Currently, the Company's accounting, agency service personnel, and administrative personnel are primarily located in its corporate headquarters in Overland Park, Kansas, its insurance company relations functions in Fargo, North Dakota and Overland Park, Kansas and a significant number of its software development personnel are located in Austin, Texas. In addition to these offices, the Company also leases or owns space for its local and regional offices and independent agent operations. At December 31, 1996, the Company had 13 offices. The Company also conducts independent agent operations through its offices in Prosser, Washington; Modesto, California; and Manlius, New York.
The following should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included elsewhere in the Company's Annual Report on Form 10-K.
For Buy-Up Coverage, the Company is entitled to the expense reimbursement payable by the FCIC. This expense reimbursement is passed through to the Company under its MPCI contracts with third party insurance companies and is paid directly to the Company for MPCI premiums underwritten by its property and casualty insurance subsidiaries. For the 1997 crop year, beginning July 1, 1996, the expense reimbursement for Buy-Up Coverage was established by the FCIC at 29%. For the 1996 and 1995 crop years, the expense reimbursement for Buy-Up Coverage was established by the FCIC at 31%.
For Basic Coverage, the Company retains a portion of the administrative fee paid by the insured and receives an amount for loss adjusting expenses (regardless of the loss experience of the insureds), which amounts are passed through or paid directly to the Company under its MPCI contracts. For Basic Coverage, the Company's portion of the administrative fee is up to the first $100 of the fee paid by the insured and the loss adjusting expense reimbursement which is equal to 4.7% of an imputed premium (based upon a 65% production guarantee at a 100% price election.)
The Company's service fees related to crop hail insurance are a percentage of the premiums serviced for third party insurance companies.
Agent commissions and other direct costs related to marketing and servicing MPCI are obligations of the Company under its MPCI agreements and, accordingly, are reflected as expenses of the Company. Additionally, agent commissions and other direct costs on crop hail insurance are generally direct obligations of the Company and, therefore, are reflected as expenses of the Company. Under the Company's crop hail contract with CNA, agent commissions and other direct costs, except loss adjusting expense, are the direct obligations of CNA and therefore are not reflected as an expense of the Company.
Loss adjustment expenses are based on management's estimate of all Company adjusting costs to settle claims incurred or to be incurred on policies on which revenue has been recognized. The estimate is reviewed periodically and variances, if any, in estimated versus actual amounts are reflected in current operations. In some instances, agents are responsible for loss adjusting expenses or other direct costs associated with policies sold by them, and those agents generally receive higher commissions in return for the assumption of those direct costs. Bureau fees are fees charged by NCIS for providing rates and procedures required to be used by the FCIC.
For crop hail insurance, service fees are recognized when the insurance coverage is accepted by the insurance company, which is concurrent with the completion of substantially all services required to be performed by the Company. Direct costs such as agent commissions, loss adjusting and premium taxes are recognized at the time service fees are recognized.
The Company recognizes service fees under the profit sharing provisions of its agreements with third party insurance companies when a reasonable estimate can be made. The Company generally recognizes profit sharing, if any, in the third and fourth quarters.
The Company's insurance operations include premiums earned and losses incurred on Buy-Up and Basic Coverages, crop hail, and farm and ranch insurance coverages underwritten and retained by the Company's property and casualty insurance company subsidiaries.
The Company has agreed with its contracting insurance companies to assume the responsibility for such payments to the FCIC and, therefore, receives interest payments made by policyholders on deferred premiums. In the event of an insured loss, the Company deducts premium payments and interest, if any, from the claim payment to the farmer.
In addition to profit sharing, the Company also recorded excess loss adjusting expense reimbursement of $2.0 million in the year ended December 31, 1996 as compared to $3.3 million in the year ended December 31, 1995. Included in the $3.3 million of excess loss adjusting expense reimbursement in 1995 was $1.7 million of excess loss adjusting expense reimbursement associated with hold harmless provisions on certain prevented planting claims specific to the 1995 crop year.
Agent commissions and other direct costs in the year ended December 31, 1996 increased by $18.5 million to $71.1 million from $52.6 million in the year ended December 31, 1995. The increase in agent commissions and other direct costs was primarily a result of the increased MPCI and crop hail premiums serviced. Agent commissions increased as a percentage of premiums serviced in 1996 as compared to 1995 due to competitive pressures which forced the Company to, in several areas of the country, increase commissions offered to agents.
Also included in agent commissions and other direct costs in the year ended December 31, 1996 were $3.2 million in charges related to the Company's assessment of its adequacy of the allowance for uncollectible receivables. The Company reviewed the historical collection experience of receivables, collectability of certain balances, and the growth in the volume of premiums serviced and other receivables in determining the necessary allowance for uncollectible receivables at December 31, 1996. In addition to the charges included in agent commissions and other direct costs, the Company recorded $655,000 and $697,000, respectively, in 1996 and 1995 to the provision for uncollectible receivables which is included in general and administrative expenses.
INSURANCE OPERATIONS. Premiums earned increased to $2.5 million in 1996 from $(182,000) in 1995. Losses incurred increased in 1996 to $1.3 million from $(2.3) million. The increases were primarily due to crop hail premiums underwritten and retained by Dawson in 1996. Dawson was not acquired until July 1995 which was after most crop hail premiums had been written for 1995.
RESTRUCTURING AND NON-CORE EXPENSES. In 1996, as a result of management's assessment of the Company's core operation and focus on improving the consistency of its financial performance and improving shareholder returns, the Company recorded costs related to the relocation of the Company's corporate headquarters and main office to Overland Park, Kansas, of $2.0 million, write downs and losses on assets to be disposed of consisting of real estate and software mapping of $1.3 million, losses on the discontinuation of certain non- core business operations of $2.0 million, and costs accrued as a result of the cancellation of certain agreements and contracts with third parties of $1.1 million.
Additionally, as a result of the dissolution of its MPCI agreement with CNA, the Company was required to request agents to cancel and rewrite MPCI policies previously written on CNA paper to Fireman's Fund, or one of its insurance subsidiaries paper. For other competitive factors, including significant incentive fees being offered to agents by competitors to induce agents to transfer their books of business, the Company offered incentive fees to agents to compensate them for obtaining the necessary cancellation and rewrite forms from policyholders. In the year ended December 31, 1996, the Company agreed to pay approximately $300,000 relating to transferred business. The Company expects to pay approximately $1.5 million to $1.8 million of additional incentive fees in the first quarter of 1997 as part of the cancellation and rewrite process. The Company anticipates accruing these amounts consistent with the Company's revenue recognition method. The Company believes these costs are a one-time expenditure.
AGENCY OPERATIONS. Service fees in the year ended December 31, 1995 increased $36.9 million to $85.0 million from $48.1 million in the year ended December 31, 1994. The increase in service fees was primarily the result of an increase in MPCI and crop hail premiums serviced, underwriting gains and revenues from excess loss adjustment expense reimbursement. The increase in MPCI premiums serviced was due, in part, to the overall increase in the Buy-Up Coverage market as a result of the Reform Act, and the addition of Basic Coverage beginning with the 1995 crop year. Actual premiums serviced by the Company (including Dawson) during the 1995 crop year were $191.4 million and $39.5 million for Buy-Up and Basic Coverage, respectively. During the 1995 crop year, the FCIC made a one time change (in large part due to excess moisture which delayed planting in certain states) to excess loss adjustment expense reimbursement to allow companies to recover additional loss adjusting expenses associated with adjusting prevented planting claims. The Company recognized $3.3 million in excess loss adjustment expense reimbursement from the FCIC attributable to the 1995 crop year. A significant portion of this was related to preventive planting claims. Crop hail premiums serviced increased as a result of growth in the Company's business and as a result of the Dawson acquisition.
Service fees also increased as the Company recognized $9.1 million of underwriting gains in the year ended December 31, 1995 compared to $3.1 million in the year ended December 31, 1994. The increase in the Company's share of underwriting gains was primarily a result of increased premiums serviced, the fact that there was no loss carryforward remaining under its MPCI contract with CNA and favorable underwriting results on premiums retained by Dawson.
Agent commissions and other direct costs increased by $22.1 million to $52.6 million for the year ended December 31, 1995 compared to $30.5 million for the year ended December 31, 1994. The increase in agent commissions and other direct costs was a result of the increased MPCI premiums serviced by the Company during the year ended December 31, 1995 compared to the same period in 1994 and as a result of the loss adjusting costs associated with adjusting of claims incurred in prevented planting. These increases were partially offset by the agency acquisitions completed during the year which had the effect of moving direct costs to general and administrative expenses as these agents became employees. In addition, overwrite fees payable to third party insurance companies decreased slightly as Plains and Dawson underwrote a larger percentage of the premiums serviced by the Company in the year ended December 31, 1995 compared to 1994. As a percentage of service fees, related agent commissions and other direct costs decreased to 62.5% in 1995 from 63.5% in 1994.
INTEREST EXPENSE. The increase in interest expense was primarily due to additional borrowings necessary to finance MPCI deferred premiums and operating expenses attributed to the increase in premium volume as a result of the extension by the FCIC of reporting deadlines for the 1995 crop year (which delayed the Company's receipt of a portion of the expense reimbursement payable to the Company on MPCI premiums) as well as additional long-term debt incurred on the permanent financing of the Company's former headquarters in Great Falls, Montana.
Depreciation and amortization expenses increased to $2.4 million in the year ended December 31, 1995 from $1.0 million for the year ended December 31, 1994. The increase was primarily a result of increased property and equipment purchased to support the growth of the Company and an increase in the amortization of intangible assets as a result of acquisitions.
MINORITY INTEREST. Minority interest represents dividends accrued and the accretion of discount on preferred stock issued in March of 1995, to fund the Dawson acquisition. Also included in minority interest are earnings attributed to minority shareholders.
Cash provided by investing activities was $22.4 million and $699,000 for 1996 and 1995, respectively, compared with cash used by investing activities of $37.3 million in 1994. Historically, most of the Company's cash flow has been used to pay premiums due to the FCIC in the last quarter of the year on behalf of policyholders in order to earn the spread between the interest charged to the policyholders, which is equal to the rate established by the FCIC, and the Company's cost of funds. The increase in cash provided by investing activities in 1996 was primarily a result of the Company not financing the premiums payable to the FCIC on the 1996 crop year. In November 1996, Crop Growers and Fireman's Fund amended their MPCI agreement pursuant to which Fireman's Fund financed the premiums on behalf of the policyholders in exchange for the interest charged on the deferred premiums. The Company continues to administer the collection of the receivables and is ultimately responsible for the collection of the balances. The Company receives a fee for administrative costs related to the premiums financed. Deferred premiums financed at December 31, 1995, were $22.1 million compared to $27.6 million at December 31, 1994. The portion of deferred premiums financed at December 31, 1995, was less than 1994, due to less available funds to finance premiums, primarily as a result of the Company's use of funds to finance the acquisition of Dawson and the delay in receiving the excess loss adjusting expense reimbursement from the FCIC for prevented planting until January, 1996.
The remaining investing activities of the Company have been primarily purchases and sales of investment securities, acquisitions and purchases of property and equipment needed as a result of the growth of the Company. During 1996, a portion of the proceeds from the $6.1 million sale of investment securities were used by the Company to assist in funding operations during 1996 and early 1997. Additionally, during 1995, the Company used $9.1 million in proceeds from the sale of investment securities to fund the acquisition of Dawson. During 1994, the Company invested $13.5 million in investment securities. This amount represented proceeds from the Company's two public offerings pending the need for corporate use.
Cash used by financing activities was $25.4 million in 1996, compared with cash provided by financing activities of $18.6 million and $34.1 million for 1995 and 1994, respectively. The primary source of cash during 1996 was $10 million from the issuance of redeemable preferred stock to Fireman's Fund. The primary use of cash during 1996 was to repay amounts outstanding under the Company's line of credit of $32.2 million. The primary sources of cash during 1995 and 1994 were from draws on the Company's line of credit to pay the deferred premiums due to the FCIC on behalf of policyholders and $35.9 million in 1994 of net proceeds received in the Company's two public offerings. The Company also redeemed $3.5 million of subsidiary preferred stock during 1994.
In addition, during 1996, the Company repurchased $2.1 million of common stock from certain former executive officers under separation agreements with the officers. The Company purchased an additional $85,000 of stock in January 1997 as the last required purchases under these agreements. See Note 8 of Notes to Consolidated Financial Statements.
Historically, the Company has maintained lines of credit to finance working capital needs and premiums on behalf of policyholders who elect not to pay their MPCI premiums on the FCIC established due date and to fund crop hail losses in advance of reimbursement from the contracting insurance companies. These lines of credit expired in October and November 1996 and were not renewed.
In connection with the March 1997 acquisition agreement between the Company and Fireman's Fund, Fireman's Fund has agreed to provide the Company with a working capital line of credit of up to $15 million subject to certain borrowing base limitations in the event that the Company is not able to secure third party financing. The credit agreement includes restrictive covenants and the requirement to maintain certain financial ratios and minimum net worth. The commitment which will expire in March 1998, does not contain any loan or commitment fees and borrowings bear interest at national bank's base rate. If the Company were to terminate the acquisition agreement with Fireman's Fund, any amounts then outstanding under the line of credit would become immediately due and payable.
Statements of Operations for the years ended December 31, 1996, 1995 and 1994 36
CROP GROWERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995 ---- ---- Investments: Fixed maturities, held to maturity $ 1,308,439 $ 2,311,177 Fixed maturities, available for sale 5,199,708 5,838,391 Equity securities, available for sale -- 1,757,540 ------------ ------------ Total investments 6,508,147 9,907,108
Cash and cash equivalents 16,132,126 6,980,570 Premiums receivable, net 57,536,838 60,944,012 Underwriting gain receivable 14,317,285 12,926,642 Reinsurance balances recoverable 32,625,869 31,779,006 Property and equipment, net 5,242,447 11,687,066 Intangible assets, net 9,857,238 10,528,630 Income tax recoverable 4,949,064 5,434,737 Deferred tax asset 1,861,640 -- Other assets 9,898,474 3,277,131 ------------ ------------ $158,929,128 $153,464,902 ------------ ------------ ------------ ------------
Stockholders' equity Common stock (par value $.01): 40,000,000 shares authorized; 7,970,251 and 8,172,581 shares issued and outstanding at December 31, 1996 and December 31, 1995, respectively 79,702 81,726 Paid-in capital 36,729,115 38,244,567 Accumulated (deficit)/retained earnings (3,086,499) 5,881,973 Unrealized appreciation of fixed maturity and equity investments, net of taxes 54,707 208,958 Unearned compensation (25,000) (75,000) ------------ ------------ Total stockholders' equity 33,752,025 44,342,224
Commitments and contingencies (Notes 11, 13 and 16) ------------ ------------ $158,929,128 $153,464,902 ------------ ------------ ------------ ------------
CROP GROWERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
On March 5, 1997, Fireman's Fund and the Company entered into a definitive agreement by which Fireman's Fund would acquire the Company in a cash merger at $10.25 per share. The transaction is subject to, among other things, Company stockholder approval, regulatory approval and other customary conditions. Because of regulatory approvals and clearances, the transaction is not expected to close until mid-1997.
For multi-peril crop insurance, service fees are recognized based on estimates of premium as of the sales closing date which is when coverage for a crop must be applied for or renewed by the policyholder and when substantially all required services relating to placing the insurance have been rendered. Actual premiums billed, which are based on actual planted acreage, may vary from the original estimates made at the sales closing date. The resulting adjustments are reflected in operations in the periods in which they are determined. For crop hail insurance, service fees are recognized when the insurance coverage is accepted by the insurance company, which is concurrent with the completion of substantially all services required by the Company. Direct costs such as agent commissions are recognized at the time service fees are recognized.
The Company is entitled to additional income on certain business written for or reinsured with third-party insurance companies based on specified loss experience. This additional income is recognized as income when a reasonable estimate can be made. The Company recognized $10.9 million, $9.1 million and $3.1 million for the years ended 1996, 1995 and 1994, respectively, under certain of these profit sharing provisions.
Realized gains or losses on sales of investments are determined on the specific- identification method and are included in investment income. Investment income is recognized as earned and includes the accretion of bond discount and amortization of bond premium.
Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed primarily on a straight-line basis over the estimated useful lives of the underlying assets from 3 to 10 years.
The Company utilizes various methods to determine the recoverability of its intangible assets, including discounted cash flows and net future cash flows of assets acquired. To the extent the carrying value is in excess of the recoverable value, the assets are written down to their estimated net realizable value. There have been no significant write-downs of intangible assets during 1996, 1995 or 1994.
The Company adopted the Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, in the first quarter of 1996. SFAS No. 121 requires that certain long-lived assets be reviewed for impairment when events or circumstances indicate that the carrying amounts of the assets may not be recoverable. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset's carrying value is written down to fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Amounts attributable to the Company's current year tax return are reflected as current income taxes.
At December 31, 1993, all members of the consolidated group had elected S Corporation status under Section 1362 of the Internal Revenue Code. Some members joined the consolidated group as part of the Reorganization (see Note 8). At that date their S Corporation status terminated. Additionally, prior to that time certain of these members reported taxable income on the cash basis of accounting. Upon joining the consolidated group, these members had to change their method of reporting income to the accrual basis and incurred a tax expense on the outstanding difference in income between the two methods of accounting. Accordingly, there is no provision for income taxes in the consolidated financial statements for all income in periods in which certain members of the group were S Corporations since the income tax liability or benefit accrued to the stockholders and not to the Company.
As discussed in Note 7, a pro forma provision for income taxes has been reflected in the accompanying consolidated statement of operations in 1994.
All software development costs are amortized on a straight-line basis over the remaining estimated economic life. To date such costs have resulted from engineering and development of new and existing products. All other research and development costs are charged to expense in the period incurred.
The Company considers all highly liquid debt instruments with original maturities of three months or less as cash equivalents in the statements of cash flows.
The Company had restricted cash of $7.5 million and $665,000 at December 31, 1996 and 1995, respectively.
Minority interest includes dividends accrued on the preferred stock of subsidiaries and earnings attributed to minority shareholders on the consolidated statements of operations.
When dilutive, stock options are included as stock equivalents using the treasury stock method. There is not a material difference between primary and fully diluted earnings per share.
The amortized cost, gross unrealized appreciation and depreciation, and estimated market value of investments in fixed maturity and equity investments are as follows:
At December 31, 1996, Plains and Dawson had fixed maturities with a carrying value of $3.5 million on deposit with various regulatory agencies, as required by law.
Fixed maturity investments $ 492,654 $ 709,922 $ 151,870 Equity investments 32,298 27,681 -- Premium finance 1,134,603 899,347 945,923 Loss on 50% or less owned companies (257,938) (114,245) -- Other, including realized gains 853,707 639,908 298,920 ---------- ---------- ---------- $2,255,324 $2,162,613 $1,396,713 ---------- ---------- ---------- ---------- ---------- ----------
Proceeds from the sale of available-for-sale securities and gross realized gains and losses were as follows for the years ended December 31, 1996, 1995, and 1994:
1996 1995 1994 ---- ---- ---- Proceeds $6,136,261 $9,227,684 $ -- Gross realized gains 582,925 412,467 -- Gross realized losses (101,111) (41,230) --
On July 10, 1996, Fireman's Fund Insurance Company purchased 10,000 shares of a new series of preferred stock of the Company for $10 million. The preferred stock is convertible into common stock at a price of $13.25 per share (equivalent to 754,717 shares), subject to certain adjustments. The preferred stock pays a quarterly dividend (on each January 1, April 1, July 1 and October 1 commencing October 1, 1996) of 5% per annum and is entitled to vote on all matters brought before the common shareholders on an as- converted basis. The preferred stock is redeemable at the option of the Company after July 8, 1997, at $1,000 per share plus all dividends accumulated and unpaid on the date fixed for redemption; however, the Company may not redeem the shares prior to July 9, 2001 unless the price of common stock exceeds a redemption threshold set forth in the certificate of designation creating the preferred stock. The preferred stock is subject to mandatory redemption on July 9, 2006.
Long-term debt is summarized as follows: December 31, ------------ 1996 1995 ---- ---- 6.9% notes, payable in aggregate monthly installments of $14,443, including interest, through January 2015, secured by building and office equipment. $1,734,155 $1,780,488
Bank base rate plus 1% notes, payable in aggregate annual installments of $223,796, plus interest, through 1999; secured by crop insurance agency operations. 671,389 895,186
The aggregate maturities of long-term debt for the next five years are as follows:
Years Ending December 31, ------------ 1997 $636,955 1998 546,063 1999 533,195 2000 60,932 2001 65,296
Fireman's Fund has agreed to provide the Company with a working capital line of credit of up to $15,000,000 subject to certain borrowing base limitations. The credit agreement includes restrictive covenants and the requirement to maintain certain financial ratios and minimum net worth. The commitment, which will expire in March 1998, does not contain any loan or commitment fees and borrowings bear interest at a national bank's base rate. If the Company were to terminate the acquisition agreement with Fireman's Fund, any amounts then outstanding under the line of credit would become immediately due and payable.
Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- Current: Federal $ (260,261) $ 1,650,050 $ 1,617,185 State (78,702) 456,723 380,716 Deferred: Federal (2,325,694) 652,744 224,343 State (681,075) 182,935 51,191 ----------- ----------- ----------- $(3,345,732) $ 2,942,452 $ 2,273,435 ----------- ----------- ----------- ----------- ----------- -----------
The following is a reconciliation between federal income tax (benefit) expense applicable to (loss) income before income taxes and minority interest and the amount computed at the statutory federal income tax rate of 34%.
Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- Federal income tax (benefit) expense at statutory rate $(3,903,600) $ 2,565,215 $ 2,678,120 S Corporation earnings prior to reorganization -- -- (424,319) Change in tax status -- 21,165 172,787 Rehabilitation tax credit -- (52,217) (264,000) State taxes, net of federal benefit (501,453) 426,779 288,036 Tax exempt interest and dividends received (88,010) (170,502) -- Non-deductible payments 760,747 -- -- Other, net 386,584 152,012 (177,189) ----------- ----------- ----------- $(3,345,732) $ 2,942,452 $ 2,273,435 ----------- ----------- ----------- ----------- ----------- -----------
Federal tax expense $ 251,532 State taxes, net of federal benefit 29,443 --------- $ 280,975 --------- ---------
During 1996, the Company entered into separation agreements with its former President and Chief Executive Officer John Hemmingson and its former Executive Vice President and Chief Financial Officer Gary Black. Under the agreements, the Company purchased 100,000 and 80,000 shares of its common stock from Hemmingson and Black, respectively, at prices ranging from $10.00 to $6.65 during 1996. The Company also purchased 8,000 and 4,000 shares at $6.50 per share from Hemmingson and Black, respectively, in January 1997.
The Entities distributed to their stockholders $830,000 as a partial distribution of accumulated S Corporation earnings. The status of any of the Entities as S Corporations was terminated upon consummation of the Reorganization. At the date of Reorganization, any remaining undistributed earnings were transferred to paid-in capital as though the Company had distributed such earnings to the stockholders and they had contributed the amounts back to the Company. During the fourth quarter of 1994, the Company distributed an additional $300,000 of dividends to cover tax liabilities of certain former S Corporation stockholders relating to earnings of certain of the S
Corporations prior to the Reorganization. This amount has been included in dividends and distributions in the accompanying consolidated financial statements.
The Company has a Stock Incentive Plan (Incentive Plan) which permits the issuance of options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalents and other stock based awards to employees, officers, consultants or independent contractors providing service to the Company.
Under the terms of the Incentive Plan, the exercise price determined by the Committee, of any stock option may not be less than 100% of the fair market value on the date of grant. The options vest in periods of three to five years. Following is a summary of the stock option activity:
Outstanding, January 1, 1994 -- $ -- Granted 743,900 7.50 - 25.00 Forfeited (10,000) 7.50 Exercised -- -- ---------- -------------- Outstanding, December 31, 1994 733,900 7.50 - 25.00 Granted 181,750 12.63 - 26.75 Forfeited (5,060) 7.50 Exercised (38,400) 7.50 ---------- -------------- Outstanding, December 31, 1995 872,190 7.50 - 26.75 Granted 299,710 8.50 - 11.00 Forfeited (97,899) 7.50 - 19.50 Exercised (1,920) 7.50 ---------- -------------- Outstanding, December 31, 1996 1,072,081 7.50 - 19.50 ---------- -------------- ---------- --------------
Exercisable, December 31, 1996 578,801 7.50 - 26.75 ---------- -------------- ---------- --------------
In 1994, 20,000 shares of restricted stock were granted under the Incentive Plan which vest over three years. The shares are considered issued when awarded, but the recipient does not own and cannot sell the shares while they are restricted.
In May, 1996, the Board of Directors awarded 75,000 and 65,000 options to the Chairman and Vice Chairman of the Board, respectively. The options, with exercise prices of $11.00 per share, vested 30 days after issuance.
In March 1996, a Management Compensation Plan ("Plan") was authorized by the Board of Directors. The Plan provides annual and long-term incentives for officers and certain key employees of the Company. Under the annual plan, for the year ended December 31, 1996, certain required performance goals under the Plan were achieved and accordingly, the Company recorded approximately $100,000 in compensation expense. Under the long-term portion of the plan, performance units for potential cash incentives and 10 year stock options may be awarded. Performance units are earned over a three-year performance period between 1996 to 1998, based on the degree of attainment of performance objectives. The cash target value of the performance units at December 31, 1996 was approximately $151,000. Options are awarded at the discretion of the board during the three-year performance period and vest in thirds over the three year period following the option grant date. As of December 31, 1996, 188,710 options had been granted; none were exercisable.
The Company has a 401(k) plan covering substantially all of its employees who have met specific age and service requirements. Benefits under the plan vest after varying periods of plan participation. Contributions to the plan are at the sole discretion of the Board of Directors. Contributions to the plan for 1996, 1995 and 1994 were $381,001, $208,182, and $134,610, respectively.
Stockholder's equity and net income, as reported to the domiciled state insurance departments in accordance with its prescribed or permitted statutory accounting practices, for the Company's insurance subsidiaries, are summarized as follows:
1996 1995 1994 ---- ---- ---- Net income: Plains $ 187,020 $ 375,152 $ 262,131 Dawson 1,159,787 2,793,067 --
On a statutory accounting basis, Dawson recognizes premiums earned, commission income and the related direct costs such as agent commissions, premium taxes and other underwriting expenses based on the FCIC crop year. This accounting practice was approved by the North Dakota Insurance Department as a permitted accounting practice.
The payment of stockholder dividends by insurance companies without the prior approval of regulators is limited to surplus determined in accordance with statutory accounting practices, and requires that the capital and surplus following such dividends be reasonable in relation to its outstanding liabilities, and adequate to meet its financing needs. The maximum amount available for the payment of dividends by Plains and Dawson to the Company during 1997 without prior approval with the regulatory authorities is $213,000. During 1996, Plains and Dawson paid dividends, to the Company, of $500,000 and $2.5 million, respectively, from earned surplus.
The NAIC has adopted minimum risk based capital requirements to evaluate the adequacy of statutory capital and surplus in relation to an insurance company's risks. Regulatory compliance of risk based capital requirement is defined by a ratio of a company's regulatory total adjusted capital to its to its authorized control level risk based capital, as defined by the NAIC. At December 31, 1996, Plains and Dawson exceed the minimum risk based capital requirements.
The effect of these reinsurance transactions on premiums earned and losses incurred are as follows:
During 1996, 1995 and 1994, Plains and Dawson underwrote approximately $40.4 million, $12.4 million and $3.3 million, respectively, of imputed premium for basic catastrophic and buy up coverage which is included in direct and ceded multi-peril premiums earned. These premiums are fully subsidized by the FCIC and any related losses are fully recoverable from the FCIC, except to the extent Plains and Dawson elect to participate in the overall underwriting gain or loss relating to such business.
The following are the estimated fair values of the Company's financial instruments:
The Dawson transactions have been accounted for as purchases and, accordingly, the purchase prices have been allocated to the assets and liabilities of the agency operations and Dawson based on their relative fair values at the dates of acquisition. The Company's results of operations include the results of the agency operations and Dawson from the respective dates of acquisition.
In conjunction with the Dawson acquisitions, the allocation of the purchase price consisted of the following:
Fair value of assets acquired, excluding intangible assets $118,968,335 Intangible assets 4,431,940 Liabilities assumed 115,549,195 ------------ Total purchase price $ 7,851,080 ------------ ------------ The following unaudited pro forma information represents the consolidated results of operations as if the acquisitions had occurred at the beginning of the periods presented below after giving effect to certain adjustments, including amortization of intangible assets acquired and related income tax effects.
Year Ended December 31, ------------ 1995 1994 ---- ---- Total revenues $97,932,000 $68,255,000 Net income 6,124,000 5,417,000 Net income per common share .73 .97 Weighted average common shares outstanding 8,352,837 5,562,374
From time to time the Company is involved in litigation relating to claims arising from its operations in the normal course of business. Neither the Company nor any of its subsidiaries is a party to any legal proceedings other than as described below, the adverse outcome of which individually or in the aggregate, in the Company's opinion, would have a material adverse effect on the Company's results of operations, financial position or liquidity.
For the year ended December 31, 1996, the Company incurred approximately $4.0 million in expenses, primarily legal fees, in connection with indictments of the Company and certain of its former officers by the Independent Counsel appointed to investigate matters relating to former Secretary of Agriculture, Mike Espy. On January 21, 1997, the court accepted the Company's plea of NOLO CONTENDERE to two charges. Pursuant to an agreement with the Independent Counsel, the Company also agreed to pay a fine of $2.0 million. The settlement concludes matters between the Company and the IC. The entire amount of the settlement which is not deductible for tax purposes has been accrued at December 31, 1996.
By its terms, the Company's agreement with the IC does not compromise or preclude civil actions by other governmental regulatory authorities, such as the Federal Election Commission, Securities and Exchange Commission, the USDA, or state or federal regulatory authorities, or shareholders as a result of the allegations made by the IC and the Company's NOLO CONTENDERE plea. No assurance can be given as to what action a regulatory authority might take in response to the Company's plea and its agreement with the IC.
Included in restructuring and non-core expenses are costs related to the relocation of the Company's corporate headquarters and main office to Overland Park, Kansas in 1996, write downs and losses on assets to be disposed of consisting primarily of real estate and software mapping inventory, losses on the discontinuation of certain non-core business operations, and costs accrued as a result of the cancellation of certain agreements and contracts with third parties.
The following table provides a summary of these costs for the year ended December 31, 1996.
At December 31, 1996, the Company had $6.4 million recorded as assets to be disposed of which are included in other assets. The Company had recorded a valuation allowance of $1.8 million on the assets to be disposed of. The Company anticipates selling these assets over the next twelve months.
Change in MPCI commission estimate $ 1,916,000 Roll bonuses on MPCI premiums 1,040,000 Additional allowance for uncollectible receivables 2,025,000 Additional deferred service fees 1,222,000 ----------- Total increase to agent commissions and other direct costs $ 6,203,000 ----------- -----------