The Company's expense ratio, which represents commissions, general and administrative expenses and premium taxes as a percentage of Membership premiums and product sales, was 34% for 1998 compared to 32% for 1997. The product cost ratio, which represents product costs as a percentage of product sales, was 65% during 1998 compared to 66% for 1997. The loss ratio, product cost ratio and the expense ratio do not measure total profitability because they do not take into account all revenues and expenses.
Associate services and direct marketing expenses increased to $11.4 million for 1997 from $4.5 million for 1996 primarily as a result of approximately $4.4 million in Fast Start training bonuses paid, additional costs of supplies due to increased purchases by associates and higher staffing requirements. These expenses also include the costs of providing associate services and marketing costs other than commissions that are directly associated with new Membership sales.
Year Ended December 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- Net income.............................. $ 30,210 $ 17,523 $ 10,263 -------- -------- --------
Nature of Operations Pre-Paid Legal Services, Inc. (the "Company") underwrites and markets legal service plans (referred to as "Memberships") which provide for or reimburse a portion of legal fees incurred by members in connection with specified matters. The Company has offered legal services under two types of Memberships: closed panel and open panel. Since 1987, substantially all of the Memberships sold by the Company have been closed panel Memberships that allow members to access legal services through a network of independent attorneys ("provider attorneys") under contract with the Company. Membership benefit costs relating to open panel Memberships, which constituted approximately 6% of Memberships in force at December 31, 1998, are based on the usual, reasonable and customary fee for providing the required services. Memberships are generally guaranteed renewable and are marketed primarily in 26 states by an independent sales force referred to as "Associates". Membership premiums are principally collected on a monthly basis.
Product costs consist primarily of the commissions paid to selling associates together with the actual cost paid to acquire such goods and services. Costs to purchase products and deliver services are included in product costs in the consolidated statements of income
Accounting Standard to be Adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") was issued in June 1998. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. This Statement applies to all entities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company believes that it holds no derivative instruments at December 31, 1998.
1998 1997 1996 -------- -------- -------- Net income applicable to common stockholders: As reported................................ $ 30,200 $ 17,510 $ 10,248 Pro forma.................................. 21,671 16,387 10,020