, 2005 and 2004, respectively. The Company had claims payable liability to related party providers of approximately $3,508,000 and $3,008,000 at December 31, 2006 and 2005, respectively.