The results of our fully-insured dental HMO/IND, fully-insured dental PPO, and self-insured dental segments are measured by gross profit. We do not measure the results of our corporate, all other segment. We do not allocate investment and other income, insurance expenses, 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.
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.
We have experienced steady growth in membership and revenue in our dental products during the last five years. We attribute this growth to our broad provider networks, 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).
Our dental and vision products grew by approximately 9,100 members, or 3.1%, from 290,700 members at December 31, 2011 to 299,800 members at December 31, 2012. This membership increase from December 31, 2011 is due to an increase in fully-insured dental HMO/IND membership of
approximately 1,900 members, an increase in fully-insured dental PPO membership of approximately 5,000 members, an increase in self-insured dental membership of approximately 1,500 members and an increase in corporate, all other membership of approximately 700 members.
The following table shows membership totals and revenues and expenses for our four business segments for the years ended December 31, 2012 and 2011 (dollars in thousands):
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 claims revenue increased by approximately $173,000 primarily 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.
Self-Insured ASO Fees-Self-insured ASO fees increased approximately $41,000, or 3.4%, to $1,249,000 in 2012 from $1,208,000 in 2011. Approximately $28,000 of this increase is attributable to the self-insured product sales. Approximately $13,000 of this increase was due to a small increase in average self-insured ASO fee rates.
Corporate, all other premium revenue is primarily derived from the non-DCP dental indemnity product, dental PPO product and vision product underwritten by third party insurance carriers. In aggregate, corporate, all other premium revenue increased by approximately $7,000, or 1.4%, to $500,000 in 2012 from $493,000 in 2011.
Our fully-insured dental PPO membership decreased by approximately 900 members in 2011. This membership decrease is due to the loss of approximately 5,100 members with employer groups that did not renew with the Company or reduced employee counts of retained employer groups in these markets, offset by new sales in the Dayton and Columbus, Ohio markets and the Southern Kentucky market of approximately 4,200 members during 2011.
Fully-insured dental HMO/IND premium decreased approximately $119,000 in 2011 compared to 2010. Fully-insured dental HMO/IND premium rates negotiated with employer groups at their renewals resulted in an increase of approximately $1,035,000 in fully-insured dental HMO/IND premium revenue. A decrease in fully-insured dental HMO/IND membership in 2011 resulted in an decrease in fully-insured dental HMO/IND premiums of approximately $1,154,000. The fully-insured dental HMO/IND segment represented approximately 55.8% of our total dental business in 2011.
Other income increased approximately $14,000 or 21.6% to $78,000 in 2012 from $64,000 in 2011. This increase is primarily the result of an increase of realized gains due to the sale of investments in 2011. There were no realized gains on the sale of investments in 2010.
Fully-insured dental PPO healthcare services expense decreased by $735,000, or 7.9%, to $8,543,000 in 2011 from $9,278,000 in 2010. This decrease is attributable to a decrease in fully-insured dental PPO healthcare services expense of approximately $239,000 due to a decrease in fully-insured dental PPO member months of 2.6% in 2011 compared to 2010. This decrease is also the result of a decrease in fully-insured dental PPO healthcare services expense of approximately $496,000 due to a decrease in fully-insured dental PPO healthcare services expense on a per member per month basis of approximately 5.3% in 2011 for both existing and new fully-insured dental PPO membership. The introduction of the 10% provider withhold on the in-network portion of the fully-insured dental PPO effective April 1, 2011 was a primary factor in this decrease in fully-insured dental PPO healthcare services expense on a per member per month basis.
Our effective tax rate for 2011 was 37.6% compared to the 25.0% effective tax rate in 2010. Our 2011 effective tax rate was higher than the federal statutory rate primarily due to the impact of permanent tax
differences related to meal and entertainment and legal fees. Our 2010 effective tax rate was much higher than the federal statutory rate primarily due to the low amount of our pre-tax income (loss) relative to the impact of permanent tax differences. 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.
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 accounts receivable of approximately $61,000. A decrease in unbilled accounts receivable of approximately $6,842,000 was offset by a decrease in unearned premium revenue of $7,074,000, resulting in a net cash decrease of $232,000. This cash decrease is attributable to a decrease in unearned premium revenue received in advance. Unbilled accounts receivable and unearned premium revenue are recorded primarily as the result of non-cancelable short-term insurance contracts.
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.
Our new mortgage note matures in December 2022. The note requires us to make principal payments of $3,800 per month in 2013 and higher principal payments in 2014 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, 2012, 2011 or 2010.
(1) Includes swap interest payments based on a fixed rate of 3.90%.
(2) Includes deferred compensation liability to Company directors and employees. We expect to pay two directors approximately $81,000 in 2013 and one director approximately $154,000 in 2014. The remainder is expected to be paid in more than five years. Actual payments may occur sooner based on termination dates of directors or employees.
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 2.02% at December 31, 2012. 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, 2012, 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, 2012.
Commissions-We expect commission payments to generally correspond to earned premium volume.
Our consolidated cash and short term investments were approximately $8.9 million at December 31, 2012. Our consolidated cash and short term investments increased by approximately $1.6 million from approximately $7.3 million as of December 31, 2011.
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 provider 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 $138,000, $128,000, and $61,000 of redeemable common shares in the years ended December 31, 2012, 2011, and 2010, 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.
Dental Care Plus, an Ohio-domiciled insurance company dually licensed as a life and health insurer and a specialty health insuring corporation, is able to underwrite dental indemnity, dental PPO, dental HMO, and vision benefit products as well as other life and health insurance products in Ohio. The minimum 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, 2012.
completion factors that were used to estimate the claims payable liability as of December 31, 2012 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.
In December 2011, the FASB issued guidance regarding balance sheet offsetting disclosures, effective for reporting periods beginning on or after January 1, 2013. The guidance will be applied retrospectively for all comparative periods presented. The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effects of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of the guidance is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. The FASB issued updated guidance in January 2013 clarifying the scope of the disclosures to include derivatives and hedging instruments that are subject to an enforceable master netting or similar agreement. The guidance will not have a material impact on the Company’s consolidated financial statements and related disclosures.
As discussed in Note 1 to the consolidated financial statements, the Company changed its accounting for costs associated with acquiring or renewing insurance contracts in 2012.
FOR THE THREE YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010
AS OF DECEMBER 31, 2012 AND 2011 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2012
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 565 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 plans and vision benefit plans. As of December 31, 2012, we had approximately 276,800 members in our dental benefits plans and approximately 23,000 members in our vision benefit plans. We had 2,652 dentists participating in our dental HMO network and 2,892 dentists participating in our dental PPO network at this time. Effective June 1, 2011, the Company entered into 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 2,200 additional dentists in the Company’s operating territory and approximately 39,000 additional dentists throughout the United States.
The Company changed its reportable segments in the first quarter of 2012 to reflect management’s revised view of the business and to align the external financial reporting with a new operating and internal reporting model. The Company has separated the fully-insured dental PPO product into its own segment as a result of recent revenue growth of the fully-insured dental PPO product and the unique sales and operations management considerations for this product in the Company’s expanding markets. All respective amounts related to the segment change are reflected in the consolidated financial statements.
The following table illustrates the effect of the guidance change in the consolidated statements of comprehensive income (loss):
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 in Ohio and Kentucky are eligible to own Class A voting redeemable common shares (See Note 9). All participating providers, Company directors and Company employees are eligible to own the Class B non-voting redeemable common shares. 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 (loss) 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.
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 $19,792,000 and $22,457,000 at December 31, 2012 and 2011, respectively, and primarily relates to the estimated premium revenue associated with the remaining contract periods. Related amounts recorded in unbilled accounts receivable were approximately $18,596,000 and $21,219,000 at December 31, 2012 and 2011, 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
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 with the dental service providers, and (iv) the Company is involved in the determination of dental service specifications. Self-insured premium revenue is recognized upon the payment of claims for self-insured members in accordance with agreements with self-insured employers and is included in premium revenue in the accompanying consolidated statements of comprehensive income (loss).
Investment Income and Realized Gains On Investments, Net-Investment income is comprised of interest income primarily earned from the Company’s certificates of deposit, investment grade corporate bonds and money market investments. Realized gains on investments, net is primarily made up of realized investment gains and losses from the sale of investment grade corporate bonds.
The cost of fully-insured healthcare services to members is accrued in the period such services are provided based on the accumulation of claims reported prior to the end of a reporting period and of estimates of dental services incurred but not reported to the Company, net of the amounts withheld, in accordance with the provider agreements.
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 $189,000, $259,000 and $148,000 for the years ended December 31, 2012, 2011 and 2010, respectively. The healthcare services expense assumed was approximately $173,000, $220,000 and $135,000 for the years ended December 31, 2012, 2011 and 2010, respectively. As of December 31, 2012 and 2011, the Company had approximately $14,000 and $12,000 of reinsurance premium receivable, respectively, and claims payable of approximately $9,000 and $20,000, respectively.
During 2012, 2011 and 2010, four fully-insured customers accounted for approximately 9%, 10%, and 10%, respectively, of the Company’s total revenue. Additionally, two self-insured customers accounted for approximately 12%, 11% and 11% of the Company’s total revenue during each of the years 2012, 2011 and 2010, respectively.
The Company maintains its cash in bank deposit accounts, which at times exceed federally insured limits. The Company has not experienced any losses in such accounts.
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 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 December 2011, the FASB issued updated guidance on the presentation of comprehensive income that was issued by the FASB in June 2011 effective prospectively for fiscal years beginning after December 15, 2011. The June 2011 guidance requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single, continuous statement of comprehensive income or in two separate but consecutive statements. The updated December 2011 guidance defers these changes that relate to the presentation of adjustments between other comprehensive income and net income. The Company has adopted the new guidance and has elected to present one continuous consolidated statement of comprehensive income (loss). This did not have a material impact on the consolidated financial statements.
In May 2011, the FASB issued guidance related to amendments to certain measurement principles and disclosures regarding fair value measurements. The amendments in this update improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of the guidance did not have a material impact on the consolidated financial statements and related disclosures.
instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of the guidance is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. The FASB issued updated guidance in January 2013 clarifying the scope of the disclosures to include derivatives and hedging instruments that are subject to an enforceable master netting or similar agreement. The guidance will not have a material impact on the Company’s consolidated financial statements and related disclosures.
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, 2012 and 2011. There has not been any impairment on goodwill. Identifiable and amortizable intangible assets amounted to approximately $112,000 net of approximately $128,000 of accumulated amortization at December 31, 2012 and to approximately $127,000 net of approximately $113,000 of accumulated amortization at December 31, 2011. Amortization expense was approximately $15,000 for each of the three years ended December 2012, 2011 and 2010. The provider network intangible asset of approximately $68,000 at December 31, 2012 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 $44,000 at December 31, 2012 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 2013 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, 2012 and 2011.
The Company owned certificates of deposit insured by the Federal Deposit Insurance Corporation (“FDIC”) with an amortized cost of $1,200,000 as of December 31, 2012 and 2011. 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 $93,000 and $108,000 as of December 31, 2012 and 2011, respectively. The Company invests in investment grade corporate bonds with an amortized cost of approximately $2,871,000 and $2,727,000 as of December 31, 2012 and 2011, 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, 2012 and, 2011, maturity dates for fixed maturities and short-term investments (excluding the money market funds) were:
Unrealized losses at December 31, 2012 and 2011 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 2012, 2011 and 2010. The Company had no investments in a continuous unrealized loss position for greater than one year as of December 31, 2012 and 2011.
The components of the provision (benefit) for income taxes are summarized as follows as of December 31, 2012, 2011 and 2010, respectively:
Management believes it is more likely than not that deferred tax assets will reduce future income tax payments. Significant factors considered by management in its determination of the probability of the realization of the deferred tax benefits include the historical operating results and the expectations of future earnings. The Company had $122,544, $122,547, and $134,565 of net operating loss carry forwards to utilize in future years at December 31, 2012, 2011, and 2010, 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, 2012 and 2011.
For the years ended December 31, 2012, 2011, and 2010, 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 2008 remain open to examination by the Internal Revenue Service (“IRS”), and tax years subsequent to 2007 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 $88,000, $60,000 and $59,000 related to deferred director fees and deferred employee compensation for the years ended December 31, 2012, 2011 and 2010, 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 2012 and 2011.
In March 2012, the Board declared a $21.00 per share dividend for all Class A and Class B redeemable common shares. 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 $28,000.
The following is a summary of activity of non-vested awards for the year ended December 31, 2012:
The following is a summary of activity of vested awards for the year ended December 31, 2012:
The Company has 93,700 remaining preferred shares, without par value. As of December 31, 2012 and 2011, 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.
GAAP differs in certain respects from the accounting practices prescribed or permitted by state insurance regulatory authorities (“statutory-basis”), a non-GAAP basis of accounting. The statutory-basis net income (loss) for Dental Care Plus was approximately $1,108,000, $703,000 and $(94,000) for the years ended December 31, 2012, 2011 and 2010, respectively. Statutory-basis equity was approximately $7,396,000 and $6,101,000 at December 31, 2012 and 2011, respectively.
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 2.02% at December 31, 2012. 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 $1,340,000 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 Company was in compliance with these covenants at December 31, 2012. The mortgage note fair value disclosure is classified as Level 2 in the fair-value hierarchy.
In 2010, the Company entered into a sale-leaseback transaction with a leasing company for the sale of certain fixed assets for approximately $323,000. There was no gain or loss on the sale. The Company did not retain the benefits and risk to the property sold and the risk of ownership was transferred to the leasing company. The Company also entered into a capital lease agreement with the leasing company that obligates the Company to pay lease payments totaling approximately $339,000 related to these assets 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, and the Company was in compliance with this covenant at December 31, 2012 and 2011. The net book value of these certain fixed assets is approximately $108,000 and $216,000 at December 31, 2012 and 2011, respectively. At December 31, 2012, future required payments under the capital lease is approximately $113,000, which includes imputed interest of approximately $1,900.
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% and was 2.75% and 2.88% at December 31, 2012 and 2011, respectively. 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, 2012. As of December 31, 2012 and 2011, there was no amount outstanding on this line of credit. The $500,000 working capital line of credit expires in July 2013.
The Company has an additional annually renewable working capital line of credit for $960,000. Interest is payable at a variable rate of LIBOR plus 2.50% and was 2.75% and 2.88% at December 31, 2012 and 2011, respectively. 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, 2012. At December 31, 2012 and 2011, there was no amount outstanding on this line of credit. The $960,000 working capital line of credit expires in August 2013. In addition, the Company obtained an irrevocable letter of credit for $40,000, with interest payable on all outstanding amounts at a variable rate of the prime rate of borrowing plus 6.00%. The letter of credit will also have an annual fixed rate of 2.10% for access to the letter of credit obligation. The letter of credit expires in December 2013. At December 31, 2012 and 2011, there was no amount outstanding on the irrevocable letter of credit obligation.
Leases-The Company leases certain equipment and office space under non-cancelable operating leases. Rent expense under all operating leases was approximately $118,000, $231,000 and $198,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
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 $68,000, $62,000 and $62,000 for the years ended December 31, 2012, 2011 and 2010, respectively. Such amounts are recorded as other income in the accompanying consolidated statements of comprehensive income (loss). As of December 31, 2012, approximate future minimum annual lease income under non-cancelable leases are as follows:
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, $52,000 and $65,000 in 2012, 2011 and 2010, 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 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.
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 $16,417,000, $13,876,000, and $12,373,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
Listed below is financial information required for each reportable segment for the years ended December 31, 2012, 2011 and 2010 (amounts in thousands):
The Company measures fair value using the following valuation methodologies. The Company uses quoted market prices in active markets 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 equity mutual fund 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 and observable inputs. 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.
A summary of our unaudited quarterly results of operations for the years ended December 31, 2012 and 2011 is as follows (amounts in thousands):
Subsequent to December 31, 2012, 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 “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 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 Share was outstanding in 2013; and (ii) in respect of the dividends payable in 2014 and all years thereafter, 5% of the book value of the Share on December 31 of the preceding