We manage our business with four reportable segments: fully-insured dental HMO/IND, fully-insured dental PPO, self-insured dental, and corporate, all other. Corporate, all other consists of revenue associated with our dental PPO and vision products underwritten by third-party insurance carriers and certain corporate activities. Our dental HMO, PPO and indemnity products and our vision product line are marketed to employer groups.
Historically, healthcare services expense has generally increased for both the fully-insured dental segment and the self-insured dental segment. We continue to review and adjust our provider fee schedules where appropriate. In 2013, insurance expenses increased by approximately 14.9% compared to 2012. In 2012, insurance expenses increased by approximately 11.4% compared to 2011. Other important factors that have an impact on our profitability are both the competitive pricing environment and market conditions. With respect to pricing, there is a tradeoff between sustaining or increasing underwriting margins versus increasing enrollment. With respect to market conditions, economies of scale have an impact on our administrative overhead. As a result of a decline in preference for more closely managed dental HMO products, dental costs have become increasingly comparable among our larger competitors. Product design and consumer involvement have become more important drivers of dental services consumption, and administrative expense efficiency is becoming a more significant driver of margin sustainability. Consequently, we continually evaluate our administrative expense structure and attempt to realize administrative expense savings principally through technology improvements.
We had net income of approximately $1,282,000 for the year ended December 31, 2013 compared to net income of approximately $1,318,000 for the year ended December 31, 2012. This slight decrease in net income is primarily the result of an increase in premium revenue of approximately $6,210,000, to $86,363,000 in 2013 from $80,153,000 in 2012, offset by an increase in healthcare services expense of approximately $4,026,000, to $67,762,000 in 2013 from $63,736,000 in 2012. This resulted in an increase in gross margin of approximately $2,184,000 which was offset by an increase in insurance expenses of $2,179,000, to $16,789,000 in 2013 from $14,610,000 in 2012. Our ratio of insurance expense to total premium revenue (“insurance expense ratio”) increased to 19.4% in 2013 from 18.2% in 2012.
Our ratio of healthcare services expense to premium revenue (“loss ratio”) decreased by 1.0%, to 78.5% in 2013 from 79.5% in 2012. This loss ratio decrease is primarily due to an increase in fully-insured premium rates in 2013 compared to 2012 and improved underwriting practices. The fully-insured dental HMO/IND and fully-insured dental PPO segments together represent approximately 68.1% of our total dental business.
Our dental and vision products grew by approximately 19,000 members, or 6.5%, from 299,800 members at December 31, 2012 to 319,200 members at December 31, 2013. This membership increase from December 31, 2012 is due to an increase in fully-insured dental HMO/IND membership of approximately 4,400 members, an increase in fully-insured dental PPO membership of approximately 6,900 members, an increase in self-insured dental membership of approximately 4,000 members and an increase in corporate, all other membership of approximately 3,700 members.
Our fully-insured dental HMO/IND membership increased approximately 4,500 in 2013. This membership increase is primarily attributable to an increase of approximately 4,600 fully-insured dental HMO members, offset by a decrease of approximately 100 fully-insured dental indemnity members underwritten by Dental Care Plus, Inc. (“DCP”). The increase in fully-insured dental HMO membership of 4,600 members is due to new sales in the Cincinnati and Northern Kentucky markets of approximately 14,600 members during 2013, offset by the loss of approximately 10,000 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups. A significant portion of the fully-insured dental HMO membership losses were the result of not renewing certain employer groups that did not accept the premium rate increases we proposed. In addition, some of these membership losses were due to corporate acquisitions where our employer group customers moved to the new parent company benefit plans.
Self-Insured Claim Revenue-Self-insured claim revenue increased approximately $1,227,000, or 5.3%, to $24,358,000 in 2013 from $23,131,000 in 2012. Self-insured claim revenue increased by approximately $1,103,000 due to new self-insured sales. Also, self-insured claim revenue increased by approximately $124,000 primarily due to an increase in the self-insured claim revenue on a per member per month basis as a result of slightly higher dental service utilization.
Fully-insured dental PPO healthcare services expense increased by $1,332,000, or 14.2%, to $10,695,000 in 2013 from $9,363,000 in 2012. This increase is attributable to an increase in fully-insured dental PPO healthcare services expense of approximately $1,307,000 due to an increase in fully-insured dental PPO member months of 14.0% in 2013 compared to 2012. This increase in fully-insured dental PPO healthcare services expense was also attributable to an increase of approximately $25,000 due to an increase in fully-insured dental PPO healthcare services expense on a per member per month basis of approximately 0.2% in 2013 for both existing and new fully-insured dental PPO membership.
Consolidated insurance expenses increased approximately $2,180,000 in 2013. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 19.4% for 2013, increasing 1.2% from the 2012 ratio of 18.2%. Salaries and wages increased by approximately $1,010,000 as a result of salary and wage increases in 2013, the addition of some incremental full-time positions and increased management bonuses in 2013 due to our profitability. Commissions expense increased approximately $301,000, or 8.8%, due to the increase in total premium revenue in 2013 compared to 2012. Legal services expense in 2013 increased by approximately $149,000, or 86.3%, as a result of the legal fees incurred related to the amendments to our Articles of Incorporation and Code of Regulations. Professional consulting expense increased by approximately
Our fully-insured dental PPO membership increased by approximately 5,000 members in 2012. This membership increase is due to new sales in the Dayton and Columbus, Ohio markets and the Southern Kentucky market of approximately 9,200 members during 2012, offset by the loss of approximately 4,200 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups in these markets.
Our self-insured dental membership increased by approximately 1,500 members in 2012. This increase is primarily due to the addition of new self-insured dental HMO and dental PPO employer groups in the Southwest Ohio and Northern Kentucky markets, as well as an increase in membership of existing employer groups in the last twelve months.
Total self-insured revenue increased approximately $730,000 in 2012 compared to 2011. Self-insured dental revenue increased by approximately $544,000 due to new self-insured sales. In addition, self-insured revenue increased by approximately $186,000 due to an increase in the self-insured claims revenue on a per member per month basis as a result of slightly higher dental service utilization and a slight increase in self-insured administrative fee rates on per member per month basis. The self-insured dental segment represented approximately 30.4% of our total dental business in 2012. The self-insured segment revenue has two components:
Self-Insured Claim Revenue-Self-insured claim revenue increased approximately $689,000, or 3.1%, to $23,131,000 in 2012 from $22,442,000 in 2011. Self-insured claim revenue increased by approximately $516,000 due to new self-insured sales. Also self-insured claim revenue increased by approximately $173,000 primarily due to an increase in the self-insured claim revenue on a per member per month basis as a result of slightly higher dental service utilization.
Other income increased approximately $24,000 or 30.8% to $102,000 in 2012 from $78,000 in 2011. This increase is primarily the result of an increase of realized gains due to the sale of investments in 2012 as compared to 2011.
Consolidated insurance expenses increased approximately $1,492,000 in 2012. Total insurance expenses as a percentage of total premium revenue, or the insurance expense ratio, was 18.2% for 2012, increasing 1.0% from the 2011 ratio of 17.2%. Salaries and wages increased by approximately $488,000 as a result of salary and wage increases in 2012, the addition of some incremental full-time positions and management bonuses in 2012 due to our improved profitability. Commissions expense increased approximately $157,000, or 4.8%, due to the increase in total premium revenue in 2012 compared to 2011. Advertising expense in 2012 increased by approximately $144,000, or 86.3%, as advertising programs were initiated in the Columbus, Ohio market in addition to the ongoing advertising programs in our other established markets. Professional consulting expense
In 2013, we generated approximately $2,696,000 of cash from operating activities. This level of cash flow from operating activities is significantly higher than the cash flow generated from operating activities in 2012. We had net income of approximately $1,282,000 in 2013 compared to net income of $1,318,000 in 2012. During 2013, we paid approximately $540,000 in federal tax payments as compared to $1,110,000 in 2012. As a result,
our federal income tax payable increased by approximately $271,000 in 2013. In addition to our 2013 net income, we had non-cash depreciation and amortization expense of approximately $358,000 and an increase in deferred compensation liabilities of $675,000. The increase in deferred compensation liabilities is primarily due to the 9.7% increase in the book value of the common shares during 2013. An increase in accounts receivable of approximately $15,449,000 was offset by an increase in unearned premium revenue of $15,603,000, resulting in a net cash increase of $154,000. This cash increase is attributable to an increase in unearned premium revenue received in advance and uncollected premiums. Accounts receivable and unearned premium revenue are recorded primarily as the result of non-cancelable short-term insurance contracts. Most of our contracts are one year in duration; however, we occasionally enter into multi-year contracts that tend to be for larger groups. As a result, depending on the timing of large group renewals, the accounts receivable and unearned premium revenue can experience large fluctuations from period to period.
In 2012, we invested approximately $124,000 in building improvements, office equipment and computer equipment and software. Also in 2012, 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 $1.2 million in additional FDIC insured certificates of deposit, investment grade corporate bonds and money market funds. We also invested $40,000 to develop a dental and vision discount product. Collectively, these investments resulted in a decrease in cash from investment activities of approximately $256,000.
In most cases, our reimbursement to our directly contracted participating providers for covered dental services under the dental HMO, and also the dental PPO effective April 1, 2011, are subject to a 10% withhold. The amounts withheld are not retained in a separate fund and we have no obligation to pay any portion of the amounts withheld to the providers. The dental providers have no vested rights in the amounts withheld unless our Board of Directors (the “Board”) authorizes any amounts withheld to be paid to the providers, and then vesting is only to the extent of such amounts authorized to be paid. Once authorized for payment by the Board, such amounts are recorded as claims payable liabilities until paid.
Deferred Compensation-We expect to pay our deferred compensation liability of approximately $2,063,000 to the Company directors and employees as they retire or otherwise terminate their association with the Company in future years. As of December 31, 2013, we expect to pay one director and two key employees approximately $203,000 and $68,000, respectively in 2014.
Redeemable Common Shares-Pursuant to the Company’s Amended and Restated Code of Regulations, holders of Class A and Class B shares have the right to require the Company to repurchase such holder’s common shares on the terms contained in the Code of Regulations. In 2014, we expect to pay approximately $130,000 in redeemed common shares.
Federal and State Premium Taxes-We expect federal and state premium payments to generally correspond to earned premium volume.
This decrease in cash and short term investments from December 31, 2012 to December 31, 2013 is primarily due to the net cash used in investing activities of approximately $3,379,000, offset by the cash provided by operating activities of approximately $2,696,000 and cash provided by financing activities of approximately $258,000. In addition, there was a reinvestment of approximately $133,000 from short term investments to long term investments during this period.
In July 2013, we renewed an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. The Company did not have any interest expense for the line of credit in 2013, 2012 or 2011. As of December 31, 2013 and 2012, there was no amount outstanding on this line of credit.
Our largest subsidiary, Dental Care Plus, operates in states that regulate its payment of dividends and debt service on inter-company loans, as well as other inter-company cash transfers and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by Dental Care Plus, without prior approval by state regulatory authorities, is limited based on statutory income and statutory capital and surplus. Dividends cannot exceed in any one year the lesser of: (i) 10% of net worth (as of the preceding December 31), or (ii) net income for the prior year, and only if net worth exceeds $250,000 and only out of positive retained earnings. In 2012, Dental Care Plus paid an ordinary dividend in the amount of
Most states rely on risk-based capital requirements, or RBC, to define the required levels of equity. RBC is a model developed by the NAIC to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. RBC has been adopted by Ohio, Kentucky and Indiana, the three states in which we currently do business. We file our annual statement and RBC reporting with the Ohio Department of Insurance and the NAIC. Dental Care Plus’s statutory annual statements for the year ended December 31, 2013 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, 2013, 2012, and 2011, respectively, such changes increased or (decreased), net of related income tax effects, by the following amounts:
The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) decreased by $9,466 due to a slight decrease in prevailing interest rates at the end of December 2013. The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) decreased by $20,339 due to a slight decrease in prevailing interest rates at the end of December 2012. The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) increased by $7,448 at December 31, 2011 due to an increase in prevailing interest rates during 2011 as compared to 2010. The fair market value of the variable-to-fixed interest rate swap contract was a liability of $55,618 and $41,275 and is included in other payables and accruals at December 31, 2013 and 2012, respectively.
Between December 31, 2012 and December 31, 2013, our claims payable liability estimate increased by approximately $84,000 or 3.9%, primarily due to higher fully-insured dental HMO/IND and fully-insured dental PPO membership at December 31, 2013 compared to December 31, 2012, along with a slight increase in fully-insured dental HMO/IND utilization in December 2013 compared to December 2012. This was partially offset by a 3.0% decrease in fully-insured dental claims on a per member per month basis in during the fourth quarter of 2013 compared to the fourth quarter of 2012. Reported claims in process at December 31, 2013 was approximately $593,000, or $225,000 higher than the reported claims in process at December 31, 2012. This increase was the result of a larger claims inventory at December 31, 2013. In 2012, the payment of provider claims that occurred on December 31, 2012 reduced reported claims in process to its lowest possible level. The final payment of provider claims in 2012 occurred on December 31, 2012, whereas the final payment of provider claims in 2013 occurred on December 30, 2013. Accordingly, there was one additional day of reported claims in process at December 31, 2013 as compared to December 31, 2012.
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
When developing our estimate for claims payable liability as of December 31, 2013, we considered actual paid claim data from January 2014. As a result, we are able to use the completion factors approach for all historical months in 2013, including December 2013. The table below illustrates how our operating results are impacted when there is a variance between estimated claims expense and actual claims expense. The table shows the sensitivity of the estimated fully-insured incurred claims payable liability to fluctuations in the expected completion factors that were used to estimate the claims payable liability as of December 31, 2013 within variance ranges historically experienced. Based on historical experience, the completion factors we use to estimate outstanding IBNR and reported claims in process are highly reliable for predicting actual claims paid at future times, with a variance range of approximately one-half of one percent, plus or minus.
(a) Reflects estimated potential changes in incurred claims payable liability caused by changes in completion factors for all months prior to December 31, 2013.
Our accounting for income taxes requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that are recognized in our consolidated financial statements in different periods than those in which the events are recognized in our tax returns. The measurement of deferred tax liabilities and assets is based on current tax laws as of the balance sheet date. We record a valuation allowance related to deferred tax assets in the event that available evidence indicates that the future tax benefits related to deferred tax assets may not be realized. A valuation allowance is required when it is more likely than not that the deferred tax assets will not be realized. Our determination of whether a valuation allowance is required is subject to change based on future estimates of the recoverability of our net deferred tax assets.
In February 2013, the FASB issued new guidance regarding comprehensive income for amounts reclassified out of accumulated other comprehensive income (loss) effective prospectively for fiscal years beginning after December 15, 2012. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.
AS OF DECEMBER 31, 2013 AND 2012 AND FOR THE YEARS ENDED
Investments-The Company invests in certificates of deposit, investment grade corporate bonds and money market funds. The Company classifies all investments as available-for-sale. The Company engages a fixed income portfolio manager to manage the Company’s investment grade corporate bonds, under the Company’s direction, in order to maximize investment returns. Such investments are recorded at fair value, with unrealized gains and losses recorded as a component of other comprehensive income. The Company recognizes gains and losses when these securities mature or are sold using the specific identification method.
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.
Deferred Acquisition Costs-Deferred acquisition costs are those incremental direct costs related to the successful acquisition of new and renewal business. 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. Such incremental direct costs include commissions, costs of contract issuance and underwriting, premium taxes and other costs the Company incurs to acquire successful new business or renew existing business. The Company defers policy acquisition costs and amortizes 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 $4,867,000, $3,368,000, and $3,401,000, and amortized approximately $3,862,000, $3,592,000 and $3,921,000 of these capitalized costs for the years ended December 31, 2013, 2012 and 2011, respectively. The amortization of these costs are recorded in commission expenses and other acquisition costs included in the consolidated statements of comprehensive income.
In the event of any liquidation, dissolution or winding up of the Company, any merger or consolidation resulting in a change of control of the Company, or any sale, lease, transfer or other disposition of substantially all of the assets of Company, holders of the Institutional Preferred Shares purchased pursuant to the 2012 and
2013-Stock Purchase Agreements will have the right to receive a cash payment in an amount equivalent to the consideration the investor would have otherwise received if the investor had the ability to convert each Share to 1.2 Class B Common Shares.
Redeemable Common Shares-The Company’s Class A and Class B redeemable common shares are owned by participating providers, Company directors and employees. Only participating providers in our service area that includes Ohio and Kentucky are eligible to own Class A voting redeemable common shares (See Note 10). All participating providers, Company directors and Company employees are eligible to own the Class B non-voting redeemable common shares. The Company’s Class A and Class B common shares are considered to be redeemable common shares due to the fact that the shareholders have the option to require the Company to repurchase these shares upon their death, permanent disability or retirement. The Company records Class A and Class B common shares as Redeemable Common Shares in the consolidated balance sheets outside of shareholders’ equity at the redemption value of the common shares. Accordingly, the Company records total comprehensive income as a change to the redemption value of the Redeemable Common Shares to accrete (dilute) the carrying value of the Redeemable Common Shares to the redemption value at the end of each reporting period. Under this method, the end of the reporting period is treated as if it were also the redemption date for the securities. Effective January 9, 2014, the terms of our Redeemable Commons Shares were amended (See Note 21).
Fully-Insured-Membership contracts are written on an annual basis and are subject to cancellation by the employer group upon thirty days written notice. The Company’s unearned premium revenue was approximately $35,395,000 and $19,792,000 at December 31, 2013 and 2012, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related amounts recorded in accounts receivable were approximately $33,810,000 and $18,596,000 at December 31, 2013 and 2012, respectively. 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 amounts not received by the end of a reporting period are recorded as accounts receivable by the Company. Any premiums received prior to the beginning of a reporting period are recognized as premiums received in advance and are included in unearned premium revenue in the accompanying consolidated balance sheets. Premiums received in advance were approximately $1,585,000 and $1,196,000 at December 31, 2013 and 2012, respectively. Management has determined that as of December 31, 2013 and 2012, respectively, no premium deficiency reserve is required. The Company’s premium deficiency reserve analysis includes an allocation of investment income.
Self-Insured-The Company provides administrative and claims processing services, benefit plan design, and access to its provider networks for an administrative fee to self-insured groups. The Company has no underwriting risk arising from the provision or cost of any services provided to the self-insured groups. The Company recognizes and records self-insured premiums on a gross basis because: (i) the Company is the primary obligor in its contractual relationships with self-insured employers and dental service providers, (ii) the Company establishes the pricing for the services provided, (iii) the Company controls the selection of and the relationships
Investment Income-Investment income is comprised of interest income primarily earned from the Company’s certificates of deposit, investment grade corporate bonds and money market investments.
Other Income and Realized Gains On Investments, Net -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 15) as well as revenues earned from the leasing of the Company’s dental provider network to other dental benefit providers. Realized gains on investments, net is primarily made up of realized investment gains and losses from the sale of investment grade corporate bonds.
Reinsurance-In the normal course of business, the Company assumes premium revenue and related healthcare services expense from a third party insurance provider. Dental insurance premium assumed was approximately $38,000, $189,000, and $259,000 for the years ended December 31, 2013, 2012 and 2011, respectively. The healthcare services expense assumed was approximately $28,000, $173,000, and $220,000 for the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013 and 2012, the Company had approximately $1,000 and $14,000 of reinsurance premium receivable, respectively, and claims payable of approximately $1,000 and $9,000, respectively.
Derivative Instruments-All derivative financial instruments are recorded on the consolidated 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. The Company’s risk management policy is to not enter into derivatives for speculative purposes.
Federal Income Tax-Deferred federal income tax is provided for in the accompanying consolidated 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 accrued commissions, deferred compensation, unearned premiums, deferred acquisition costs and unrealized gains on investments.
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. Changes in assumptions or estimation methods could affect the fair value estimates.
New Accounting Standards-In February 2013, the FASB issued new guidance regarding comprehensive income for amounts reclassified out of accumulated other comprehensive income (loss) effective prospectively for fiscal years beginning after December 15, 2012. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. See Note 4.
The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with an amortized cost of $1,250,000 and $1,200,000 as of December 31, 2013 and 2012, respectively. The certificates of deposit included in short-term and fixed maturities investments are classified as available-for-sale and are carried at fair value. The Company also invests in money market funds included in short-term investments and are classified as available-for-sale, with a cost and fair value of approximately $60,000 and $93,000 as of December 31, 2013 and 2012, respectively. The Company invests in investment grade corporate bonds with an amortized cost of approximately $5,936,000 and $2,871,000 as of December 31, 2013 and 2012, respectively. The investment grade corporate bonds included in fixed maturity investments are classified as available-for-sale and are carried at fair value.
At December 31, 2013 and, 2012, maturity dates for fixed maturities and short-term investments (excluding the money market funds) were:
In 2012, the Company established a long-term incentive compensation program for named executive officers pursuant to which an officer may receive an award of up to 45% of such officer’s base salary in the form of share awards which will vest if established Company performance criteria related to the growth of total preferred and common redeemable shares are achieved over a three year period. There were approximately 480 and 368 of these non-vested awards outstanding at December 31, 2013 and 2012, respectively.
The maximum aggregate number of share based awards that may be issued under the Plans are 15,000 Class B Common Shares. In 2013, the non-employee members of the Board were granted a total of 252 share based
The Board of Directors authorized and approved the issuance of Redeemable Institutional Preferred Shares (“the Shares”) consisting of a total of 2,300 preferred shares issued of the 100,000 authorized. In 2010, the Company entered into a Preferred Stock Purchase Agreement with an investor for 300 Shares at a purchase price of $1,000 per share. In 2012 and 2013, the Company entered into an additional Stock Purchase Agreement with an investor for the sale of 1,000 Shares each year at a purchase price of $1,000 per share. The annual dividend payable on each Share is 5% of the book value at the beginning of the dividend period. As of December 31, 2013, 2012, and 2011, dividends declared were approximately $123,000, $67,000, and $16,000, respectively. As of December 31, 2013, 2012, and 2011, dividends paid were approximately $123,000, $83,000, and $7,000 respectively.
The Board authorized and approved for issuance the Provider Preferred Shares-2009 Series that includes 5,000 preferred shares of the 100,000 authorized. 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. As of December 31, 2013 and 2012, none of these Provider Preferred shares were issued or are outstanding.
In December 2012, the Company refinanced the mortgage of its office building and in connection therewith, the Company executed a mortgage note with a bank, secured by the land and the office building, in the amount of $1,340,000. Interest is payable based on the 30-day LIBOR rate plus 1.95% and was 2.12% and 2.02% at December 31, 2013 and 2012, respectively. As a result of the mortgage note having a variable interest rate that adjusts monthly with the 30-day LIBOR rate, the carrying value of the mortgage note of $1,294,400 approximates fair value. The Company 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 3.90% for the 10-year period through December 22, 2022. 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 mortgage note fair value disclosure is classified as Level 2 in the fair-value hierarchy.
The amount included in other comprehensive income (loss) related to the interest rate swaps were $(9,466), $(16,447), and $7,448, net of income tax expense (benefit) of $(4,877), $(8,474), and $3,837 during 2013, 2012 and 2011, respectively.
The Company has an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest is payable at a variable rate of LIBOR plus 2.50%. 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. As of December 31, 2013 and 2012, there was no amount outstanding on this line of credit. The $500,000 working capital line of credit expires in July 2014.
At December 31, 2013, future approximate minimum annual lease payments under non-cancelable operating leases are as follows:
Litigation-In the normal course of business, the Company is subject to various regulatory proceedings, lawsuits, claims and other matters. We are not aware of any matters which are more than remote in possibility and 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 have a material adverse effect on the financial condition or results of operations of the Company.
The Company leases space in its building to unrelated parties under non-cancelable leases. Income recorded by the Company under non-cancelable leases amounted to approximately $62,000, $68,000, and $62,000 for the years ended December 31, 2013, 2012 and 2011. Such amounts are recorded as other income in the accompanying consolidated statements of comprehensive income. As of December 31, 2013, approximate future minimum annual lease income under non-cancelable leases are as follows:
the prior period financial statements relating to reportable segments have been modified to conform to the current composition of reportable segments. The Company changed the reportable segments to reflect managements’ view of the dental PPO products in the Company’s expanding markets. Prior to 2012, the Company managed its business with three segments: dental fully-insured, dental self-insured and corporate, all other.
Listed below is financial information required for each reportable segment for the years ended December 31, 2013, 2012 and 2011 (amounts in thousands):
All of the Company’s Class A, Class B and Provider Preferred Redeemable Shareholders are related parties, either as a participating provider, director or an employee of the Company.