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 territories. We expect our dental PPO and indemnity products to be important drivers of growth in the years ahead.
Healthcare services expense has increased for both the fully-insured dental segment and the self-insured dental segment. We have reviewed and adjusted our provider fee schedules where appropriate. Insurance expenses increased significantly in 2009, 2008 and 2007 in connection with our expansion into Dayton, Ohio and Central Kentucky with new dental indemnity and dental PPO products. 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 through productivity and technology improvements.
We had a net loss of approximately $(289,000) for the year ended December 31, 2009 compared to net income of approximately $615,000 for the year ended December 31, 2008. The decrease in net income is primarily the result of a 2.5% increase in fully-insured healthcare services utilization. The fully-insured healthcare services utilization increase was primarily due to a 4.7% increase in preventive dental services utilization and a 1.4% increase in basic dental services utilization. A higher percentage
Our dental and vision products grew by approximately 9,400 members, or 3.5%, from 267,800 members at December 31, 2008 to 277,200 members at December 31, 2009. Despite the loss of a large self-insured employer group effective January 1, 2009 that represented approximately 15,700 members and the loss of approximately 12,700 fully-insured dental HMO members due to employer groups that did not renew their contracts and employee reductions at renewed employer groups, our marketing and sales team obtained approximately 37,800 new dental and vision members in 2009. Our membership at December 31, 2009 includes approximately 32,400 members in our DentaSelect dental PPO offering.
The following chart shows membership totals and revenues and expenses for our three business segments for the years ended December 31, 2009 and 2008 (in thousands, except for membership data and percentage change):
Net income (loss) on redeemable shares was approximately $(289,000) and $615,000 for the years ended December 31, 2009 and 2008, respectively. Basic earnings (loss) per redeemable common share was $(37.27) and $72.71 at December 31, 2009 and 2008, respectively. The decrease in net income on redeemable shares primarily resulted from an increase in total healthcare services expense as a percentage of total premium revenue from 80.9% in 2008 to 82.7% in 2009. In addition, insurance expense as a percentage of total premium revenue increased from 18.0% in 2008 to 18.1% in 2009.
Our fully-insured membership increased approximately 16,100 in 2009. Our fully-insured dental HMO membership increased approximately 4,200 members, or 3.2%, from 131,200 at December 31, 2008 to 135,400 at December 31, 2009. This membership increase is attributable to new fully-insured dental HMO sales in the Cincinnati and Northern Kentucky market of approximately 16,900 members, offset by a decrease in fully-insured dental HMO membership of 12,700 members that did not renew their contracts with Dental Care Plus in the last 12 months. Our fully-insured indemnity membership increased by approximately 600 members, or 13.3%, from approximately 4,500 members at December 31, 2008 to approximately 5,100 members at December 31, 2009. In addition, our fully-insured dental PPO membership increased by approximately 11,300 members, from approximately 19,300 members at December 31, 2008 to approximately 30,600 members at December 31, 2009.
Our self-insured dental membership decreased approximately 10,500 members, or 10.7%, from approximately 98,100 members at December 31, 2008 to approximately 87,600 members at December 31, 2009. This membership decrease was primarily due to the loss of one large self-insured employer group with approximately 15,700 members, offset by new self-insured sales of approximately of 5,200 members.
Fully-insured dental premium increased approximately $5,034,000 in 2009. An increase in fully-insured membership volume in 2009 resulted in an increase in fully-insured dental premiums of $4,135,000. Fully-insured dental premium rate increases negotiated with employer groups at their renewals resulted in an increase of approximately $899,000 in fully-insured dental premium.
Self-Insured Claim Revenue-Self-insured claim revenue decreased approximately $651,000, or 2.7%, from approximately $24,102,000 in 2008 to approximately $23,451,000 in 2009. Self-insured claim revenue decreased by approximately $4,848,000 due to the loss of the member month volume associated with the large self-insured employer group discussed above. This decrease was offset by an increase of approximately $2,131,000 related to new self-insured sales and an increase of approximately $2,066,000 related to an increase in dental service utilization by our self-insured members in 2009 compared to 2008, a provider fee schedule increase implemented in April of 2009 and the run out claims of the self-insured group that did not renew its contract.
Self-Insured ASO Fees-Self-insured ASO fees decreased approximately $97,000, or 7.2%, from approximately $1,349,000 in 2008 to approximately $1,252,000 in 2009. This decrease is primarily attributable to the decrease of approximately $271,000 related to the loss of the member month volume associated with the large self-insured employer group discussed above. This decrease was offset by an increase of approximately $119,000 related to new self-insured sales and an increase of approximately $55,000 related to a small increase in the average self-insured ASO fee rates.
Investment income decreased approximately $124,000, or 55.6%, from approximately $223,000 in 2008 to approximately $99,000 in 2009. This decrease is primarily attributable to a decrease in short-term investment interest rates during 2009. In 2008 and 2009, we invested in Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit and money market funds.
Fully-insured dental HMO healthcare services expense increased by approximately $1,979,000, or 7.1%, from approximately $27,953,000 in 2008 to approximately $29,932,000 in 2009. This increase is attributable to the 2.6% increase in fully-insured dental HMO member months in 2009 compared to 2008 and an increase in fully-insured dental HMO healthcare services expense on a per member per month basis of approximately 4.3% in 2009 for both our new and existing fully-insured membership.
Self-insured healthcare services expense decreased by approximately $726,000 in 2009. Self-insured healthcare services expense decreased by approximately $4,428,000 due to the loss of the member month volume associated with the large self-insured employer group discussed above. This decrease in self-insured healthcare services expense was offset by an increase of approximately $1,946,000 related to new self-insured employer groups and an increase of approximately $1,756,000 related to an increase in dental service utilization by our self-insured members in 2009 compared to 2008, a provider fee schedule increase implemented in April of 2009 and the run out claims of the self-insured group that did not renew its contract.
anticipated Sarbanes Oxley Act of 2002 Section 404 (“SOX”) attestation and a new audit of our administrative system based on Statement on Auditing Standards No. 70. Legal fees increased by $81,000, or 39.5%, in 2009 as a result of required state insurance department filings and new product development.
In the normal course of business, the Company ceded portions of its written premium revenue. As such, the Company limits its loss exposure to that portion of the insurable risk that it retains. However, if a reinsurer fails to honor its obligations, the Company could suffer additional losses as the reinsurance contracts do not relieve the Company of its obligations to policyholders. The Company terminated its reinsurance contracts effective May 31, 2008. Dental insurance premiums ceded were approximately $121,000 and $228,000 for the years ended December 31, 2008 and 2007, respectively. The healthcare services expense ceded was approximately $106,000 and $189,000 for the years ended December 31, 2008 and 2007, respectively. The Company has approximately $5,000 and $27,000 of reinsurance recoverable and prepaid reinsurance premium net of reinsurance payable as of December 31, 2008 and 2007, respectively.
In 2009, we generated approximately $37,000 of cash in operating activities. This level of cash flow from operating activities is lower than the cash flow generated from operating activities in 2008. We had a net loss of approximately $(289,000) in 2009, primarily due to a 2.5% increase in fully-insured healthcare service utilization. In addition to our 2009 net loss, other uses of cash include: a decrease in claims payable of approximately $315,000, and a decrease in unearned premium of approximately $647,000 that was offset by a decrease in unbilled accounts receivable of approximately $860,000. The decrease in our claims payable is primarily due to the fact that there was a provider withhold return liability of $464,000 at December 31, 2008 and no provider withhold return liability at December 31, 2009. The decrease in unbilled accounts receivable and a corresponding decrease in unearned premium revenue of approximately $860,000 are the result of some large two-year fully insured dental contracts that expired December 31, 2009. The unearned premium decrease was offset by an increase in unearned premiums received in advance of approximately $213,000. Additional uses of cash included an increase in deferred acquisition costs and an increase in other assets totaling approximately $180,000. Also, we had a non-cash tax benefit related to deferred income taxes of approximately $292,000. These uses of operating cash were offset by non-cash depreciation and amortization expense of approximately $468,000, an increase in deferred compensation liabilities of approximately $275,000, along with a decrease in accrued investment income, a decrease in accounts receivable and an increase in other payables and accruals totaling approximately $156,000.
In 2009, we invested approximately $245,000 in building improvements, office equipment and computer equipment and software. Also in 2009, approximately $19.2 million of our investments in FDIC insured certificates of deposit and money market funds either matured or were liquidated to fund operations. We also invested approximately $14.6 million in additional FDIC insured certificates of deposit and money market funds. Collectively, this resulted in an increase in cash from investment activities of approximately $4.3 million. Approximately $4.5 million of the increase in cash flows from investing activities was the result of our decision in the fourth quarter to move funds out of money market mutual funds yielding less than 0.1% interest to our checking account where the earnings credit of approximately 0.4% was used to offset bank fees.
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 and 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 submitted by such participating dental provider in relation to the total claims submitted by 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 are accrued in the fourth quarter of the fiscal year. The Board authorized amounts of return of withhold amounting to $0, $464,000, and $650,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
The Board may authorize aggregate provider withhold payments for calendar years 2011 through 2013 in amounts between 0% and 45% of the total provider withhold returns for future years in relation to the total provider withhold amount for those years. However, the Board will not authorize an aggregate provider withhold payment for any year that would result in an operating loss for the year in review. These forecasted amounts are based on projections of future claims revenues and certain planning assumptions and estimates currently being made with respect to future application of the factors historically considered by the Board in making its determination to authorize the payment of withhold amounts. These planning assumptions reflect management’s current expectations and views about future events and are subject to risks, uncertainties and other factors that could cause actual withhold payment amounts to differ materially from these stated assumptions. Important factors that could cause actual results to differ materially from those being planned for, include, among others: claims exceeding or not meeting our estimates, a threatened or actual downgrade in our financial strength rating, the loss of a significant customer or broker, the loss of a large employer group and an unexpected increase or decrease in dental service utilization by our dental members.
A summary of our future commitments as of December 31, 2009 is as follows:
Our consolidated cash and short term investments were approximately $8.0 million at December 31, 2009. Our consolidated cash and short term investments decreased by approximately $200,000 from approximately $8.2 million as of December 31, 2008.
In 2006 we entered into an annually renewable agreement with a commercial bank for a $500,000 working capital line of credit. Interest was payable on the prime rate of borrowing rate of 3.25% at December 31, 2008. In July 2009, we renewed the $500,000 working capital line of credit. Interest was payable at a variable rate of LIBOR plus 2.50% and was 2.75% at December 31, 2009. The Company did not have any interest expense for the line of credit in 2009 or 2008. As of December 31, 2009 and 2008 there was no amount outstanding on this line of credit.
In 2008 we entered into an annually renewable agreement with a commercial bank for a $1,000,000 working capital line of credit. Interest was payable on the prime rate of borrowing rate of 3.25% at December 31, 2008. In August 2009, we renewed the $1,000,000 working capital line of credit. Interest was payable at a variable rate of
We operate as a holding company in a highly regulated industry. We are primarily dependent upon management fees that we receive from our subsidiaries. We receive over 99% of our management fees from our subsidiary Dental Care Plus. We also receive dividends from our subsidiaries from time to time. The dividends from our subsidiary, Dental Care Plus, are subject to regulatory restrictions.
Dental Care Plus, Inc., 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 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, 2009.
The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) increased by $9,462 at December 31, 2009 due to a slight increase in expected interest rates during 2009. The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) decreased by $42,885 at December 31, 2008 due to a decrease in prevailing interest rates during 2008. The fair market value of the variable-to-fixed interest rate swap contract (net of income tax effects) decreased by $30,096 at December 31, 2007 due to a decrease in prevailing interest rates during 2007. The fair market value of the variable-to-fixed interest rate swap contract was a liability of $23,633 and is included in other payables and accruals at December 31, 2009. The fair market value of the variable-to-fixed interest rate swap contract was a liability of $37,969 as of December 31, 2008 and an asset of $27,009 as of December 31, 2007 and is included in other payables and accruals and other assets at December 31, 2008 and 2007, respectively.
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 shareholders’ equity. We invest our excess cash in FDIC insured bank certificates of deposit and money market funds. Each certificate of deposit with an original cost of $100,000 to $200,000 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 follow a consistent and systematic process for recognizing impairments on securities that sustain other-than-temporary declines in value. The decision to impair a security incorporates both quantitative criteria and qualitative information. The impairment review process considers a number of factors including, but not limited to the length of time and the extent to which the fair value has been less than cost, our intent to sell for a period of time
Unbilled accounts receivable represents the accounts receivable for all remaining future months related to our noncancelable fully-insured dental contracts with a corresponding unearned premium revenue liability. With monthly premium billing, the billed amount is recorded as accounts receivable, and the unbilled accounts receivable is adjusted for the billing of new or renewed contracts.
Goodwill arises in business combinations when the purchase price of assets acquired net of liabilities assumed exceeds the fair value. As with tangible and other intangible assets, periodic impairment reviews are required, at least annually, as well as when events or circumstances change. Management uses judgment in assessing goodwill for impairment. 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. Considerable judgment must be exercised in determining future cash flows and their timing and choosing business value comparables or selecting discount rates to be used in any value computations.
Business acquisitions often result in recording intangible assets. Intangible assets are recognized at the time of an acquisition, based upon their fair value. Similar to long-lived tangible assets, intangible assets are subject to amortization and periodic impairment reviews whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review for impairment of our intangible assets requires management to predict the estimated cash flows that will be generated by the long-lived asset over its remaining estimated useful life. As with tangible assets, considerable judgment must be exercised.
No provider withhold liability was recognized in December 2009 due to the fact no provider withhold return was authorized by our Board of Directors in December 2009. A provider withhold liability amounting to $464,000 was recognized at December 31, 2008 and is included in other healthcare service expense payable at December 31, 2008.
The table set forth 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 and claims trend factors that were used to estimate the claims payable liability as of December 31, 2009 within variance ranges historically experienced.
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, 2009, our claims payable liability remained at $2,316,515 after no provider withhold payment was 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.
The Board of Directors authorized and approved for issuance the redeemable Provider Preferred Shares-2009 (“Provider Preferred Shares”) Series that includes 5,000 preferred shares of the 100,000 preferred shares authorized. These Provider Preferred Shares may only be purchased by participating dentists in the Company’s dental plans or retired participating dentists that own at least 12 Redeemable Common Shares (Class A and/or B). The Provider Preferred Shares are considered to be redeemable preferred shares due to the fact that the shareholders have the option to require the Company to repurchase these shares upon their death, permanent disability or retirement. The Company records the Provider Preferred Shares as redeemable Provider Preferred Shares in the consolidated balance sheets outside of shareholders’ equity at the redemption value of the preferred shares. Accordingly, Provider Preferred Shares are participating securities that share in the net income (loss) or other comprehensive income (loss) as a change to the redemption value of the redeemable Provider Preferred Shares to accrete (dilute) the carrying value to the redemption value at the end of each reporting period. Under this method, the end of the reporting period is treated as if it were also the redemption date for the security. Redeemable Provider Preferred Shares are entitled to a cumulative cash dividend equal to 5% of the year end book value of the redeemable Provider Preferred Shares.
We do not consider the impact of the changes in prices due to inflation to be material in the analysis of our overall operations.
We have audited the accompanying consolidated balance sheets of DCP Holding Company and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and redeemable shares, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedules included in Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, 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.
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
The Company’s products consist primarily of dental HMO, PPO and indemnity plans, with dental HMO products constituting 88.3% of its total revenues. Substantially, 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.
Investments-The Company invests primarily in certificates of deposit and a money market mutual fund. The Company classifies all investments as available-for-sale. 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. Management follows a consistent and systematic process for recognizing impairments on securities that sustain other-than-temporary declines in value. The decision to impair a security incorporates both quantitative criteria and qualitative information. The impairment review process considers a number of factors including, but not limited to the length of time and the extent to which the fair value has been less than cost, the Company’s intent and ability to retain a security for a period adequate to recover its cost, and general market conditions. The Company’s impairment policy for fixed-maturity securities states that other-than-temporary impairment is considered to have occurred (1) if the Company intends to sell the impaired fixed maturity security; (2) if it is more likely than not the Company will be required to sell the fixed maturity security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis.
State Guarantee Fund Deposits-The Company maintains funds on deposit with state insurance departments in those states where the Company is licensed to do business. These funds amounted to approximately $291,000 and $298,000 at December 31, 2009 and 2008, respectively. These funds are restricted and not available to the Company for normal operations and are included in other assets in the accompanying consolidated balance sheets.
Redeemable Common Shares-The Company’s Class A and Class B redeemable common shares are owned by participating providers and Company directors and employees. Only participating providers in our service area that includes all counties located in 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 any net income (loss) or other 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 security.
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 $974,000 and $761,000 at December 31, 2009 and 2008, respectively. Management has determined that as of December 31, 2009 and 2008, respectively, no premium deficiency reserve is required. The Company’s premium deficiency reserve analysis includes an allocation of investment income.
Investment Income-Investment income of approximately $99,000, $223,000, and $269,000, during 2009, 2008, and 2007, respectively, is comprised of approximately $25,000, $122,000, and $175,000, of interest income earned from money market accounts and cash in operating accounts in 2009, 2008 and 2007, respectively, and approximately $74,000, $101,000, and $94,000, of investment income earned from certificates of deposit in 2009, 2008, and 2007, respectively.
Healthcare Service Expense-The Company compensates its providers based on contractual reimbursement for various services. With respect to the dental HMO product, the Company generally retains 10% of this reimbursement (including payments on self-insured claims) in accordance with the Company’s provider agreements. Healthcare services expense is recorded net of any amounts withheld in the accompanying consolidated statements of operations. Under the terms of the Company’s provider agreements, the Company is not obligated to return to providers any amounts withheld. Withheld amounts are retained by the Company but not reserved or retained in a separate fund. Participating providers have no interest in the amounts withheld unless the Company’s Board authorizes any amount to be paid to the providers.
Earnings Per Share-Basic and diluted earnings per share is computed by taking the total of net income (loss) attributable to redeemable common shares divided by the weighted average number of redeemable common shares outstanding during the period.
New Accounting Standards-In April 2009, FASB issued guidance for determining whether an impairment is other-than-temporary for debt securities, requires bifurcation of any other-than-temporary impairment between the amount representing credit loss and the amount related to all other factors and requires additional disclosures on other-than-temporary impairment of debt and equity securities. Under the guidance, an other-than-temporary impairment is triggered if a Company has the intent to sell the security, if is more likely than not that it will be required to sell the security before recovery or it does not expect to recover the entire amortized cost basis. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. This guidance did not have a material effect on the Company’s consolidated financial position or results of operations.
In June 2009, FASB issued guidance that establishes the FASB Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP. The guidance explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. This guidance is effective for financial statements issued for periods ending after September 15, 2009. This guidance changed the
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, 2009 and December 31, 2008. There has not been any cumulative impairment on goodwill. Identifiable and amortizable intangible assets amounted to approximately $158,000 net of approximately $82,000 of accumulated amortization at December 31, 2009 and to approximately $173,000 net of approximately $67,000 of accumulated amortization at December 31, 2008. Amortization expense was approximately $15,000 for each of the three years ended December 2009, 2008 and 2007. The provider network intangible asset of approximately $85,000 at December 31, 2009 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 $73,000 at December 31, 2009 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 12 years. Goodwill and intangible assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2009 and 2008.
At December 31, 2009 and 2008, maturity dates for fixed maturity and short-term maturities were:
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 $146,582, $194,580, and $242,579 of net operating loss carry forwards to utilize in future years at December 31, 2009, 2008 and 2007, respectively. These losses will expire between 2011 and 2022. Deferred tax assets are included in other assets in the accompanying consolidated balance sheets at December 31, 2009 and 2008.
In 2007, the Company recorded a cumulative effect adjustment of a change in accounting principle which reduced retained earnings by approximately $6,000. The amount of unrecognized tax benefits from uncertain tax positions at January 1, 2007 was $4,300. The Company accrued approximately $1,700 in interest and penalties as of January 1, 2007. For the year ended December 31, 2009 and 2008, the Company did not have any significant uncertain tax position liability or expense.
The Company is primarily subject to U.S. federal and various U.S. state and local tax authorities. Tax years subsequent to 2005 remain open to examination by the Internal Revenue Service, and 2004 remains open to other state and local tax authorities. As of December 31, 2009, there are no U.S. federal or state returns under examination.
Share-based compensation cost is measured at the grant date based on the fair value of the liability awards and is recognized as expense ratably over the vesting periods. The fair value of the liability awards are remeasured at the end of each reporting period through the remaining vesting period with the change in fair value recognized in earnings currently.
The expected fair value of the awards are calculated by applying the three year historical average growth rate of the book value per redeemable common share over the respective vesting period. The weighted average grant date fair value of the awards granted in the three years ended December 31, 2009, 2008, and 2007 were $801, $680, and $556, respectively. The fair value of the awards converted to Class B Redeemable Common Shares in May 2008 was approximately $25,000. There were no awards converted in 2009 or 2007. The fair value of the awards paid in 2007 was approximately $11,000. There were no award payments in 2009 or 2008. The total fair value of the awards that vested during the three years ended December 31, 2009, 2008 and 2007 were approximately $232,000, $247,000, and $170,000, respectively. At December 31, 2009 and 2008, the deferred compensation liability was approximately $960,000 and $684,000. The increase of the deferred compensation liability of approximately $276,000 is the result of deferred compensation expense offset by current year disbursements and changes in unrealized investment activity.
The following is a summary of activity of nonvested awards for the year ended December 31, 2009:
The Company reported diluted earnings per share for the year ended December 31, 2007 as a result of 44 restricted share awards granted that had a dilutive effect on the Company’s earnings per share. The restricted share awards were redeemed and shares were issued in May of 2008. There have been no restricted share awards granted that would have a dilutive effect on the Company’s basic earnings per share for the years ended December 31, 2009 and 2008.
Providers in the Company’s service area have the option to purchase one share of voting Class A Redeemable Common Shares of the Company. The area we refer to as our service area includes all counties located in Ohio and Kentucky. All participating providers along with Company directors and employees have the option to purchase one or more non-voting Class B Redeemable Common Shares of the Company. Accordingly, prospective shareholders may make a subscription payment per share equal to the book value of a common share, which was approximately $636 and $672 at December 31, 2009 and 2008, respectively.
The Company has authorized 95,000 preferred shares, without par value. As of December 31, 2009 and 2008, 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.
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 1.75% and was 1.98% and 3.19% at December 31, 2009 and 2008, respectively. At the maturity date of the mortgage note in 2013, the expected outstanding balance of the note of $600,000 must be repaid or refinanced.
On December 15, 2009, the Company renewed its revolving note with a commercial bank in the amount of $650,000 collateralized by a second mortgage on the office building. As of December 31, 2009, there was a principal balance outstanding of $630,000 related to this revolving note. At December 31, 2009, the carrying value of the revolving note approximates fair value. This revolving note matures on December 15, 2010, is annually renewable and requires monthly interest payments at a variable rate of 30-day LIBOR plus 1.75%, which was 1.98% at December 31, 2009.
approximately $823,000. The net book value of this computer software and related implementation costs is approximately $165,000 and $329,000 at December 31, 2009 and 2008, respectively. The required payments under the capital lease were completed in January 2009.
Leases-The Company leases certain equipment and office space under non-cancelable operating leases. Rent expense under all operating leases was approximately $176,000, $181,000, and $211,000 for the years ended December 31, 2009, 2008, and 2007, 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 $66,000, $47,000, and $58,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Such amounts are recorded as other income in the accompanying consolidated financial statements. As of December 31, 2009, approximate future minimum annual lease income under non-cancelable leases are as follows: 2010-$62,000 and 2011-$44,000.
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 $56,000, $51,000, and $50,000 in 2009, 2008, and 2007, respectively.
The results of the fully-insured and self-insured dental segments are measured by gross profit. The Company does not allocate insurance expense, investment and other income, goodwill, or other assets or liabilities to these 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 $12,169,000, $12,617,000, and $11,798,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Listed below is financial information required for each industry segment for the years ended December 31, 2009, 2008, and 2007 (amounts in thousands):
Seven of our Board members are also participating providers and as a group received approximately $155,000, $151,000, and $151,000 in directors fees for the years ended December 31, 2009, 2008 and 2007, respectively.
The following table presents for each of the fair value levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2009 and 2008 (amounts in thousands).
The Company measures fair value using the following valuation methodologies. The Company uses quoted market prices to determine the fair value of the deferred compensation investments and certain state fund guarantee fund deposits; such items are classified as Level 1 of the fair-value hierarchy. Examples include government securities and exchange-traded equity securities. The Company obtains prices from independent vendors to determine the fair value of the majority of its short-term investments and investments portfolio. The remainder of the short-term investments and investments portfolio and the remainder of the state fund guarantee deposits are fair valued using a discounted cash flow method whereby the significant observable inputs include the maturity date and the interest rate yield; such items are classified as Level 2 of the fair-value hierarchy. Examples include brokered and non-brokered certificates of deposit. The Company obtains a price from an
Certain assets and liabilities are measured at fair value on a non-recurring basis. These include long-lived assets such as certain plant, property and equipment items, intangible assets and goodwill, as well as assets measured at cost that are written down to fair value during a period as a result of an impairment. For the year ended December 31, 2009 and 2008, there were no assets or liabilities that were required to be measured at fair value on a non-recurring basis.
A summary of our unaudited quarterly results of operations for the years ended December 31, 2009 and 2008 is as follows (amounts in thousands, except for per share results):