The following table sets forth selected consolidated financial information for the Company and its subsidiaries for the years indicated. The financial information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this registration statement.
Headquartered in Cincinnati, Ohio, Dental Care Plus Group offers to employer groups of all sizes dental HMO, dental PPO, dental indemnity and vision PPO benefit plans and related services. As of December 31, 2009, we had approximately 277,200 members in our dental and vision benefit programs with 2,441 dentists participating in our networks of providers.
The results of our fully-insured and self-insured dental segments are measured by gross profit. We do not measure the results of our corporate, all other segment. We do not allocate investment and other income, insurance expenses, 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 gross profit of each of our fully-insured and self-insured segments to costs retained in our corporate, all other segment.
We have experienced steady growth in membership and revenue in both the fully-insured and self-insured dental HMO product during the last five years. We attribute this growth to our broad provider network, competitive premium rates for our fully-insured business and ASO fees for our self-insured business, and our commitment to providing outstanding customer service to all of our constituencies (employer groups, members, insurance brokers, and dentists). The introduction of the DentaPremier dental indemnity product in 2003 created new business opportunities for us with employer groups in our original eight county service area. The introduction of the DentaSelect dental PPO product has been instrumental to our new sales in the Dayton, Ohio and Central Kentucky markets.
of our fully-insured members received dental services in 2009. Given this higher level of utilization that may continue, we are reevaluating our rating and underwriting practices to achieve a loss ratio consistent with our historical performance. In addition, we believe some employees of our existing employer group customers and their dependents utilized preventive and basic dental services prior to losing their coverage. We incurred healthcare service expense for those services with no subsequent premium revenue for these members, which adversely affected our gross profit level.
We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain critical accounting policies and estimates have an impact on our financial statements.
Fully-insured dental HMO premium revenue increased approximately $1,693,000 in 2009, from approximately $36,149,000 in 2008 to approximately $37,842,000 in 2009. This increase is primarily due to the 2009 new sales of the fully-insured dental HMO product discussed above, offset by the fully-insured dental HMO membership decrease due to employer groups that did not renew their contracts in 2009. Fully-insured dental indemnity premium revenue increased by approximately $149,000, or 12.5%, from approximately $1,192,000 in 2008 to approximately $1,341,000 in 2009. Fully-insured dental PPO premium revenue increased by $3,192,000, or 107.1%, from approximately $2,980,000 in 2008 to approximately $6,172,000 in 2009 primarily due to the increase in fully-insured dental PPO membership discussed above.
Total self-insured revenue decreased approximately $748,000 in 2009 compared to 2008. Self insured revenue decreased by approximately $5,119,000 due to the loss of the member month volume associated with the large self-insured employer group discussed above. This decrease was offset by an increase in self-insured revenue of approximately $2,250,000 due to new self-insured sales and by an increase of approximately $2,121,000 attributable to an increase in self-insured ASO fee rates, a provider fee schedule increase implemented in April of 2009, an increase in dental service utilization by our self-insured members in 2009 compared to 2008 and the run out claims of the self-insured group that did not renew its contract. The self-insured segment revenue has two components:
Corporate, all other premium revenue is primarily derived from the non-DCP dental indemnity product, dental PPO product and vision product underwritten by third party insurance carriers. In aggregate, Corporate, all other premium revenue decreased by approximately $18,000, or 4.1%, from approximately $435,000 in 2008 to approximately $417,000 in 2009.
Fully-insured healthcare services expense increased approximately $5,442,000 in 2009 compared to 2008. A net increase in fully-insured membership volume of 10.4% in 2009 resulted in an increase in fully-insured dental healthcare services expense of approximately $3,455,000. An increase in fully-insured dental healthcare services of approximately $1,987,000 is primarily the result of an increase in fully-insured dental healthcare services expense on a per member per month basis of approximately 4.7% in 2009 for both our new and existing fully-insured membership. A higher percentage of our fully-insured members received dental services in 2009. Also, we believe that certain of our subscribers and their dependents received preventive and basic dental services in 2009 prior to losing their coverage. The fully-insured segment represents approximately 64% of our total dental business in 2009.
Fully-insured dental indemnity healthcare services expense increased by approximately $178,000, or 16.4%, from approximately $1,084,000 in 2008 to approximately $1,262,000 in 2009. Approximately $94,000 of this increase is attributable to the 8.7% increase in fully-insured dental indemnity member months in 2009 compared to 2008. Approximately $84,000 of this increase is attributable to an increase in fully-insured dental indemnity healthcare services expense on a per member per month basis of approximately 7.2% in 2009.
Our fully-insured membership increased approximately 11,100 in 2008. Our fully-insured dental HMO membership decreased approximately 2,600 members, or 1.9%, from 133,800 at December 31, 2007 to 131,200 at December 31, 2008. This membership decrease is attributable to the reduction of approximately 9,000 fully-insured dental HMO members due to the conversion of the membership of one employer group from our fully-insured dental HMO product to our self-insured dental HMO product effective January 1, 2008, offset by new fully-insured dental HMO sales in the Cincinnati and Northern Kentucky market of approximately 8,500 members. In addition, fully-insured dental HMO membership decreased by an additional 2,100 members due to a limited number of employer groups that did not renew their contracts with Dental Care Plus in the last 12 months. Our fully-insured indemnity membership increased by approximately 500 members, or 12.5%, from approximately 4,000 members at December 31, 2007 to approximately 4,500 members at December 31, 2008. In addition, our fully-insured dental PPO membership increased by approximately 13,200 members, from approximately 6,100 members at December 31, 2007 to approximately 19,300 members at December 31, 2008.
Fully-insured dental premium increased approximately $639,000 in 2008. Approximately $612,000 of this premium revenue increase is attributable to net membership volume increases in the fully-insured dental product lines. New fully-insured sales resulted in an increase in fully-insured premium revenue of approximately $5.1 million in 2008 that was offset by a decrease in fully-insured revenue of approximately $4.5 million due to the conversion of employer groups to the self-insured product line in 2007 and 2008. Approximately $27,000 of this premium revenue increase is associated with fully-insured dental premium rates during 2008. Fully-insured premium revenue increased by approximately $666,000 as a result of higher premium rates in 2008 on new sales and employer group renewals. This increase was offset by a decrease in premium revenue of approximately $639,000 due to the shift of employer groups with higher than average premium rates to the self-insured product.
Total self-insured revenue increased approximately $5,638,000 in 2008. This increase is attributable to the 24.2% increase in self-insured dental member months, an increase in self-insured ASO fee rates and a 3.7% increase in self-insured claim revenue on a per member per month basis in 2008 as compared to 2007. The self-insured segment revenue has two components:
Self-Insured Claim Revenue-Self-insured claim revenue increased approximately $5,378,000, or 28.7%, from approximately $18,724,000 in 2007 to approximately $24,102,000 in 2008. This increase is due to the 24.2% increase in self-insured dental member months along with a 3.7% increase in self-insured claim revenue on a per member per month basis in 2008 as compared to 2007.
Corporate, all other premium revenue is primarily derived from the non-DCP dental indemnity product, dental PPO product and vision product underwritten by third party insurance carriers. In aggregate, Corporate, all other premium revenue decreased by approximately $65,000, or 13.0%, from approximately $500,000 in 2007 to approximately $435,000 in 2008. During the first nine months of 2007, the dental indemnity product was underwritten by a third party insurance carrier and we were paid a portion of its premium in the form of administrative fees that cover our related costs and broker commissions. These dental indemnity administrative fees were approximately $124,000 for 2007 and approximately $42,000 for 2008. Our other dental PPO product is underwritten by third party insurance carriers and we are paid a portion of its premium in the form of administrative fees that cover our related costs and broker commissions. These dental PPO administrative fees decreased by approximately $21,000, or 11.5%, from approximately $182,000 in 2007 to approximately $161,000 in 2008. In addition, our fully-insured vision product is underwritten by a third party insurance carrier and we are paid a portion of its premium in the form of administrative fees that cover our related costs and broker commissions. These vision product administrative fees decreased by approximately $59,000, or 36.2%, from approximately $163,000 in 2007 to approximately $104,000 in 2008.
Consolidated insurance expenses increased approximately $702,000 in 2008. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 18.0% for 2008, decreasing 80 basis points from the 2007 ratio of 18.8%. Salaries and benefits increased by approximately $271,000, or 6.6%, due to staff pay increases implemented in 2008 and the addition of one full-time employee in the claims and customer service department. Commissions expense increased approximately $150,000, or 6.3%, due to the increases in membership. Advertising expense for 2008 increased by approximately $128,000, or 45.9%, compared to 2007. This increase was primarily due to a significant advertising campaign in the Louisville, Kentucky market during 2008. Depreciation and amortization expense for 2008 increased approximately $41,000, or 10.1%, compared to 2007. This increase was due primarily to the purchase of new depreciable equipment and computer software in 2008. In 2008, board of directors expense increased approximately $59,000, or 11.3%, as a result of director compensation increases. Interest expense decreased $26,000, or 27.4%. The decrease is primarily attributable to a decrease in the interest expense associated with our capital lease and mortgage obligations as these obligations decreased. The remaining amount of approximately $79,000 is due to various operating expense increases in 2008 as compared to 2007.
Our primary sources of cash are premiums, ASO fees, investment and other income, as well as the proceeds from the sale or maturity of our investment securities and from borrowings. Our primary uses of cash include disbursements for claims payments, insurance expense, interest expense, taxes, purchases of investment securities, capital expenditures, redeemable common shares redemptions, and payments on borrowings. Because premiums are collected in advance of claims payments, our business should normally produce positive cash flows during a period of increasing enrollment. Conversely, cash flows would be negatively impacted during a period of shrinking enrollment. However, we have used more cash than expected for claim payments in 2009 due to higher than expected dental services utilization in 2009 and the decrease in the elapsed time from dental claims submission to claims payment. Cash increased approximately $4.2 million, or 168.0%, for the year ended December 31, 2009 to approximately $6.7 million at December 31, 2009 from approximately $2.5 million at December 31, 2008. Cash increased approximately $265,000 or 11.7%, to approximately $2.5 million at December 31, 2008 from approximately $2.3 million at December 31, 2007. The change in cash for the years ended December 31, 2009, 2008 and 2007 is summarized as follows (in thousands):
In 2007, we used approximately $398,000 of cash in operating activities mainly due to the reduction of our claims payable liability that resulted from the payment of the majority of our dental claims inventory by the end of 2007. We realized net income of approximately $604,000. In addition to our 2007 net income, we recognized depreciation and amortization of approximately $405,000. Other sources of cash include: increases in our unearned premium, other payables and deferred compensation totaling approximately $598,000. These sources of operating cash were offset by a decrease in our claims payable liability of approximately $1.5 million due to the payments to dental providers on December 31, 2007 that reduced our inventory of reported claims in process, increases in accounts receivable, accrued investment income and other assets totaling approximately $339,000, and deferred income taxes of approximately $144,000.
In 2007, we invested approximately $137,000 in building improvements, office equipment and computer equipment. Also in 2007, approximately $18.0 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 $20.2 million in additional FDIC insured certificates of deposit and money market funds.
In 2009, we paid $120,000 of our outstanding mortgage balance and approximately $19,000 in capital lease payments for our dental administration software. During 2009, we repurchased redeemable common shares with a value of approximately $172,000, which was offset by the issuance of redeemable common shares and provider preferred shares related to our current share offerings with a value of approximately $222,000.
In 2008, we executed a revolving note with a commercial bank in the amount of $650,000 collateralized by a second mortgage on our office building. As of December 31, 2008, there was a principal balance outstanding of $630,000 related to this revolving note. In 2008, we paid $120,000 of our outstanding mortgage balance and approximately $224,000 in capital lease payments for our dental administration software. During 2008, we repurchased redeemable common shares with a value of approximately $68,000, which was offset by the issuance of redeemable commons shares with a value of approximately $28,000.
Our mortgage note matures in June 2013. The note requires us to make principal payments of $10,000 per month, and bears interest at a variable rate of 30-day LIBOR plus 1.75%. Our revolving note matures on December 15, 2010 and requires us to make monthly interest payments at a variable rate of 30-day LIBOR plus 1.75%.
(1) Our swap interest payments are based on a fixed rate of 4.95%. We estimate that we will receive swap interest payments totaling approximately $35,000 based on a variable rate of LIBOR plus 1.75% or 1.98%, as of December 31, 2009.
This decrease in cash and short term investments from December 31, 2008 to December 31, 2009 is primarily due to the net cash used in by financing activities of $90,000, the cash invested in property, plant and equipment of $245,000, offset by the cash generated by operating activities of $37,000. In addition to this decrease in cash and short term investments there was a shift of approximately $100,000 in FDIC insured certificate of deposit investment from long term investments to short term investments during this period.
LIBOR plus 2.50% and was 2.75% at December 31, 2009. The Company did not have any interest expense for the line of credit in 2009 or 2008. As of December 31, 2009 and 2008 there was no amount outstanding on this line of credit.
On December 15, 2009, we renewed a revolving note with a commercial bank in the amount of $650,000 collateralized by a second mortgage on our office building. As of December 31, 2009, there was a principal balance outstanding of $630,000 related to this revolving note. This revolving note matures on December 15, 2010, is annually renewable and requires us to make monthly interest payments at a variable rate of 30-day LIBOR plus 1.75%.
We believe our cash, short term investments and working capital lines of credit together 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 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 share redemptions, we repurchased approximately $172,000, $68,000, and $62,000 of redeemable common shares in the years ended December 31, 2009, 2008 and 2007, 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.
We maintained aggregate statutory capital and surplus of approximately $4.9 million as of December 31, 2009 and were in compliance with applicable statutory requirements. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly from state to state. Given our anticipated premium growth in 2010 resulting from the expansion of our networks and membership, capital requirements will increase. We expect to fund these increased requirements through the retention of earnings, investment in Dental Care Plus of the earnings of other subsidiaries and capital raised in future redeemable common and preferred share offerings.
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. Dental Care Plus’s statutory annual statements for the year ended December 31, 2009 filed with the Ohio Department of Insurance reflected total adjusted capital in excess of Company Action Level RBC.
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, 2009, 2008 and 2007, respectively, such changes increased or (decreased), net of related income tax effects, by the following amounts:
sufficient to allow for any anticipated recovery in value, and general market conditions. As of December 31, 2009, there were no other-than-temporary impairments. In the event there was an unrealized loss on an investment that we believed to be other-than-temporary, the loss would be reported in the consolidated statement of operations, instead of in a separate caption of shareholders’ equity. The Company maintains its cash in bank deposit accounts, which at times exceed federally insured limits. The Company has not experienced any losses in such accounts.
Accounts receivable represent uncollected premiums related to coverage periods prior to the balance sheet date, and are stated at the estimated collectible amounts, net of an allowance for bad debts. We regularly monitor the timing and amount of our premium collections, and maintain a reserve for estimated bad debt losses. The amount of the reserve is based primarily on our historical experience and any customer-specific collection issues that are identified.
Our estimated liability for claims payable and corresponding healthcare service 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, 2008 and December 31, 2009, our IBNR estimate increased by approximately $197,000 or 17.4%, primarily due to a 10.4% increase in the number of fully-insured members at December 31, 2009 compared to December 31, 2008 and an increase in fully-insured claims on a per member per month basis of approximately 4.7%. Reported claims in process decreased by approximately $37,000, or 3.8%, from December 31, 2008 to December 31, 2009 due to a decrease in the number of days of reported claims in process from 9 days at December 31, 2008 to 6 days at December 31, 2009, offset by the 10.4% increase in the fully-insured members at December 31, 2009 compared to December 31, 2008 and the increase in fully-insured claims on a per member per month basis of approximately 4.7%. The number of days of reported claims in process at year end varies with the timing of our weekly provider claim payment cycle. Other healthcare services expense payable decreased by approximately $475,000, primarily due to the fact that no provider withhold payment was authorized by our Board of Directors in December of 2009. The unpaid provider withhold amount was $464,000 at December 31, 2008.
We develop our estimate for claims payable liability using actuarial methodologies 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.
management has not adjusted any of the key methodologies used in calculating the most recent estimate of the IBNR and reported claims in process components of our claims payable liability.
(a) Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for months prior to the most recent month.
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-half 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 five 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.
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. Effective May 1, 2008, the Company began deferring policy acquisition costs and amortizing them over the estimated life of the contracts, which are short-duration in nature, in proportion to premiums earned. The Company capitalized deferred acquisition costs of approximately $2,787,000 and $2,632,000 and amortized approximately $2,742,000 and $1,436,000 of these capitalized costs for the year ended December 31, 2009 and 2008, respectively. These amounts are recorded in commission expense and other acquisition costs included in the consolidated statements of operations. Prior to the dates of the amendment of our contracts to be non-cancelable, all costs were expensed as incurred.
unbilled accounts receivable, are reflected on the accompanying consolidated balance sheet as unearned premium revenue. The Company’s unearned premium revenue was approximately $19,985,000 at December 31, 2009 for the estimated premium revenue associated with the remaining contract periods and related amounts recorded in unbilled accounts receivable.
Effective January 1, 2007, the Company adopted Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and 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. Accounting for Uncertainty in Income Taxes also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
In April 2009, FASB issued guidance for determining whether an impairment is other-than-temporary for debt securities, requires bifurcation of any other-than-temporary impairment between the amount representing credit loss and the amount related to all other factors and requires additional disclosures on other-than-temporary impairment of debt and equity securities. Under the guidance, an other-than-temporary impairment is triggered if a Company has the intent to sell the security, if is more likely than not that it will be required to sell the security before recovery or it does not expect to recover the entire amortized cost basis. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. This guidance did not have a material effect on the Company’s consolidated financial position or results of operations.
In April 2009, FASB issued guidance that provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability, provides guidance on circumstances that may indicate that a transaction is not
orderly and requires additional disclosures about fair value measurements in annual and interim reporting periods. This guidance is effective for interim and annual periods ending after June 15, 2009. This new guidance did not have a material effect on the Company’s consolidated financial position or results of operations.
In June 2009, FASB issued guidance that establishes the FASB Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP. The guidance explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. This guidance is effective for financial statements issued for periods ending after September 15, 2009. This guidance changed the Company’s disclosures, primarily related to references to U.S. GAAP, but did not have a material effect on the Company’s consolidated financial condition and results of operations.
AS OF DECEMBER 31, 2009 AND 2008 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009, 2008 and 2007
DCP Holding Company (the “Company”) is the parent holding company of three wholly-owned subsidiaries which include Dental Care Plus, Inc., an Ohio corporation, Insurance Associates Plus, Inc., an Ohio corporation, and Adenta, Inc., a Kentucky corporation. The Company is owned and controlled by 621 dentists who participate in our Dental Care Plus products. The Company offers to employer groups of all sizes dental health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity plans and vision benefit plans. As of December 31, 2009, the Company had approximately 261,600 members in its dental benefits programs with 2,441 dentists participating in its two provider networks in Southwestern Ohio, Northern Kentucky, Central Kentucky and Southeastern Indiana. In addition, the Company had approximately 15,600 members in its vision benefit programs. The Company markets its products through a network of independent brokers.
As an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation, Dental Care Plus is able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health insurance products. Beginning October 1, 2007, the Company transitioned the majority of its employer groups with dental indemnity products underwritten by a third-party insurance carrier to dental indemnity products underwritten by Dental Care Plus. As of June 1, 2008, the Company transitioned the majority of its employer groups with dental PPO products underwritten by a third-party insurance carrier to dental PPO products underwritten by Dental Care Plus.
Basis of Presentation-The accompanying consolidated financial statements include the accounts of the Company and subsidiaries, each of which is wholly-owned, and have been prepared in conformity with accounting principles generally accepted in the United States of America. All significant intercompany accounts and balances have been eliminated in consolidation. The Company presents its financial statements to conform with Article 7 of the Securities and Exchange Commission Regulation S-X pursuant to Section 13-15(d) of the Securities Exchange Act of 1934.
Property and Equipment-Property and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The building and the building improvements have useful lives of 27 years and 15 years, respectively. Furniture and fixtures have useful lives of 5 years, and computer equipment and software have useful lives of up to 3 years. Maintenance and repair cost are expensed as incurred. If an impairment exists, a loss is recorded as the amount by which the carrying value of the asset exceeds its fair value.
Goodwill and Intangible Assets-Goodwill arises in business combinations when the purchase price of net assets less liabilities assumed acquired exceeds the fair 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. Management reviews the recorded value of our goodwill annually, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. Professional judgment must be exercised in determining future cash flows, timing and business valuation comparables or selecting discount rates to be used in any valuation assessments.
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. Effective May 1, 2008, the Company began deferring policy acquisition costs and amortizing them over the estimated life of the contracts, which are short-duration in nature, in proportion to premiums earned. The Company capitalized deferred acquisition costs of approximately $2,787,000 and $2,632,000 and amortized approximately $2,742,000 and $1,436,000 of these capitalized costs for the year ended December 31, 2009 and 2008, respectively. These amounts are recorded in commission expense and other acquisition costs included in the consolidated statements of operations. Prior to the dates of the amendment of our contracts to be non-cancelable, all costs were expensed as incurred.
Redeemable Preferred Shares-The Board of Directors (“Board”) authorized and approved for issuance Provider Preferred Shares-2009 Series (“Provider Preferred Shares”) that includes 5,000 preferred shares of the 100,000 preferred shares authorized. These Provider Preferred Shares may only be purchased by participating dentists in the Company’s dental plans or retired participating dentists that own at least 12 redeemable Common Shares (Class A and/or B). The Provider Preferred Shares are considered to be redeemable preferred 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 records the Provider Preferred Shares as redeemable Provider Preferred Shares in the consolidated balance sheets outside of shareholders’ equity at the redemption value of the preferred shares. Accordingly, Provider Preferred Shares are participating security that share in the net income (loss) or other comprehensive income (loss) as a change to the redemption value of the redeemable Provider Preferred Shares to accrete (dilute) the carrying value 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. 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.
The cost of healthcare 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 agreements.
The Company incurred claim costs related to dental care providers amounting to approximately $58,305,000, $53,590,000, and $48,153,000 for the years ended December 31, 2009, 2008, and 2007, respectively. These costs include approximately $42,152,000, $41,666,000, and $38,941,000 of claims incurred by participating providers who are also holders of redeemable common shares in 2009, 2008, and 2007, respectively. In 2008 and 2007, the Company’s incurred claim costs also included provider withhold return of $464,000 and $650,000, respectively.
Derivative Instruments-All derivative financial instruments are recorded on the balance sheet at fair value. The changes in fair value of derivatives that are designated and qualify as cash flow hedges are recorded in other comprehensive income, with subsequent reclassification to earnings when the hedged transaction asset or liability impacts earnings. Any ineffectiveness is recognized in earnings immediately.
Federal Income Tax-Deferred federal income tax is provided in the accompanying financial statements for the tax effects of temporary differences between the carrying values and tax bases of assets and liabilities. Differences result primarily from items such as discounting on claims payable, accrued commissions, deferred compensation, bonus accruals, depreciation and deferred acquisition costs.
During 2009, 2008, and 2007, four fully-insured customers accounted for approximately 9%, 9%, and 14%, respectively, of the Company’s total revenue. Additionally, two self-insured customers accounted for approximately 11%, 13%, and 16%, of the Company’s total revenue during 2009, 2008, and 2007, respectively.
At December 31, 2009, premium receivables did not have any balance greater than 10% of the total balance from any one customer. At December 31, 2008, premiums receivable from two customers totaled approximately 23% of the premiums receivable balance.
In April 2009, FASB issued guidance that provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability has significantly decreased in relation to normal market activity for the asset or liability, provides guidance on circumstances that may indicate that a transaction is not orderly and requires additional disclosures about fair value measurements in annual and interim reporting periods. This guidance is effective for interim and annual periods ending after June 15, 2009. This new guidance did not have a material effect on the Company’s consolidated financial position or results of operations.
In May 2009, FASB issued guidance that sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance is effective for periods ending after June 15, 2009. This guidance did not have a material effect on our consolidated financial condition, results of operations or related disclosures.
In August 2009, FASB issued guidance that provides additional assistance on measuring the fair value of liabilities. The guidance clarifies that the quoted price for the identical liabilities when traded as an asset in an active market is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a Level 1 measurement, an entity must use a valuation technique that uses quoted prices or another valuation technique based on the amount an entity would pay to transfer or enter into an identical liability. This guidance did not have a material effect on the Company’s consolidated financial position, results of operations or related disclosures.
The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with a cost of $1,800,000 and $1,909,000 as of December 31, 2009 and 2008, respectively. The Company also invests in a money market fund with a cost of $204,111 and $4,634,000 as of December 31, 2009 and 2008, respectively. These short-term and fixed maturities investments are classified as available-for-sale and are carried at fair value, which is based on quoted market prices. The unrealized gains and losses on investment activity are due to a change in the quoted market prices for these certificates of deposit caused by any changes in prevailing interest rates since they were purchased. There were no realized gains or losses for the three years ended December 31, 2009, 2008 and 2007.
Investments classified at December 31, 2009 and 2008, as fixed maturities and short-term assets were as follows:
The components of the provision (benefit) for income taxes are summarized as follows as of December 31, 2009, 2008 and 2007, respectively:
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 expense of approximately $93,000, $106,000, and $90,000 related to deferred director fees and deferred employee compensation for the years ended December 31, 2009, 2008 and 2007, respectively. Directors and key employees who elect to defer cash compensation may request that the Company invest this compensation in a mutual fund investment or phantom shares of the Company. The Plans also provide for the directors and key employees to receive share awards based on the book value of the Redeemable Common Shares and to elect to defer receiving such amounts until termination of board membership or employment and vesting requirements are met. If a director or key employee does not elect to defer receiving his or her share awards, the individual will receive Class B Redeemable Common Shares upon vesting. If the share awards are deferred, these deferred amounts will be paid in cash at redemption. An individual director’s award vests 100% at the end of each year if the director meets certain attendance requirements. The key employee awards vest 10%, 20%, 30% and 40% at the end of each respective year in a four-year period following the grant date. There are no performance criteria associated with the vesting of the awards for key employees and the only requirement for vesting is that the individual is an employee of the Company at the end of the vesting year in question. The
deferred compensation expense related to these awards is recorded ratably during the applicable vesting period. The Company recorded deferred compensation expense of approximately $186,000, $278,000 and $183,000 related to deferred share awards and the change in the value of phantom shares for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009 there is approximately $120,000 of total unrecognized compensation cost related to non-vested award compensation under the Plans. That cost is expected to be recognized over a weighted average period of 1.8 years.
The following is a summary of activity of vested awards for the year ended December 31, 2009:
The Board authorized and approved for issuance the Provider Preferred Shares-2009 Series that includes 5,000 preferred shares authorized of the 100,000 authorized. These Provider Preferred Shares may only be purchased by a participating dentist 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. This dividend payable liability of approximately $11,000 was established in accordance with the Company’s Amended and Restated Articles of Incorporation for shareholders of record as of December 31, 2009 and is included in other accruals in the accompanying consolidated balance sheets. Prospective shareholders may make a subscription payment per share equal to the book value of a preferred share, which was approximately $594 at December 31, 2009.
The Company entered into an interest rate swap agreement (Note 12) that 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 effective interest expense on the mortgage note was 4.08%, 4.49%, and 5.22% at December 31, 2009, 2008 and 2007, respectively.
In 2004, the Company entered into a Master Equipment Lease Agreement with a leasing company related to the computer hardware and software for its dental insurance administration system. The Master Equipment Lease Agreement includes a four year capital lease for computer software and implementation costs which totaled
In 2003, the Company entered into an interest rate swap agreement (“Agreement”) (cash flow hedge) with a 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 any trading activities related to the Agreement. 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, 2009 and 2008 was a liability of approximately $24,000 and $38,000, respectively. These amounts are included in other payables and accruals in the accompanying consolidated balance sheet. The amount included in other comprehensive income (loss) related to the interest rate swap was $9,462, ($42,885), and ($30,096), net of income tax expense (benefit) of $4,874, ($22,093), and ($15,504) during 2009, 2008, and 2007, respectively. The agreement will terminate upon termination of the mortgage loan payable (Note 11).
Litigation-In the normal course of business, the Company is subject to various regulatory proceedings, lawsuits, claims and other matters. Such matters are subject to many uncertainties and outcomes are not reasonably predictable. In the opinion of the Company’s management, the eventual resolution of such matters for amounts above those reflected in the consolidated financial statements would not likely have a materially adverse effect on the financial condition or results of operations of the Company.
In 2006 the Company entered into an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest was payable on the prime rate of borrowing rate of 3.25% at December 31, 2008. In July 2009, we renewed the $500,000 working capital line of credit. Interest was payable at a variable rate of LIBOR plus 2.50% and was 2.75% at December 31, 2009. The Company did not have any interest expense for the line of credit in 2009 or 2008. As of December 31, 2009 and 2008 there was no amount outstanding on this line of credit.
In 2008 Dental Care Plus entered into an annually renewable agreement with a commercial bank for a $1,000,000 working capital line of credit. Interest was payable on the prime rate of borrowing rate of 3.25% at December 31, 2008. In August 2009, we renewed the $1,000,000 working capital line of credit. Interest was payable at a variable rate of LIBOR plus 2.50% and was 2.75% at December 31, 2009. The Company did not have any interest expense for the line of credit in 2009 or 2008. As of December 31, 2009 and 2008 there was no amount outstanding on this line of credit.
The Company manages its business with three reportable segments: fully-insured dental, self-insured dental and corporate, all other. Fully-insured dental consists of the fully-insured dental HMO, fully-insured dental PPO and fully-insured dental indemnity products. Self-insured dental consists of the self-insured dental HMO, self-insured dental PPO and self-insured dental indemnity products. Corporate, all other consists of revenue associated with the Company’s dental PPO and vision products underwritten by third-party insurance carriers and certain other corporate activities. These segments are consistent with information used by the Chief Executive Officer (the chief operating decision maker) in managing the business. The segment information aggregates products with similar economic characteristics. These characteristics include the nature of employer groups, pricing, benefits and underwriting requirements.
The Company’s providers who are also shareholders submitted claims of approximately $42,152,000, $41,666,000, and $38,941,000 in 2009, 2008 and 2007, respectively. The Company had claims payable liability to related party providers of approximately $1,705,000 and $2,142,000 at December 31, 2009 and 2008, respectively.
(b) Invested in Federally-Insured certificates of deposits and actively traded money market funds
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.
Based on the Company’s healthcare service expense on a per member per month (“PMPM”) basis that adjusts the quarterly healthcare service expense for membership volume changes, the dental plan members have historically used their dental plan benefits according to a seasonal pattern. In 2008 the Company’s quarterly healthcare services expense was highest in the first quarter, slightly below average in the second quarter, slightly above average in the third quarter and lowest in the fourth quarter. However, in 2009 the Company’s quarterly healthcare services expense was slightly above average in the first quarter, above average in the second quarter, significantly higher than average in the third quarter and lowest in the fourth quarter.