(1) All share and per share information has been restated to reflect the adoption of Statement of Financial Accounting Standards 128, Earnings Per Share. See Note 9 of Notes to Consolidated Financial Statements of the Company. (2) The loss ratio represents Contract benefit costs as a percentage of Contract premiums. The expense ratio represents the total of commissions, general and administrative expenses and premium taxes as a percentage of Contract premiums. The Company has revised the expense ratio definition for 1997 to provide data it believes more accurately reflects trends in the Company's growth. All prior periods have been conformed to current year presentation. The combined ratio does not measure total profitability because it does not take into account all revenues and expenses.
Prior to January 4, 1997, the Company advanced commissions at the time of sale of all new Contracts. Effective January 4, 1997, the Company implemented a policy whereby the associate receives only earned commissions on the first three sales unless the associate has successfully completed the new training program which was implemented at the same time. For all sales beginning with the fourth membership or all sales made by an associate successfully completing the new training program, the Company currently advances commissions at the time of sale of a new membership Contract. The amount of cash potentially advanced upon the sale of a new membership, prior to the recoupment of any charge-backs (described below), represents an amount equal to three years commission earnings. Although the average number of marketing associates receiving an advance commission payment on a new membership is 12, the overall initial advance may be paid to more than twenty different individuals, each at a different level within the overall commission structure. This commission advance immediately increases an associate's account with the Company and represents prepaid commissions on active memberships.
Associates also receive compensation when associates sponsored by them or other associates that they have sponsored in their organization successfully complete the new training program implemented by the Company on January 4, 1997. In order to successfully qualify, the new associate going through the training program must produce 3 new Contracts and recruit 1 new associate within 15 days of receiving the training.
Contract Persistency One of the major factors affecting the Company's profitability and cash flow is Contract persistency, which represents the ability of the Company to retain a Contract, and therefore receive premiums, once it has been written. The Company monitors its overall Contract persistency rate, as well as the persistency rates with respect to Contracts sold by individual associates and agents and persistency rates with respect to Contract sales by geographic region and payment method. The Company's Contract persistency rate measures the number of Contracts in force at the end of a year as a percentage of the total of (i) Contracts in force at the beginning of such year, plus (ii) new Contracts sold during such year. From 1981 through the year ended December 31, 1997, the Company's annual Contract persistency rates, using the foregoing method, have averaged approximately 76%. The annual Contract persistency rates were 73.6%, 73.9% and 80.0% for 1997, 1996 and 1995, respectively. The Company's overall Contract persistency rate varies based on, among other factors, the relative age of total Contracts in force. The Company's overall Contract persistency rate could be lower when the Contracts in force include a higher proportion of newer Contracts. The Company has recently experienced significant increases in new Contract sales and, as a result, the percentage of newer Contracts in its total Contracts in force has increased. Unless offset by other factors, this increase could result in a decline in the Company's overall Contract persistency rate as determined by the formula described above, but does not necessarily indicate that the new Contracts written are less persistent, only that the ratio of new Contracts to total Contracts is higher than it was during 1997 and 1996. The Company's financial condition and results of operations may be materially adversely affected if the persistency rates of existing and new Contracts are materially lower than the Company's historical experience.
Income Tax Matters-Net Operating Losses At December 31, 1997, the Company had net operating loss carryforwards ("NOLs") for Federal regular and alternative minimum tax purposes of approximately $14.6 million and $14.2 million, respectively, expiring in 2001 through 2012. In addition, the Company had general business and rehabilitation tax credit carryforwards of approximately $325,000 expiring primarily in 1998 to 2001, and an alternative minimum tax ("AMT") credit carryforward of $366,000 which does not expire. A valuation allowance has been established for deferred tax assets representing pre-1996 carryforwards, except as related to the AMT Credit carryforward (which is considered to be fully realizable), as the Company does not believe it is more likely than not that the tax benefits of such carryforwards will be realized. The Company generated a tax loss for the year ended December 31, 1997 of $2.6 million. The Company believes it will realize the approximate $926,000 tax benefit from this tax loss and the approximate $997,000 of tax benefits from the 1996 tax loss of $2.8 million and has appropriately not provided a valuation allowance against these amounts. The Company accrued tax expense for 1997 and 1996 at the applicable statutory rates and expects to continue such accrual for 1998 since it does not expect to be able to utilize available tax benefits from its existing pre-1996 carryforwards. However, if the level of tax deductions for commissions is less than expected in 1998 (as a result of new Contract sales being less than expected or for any other reason), the Company may have taxable income. In such case, the Company's tax expense for 1998 would be reduced to reflect any actual or anticipated future utilization of deferred tax benefits through reduction in the current valuation allowance.
Year 2000 Issues The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and has developed a plan to resolve the issue. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's affected programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company presently believes that, with modifications to existing software and conversion to new software, the Year 2000 issue will not pose significant operational problems for the Company's computer systems as so modified and converted. Testing and conversion of system applications commenced during 1993 and is expected to be completed during 1998. Costs incurred in prior periods have not been material. The remaining total cost of the Company's remediation efforts is expected to be approximately $240,000, substantially all of which will be incurred during 1998. This amount is not expected to have a material effect on results of operations, liquidity or capital resources during 1998 or future periods. A significant portion of the Company's Year 2000 remediation plan will be accomplished by the Company's internal programming staff and while such efforts will result in the concentration on Year 2000 programming, these costs are not likely to be incremental costs to the Corporation, but rather will represent the redeployment of existing information technology resources. However, if such modifications and conversions are not completed in a timely fashion, the Year 2000 issue may have a material adverse impact on the operations of the Company.
Accounting Standards to be Adopted Statement of Financial Accounting Standards 130, "Reporting Comprehensive Income," ("SFAS 130") was issued in June, 1997. This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130, effective for fiscal years beginning after December 15, 1997, requires reclassification of financial statements for earlier periods provided for comparative purposes. The Company currently does not expect adoption of this Statement to have a material effect on financial statement presentation.
Statement of Financial Accounting Standards 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131") was issued in June, 1997. This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131, effective for fiscal years beginning after December 15, 1997, requires comparative information for previous years to be restated to comply with SFAS 131's reporting requirements. The Company currently does not expect adoption of this Statement to have a material effect on financial statement presentation or related footnote disclosures.
Comparison of 1997 to 1996 The Company reported net income applicable to common shares of $18.8 million, or $.83 per diluted common share, for 1997, up 51% from net income applicable to common shares of $12.5 million, or $.56 per diluted common share, for 1996. The increase in the net income applicable to common shares for 1997 is primarily the result of increases in every revenue category for 1997 as compared to 1996.
Associate services revenue increased 115% from $5.6 million for 1996 to $12.1 million during 1997 primarily as a result of Fast Start which resulted in the Company receiving training fees of approximately $5.7 million during 1997. The new combination classroom and field training program, titled Fast Start to Success ("Fast Start"), is aimed at increasing the level of new membership sales per associate. The positive impact of the program is reflected in the increase in new memberships written and new sales associates recruited per Fast Start associate. Fast Start requires a training fee of $184 per new associate and upon successful completion of the program provides for the payment of certain training bonuses. In order to be deemed successful for Fast Start purposes, the new associate must write three new memberships and recruit one new sales associate within 15 days of the associate's Fast Start training. The $5.7 million in training fees was comprised of $184 from each of approximately 28,900 new sales associates who elected to participate in Fast Start and training fees of $25 from each of approximately 14,500 existing associates who participated in the program. New associates enrolled during 1997 were 58,121 compared to 69,789 for 1996, a decrease of 17%. The Company believes that the decline in new associate enrollment during 1997 is primarily attributable to the increased costs associated with the Fast Start program. However, while the number of new associates decreased during 1997, the number of new Contracts sold, at least partially as a result of the Fast Start program, increased significantly. Future revenues from associate services will depend primarily on the number of new associates enrolled and the number who choose to participate in the Company's training program, but the Company expects that such revenues will continue to be largely offset by the direct and indirect cost to the Company of training bonuses paid, providing associate services and other direct marketing expenses.
Contract benefits totaled $25.1 million for 1997 compared to $16.9 million for 1996, and represented 33% of Contract premiums for both 1997 and 1996. This loss ratio (Contract benefits as a percentage of Contract premiums) should remain near 35% as the portion of active Contracts which provide for a capitated benefit continues to increase.
Commission expense was $16.7 million for 1997 compared to $11.5 million for 1996, and represented 22% and 23% of Contract premiums for 1997 and 1996, respectively. Commission expense, as a percentage of Contract premiums, should remain at or near 25% of Contract premiums in future years.
General and administrative expenses during 1997 and 1996 were $8.7 million and $6.2 million, respectively, and represented 11% and 12% of Contract premiums for such years. Although the total amount of general and administrative expenses increased approximately $2.5 million during 1997, these expenses, as a percent of Contract premiums, decreased 1%. This trend of gradual increases in the total dollar amount of these expenses but decreases when expressed as a percentage of Contract premiums should continue as a result of certain economies of scale pertaining to the Company's operating leverage.
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 which are directly associated with new membership sales.
Due to property and equipment additions during 1997 of $1.3 million, depreciation increased from $533,000 for 1996 to $704,000 for 1997.
The Company's expense ratio, which represents commissions, general and administrative expenses and premium taxes as a percentage of membership premiums, was 34% for 1997 compared to 36% for 1996 resulting in a combined loss and expense ratio of 67% for 1997 compared to 69% for 1996. The combined ratio does not measure total profitability because it does not take into account all revenues and expenses.
Dividends paid on outstanding preferred stock decreased to $13,000 for 1997 from $15,000 during 1996 and is attributable to the conversion of shares of $3.00 Cumulative Convertible Preferred Stock into common stock.
Contract benefits totaled $16.9 million for 1996 compared to $10.5 million for 1995, an increase of 61%. However, the loss ratio for the 1996 period of 33% was the same for 1995 and should remain near 35% as the portion of active Contracts which provide for a capitated benefit continues to increase.
Commission expense was $11.5 million for 1996 compared to $7.7 million for 1995, and represented 23% and 24% of Contract premiums for 1996 and 1995, respectively. Commission expense, as a percentage of Contract premiums, should remain at or near 25% of Contract premiums in future years.
Associate services and direct marketing costs increased to $4.5 million for 1996 from $2.6 million for 1995 but were generally consistent as a percent of total revenues, 8% for 1996 and 7% for 1995. These costs include the costs of providing associate services and marketing costs other than commissions, which are directly associated with new Contract sales.
The Company's expense ratio for 1996 was 36% compared to 39% for 1995. These factors resulted in a combined loss and expense ratio of 69% and 73% for 1996 and 1995, respectively.
The Company had a consolidated working capital surplus of $39.2 million at December 31, 1997 compared to $23.4 million at December 31, 1996. The $15.8 million increase in working capital during 1997 was primarily the result of increases in the current portion of commission advances of $6.6 million and increases in cash and investments of $10.7 million.
The Company generally advances significant commissions at the time a membership is sold. During 1997, the Company advanced commissions of $38.1 million on new membership sales compared to $28.5 million for 1996. Since approximately 93% of membership premiums are collected on a monthly basis, a significant cash flow deficit is created at the time a membership is sold. This deficit is reduced as monthly premiums are remitted and no additional commissions are paid on the membership until all previous commission advances have been fully recovered. Commission advances were subsequently reduced by commission earnings of $14.9 million and $9.3 million for 1997 and 1996, respectively. The Company has recorded an allowance of $3.7 million to provide for estimated uncollectible balances which includes an increase in the allowance of $300,000 during 1997.
PRE-PAID LEGAL SERVICES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statement Schedule - ----------------------------------------- Schedule II. Consolidated Valuation and Qualifying Accounts - For the years ended December 31, 1997, 1996 and 1995
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pre-Paid Legal Services, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ASSETS December 31, ----------------- 1997 1996 ------ ------ Current assets: Cash and cash equivalents............................... $21,803 $14,831 Held-to-maturity investments - current portion.......... 4,242 500 Accrued Contract income................................. 2,399 1,710 Commission advances - current portion................... 15,705 9,108 ------- ------- Total current assets.................................. 44,149 26,149 Held-to-maturity investments.............................. 650 1,757 Investments pledged....................................... 2,772 2,772 Commission advances, net.................................. 38,038 21,744 Property and equipment, net............................... 3,594 2,955 Other..................................................... 2,709 2,155 ------- ------- Total assets......................................... $91,912 $57,532 ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Contract benefits........................................ $ 2,649 $ 1,862 Accounts payable and accrued expenses.................... 2,281 912 ------- ------- Total current liabilities.............................. 4,930 2,774 Deferred income taxes...................................... 16,471 9,284 ------- ------- Total liabilities...................................... 21,401 12,058 ------- -------
Year Ended December 31, ------------------------- 1997 1996 1995 ------ ------ ------ Revenues: Contract premiums............................ $76,688 $50,582 $31,290 Associate services........................... 12,143 5,646 3,183 Interest income.............................. 1,636 1,302 1,308 Other........................................ 2,001 1,678 1,255 ------- ------- ------- 92,468 59,208 37,036 ------- ------- ------- Costs and expenses: Contract benefits............................ 25,132 16,871 10,477 Commissions.................................. 16,717 11,476 7,708 General and administrative................... 8,711 6,227 4,315 Associate services and direct marketing...... 11,431 4,544 2,573 Depreciation................................. 704 533 477 Premium taxes................................ 866 372 242 ------- ------- ------- 63,561 40,023 25,792 ------- ------- -------
Income before income taxes..................... 28,907 19,185 11,244 Provision for income taxes..................... 10,117 6,715 3,932 ------- ------- ------- Net income..................................... 18,790 12,470 7,312 Less dividends on preferred shares............. 13 15 125 ------- ------- ------- Net income applicable to common stockholders... $18,777 $12,455 $ 7,187 ======= ======= =======
PRE-PAID LEGAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in 000's)
Year Ended December 31, -------------------------- 1997 1996 1995 ------ ------ ------ Cash flows from operating activities: Net income..................................... $18,790 $12,470 $ 7,312 Adjustments to reconcile net income to net cash provided by operating activities: Provision for associate stock options........ 100 318 76 Provision for deferred income taxes.......... 10,117 6,715 3,932 Depreciation and amortization................ 704 533 477 Increase in accrued Contract income.......... (689) (672) (475) Increase in commission advances.............. (22,891) (18,381) (9,938) Increase in other assets..................... (554) (492) (736) Increase in Contract benefits................ 787 315 138 Increase (decrease) in accounts payable and accrued expenses............................ 1,369 136 (162) ------- ------- ------- Net cash provided by operating activities.. 7,733 942 624 ------- ------- -------
Cash flows from investing activities: Additions to property and equipment.......... (1,343) (1,286) (608) Purchases of investments..................... (2,951) (1,663) (1,695) Maturities of investments.................... 316 400 111 ------- ------- ------- Net cash used in investing activities...... (3,978) (2,549) (2,192) ------- ------- -------
$3.00 Cumulative Convertible Preferred Stock, authorized 5 shares; 5 shares issued and outstanding at beginning of year, liquidation value of $84....................................... 5 5 5 Shares exchanged for Common Stock (2 in 1997)....... (2) - - ----- ----- ----- Shares issued and outstanding at end of year (3 in 1997, 5 in 1996 and 1995), liquidation value of $55 at December 31, 1997........................... 3 5 5 ----- ----- -----
Common Stock - $.01 par value, shares authorized 100,000; shares issued and outstanding at beginning of year (22,459 in 1997, 21,513 in 1996, and 14,216 in 1995)............................................ 225 215 142 Shares issued during year: Conversion of Preferred Stock (38 in 1997, 46 in 1996, and 4,245 in 1995)............................ - 1 42 Contributed to Company's employee stock ownership plan (3 in 1997, 5 in 1996, and 20 in 1995)......................... - - - Exercise of stock options and warrants (651 in 1997, 895 in 1996, and 3,032 in 1995) .............. 7 9 31 ----- ----- -----
Shares issued and outstanding at end of year (23,151 in 1997, 22,459 in 1996, and 21,513 in 1995)........ 232 225 215 ----- ----- -----
Capital in Excess of Par Value Balance at beginning of year.......................... 41,039 37,757 30,770 Exercise of stock options and warrants.............. 3,267 2,225 6,567 Income tax benefit related to exercise of stock options............................................. 2,930 997 - Conversion of preferred stock and convertible debentures.......................................... 11 14 272 Stock contribution to employee stock ownership plan. 56 46 39 Other............................................... - - 109 ------ ------ ------ Balance at end of year................................ 47,303 41,039 37,757 ------ ------ ------
PRE-PAID LEGAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in tables are in thousands unless otherwise indicated)
Nature of Operations Pre-Paid Legal Services, Inc. (the "Company") underwrites and markets legal service plans (referred to as "Contracts") which provide for or reimburse a portion of legal fees incurred by members in connection with specified matters. Contracts are guaranteed renewable and are marketed primarily in 27 states by an independent sales force referred to as "Associates". Contract premiums are principally collected on a monthly basis.
Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as those of PPL Agency, Inc. (See Note 6 for additional information regarding PPL Agency, Inc.) The primary subsidiaries of the Company include Pre-Paid Legal Casualty, Inc. (PPLCI) and Pre-Paid Legal Services, Inc. of Florida (PPLSIF). All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition Contract premiums are recognized in income when due in accordance with Contract terms which generally require the holder of the Contract to remit premiums on a monthly basis. Contracts are canceled for nonpayment of premium after ninety days. Premiums due but not collected at the end of an accounting period are recorded as accrued Contract income; a provision for uncollectible premiums, if any, is recorded currently. Revenues from Associates' training program fees and sales of marketing supplies are recognized as income when cash is received.
Contract Benefit Liability The Contract benefit liability represents claims reported but not paid and actuarially estimated claims incurred but not reported on open panel Contracts and per capita amounts due provider attorneys on closed panel Contracts. The Company calculates the benefit liability costs on open panel Contracts based on completion factors which consider historical claims experience based on the dates that claims are incurred, reported to the Company and subsequently paid. Processing costs related to these claims are accrued based on an estimate of expenses to process such claims.
Income Taxes The Company accounts for income taxes in accordance with SFAS 109, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are recognized in different periods in the Company's financial statements and tax returns. In estimating future tax consequences, SFAS 109 generally considers all future events other than the enactment of changes in the tax law or rates.
December 31, 1997 ------------------------------------ Amortized Gross Unrealized Fair Cost Gains Losses Value --------- ------- ----------- ------ U.S. Government obligations.. $3,200 $ 3 $ - $3,203 Obligations of state and political subdivisions..... 300 - - 300 ------ ------ ------ ------ Total................... $3,500 $ 3 $ - $3,503 ====== ====== ====== ======
December 31, 1996 ------------------------------------ Amortized Gross Unrealized Fair Cost Gains Losses Value --------- ------- ----------- ------ U.S. Government obligations.. $2,025 $ - $ 3 $2,022 Obligations of state and political subdivisions..... 414 1 $ 2 $ 413 ------ ------ ------ ------ Total................... $2,439 $ 1 $ 5 $2,435 ====== ====== ====== ======
A comparison of the amortized cost and fair value of the Company's held to maturity investment securities at December 31, 1997 by maturity date follows:
Remaining amounts included in these balance sheet captions represent certificates of deposit.
The Company is required to pledge investments to various state insurance departments as a condition to obtaining authority to do business in certain states. The Company has investments pledged to state regulatory agencies as follows: December 31, ---------------- 1997 1996 ------ ------ Certificates of deposit.......... $1,797 $1,822 Obligation of state and political subdivisions.......... 300 300 U. S. Government obligations.... 675 650 ------ ------ Total $2,772 $2,772 ====== ======
Equipment, furniture and fixtures................... 3-10 years $6,186 $5,283 Computer software.............. 5 years 2,324 2,087 Building and improvements...... 20 years 1,834 1,653 Automotive..................... 3 years 231 213 Land........................... 110 110 ------ ------ 10,685 9,346 Accumulated depreciation...... (7,091) (6,391) ------ ------ Property and equipment, net... $3,594 $2,955 ====== ======
Year Ended December 31, ------------------------- 1997 1996 1995 ------- ------- ------- Current........................... $ - $ - $ - Deferred.......................... 10,117 6,715 3,932 ------- ------- ------- Total provision for income taxes.. $10,117 $ 6,715 $ 3,932 ======= ======= =======
December 31, --------------------- 1997 1996 -------- -------- Deferred tax liabilities: Commissions advanced .............................. $ 18,784 $ 10,772 Depreciation ...................................... - 175 -------- -------- Total deferred tax liabilities.................... 18,784 10,947 -------- --------
A valuation allowance has been established for deferred tax assets representing the estimated tax benefit of the General Business Credit carryforward and pre-1996 net operating loss carryforwards as the Company does not believe it is more likely than not that the tax benefits of such carryforwards will be realized. The valuation allowance decreased $284,000 during the year ended December 31, 1997 and increased $147,000 for the year ended December 31, 1996.
At December 31, 1997, the Company has net operating loss carryforwards for Federal regular tax and alternative minimum tax purposes of approximately $14.6 million and $14.2 million, respectively, expiring in 2001 through 2012. In addition, the Company has general business and rehabilitation tax credit carryforwards of approximately $325,000, expiring primarily in 1998 to 2001, and an alternative minimum tax credit carryforward of $366,000 which does not expire.
Each share of $3.00 Cumulative Convertible Preferred Stock is entitled to receive cumulative cash dividends at the annual rate of $3 per share, payable quarterly, is convertible into 2.5 shares of Common Stock and is redeemable at the option of the Company at $25 per share. The $3.00 Cumulative Convertible Preferred Stock had a liquidation value of $55,000 at December 31, 1997. During 1997 and 1996, $3.00 Cumulative Convertible Preferred Stock consisting of 1,714 and 40 shares, respectively, were converted into 4,385 shares of Common Stock.
Agency's financial position and results of operations are included in the Company's financial statements on a combined basis. Agency earned commissions, net of amounts paid directly to its agents by the underwriter, during 1997, 1996 and 1995 of $110,000, $130,000 and $120,000, respectively, through its sales of insurance products of an unaffiliated company. Agency had a net loss for the year ended December 31, 1997 of $12,500 and net income for the year ended December 31, 1996 and 1995 of $6,700 and $599, respectively, after incurring commissions earned by the Chairman of $50,000, $49,000 and $45,000 respectively, and annual management fees of $72,000 paid to the Company.
The Chairman and his wife own Stonecipher Aviation LLC ("SA"). The Company has agreed to reimburse SA for certain expenses pertaining to trips made by Company personnel for Company business purposes using aircraft owned by SA. Such reimbursement represents the pro rata portion of direct operating expenses, such as fuel, maintenance, pilot fees and landing fees, incurred in connection with such aircraft based on the relative number of flights taken for Company business purposes versus the number of other flights during the applicable period. No reimbursement is made for depreciation, capital expenditures or improvements relating to such aircraft. During 1997, the Company paid $192,000 to SA as reimbursement for such transportation expenses.
An executive officer (President) and director of the Company has loans from the Company made in December 1992 and December 1996. The largest aggregate balance of these loans during the year ended December 31, 1997 was $296,000. The outstanding balance of these loans as of December 31, 1997 was $296,000. These loans bear annual interest at the rate of 3% in excess of the prime rate, adjusted on January 1 of each year, and are secured by commissions due from the Company. This individual also owns interests ranging from 10% to 67% in corporations or partnerships not affiliated with the Company but engaged in the marketing of the Company's Contracts and which earn commissions from sales of Contracts. These entities earned commissions, net of amounts passed through as commissions to their sales agents, during 1997, 1996 and 1995 of $49,000, $54,000 and $55,000, respectively.
The following table summarizes information about stock options outstanding at December 31, 1997 issued pursuant to the Plan:
The Company, effective July 3, 1995 and July 22, 1997, adopted stock option plans for its marketing associates whereby the associates could earn stock options based upon their production and recruiting efforts. These options were issued to qualifying associates at each month end from July 1995 through March 1996 and for the month of July 1997 based on the month's production and recruiting results. The exercise price is equal to the closing stock price on the last trading day of each respective month for all grants from July 1995 through March 1996 and the exercise price for the July 1997 grants was $27.00 (which exceeded market). The options granted from July 1995 through March 1996 expired pursuant to their terms on July 31, 1997 and the options granted for production during July 1997 expire on July 31, 1998. Activity related to these plans is as follows:
$8.25 2,500 2.96 $ 8.25 $27.00 98,850 .58 27.00 ------- ----- ------ 101,350 .64 $26.54 ======= ===== ======
1997 1996 ------ ------ Net income applicable to common stockholders: As reported.................. $18,790 $12,455 Pro forma.................... $17,667 $12,227
The estimated fair value of options granted to employees was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used: no dividend yield; risk-free interest rate of 5.00%; expected life of 5 years; and expected volatility of 30%.
During 1988, the Company adopted an employee stock ownership plan. Under the plan, employees may elect to defer a portion of their compensation by making contributions to the plan. Up to seventy-five percent of the contributions made by employees may be used to purchase Company common stock. The Company, at its option, may make matching contributions to the plan, and recorded expense during 1997, 1996 and 1995 of $55,785, $46,176 and $39,150 based on contributions of Company stock of 3,000 shares, 5,100 shares and 20,000 shares, respectively.
The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," and has restated earnings per share for all periods presented in accordance with that Statement.
Earnings: - --------- Net income applicable to common stockholders......... $18,777 $12,455 $ 7,187 ======= ======= =======
Shares: - ------- Weighted average shares outstanding.................. 22,127 21,332 18,947 ======= ======= ======= Basic earnings per common share...................... $ .85 $ .58 $ .38 ======= ======= =======
Shares: - ------- Weighted average shares outstanding.................. 22,127 21,332 18,947 Assumed conversion of preferred stock................ 109 142 827 Assumed exercise of options and warrants............. 339 845 1,634 ------- ------- ------- Weighted average number of shares, as adjusted....... 22,575 22,319 21,408 ======= ======= ======= Diluted earnings per common share.................... $ .83 $ .56 $ .34 ======= ======= =======
Income before Basic earnings Diluted income Net per common earnings per Revenues taxes Income share common share -------- -------- -------- ------------- ------------ ---- First quarter.... $19,725 $6,124 $3,981 $.18 $.18 Second quarter... 22,199 6,700 4,355 .20 .19 Third quarter.... 24,199 7,667 4,983 .22 .22 Fourth quarter... 26,345 8,416 5,471 .24 .24