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, 2013, we had approximately 319,200 members in our dental and vision benefit programs with approximately 2,686 dentists participating in our dental HMO provider network and approximately 2,915 dentists participating in our dental PPO provider network.
Our strategy focuses on providing solutions for employers to the rising cost of dental care by leveraging our growing networks of participating dentists and deploying a variety of products that give employer groups and members more choices. Additionally, we have increased the diversification of our membership base, not only
through our newer products, but also by entering new geographic areas. We expect our dental PPO product to be an important driver of growth in the years ahead.
The following table shows membership totals and revenues and expenses for our four business segments for the years ended December 31, 2013 and 2012 (dollars in thousands):
Our fully-insured dental PPO membership increased by approximately 7,200 members in 2013. This membership increase is due to new sales in the Dayton and Columbus, Ohio markets and the Southern Kentucky market of approximately 11,800 members during 2013, offset by the loss of approximately 4,600 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups in these markets.
Our corporate, all other membership increased by approximately 3,700 members in 2013. The increase is primarily due to an increase of approximately 3,900 members in our vision plan, offset by a decrease of approximately 200 dental indemnity members that shifted into the fully-insured dental HMO/IND segment at renewal.
Self-Insured ASO Fees-Self-insured ASO fees increased approximately $34,000, or 2.7%, to $1,283,000 in 2013 from $1,249,000 in 2012. Approximately $60,000 of this increase is attributable to the self-insured product sales. This increase was offset by a decrease of $26,000 due to a small decrease in average self-insured ASO fee rates.
Investment income increased approximately $36,000, or 28.1%, to $164,000 in 2013 from $128,000 in 2012. This increase is the result of the increased amount of funds that were invested in both medium duration investment grade corporate bonds and short duration investment grade corporate bonds with higher yields during 2013.
Fully-insured dental HMO/IND healthcare services expense increased by $1,625,000, or 4.9%, to $35,024,000 in 2013 from $33,399,000 in 2012. This increase is attributable to an increase in fully-insured dental HMO/IND healthcare services expense on a per member per month basis of approximately $596,000, or 1.7%, in 2013 for both existing and new fully-insured dental HMO/IND membership. This increase in fully-insured dental HMO/IND healthcare services expense is also the result of an increase of approximately $1,029,000 due to an increase in fully-insured dental HMO/IND member months of 3.1% in 2013 compared to 2012.
$675,000, or 158.9%, as a result of special projects related to business cycle process automation and the planning and design work associated with our new individual dental products. In addition, miscellaneous expenses increased by approximately $134,000 due to the one-time costs incurred relative to the recruitment of new management staff.
Net income was approximately $1,318,000 and $591,000 for 2012 and 2011, respectively. The increase in net income primarily resulted from an increase in premium revenue of approximately $3,926,000, to $80,153,000 in 2012 from $76,227,000 in 2011, offset by an increase in healthcare services expense of $1,385,000, to $63,736,000 in 2012 from $62,351,000 in 2011. The resulting increase in gross margin of approximately $2,541,000 was offset by an increase in insurance expenses of $1,492,000, to $14,609,000 in 2012 from $13,117,000 in 2011. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 18.2% in 2012 from 17.2% in 2011.
Our corporate, all other membership increased by approximately 700 members in 2012. The increase is primarily due to an increase of approximately 800 members in our vision plan, offset by a decrease of approximately 100 dental indemnity members that shifted into the fully-insured dental HMO/IND segment at renewal.
Investment income increased approximately $17,000, or 15.3%, to $128,000 in 2012 from $111,000 in 2011. This increase is the result of funds that were invested in medium duration investment grade corporate bonds with higher yields during all of 2012. We invested in short duration investment grade corporate bonds for the first seven months of 2011 before transitioning to medium duration investment grade corporate bond investments during the last five months of 2011 and into 2012.
Fully-insured dental PPO healthcare services expense increased by $820,000, or 9.6%, to $9,363,000 in 2012 from $8,543,000 in 2011. This increase is attributable to an increase in fully-insured dental PPO healthcare services expense of approximately $867,000 due to an increase in fully-insured dental PPO member months of 10.1% in 2012 compared to 2011. This increase was offset by a decrease in fully-insured dental PPO healthcare services expense of approximately $47,000 due to a decrease in fully-insured dental PPO healthcare services expense on a per member per month basis of approximately 0.5% in 2012 for both existing and new fully-insured dental PPO membership.
Our effective tax rate for 2012 was 35.3% compared to the 37.6% effective tax rate in 2011. Our 2012 and 2011 effective tax rates were higher than the federal statutory rate primarily due to the impact of permanent tax differences related to meal and entertainment and legal fees. See Note 5 to the consolidated financial statements included in Item 8 - Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate.
Cash increased approximately $1,554,000, or 22.3%, for the year ended December 31, 2012 to approximately $8.5 million at December 31, 2012 from approximately $7.0 million at December 31, 2011. This cash increase is primarily the result of improved profitability in 2012 due to a lower fully-insured loss ratio, offset by higher insurance expense as a percentage of premium in 2012. This loss ratio decrease is primarily due to an increase in fully-insured premium rates in 2012 compared to 2011, improved underwriting practices, and a decrease in fully-insured healthcare services expense on a per member per month basis. The change in cash for the years ended December 31, 2013, 2012 and 2011 is summarized as follows (in thousands):
In 2011, we generated approximately $1,571,000 of cash from operating activities. This level of cash flow from operating activities is higher than the cash flow generated from operating activities in 2010. We had net income of approximately $591,000 in 2011 compared to net loss of $89,000 in 2010. In addition to our 2011 net income, we had non-cash depreciation and amortization expense of approximately $264,000, an increase in deferred compensation liabilities of $226,000, an increase in claims payable of $25,000 and an increase in other payables and accruals of $276,000. The increase in deferred compensation liabilities is primarily due to the 11% increase in the book value of the common shares during 2011, while the increase in other payables and accruals is primarily the result of a higher management bonus liability for 2011. These sources of cash were offset by cash uses such as an increase in uncollected premiums of approximately $61,000. A decrease in accounts receivable of approximately $6,781,000 was offset by a decrease in unearned premium revenue of $7,074,000, resulting in a net cash decrease of $293,000. This cash decrease is attributable to an increase in uncollected premiums and unearned premium revenue received in advance. Accounts receivable and unearned premium revenue are recorded primarily as the result of non-cancelable short-term insurance contracts.
In 2013, we invested approximately $601,000 in building improvements, office equipment and computer equipment and software. Also in 2013, approximately $1.1 million of our investments in FDIC insured certificates of deposit, investment grade corporate bonds and money market funds either matured or were liquidated. We also invested approximately $4.2 million in additional FDIC insured certificates of deposit, investment grade corporate bonds and money market funds. In addition, in December of 2013, we also sold certain office equipment and computer equipment with a value of approximately $312,000 to a leasing company and entered into an agreement to lease back these same assets over a three year period. We also invested an additional $5,000 in a dental and vision discount product. Collectively, these investments and transactions resulted in a decrease in cash from investment activities of approximately $3.4 million.
In 2011, we invested approximately $124,000 in building improvements, office equipment and computer equipment and software. Also in 2011, approximately $7.3 million of our investments in FDIC insured certificates of deposit, investment grade corporate bonds and money market funds either matured or were liquidated. We also invested approximately $7.5 million in additional FDIC insured certificates of deposit, investment grade corporate bonds and money market funds. Collectively, this resulted in a decrease in cash from investment activities of approximately $309,000.
In 2013, we paid approximately $46,000 of our outstanding mortgage balance and repaid approximately $137,000 related to the capital lease that we executed in December 2010. During 2013, we sold $1 million of institutional preferred shares and approximately $97,000 of Class A and Class B common shares. Also during 2013, we repurchased redeemable common shares of $264,000 from provider shareholders. In addition, we paid dividends to our institutional preferred shareholders and our common shareholders totaling approximately $392,000 in 2013.
In 2011, we paid approximately $120,000 of our outstanding mortgage balance and repaid approximately $104,000 related to the capital lease that we executed in December 2010. During 2011, we repurchased redeemable common shares of $128,000 from provider shareholders. In the fourth quarter of 2011, we exchanged the 330 outstanding Provider Preferred Shares with a book value of approximately $205,000 for 330 Class B Common Shares with a book value of $227,000 and received $22,000 in cash.
Our mortgage note matures in December 2022. The note requires us to make principal payments of $3,800 per month in 2013, $3,900 per month in 2014 and higher principal payments in subsequent years through 2022 in accordance with the agreed upon loan amortization schedule. The mortgage note bears interest at a variable rate of 30-day LIBOR plus 1.95%. We also entered into a variable to fixed interest rate swap agreement that converts the variable rate mortgage to a fixed rate mortgage with an effective fixed interest rate of 3.90%. At the maturity date of the mortgage note in December 2022, the expected outstanding balance of the note of approximately $804,000 must be repaid or refinanced.
In December of each year our Board evaluates the projected pre-tax income of our dental HMO and dental PPO plans, capital and surplus requirements prescribed by the Ohio Department of Insurance and factors impacting our A.M. Best financial strength rating, such as the ratio of our projected fully-insured premium revenue to our projected capital and surplus level. In addition, the Board considers the capital expenditures needed to support strategic objectives for the coming years (such as the improvements to the dental plan administration system, expansion of office space and acquisition of office equipment for new employees) and our estimated federal income tax liability. After considering these and any other factors deemed relevant, the Board determines the amount of the provider withhold that may be paid to participating dental providers, if any. Each participating dental provider’s share of the provider withhold payment is based on the proportionate amount of claims paid to such participating dental provider in relation to the total claims paid to all participating dental providers in a given year, expressed as a percentage, and is not related to or dependent upon any such provider’s holdings of shares in the Company. Payments authorized by the Board, if any, are accrued in the fourth quarter of the fiscal year. The Board did not authorize any return of withhold for the years ended December 31, 2013, 2012 or 2011.
A mortgage note, secured by the land and the office building, accrues interest based on the 30-day LIBOR rate plus 1.95% and was 2.12% at December 31, 2013. At the maturity date of the mortgage note in 2022, the expected outstanding balance of the note of approximately $804,000 must be repaid or refinanced. We also entered into an interest rate swap agreement that effectively changed the interest rate related to the $1,340,000 mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of approximately 3.90% for the 10-year period through December 2022. At December 31, 2013, the carrying value of the mortgage note approximates fair value. Under this mortgage, the Company is required to have a minimum tangible net worth equal to or greater than $3,500,000 at the end of each fiscal year and a debt service ratio of at least 1:1. The Company was in compliance with these covenants at December 31, 2013. The Company also entered into a capital lease agreement with the leasing company that obligates the Company to pay lease payments over a three year period. Under this capital lease agreement, the Company is required to have a minimum tangible net worth equal to or greater than $2,500,000 at the end of each fiscal year.
As of December 31, 2013, we believe our most significant other commitments are:
Our consolidated cash and short term investments were approximately $8.4 million at December 31, 2013. Our consolidated cash and short term investments decreased by approximately $500,000 from approximately $8.9 million as of December 31, 2012.
In August 2013, we renewed an annually renewable agreement with a commercial bank for a $1,000,000 working capital line of credit, and the commercial bank also issued an irrevocable letter of credit in the amount of $10,000. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense for the line of credit in 2013 or 2012. As of December 31, 2013 and 2012, there was no amount outstanding on this line of credit.
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. 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). We will also be obligated in certain circumstances to repurchase the redeemable shares of our Class A and Class B shareholders who die, are permanently disabled, or retire. Our Board considers limitations on the amount of share redemptions each year. While we are not able to estimate future redeemable share redemptions, we repurchased approximately $264,000, $138,000, and $128,000 of redeemable common shares in the years ended December 31, 2013, 2012, and 2011, respectively. We believe our cash balances, available-for-sale 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.
$360,000 to DCP Holding Company that did not require prior approval by the Ohio Department of Insurance. There were no dividends declared or paid by Dental Care Plus during 2013 or 2011. Even if prior approval is not required, prior notification must be provided to state insurance departments in Ohio, Kentucky and Indiana before paying a dividend.
We maintained aggregate statutory capital and surplus of approximately $8.6 million as of December 31, 2013 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 2014 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 and capital raised in future redeemable common and preferred share offerings.
period for which incurred claims are estimated, we apply a different method in determining our estimate. Throughout the year, we use both the “completion factors” and the “claims trend factor” to estimate our claims payable liability. On a quarterly basis, for periods prior to the most recent month, we calculate “completion factors” which indicate 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 factors to determine historical patterns over a rolling 12-month period, made consistent period over period with making adjustments for known changes in claim inventory levels and known changes in claim payment processes. Then, 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. We have consistently applied the key actuarial methodologies to estimate the IBNR and reported claims in process components of our claims payable liability.
Fully-insured premium revenue is recognized in the period during which dental or vision coverage is provided to the covered individuals. Payments received from customers in advance of the related period of coverage, as well as related accounts receivable, are reflected on the accompanying consolidated balance sheets as unearned premium revenue. The Company’s unearned premium revenue was approximately $35,395,000 and $19,792,000 at December 31, 2013 and 2012, respectively, for the estimated premium revenue associated with the remaining contract periods and related amounts recorded in accounts receivable. Enrollment changes not yet reflected on employer group invoices, also known as retroactive membership adjustments, are estimated based on available data and are reflected in revenue in the current period. These retroactive membership adjustments are generally immaterial to the consolidated financial statements. Self-insured premium revenue is recognized upon the payment of claims for self-insured members in accordance with contracts with self-insured employers. We provide administrative and claims processing services, benefit plan design, and access to provider networks for an administrative fee to self-insured groups. The Company has no underwriting risk arising from the provision or cost of any services provided to the self-insured groups.
We have audited the accompanying consolidated balance sheets of DCP Holding Company and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income, redeemable shares and shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedules included in Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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.
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 primarily owned and controlled by 546 dentists who participate in one or more of the networks that offers Dental Care Plus products. The Company is also partially owned by retired dentists, Company board members and employees who hold non-voting redeemable common shares and by institutional investors that hold non-voting redeemable preferred shares. The Company offers to employer groups of all sizes dental health maintenance organization (“HMO”), participating provider organization (“PPO”) and indemnity benefit plans and vision benefit plans. As of December 31, 2013, we had approximately 292,200 members in our dental benefits plans and approximately 27,200 members in our vision benefit plans. We had 2,686 dentists participating in our dental HMO network and 2,915 dentists participating in our dental PPO network at this time. The Company has a network leasing agreement with a national dental network management company that has one of the largest networks of dentists under contract in the United States. With this network leasing agreement, Dental Care Plus dental PPO members now have access to approximately 2,400 additional dentists in the Company’s operating territory and approximately 40,600 additional dentists throughout the United States.
Dental Care Plus Inc. is an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation and able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health insurance products.
Adopted Accounting Standards-Effective January 1, 2012, the Financial Accounting Standards Board (“FASB”) amended the guidance for deferred acquisition costs and requires that only incremental direct costs of successful contract acquisition be capitalized. These incremental direct costs are those that are essential to the
contract transaction and would not have been incurred had the contract transaction not occurred. On January 1, 2012, the impact of adoption on redeemable shares and beginning shareholders’ equity totaled approximately $125,000, net of tax. The Company applied the retrospective method for financial statement presentation and note disclosures for the prior periods reported.
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 costs 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.
Redeemable Institutional Preferred Shares-In 2010, the Company entered into a Preferred Stock Purchase Agreement (the “2010-Stock Purchase Agreement”) with an investor. Pursuant to the 2010-Stock Purchase Agreement, the investor agreed to purchase 300 Shares at a purchase price of $1,000 per share, with an aggregate purchase price of $300,000. The annual dividend payable on each Share is 5% of the book value at the beginning of the dividend period.
In 2013, the Company entered into a Preferred Shares Purchase Agreement (the “2013-Stock Purchase Agreement”) with an investor. Pursuant to the 2013-Stock Purchase Agreement, the investor agreed to purchase 1,000 shares of Redeemable Institutional Preferred Shares (the “2013 Preferred Shares”) at a purchase price of $1,000 per share, for an aggregate purchase price of $1,000,000. The annual dividend payable on each 2013 Preferred Share shall be (i) in respect of the dividend payable in 2013, 5% of the per share issue price, prorated based on the number of days which the 2013 Preferred Shares were outstanding in 2013; and (ii) in respect of the dividends payable in 2014 and all years thereafter, 5% of the book value of the 2013 Preferred Shares on December 31 of the preceding year, prorated based on the number of days which the 2013 Preferred Shares were outstanding in the preceding year.
Redeemable Institutional Preferred Shares are participating securities that share in total comprehensive income as a change to the redemption value of the redeemable Institutional 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 securities. Redeemable Institutional Preferred Shares are considered to be redeemable shares due to the fact that the shareholders have the option to require the Company to repurchase these shares upon the shareholder’s discretion.
The prior year presentation of accounts receivable has been conformed to the current year presentation.
Healthcare Services Expense-The Company compensates its providers based on contractual reimbursement for various services. With respect to the dental HMO product and, effective April 1, 2011, the in-network portion of the dental PPO product, the Company generally retains 10% of this reimbursement (including payments on self-insured claims) in accordance with the Company’s provider agreements. Healthcare services expense is recorded net of any amounts withheld in the accompanying consolidated statements of comprehensive income. Under the terms of the Company’s provider agreements, the Company is not obligated to return to providers any amounts withheld. 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 authorizes an amount to be paid to the providers.
Each year the Board evaluates the performance of the Company’s dental plans, capital and surplus requirements prescribed by the Ohio Department of Insurance, factors affecting the Company’s financial strength rating, funding needed to support strategic objectives for the coming years and any other factors deemed relevant by the Board and, based on that evaluation, determines whether or not to authorize the payment to the providers of any portion of the provider withhold. Once authorized by the Board, such amounts are recorded as additional healthcare services expense in the period authorized and shown as additional claims payable liability until paid. There was no withhold return authorized by the Board for 2013, 2012 or 2011.
The Company incurred claim costs related to dental care providers amounting to approximately $67,762,000, $63,736,000, and $62,351,000, for the years ended December 31, 2013, 2012 and 2011, respectively.
During 2013, 2012 and 2011, four fully-insured customers accounted for approximately 10%, 9%, and 10%, respectively, of the Company’s total revenue. Additionally, two self-insured customers accounted for approximately 11%, 12% and 11% of the Company’s total revenue during each of the years 2013, 2012 and 2011, respectively.
At December 31, 2013, the Company had one customer that had a balance of approximately 29% of the uncollected premium receivable balance. At December 31, 2012, the Company did not have any uncollected premium receivables balance greater than 10% of the total balance from any one customer.
Fair Value of Financial Instruments-Certain financial instruments are required to be recorded at fair value. The Company primarily bases fair value for investments in fixed-maturity securities (including federally-insured certificates of deposits and investment grade corporate bonds) on quoted market prices or on prices from a pricing vendor, an outside resource that supplies securities pricing, dividend, corporate action and descriptive information to support pricing, securities operations, research and portfolio management. The Company obtains
Goodwill and intangible assets were recorded as a result of the acquisition of Adenta, Inc. in 2005 related to goodwill, an acquired contract, memberships and a provider network. Goodwill amounted to approximately $136,000 at December 31, 2013 and 2012. There has not been any impairment on goodwill. Identifiable and amortizable intangible assets amounted to approximately $97,000 net of approximately $143,000 of accumulated amortization at December 31, 2013 and to approximately $112,000 net of approximately $128,000 of accumulated amortization at December 31, 2012. Amortization expense was approximately $15,000 for each of the three years ended December 31, 2013, 2012 and 2011. The provider network intangible asset of approximately $63,000 at December 31, 2013 is being amortized over a period of 20 years, a period during which the Company expects that all of these providers will have retired from the network. Membership intangible assets (net of individual memberships written-off in the year of acquisition) of approximately $34,000 at December 31, 2013 is being amortized over its 11 year useful life in accordance with the Company’s expectation for the membership retention. The remaining weighted-average amortization period for these intangible assets is approximately 9 years. Amortization expense for 2014 through 2016 is expected to be approximately $15,000 each year. Goodwill and intangible assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2013 and 2012.
At December 31, 2013, the Company has one-hundred and eight investment grade corporate bonds, which consist of eighty-nine different securities each with a credit rating of A- or better and nineteen securities that had a credit rating of between BBB- and BBB+. The weighted average yield-to-book value of our investment grade
Investments classified at December 31, 2013 and 2012, as fixed maturities and short-term investments were as follows:
Unrealized losses at December 31, 2013 and 2012 on investments were generally due to higher current market yields relative to the yields of the investments at their amortized cost. Unrealized losses due to credit risk associated with the underlying collateral of the investments, if any, are not material. All investments with unrealized losses are reviewed quarterly to determine if any impairment is other than temporary, requiring a charge to earnings. The Company considers the severity of the loss on a security, duration of loss, duration of the investment, credit rating of the security, as well as payment performance and the Company’s intent or requirement to sell the investment before recovery when determining whether any impairment is other than temporary. The Company had no other than temporary impairment charges for the years ended December 2013, 2012 and 2011. The Company had no investments in a material unrealized loss position for greater than one year as of December 31, 2013 and 2012.
2013, 2012, and 2011, respectively. These losses will expire between 2018 and 2024. Net deferred tax assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2013 and 2012.
For the years ended December 31, 2013, 2012, and 2011, the Company did not have any significant uncertain tax positions. The Company is primarily subject to U.S. federal and various U.S. state and local tax authorities. Tax years subsequent to 2009 remain open to examination by the Internal Revenue Service (“IRS”), and tax years subsequent to 2008 remain open to other state and local tax authorities.
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 $67,000, $88,000, and $60,000 related to deferred director fees and deferred employee compensation for the years ended December 31, 2013, 2012 and 2011, 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 deferred cash compensation is included in the deferred compensation liability at December 31, 2013 and 2012.
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. There were approximately 165 and 168 of these non-vested awards outstanding at December 31, 2013 and 2012, respectively. The number of awards expected to vest approximates the total non-vested awards outstanding.
The deferred compensation expense related to these awards is recorded ratably during the applicable vesting period. The Company recorded deferred compensation expense of approximately $616,000, $466,000 and $288,000, with a tax benefit of approximately $209,000, $158,000 and $98,000, related to deferred share awards and the change in the value of phantom shares for the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, there is approximately $399,000 of total unrecognized compensation cost related to non-vested awards under the Plans. That cost is expected to be recognized over a weighted average period of 1.46 years.
In February 2013 and March 2012, the Board declared a per share cash dividend for all Class A and Class B redeemable common shares in the amounts of $32.60 and $21.00, respectively. With the dividend, the holders of restricted share units and phantom shares received an equivalent share based dividend that resulted in an increase in the deferred compensation liability of approximately $52,000 and $28,000 for the years ended December 31, 2013 and 2012, respectively.
The following is a summary of activity of non-vested awards for the years ended December 31, 2013 and 2012:
When Redeemable Common shares are offered by the Company, providers in the Company’s service area have the option to purchase one share of voting Class A Redeemable Common Shares of the Company. Only participating providers in our service area that includes Ohio and Kentucky are eligible to own Class A voting redeemable common shares. All participating providers along with Company directors and employees have the option to purchase one or more non-voting Class B Redeemable Common Shares of the Company, when offered. Accordingly, prospective shareholders may make a subscription payment per share equal to the book value of a common share, which was approximately $894 and $815 at December 31, 2013 and 2012, respectively. In February 2013 and March 2012, the Board declared a per share cash dividend for all Class A and Class B redeemable common shares in the amounts of $32.60 and $21.00, respectively. No dividends were declared or paid in 2011.
The Company has 92,700 authorized preferred shares, without par value. As of December 31, 2013 and 2012, none of these 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.
Dividend restrictions vary among the subsidiaries. Dental Care Plus is restricted by regulatory requirements of its domiciliary state, which limit by reference to statutory net income and net worth, the dividends that can be paid without prior regulatory approval. Dividends paid by Dental Care Plus cannot, without prior approval of the Ohio Department of Insurance, exceed in any one year the lesser of: (i) 10% of net worth (as of the preceding December 31), or (ii) net income for the prior year, and only if net worth exceeds $250,000 and only out of unassigned surplus. In December 2012, Dental Care Plus declared and paid a dividend to the Company totaling $360,000. There were no dividends declared or paid by any subsidiaries during 2013 or 2011. During 2014, the total dividend that the Dental Care Plus subsidiary may declare without prior regulatory approval is approximately $856,000.
At December 31, 2013, future required payments under all outstanding capital leases are as follows:
In December 2012, the Company entered into an interest rate swap agreement (“Agreement”) (cash flow hedge) with an original notional amount of $1,340,000. The Agreement is used to manage the Company’s interest rate risk. The swap agreement effectively changed the interest rate related to the Company’s 2012 refinanced mortgage note with a commercial bank from a variable rate based on the 30-day LIBOR rate plus 1.95% to a fixed rate of 3.90% for the 10-year period through December 22, 2022. The Company’s risk
management policy is to not enter into derivatives for speculative purposes. The notional amount decreases 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. At December 31, 2013 and 2012, the fair value of this Agreement was a liability of approximately $56,000 and $41,000, respectively. This amount is included in other payables and accruals in the accompanying consolidated balance sheets. The agreement will terminate upon maturity of the mortgage loan payable (Note 11).
The Company has an additional annually renewable working capital line of credit for $1,000,000. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense or significant fees for the line of credit for each of the three years ended December 31, 2013. At December 31, 2013 and 2012, there was no amount outstanding on this line of credit. The $1,000,000 working capital line of credit expires in August 2014. In addition, the Company obtained an irrevocable letter of credit for $10,000, with interest payable on all outstanding amounts at a variable rate of the prime rate of borrowing plus 6.00%. The letter of credit also has an annual fixed rate of 2.10% for access to the letter of credit obligation. The letter of credit expires in December 2014. At December 31, 2013 and 2012, there was no amount outstanding on the irrevocable letter of credit obligation.
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 $60,000, $60,000, and $52,000 in 2013, 2012 and 2011, respectively.
The Company manages its business with four segments: fully-insured dental HMO and indemnity, fully-insured dental PPO, self-insured dental and corporate, all other. 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 indemnity, 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 Company changed the composition of its reportable segments in the first quarter of 2012, and the amounts in
The results of the fully-insured dental HMO and indemnity, fully-insured dental PPO and self-insured dental segments are measured by gross profit. The Company does not allocate insurance expense, investment and other income, assets or liabilities to these segments because the Company does not use these measures to analyze the segments. These items are assigned to the remainder of the Company’s business, which it identifies as corporate, all other. The Company’s gross profit was approximately $18,601,000, $16,417,000, and $13,876,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company’s providers, who are also shareholders, submitted claims of approximately $37,566,000, $37,720,000, and $40,218,000 in 2013, 2012 and 2011, respectively. The Company had claims payable liability to related party providers of approximately $1,231,000 and $1,267,000 at December 31, 2013 and 2012, respectively.
Seven of our Board members are also participating providers and as a group received approximately $154,000, $159,000 and $159,000 in directors’ fees for the years ended December 31, 2013, 2012, and 2011, respectively.
The Company classifies the assets and liabilities that require measurement of fair value on a recurring basis based on the priority of the observable and market-based sources of data into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:
The Company measures fair value using the following valuation methodologies. The Company uses quoted market prices to determine the fair value of the deferred compensation investments and certain state fund guarantee deposits; such items are classified as Level 1 of the fair-value hierarchy. Examples include government securities and mutual fund equity securities. The Company primarily bases fair value for investments in fixed-maturity securities (including federally-insured certificates of deposits and investment grade corporate bonds) on quoted market prices or on prices from a pricing vendor, an outside resource that supplies independent securities pricing, dividend, corporate action and descriptive information to support fund pricing, securities operations, research and portfolio management. The Company obtains and reviews the pricing service’s valuation methodologies and validates these prices using various inputs including quotes from other independent regulatory sources. When deemed necessary, the Company validates prices by replicating a sample using a discounted cash flow model. Such items are classified as Level 2 of the fair-value hierarchy. The Company obtains a price from an independent vendor to determine the fair value of the interest rate swap. The independent vendor uses a discounted cash flow method whereby the significant observable inputs include the replacement interest rates of similar swap instruments in the market and swap curves; such items are classified as Level 2 of the fair value hierarchy.
At December 31, 2013 and 2012, there were no assets or liabilities that were required to be measured at fair value on a non-recurring basis. As of December 31, 2013 and 2012, the Company did not have any assets or liabilities classified as Level 3 of the fair value hierarchy.
A summary of our unaudited quarterly results of operations for the years ended December 31, 2013 and 2012 is as follows (amounts in thousands):
At a Special Meeting of Shareholders of the Company held on January 9, 2014, the shareholders voted to approve the amendments to the Company’s articles of incorporation and code of regulations that were proposed in the Company’s proxy statement dated October 7, 2013. The amendments approved by the shareholders include: an increase in the number of authorized Class B Common Shares from 100,000 shares to 120,000 shares; an amendment to the terms of the Class B Common Shares to provide that the shares have voting rights and terms substantially similar to the Class A Common Shares; creation of new voting Class C Common Shares that can be owned by non-dentist individuals; creation of new non-voting Class D Common Shares that Preferred Shares can be converted to under certain circumstances; elimination of the pre-emptive rights of holders of Class A Common Shares with respect to new classes of voting shares and provision for automatic conversion of Class A, Class B and Class C Common Shares. In addition, the eligibility requirements for ownership, the transfer restrictions, the repurchase rights and obligations, and the redemption rights and obligations associated with each class of the Company’s Common Shares were established. The amendments also established that the maximum percentage of Class C Common Shares outstanding at any time as a proportion of all voting Common Shares is 40%.
On February 12, 2014, the Company’s Board of Directors declared a $35.77 per share dividend for all Class A and Class B redeemable common shareholders of record on February 12, 2014, payable on March 14, 2014. With the dividend, the holders of restricted share units will receive an equivalent share based dividend.