We manage our business with three segments, fully-insured dental HMO, self-insured dental HMO, and corporate, all other. Corporate, All Other consists primarily of certain corporate activities and three additional product lines: DentaSelect PPO, DentaPremier indemnity and Vision Care Plus PPO. Our dental HMO products and all of our other product lines are marketed to employer groups. We identified our segments in accordance with the aggregation provisions of Statement of Financial Accounting Standards (“SFAS”) 131 “Disclosures About Segments of an Enterprise and Related Information” which is consistent with information used by our Chief Executive Officer in managing our business. The segment information aggregates products with similar economic characteristics. These characteristics include the nature of customer groups and pricing, benefits and underwriting requirements.
The results of our fully-insured and self-insured HMO segments are measured by gross profit. We do not measure the results of our Corporate, All Other segment. We do not allocate selling, general and administrative expenses, investment and other income, interest expense, or other assets or liabilities to our fully-insured and self-insured segments. These items are retained in our Corporate, All Other segment. Our segments do not share overhead costs and assets. We do, however, measure the contributions of each of our fully-insured and self-insured segments to costs retained in our Corporate, All Other segment.
We have experienced steady growth in membership and revenue in both the fully-insured and self-insured dental HMO product during the last five years. We attribute this growth to our broad provider network, competitive premium rates for our fully-insured business and ASO fees for our self-insured business, and our commitment to providing outstanding customer service to all of our constituencies (employer groups, members, insurance brokers, and dentists).
Healthcare services expense has increased for both the fully-insured dental HMO segment and the self-insured dental HMO segment. We have increased our provider fee schedule at the beginning of each of the last five years; these fee schedule increases contribute to an increase in the healthcare services expense on a per member per month basis.
Net income available for redeemable common shares was approximately $604,000 and $103,000 for the years ended December 31, 2007 and 2006, respectively. Basic earnings per redeemable common shares was $72.88 and $12.59 at December 31, 2007 and 2006, respectively. The increase in net income on available for redeemable common shares primarily resulted from a decrease in total healthcare services expense as a percentage of total premium revenue from 81.5% in 2006 to 80.3% in 2007 and offset by increased selling, general and administrative expenses.
Our fully-insured dental HMO membership decreased approximately 3,400 members, or 2.5%, from 137,100 at December 31, 2006 to 133,700 at December 31, 2007. This membership decrease is attributable to the reduction of approximately 14,900 fully-insured dental HMO members due to the conversion of two employer group membership from our fully-insured dental HMO product to our self-insured dental HMO product effective July 1, 2007, offset by new fully-insured dental HMO sales in the Cincinnati/Northern Kentucky market of approximately
14,000 members. In addition, fully-insured dental HMO membership decreased by an additional 2,500 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 self-insured dental HMO membership increased by approximately 21,800 members, or 34.9%, from approximately 62,500 members at December 31, 2006 to approximately 84,300 members at December 31, 2007 primarily due to the conversion of 14,900 members of two employer groups from our fully-insured dental HMO product to our self-insured dental HMO product effective July 1, 2007. The remaining 6,900 member increase was the result of our adding a number of large new self-insured groups in Southwestern Ohio and Northern Kentucky.
Fully-insured dental HMO premium revenue increased approximately $838,000, or 2.2%, in 2007 as compared to 2006. Approximately $652,000 of this premium revenue increase is attributable to net membership volume increases in the dental HMO product line. Approximately $554,000 of this premium revenue increase is associated with dental HMO premium rate increases negotiated with employer groups at their annual renewals. These increases were offset by a decrease in Adenta premium revenue of approximately $368,000 during 2007 as the Adenta membership transferred to our dental PPO product or to another dental carrier.
Self-Insured ASO Fees - Self-insured ASO fees increased approximately $313,000, or 42.8%, from approximately $731,000 in 2006 to approximately $1,044,000 in 2007. These increases are primarily attributable to the 34.9% increase in self-insured HMO membership and a significant increase in the average self-insured ASO fee rates. We provide access to our Dental Care Plus provider network for an administrative fee, generally to self-insured groups. Our ASO fee revenue is recognized monthly when earned and is normally based on annual contracts with the self-insured groups.
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 the years ended December 31, 2006 and 2007. The majority of the dental indemnity product is now underwritten by Dental Care Plus. In the fourth quarter of 2007, our fully-insured dental indemnity premium was approximately $274,000.
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 increased by approximately $18,000, or 11.0%, from approximately $164,000 in 2006 to approximately $182,000 in 2007.
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 increased by approximately $65,000, or 66.3%, from approximately $98,000 in 2006 to approximately $163,000 in 2007.
Self-insured healthcare services expense increased approximately $5,108,000, or 43.3%, from approximately $11,808,000 in 2006 to approximately $16,916,000 in 2007. This increase is attributable to both the 34.9% increase in self-insured dental HMO membership, the provider fee schedule increase implemented at the beginning of 2007, and the shift of the two employer groups with higher than average healthcare services expense on a per-member-per-month basis into the self-insured product line.
In the normal course of business, the Company cedes portions of its written premium revenue. As such, the Company limits its loss exposure to that portion of the insurable risk that it retains. Dental insurance premium ceded was approximately $228,000 in 2007. The healthcare services expense ceded was approximately $189,000 in 2007. As of December 31, 2007 the Company has approximately $26,500 of reinsurance recoverable and prepaid reinsurance premium net of reinsurance payable, which is included in accounts receivable.
Other income decreased approximately $211,000, or 69.2% in 2007 as compared to 2006. Dental provider network leasing revenue decreased approximately $185,000 in 2007 from approximately $213,000 in 2006 to approximately $28,000 in 2007 primarily due to the loss of the revenue associated with the Humana provider network lease with Adenta that was terminated in the third quarter of 2006. Rental revenue earned from leasing a portion of the office building owned by our subsidiary Dental Care Plus decreased by approximately $34,000, or 37.0%, from approximately $92,000 in 2006 to approximately $58,000 in 2007 due to a vacancy in a portion of the office building in 2007.
Interest expense decreased $26,000, or 21.5%, from approximately $121,000 in 2006 to approximately $95,000 in 2007. The decrease is primarily attributable to a decrease in the interest expense associated with our capital lease and mortgage obligations as these obligation decreased.
Net income on redeemable common shares was approximately $103,000, or $12.59 per redeemable common share, in 2006 compared to approximately $467,000, or $55.14 per redeemable common share, in 2005. The decrease in net income on redeemable common shares primarily resulted from increased healthcare services expense and increased selling, general and administrative expenses associated with becoming an Exchange Act reporting company.
Our fully-insured dental HMO membership remained relatively constant in 2006 as compared to 2005. As of December 31, 2006 and 2005, we had approximately 137,100 and 137,000 fully-insured members, respectively.
Self-insured Claim Revenue - Self-insured claim revenue increased approximately $3.2 million, or 34.4% in 2006 as compared to 2005 is due to increased self-insured dental HMO membership along with a fee schedule increase implemented in 2006.
Self-insured ASO Fees - Self-insured ASO fees increased approximately $176,000, or 31.8% in 2006 as compared to 2005. This increase is primarily attributable to the 35.9% increase in self-insured HMO membership and is also attributable to a slight increase in average ASO fee rates. We provide access to our Dental Care Plus provider network for an administrative fee, generally to self-insured groups. Our ASO fee revenue is recognized monthly when earned and is normally based on annual contracts with the self-insured groups.
Corporate, All Other premium revenue is derived from our administrative fees related to our dental indemnity, dental PPO and vision products that are underwritten by third party insurance carriers, as well as premium revenue from our dental PPO product underwritten by Dental Care Plus. As of September 2006, we began offering the Dental Care Plus dental PPO in Kentucky only; the Dental Care Plus dental PPO premium accounts for approximately $53,000 of this revenue increase in 2006. The remaining dental and vision products are underwritten by third party insurance carriers. We are paid a portion of premium in the form of administrative fees that cover our administrative costs, brokers commissions, and profit. These administrative fees increased in 2006 by approximately $266,000 or 213.2%.
Fully-insured healthcare services expense increased approximately $2.5 million, or 9.0%, in 2006 as compared to 2005. This increase is attributable to both the increase in dental HMO membership and the provider fee schedule increase implemented at the beginning of 2006. Member utilization remained relatively constant between 2005 and 2006.
Corporate, All Other healthcare services expense was approximately $40,000 for the Dental Care Plus dental PPO product that was introduced in September of 2006. Because our other dental indemnity, dental PPO and vision
PPO products are underwritten by third party insurance carriers, we do not recognize any premium revenue or healthcare services expense associated with these products.
Investment income increased approximately $94,000, or 90.4%, in 2006 as compared to 2005. This increase is primarily attributable to a shift of funds from short term to higher yield long term investments, higher interest bearing cash balances, and an increase in prevailing interest rates.
Other income increased approximately $84,000, or 38.0%, in 2006 as compared to 2005. Dental provider network leasing revenue increased approximately $68,000 in 2006 from approximately $145,000 in 2005 to approximately $213,000 in 2006 primarily due to the revenue associated with the acquisition of Adenta. The increase of Other revenue also contributed to the increase. Other revenue includes rental revenue earned from leasing a portion of the office building owned by our subsidiary Dental Care Plus.
In 2007, we used approximately $398,000 of cash in operating activities. 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, accounts payable and other accrued expenses, deferred compensation and federal income tax payable liabilities totaling approximately $590,000. 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, prepaid expenses and other assets totaling approximately $353,000, and deferred income taxes of approximately $144,000.
In 2006, we generated approximately $1.4 million of cash by operating activities and realized net income of approximately $103,000. The decrease in net cash provided by operating activities of approximately $622,000 is primarily due to a decrease in net income in 2006 as compared to 2005. Continued growth of approximately $100,000 and an increase in the provider withhold payable in the amount of $600,000 account for the increase in claims payable of approximately $700,000 from approximately $3.3 million at December 31, 2005 to approximately $4.0 million at December 31, 2006. In addition, our growth in 2006, contributed to an increase in accounts payable, accrued expenses and other liabilities totaling approximately $538,000. Non-cash depreciation and amortization expense was approximately $615,000. These increases in cash provided by operating activities were offset by an increase in account receivable and other assets and a decrease in unearned premium totaling approximately $484,000.
In 2006, we invested approximately $160,000 in building improvements, office equipment and computer equipment. During 2006, we completed the required net asset valuation analysis for the Adenta acquisition in 2005, and the Company and the representatives of the former Adenta shareholders negotiated an agreement whereby the former Adenta shareholders were paid an additional cash consideration of $25,000. Also in 2006, we invested an additional $100,000 of our excess cash in FDIC insured bank certificates of deposits in order to earn higher interest rate yields.
In 2005, we invested approximately $80,000 in building improvements, office equipment and computer equipment. In June of 2005, we acquired all of the outstanding common stock of Adenta for $250,000 plus the assumption of approximately $242,000 in interest bearing debt. With the acquisition of Adenta we obtained cash balances of approximately $280,000 and paid acquisition related transaction costs of approximately $47,000. Accordingly, the net cash used relative to the Adenta acquisition was approximately $17,000. Also in 2005, we invested an additional $200,000 of our excess cash in FDIC insured bank certificates of deposits and U.S. government security money market funds in order to earn higher interest rate yields. Thus, the total cash used in investing activities was approximately $301,000 in 2005. This amount was approximately $1.8 million less than the cash used in investing activities in 2004 primarily because our initial investment of approximately $1.6 million in FDIC insured bank certificates of deposit.
In December of each year our Board evaluates the projected pre-tax income of our dental HMO 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 implementation of the new dental plan administration system, expansion of office
A summary of our future commitments as of December 31, 2007 is as follows:
Our consolidated cash and short term investments were approximately $6.4 million at December 31, 2007. Our consolidated cash and short term investments decreased by approximately $900,000 from approximately $7.3 million as of December 31, 2006.
On January 3, 2006 we entered into an agreement with Fifth Third Bank for a $500,000 working capital line of credit. Interest was payable based on the prime borrowing rate of 7.25% at December 31, 2007. The Company did not have any interest expense for the line of credit in 2007 and paid $158 in 2006. As of December 31, 2007 and 2006 there was no amount outstanding on the line of credit.
Together our cash, short term investments and working capital line of credit we believe are sufficient to meet our short term and long term liquidity needs. In the short term, we are obligated to make payments related to our contractual obligations such as our building mortgage, computer system capital lease, and our operating leases and other commitments (see contractual obligations and other commitments). In the long term, we will continue to be obligated to make payments related to our contractual obligations delineated above. We will also be obligated in certain circumstances to repurchase the redeemable shares of our provider shareholders who die, are permanently disabled, or retire. Our Board of Directors establishes limitations on the amount of share redemptions each year. While we are not able to estimate future redeemable common share redemptions, we repurchased approximately $62,000, $141,000, and $12,000 worth of redeemable common shares in the years ended December 31, 2007, 2006 and 2005, 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.
On December 18, 2006, the Ohio Department of Insurance approved Dental Care Plus, Inc.’s application for a life and health insurance license. As an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation, Dental Care Plus is now able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health oriented products in Ohio. Accordingly, the required capital and surplus for Dental Care Plus licensed as a life and health insurance company in Ohio was $2.5 million at December 31, 2007.
We have classified all of our investments as “available-for-sale.” Accordingly, investments are carried at fair value, based on quoted market prices, and unrealized gains and losses, net of applicable income taxes, are reported in a separate caption of stockholders’ equity. We invest our excess cash in FDIC insured bank certificates of deposit and U.S. government security money market funds. Each certificate of deposit with an original cost of $100,000 is invested with a separate FDIC-insured financial institution. The quoted market prices of these certificates of deposit are the amounts we would receive if we liquidated them prior to maturity. We conduct periodic reviews of individual portfolio holdings that have a market value less than their respective carrying value to identify other-than-temporary impairments. As of December 31, 2007, 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
At December 31, 2007, our estimated total claims payable liability included approximately $2.5 million for Dental Care Plus, comprised of IBNR of approximately $1.2 million and reported claims in process of approximately $610,000. Other healthcare services expenses at December 31, 2007 included approximately $45,000 for the estimated cost of processing outstanding claims and an accrued but unpaid provider withhold payment of $650,000. The provider withhold liability was recognized in December 2007 when it was authorized by our Board of Directors.
We estimate liabilities for both IBNR and reported claims in process by employing actuarial methods that are commonly used by health insurance actuaries and meet actuarial standards of practice. These actuarial standards of practice require that claim liabilities estimates be adequate under moderately adverse circumstances. The Company’s consulting actuary assists us in making these estimates.
We do not estimate an accrued liability on a quarterly basis for provider withhold payments because we have no obligation to pay any portion of the amount withheld to the providers and providers have no vested rights in the amounts withheld unless our Board of Directors authorizes a payment to them. Our Board makes a decision annually in December as to whether or not to authorize any payment in respect of the withhold amount for the current year at which time the Company records a liability for the authorized withhold amount. Given the uncertainties associated with the factors considered by the Board and the discretionary nature of these payments, we are not able to estimate the liability for provider withhold payments prior to Board authorization. The actual amount authorized by our Board for payment to the providers is added to the accrued liability for claims payable in the month the authorization occurs.
The annual provider withhold payment authorized by the Board is recorded in December of the applicable year, resulting in a corresponding increase of claims expense and claims payable liability. Depending on the amount of the provider withhold payment authorized, there may be a material increase in the claims payable liability at year end. At December 31, 2007, our claims payable liability increased by approximately 35% after recording the $650,000 provider withhold payment authorized by the Board. Safeguarding the financial condition and liquidity of the Company is a material factor considered in the provider withhold payment practices adopted by the Board.
In September 2006, SFAS No. 157, “Fair Value Measurements”, was issued. This statement provides a new definition of fair value that serves to replace and unify old fair value definitions so that consistency on the definition is achieved, and the definition provided acts as a modification of the current accounting presumption that a transaction price of an asset or liability equals its initial fair value. The statement also provides a fair value hierarchy
used to classify source information used in fair value measurements that places higher importance on market based sources. New disclosures of assets and liabilities measured at fair value based on their level in the fair value hierarchy are required by this statement. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Two FASB Staff Positions on SFAS No. 157 were subsequently issued. On February 12, 2007, FSP No. 157-2 delayed the effective date of this SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. This FSP is effective for fiscal years beginning after November 15, 2008. On February 14, 2007, FSP No. 157-1 excluded SFAS No. 13 Accounting for Leases and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB No. 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, Business Combinations or FASB No. 141R, Business Combinations. This FSP is effective upon initial adoption of SFAS No. 157. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial position, results of operations and cash flows.
We have audited the accompanying consolidated balance sheets of DCP Holding Company and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. 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 at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
The Company’s products consist primarily of dental HMO, PPO and indemnity plans, with dental HMO products constituting 97% of its total revenues. All of the Company’s products are marketed to employer groups. The Company’s business model allows it to offer dental benefit products including broad networks of participating dentists while at the same time promoting the use of private practice fee-for-service dentistry, a primary interest of the Company’s participating dentists. The dental benefit products the Company offers currently vary depending on geographic market.
Cash and Cash Equivalents - The Company defines cash as cash held in operating accounts at financial institutions. The Company considers highly liquid investments with maturities of three months or less at the date of acquisition as cash equivalents in the accompanying financial statements.
assets. The building and the building improvements have useful lives of 27 years and 15 years, respectively. Furniture and fixtures have a useful life of 5 years, and computer equipment and software have useful lives of up to 3 years. Maintenance and repair cost are expensed as incurred.
Goodwill and Intangible Assets - Goodwill arises in business combinations when the purchase price of assets acquired exceeds the appraised value. As with tangible and other intangible assets, periodic impairment reviews are required, at least annually, as well as when events or circumstances change. Management uses judgment in assessing goodwill for impairment. We review the recorded value of our goodwill annually, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. The review for impairment requires management to predict the estimated cash flows that will be generated by the long-lived asset over its remaining estimated useful life. Considerable judgment must be exercised in determining future cash flows and their timing and, possibly, choosing business value comparables or selecting discount rates to be used in any value computations.
Fully-Insured - Membership contracts are written on an annual basis and subject to cancellation by the employer group or the Company upon thirty days written notice. Management has determined that as of December 31, 2007, 2006, and 2005, respectively, no cancellation reserve is required. Premiums are due monthly in advance and are recognized evenly as revenue during the period in which the Company is obligated to provide services to members. Any premiums received prior to the beginning of a reporting period are recognized as unearned premium revenue. Any amounts not received by the end of a reporting period are recorded as accounts receivable by the Company.
Healthcare Service Expense - The Company compensates its providers based on agreed-upon fees for various services. With respect to the Dental HMO product, the Company retains 10% of these fees (including payments on self-insured claims) in accordance with the Company’s provider agreement. Under the terms of the Company’s provider agreement, the Company is not obligated to return to providers any withheld amounts. Amounts withheld are a reduction of healthcare service expense in the accompanying consolidated statements of income. Withheld amounts are retained by the Company but not reserved or retained in a separate fund. Participating providers have no interest in the amounts withheld unless the Company’s Board of Directors authorizes any amount to be paid to the providers.
In December of each year the Company’s Board of Directors (the “Board”) evaluates the performance of the dental HMO plan, capital and surplus requirements prescribed by the Ohio Department of Insurance, factors impacting its 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 return 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.
Other income is comprised primarily of rental income from the rental of space in the building owned and partially occupied by the Company (See Note 14) as well as revenues earned from the leasing of the Company’s dental provider network to other dental benefit providers.
Earnings Per Share - Basic and diluted earnings per share is computed by dividing net income on redeemable common shares by the weighted average number of common shares outstanding during the period.
At December 31, 2007 and 2006, premiums receivable from one customer totaled approximately 21% and 8%, respectively, of the premiums receivable balance.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, SFAS 160 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. Accordingly, we will adopt this statement on January 1, 2009. The Company does not expect the adoption of SFAS No. 160 to have a material impact on our consolidated financial position or results of operations.
Intangibles assets amounting to approximately $568,000 were recorded as a result of the acquisition of Adenta, Inc. (See Note 2), such intangibles were related to an acquired contract, memberships, a provider network and goodwill. Identifiable and amortizable intangible assets amounted to $450,000. Amortization expense for 2007, 2006 and 2005 was approximately $15,000, $196,000, and $50,000 respectively. The provider access contract and the provider network intangible assets are being amortized on a straight-line basis with amortization periods of 3 years and 20 years, respectively. The membership intangible asset is being amortized with an accelerated amortization in the first year and then on a straight-line basis for the remaining 11 years of its 12 year useful life in accordance with the Company’s expectation for the membership retention. The weighted-average amortization period for these intangible assets is approximately 9 years.
The Company is primarily subject to US federal and various US state and local tax authorities. Tax years subsequent to 2004 remain open to examination by the Internal Revenue Service, and 2003 remain open to other state and local a tax authorities. As of December 31, 2007, there are no U.S. federal or state returns under examination.
In accordance with the 2006 Dental Care Plus Management Equity Incentive Plan and the Dental Care Plus, Inc. and DCP Holding Company Deferred Compensation Plan (the “Plans”), Company directors and certain key employees elected to defer portions of their director fees and employee compensation, as applicable. The Company recorded deferred compensation expense of approximately $90,000 and $73,000 related to deferred director fees and employee compensation for the years ended December 31, 2007 and 2006, respectively. The Plans also provide for the directors and key employees to elect to receive awards based on the book value of the redeemable common shares and to defer receiving such amounts until termination of board membership or employment and vesting requirements are met. Under the terms of these plans, these deferred amounts will be paid in cash. An individual director’s award will vest 100% at the end of each year if the director meets the board meeting attendance requirements. The key employee awards will vest 10%, 20%, 30% and 40% at the end of each respective year in a four-year period following the grant date. The Company considered SFAS 123(R) in evaluating the accounting treatment for our deferred compensation plan and recorded deferred compensation expense of approximately $183,000 and $54,000 related to deferred share awards for the years ended December 31, 2007 and 2006, respectively. No deferred compensation expense was recognized in 2005 related to deferred share awards.
The outstanding redeemable common shares in 2007, 2006, and 2005 have been adjusted for the stock split that occurred effective August 31, 2005.
December 31, 2007 and 2006, respectively. The Company’s Board of Directors review each common share subscriber, and once approved, the common share is issued.
Generally accepted accounting principles differ in certain respects from the accounting practices prescribed or permitted by state insurance regulatory authorities (“statutory-basis”). The statutory-basis net income of Dental Care Plus was approximately $494,000, $175,000, and $311,000 for the years ended December 31, 2007, 2006, and 2005, respectively. Statutory-basis net worth was approximately $4,670,000 and $4,171,000 at December 31, 2007 and 2006, respectively.
In 2003, the Company purchased land and an office building and in connection therewith, the Company executed a mortgage note, secured by the land and the office building, with a bank in the amount of $1,800,000. Interest is payable based on the 30-day LIBOR rate plus 175 basis points and was 6.07% and 7.07% at December 31, 2007 and 2006, respectively. At the maturity date of the mortgage note in 2013, the expected outstanding balance of the note must be repaid, amounting to $600,000.
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 Fifth Third Bank from a variable rate based on the 30-day LIBOR rate plus 175 basis points to a fixed rate of approximately 4.95% for the 10-year period through June 12, 2013. The Company’s effective interest expense was 5.22%, 5.41% and 5.18% at December 31, 2007, 2006 and 2005, respectively.
At December 31, 2007, future required payments under the capital lease are as follows:
In 2003, the Company entered into an interest rate swap agreement (“Agreement”) (cash flow hedge) with a total 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 Fifth Third Bank from a variable rate based on the 30-day LIBOR rate plus 175 basis points 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 Company believes that the risk of nonperformance by the other party in conjunction with this arrangement is not material to the financial statements. The fair value of this Agreement included other assets in the accompanying balance sheet was approximately $27,000 and $73,000 at December 31, 2007 and 2006, respectively. The amount included in other comprehensive (loss) income related to the interest rate swap was $(30,096), ($3,953), and $15,429 (net of income tax expense (benefit) of ($15,504), ($2,037), and $7,949) during 2007, 2006, and 2005, respectively.
Leases - The Company leases certain equipment and office space under noncancellable operating leases. Rent expense under all operating leases was approximately $211,000, $210,000, and $86,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
At December 31, 2007, future approximate minimum annual lease payments under noncancellable operating leases are as follows: 2008 - $166,000; 2009 - $159,000; 2010 - $148,000, and 2011 - $31,000.
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 $50,000, $30,000, and $26,000 in 2007, 2006, and 2005, respectively.
As of December 31, 2007 and 2006, there were no amounts outstanding on the line of credit.
The Company manages its business with three segments, fully-insured dental HMO, self-insured dental HMO and Corporate, All Other. Corporate, All Other consists primarily of certain corporate activities and three additional product lines: DentaSelect PPO, DentaPremier indemnity, and Vision Care Plus. We identified our segments in accordance with the aggregation provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosure about Segments of an Enterprise and Related Information”. These segments are consistent with
information used by our Chief Executive Officer (the chief decision maker) in managing our business. The segment information aggregates products with similar economic characteristics. These characteristics include the nature of customer groups and pricing, benefits and underwriting requirements.
The results of the fully-insured and self-insured HMO segments are measured by gross profit. The Company does not allocate selling, general and administrative expenses, investment and other income, interest expense, goodwill, or other assets or liabilities, to these segments. These items are assigned to the remainder of our business, which we identify as Corporate, All Other. The Company combines all gross profit and applies that amount as a contribution to selling, general and administrative expenses, resulting in a consolidated income before taxes. The Company’s gross profit was approximately $11,797,000, $9,561,000 and $8,608,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Listed below is financial information required to be reported for each industry segment. Operating segment information is based on how it is reviewed by the Company and is as follows for the years ended December 31, 2007, 2006, and 2005 (amounts in 000’s):
Inter-segment revenues were not significant for 2007, 2006, or 2005. See Note 1 for a discussion of major customers - “Concentrations of Credit Risk”.
Seven of our Board members are also participating providers and as a group received approximately $151,000, $160,000, and $104,000 in directors fees for the years ended December 31, 2007, 2006 and 2005, respectively.
The sum of quarterly earnings per common share may not equal the year end earnings per common share due to rounding. There were 44 restricted share awards granted in 2007 that were not included in the dilutive earnings per redeemable common share calculation in the quarterly results of operations for the three months ended March 31, 2007 and September 30, 2007 as their effect would have been anti-dilutive.