The executive and administrative offices of the Company and its subsidiaries are located at 321 East Main Street, Ada, Oklahoma. These offices, containing approximately 40,000 square feet of office space, are owned by the Company. Additionally, the Company completed construction during 1999, of a new facility containing approximately 17,000 square feet of office and warehouse and shipping space. The Company now has three buildings located on its property located approximately five miles from the Company's executive and administrative offices. The Company previously completed construction of its Customer Care facility during 1998 that contains approximately 10,000 square feet of office and call center space. The Customer Care is adjacent to the material distribution center constructed during 1997 containing 8,600 square feet of inventory, package assembly and shipping space. While the Company currently fully utilizes these existing facilities, management believes that it will have no difficulty in securing additional facilities in close proximity to its office building if necessary for future expansion.
The executive and administrative offices of Universal Fidelity Life Insurance Company ("UFL"), a wholly owned subsidiary, are located at 2211 North Highway 81 in Duncan, Oklahoma. These offices, containing approximately 20,000 square feet of office space, were constructed in 1986 and are owned by UFL. Additionally, UFL completed construction during 1993 on a separate 2,400 square foot climate-controlled building used primarily for printing activities and equipment storage. The Company currently fully utilizes these facilities but owns several acres of additional real estate at this location that could be used for future business expansion.
(1)The loss ratio represents Membership benefit costs as a percentage of Membership fees. The product cost ratio represents product costs as a percentage of product sales. The expense ratio represents the total of commissions, general and administrative expenses and premium taxes as a percentage of Membership fees and product sales. These ratios do not measure total profitability because they do not take into account all revenues and expenses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS ---------------------
Of the shares of Company common stock issued in the TPN merger, 75,000 shares remain in escrow pending the resolution of certain specified contingencies, relating to pending or threatened litigation against TPN at the time of the Merger.
Membership benefit costs vary depending on the type of Membership. Closed panel plans provide the Membership benefits through a designated provider law firm with whom the Company has arranged for the services to be provided in a particular geographic area. Provider law firms receive a fixed monthly payment for each member in their service area and are responsible for providing the Membership benefits without additional remuneration. The fixed cost aspect of closed panel plans provides significant advantages to the Company in managing its claims risk. Under closed panel plans, the Company has the ability to more effectively monitor the quality of legal services provided and, due to the volume of claims that may be directed to particular provider law firms, has access to larger, more diversified law firms. At December 31, 1999, approximately 97% of the Company's Memberships were closed panel plans compared to 94% at December 31, 1998.
Commissions Beginning with new Memberships written after March 1, 1995, the Company implemented a level commission schedule which results in the Company incurring commission expense related to the sale of its legal expense plans on a basis more consistent with the collection of the fees generated by the sale of such Memberships. Prior to March 1, 1995, the Company had incurred much higher commissions (approximately 70%) during the first year of the Membership with substantially lower commissions (approximately 16%) in all subsequent years. The level commission structure results in the Company incurring commissions at the rate of approximately 25% per year for all Membership years.
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 in January 1997. In order to successfully qualify, the new associate going through the training program must produce three new Memberships and recruit three new associates or personally sell five new memberships within 60 days of becoming an associate.
Prior to February 1999, TPN distributors received commissions from the sale of personal and home care products, personal development products, communication services and satellite subscription sales. These commissions were paid to the distributor actually making the sale as well as other distributors in his organization. Commissions on goods and services were not advanced and have averaged approximately 32% of the product sales price. These commissions were paid at the time of sale and subject to recovery only in the event of returned goods or refunds.
Membership Persistency One of the major factors affecting the Company's profitability and cash flow is Membership persistency, which represents the ability of the Company to retain a Membership, and therefore receive fees, once it has been written. The Company monitors its overall Membership persistency rate, as well as the persistency rates with respect to Memberships sold by individual associates and agents and persistency rates with respect to Membership sales by geographic region and payment method. The Company's Membership persistency rate measures the number of Memberships in force at the end of a year as a percentage of the total of (i) Memberships in force at the beginning of such year, plus (ii) new Memberships sold during such year. From 1981 through the year ended December 31, 1999, the Company's annual Membership persistency rates, using the foregoing method, have averaged approximately 75.1%. The annual Membership persistency rates were 73.4%, 73.8% and 73.6% for 1999, 1998 and 1997, respectively. The Company's overall Membership persistency rate varies based on, among other factors, the relative age of total Memberships in force. The Company's overall Membership persistency rate could become lower when the Memberships in force include a higher proportion of newer Memberships. During the last three years, the Company has experienced significant increases in new Membership sales and, as a result, the percentage of newer Memberships in its total Memberships in force has increased. Unless offset by other factors, this increase could result in a decline in the Company's overall Membership persistency rate as determined by the formula described above, but does not necessarily indicate that the new Memberships written are less persistent, only that the ratio of new Memberships to total Memberships is higher than it averaged during the 1981 through 1999 period. The Company's financial condition and results of operations may be materially adversely affected if the persistency rates of existing and new Memberships become materially lower than the Company's historical experience.
Cash Flow Considerations Relating to Sales of Memberships The Company generally advances significant commissions at the time a Membership is sold. Since approximately 92% of Membership fees 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 Membership fees are remitted and no additional commissions are paid on the Membership until all previous commission advances have been fully recovered. Since the cash advanced at the time of sale of a new Membership may be recovered over a multi-year period, cash flow from operations may be adversely affected depending on the number of new Memberships written in relation to the existing active base of Memberships and the composition of new or existing sales associates producing such Memberships.
Investment Policy The Company's investment policy is to some degree controlled by certain insurance regulations, which, coupled with management's own investment philosophy, results in a conservative investment portfolio that is not risk oriented. The Company's investments consist of common stocks, investment grade (rated Baa or higher) preferred stocks and investment grade bonds primarily issued by corporations, the United States Treasury, federal agencies, federally sponsored agencies and enterprises as well as mortgage-backed securities and state and municipal tax-exempt bonds. The Company is required to pledge investments to various state insurance departments as a condition to obtaining authority to do business in certain states.
As of December 31, 1999, substantially all of the Company's investments were in investment grade (rated Baa or higher) fixed-maturity investments and interest-bearing money market accounts. The Company does not hold any investments classified as trading account assets or derivative financial instruments.
The table below summarizes the estimated effects of hypothetical increases and decreases in interest rates on the Company's fixed-maturity investment portfolio. It is assumed that the changes occur immediately and uniformly, with no effect given to any steps that management might take to counteract that change. The hypothetical changes in market interest rates reflect what could be deemed best and worst case scenarios. The fair values shown in the following table are based on contractual maturities. Significant variations in market interest rates could produce changes in the timing of repayments due to prepayment options available. The fair value of such instruments could be affected and, therefore, actual results might differ from those reflected in the following table:
- ------------------- (1)Excluding short-term investments with a fair value of $3.3 million and $2.4 million at December 31, 1999 and 1998, respectively.
Costs incurred through the end of 1999 have not been material and were expensed as incurred. Any additional Year 2000 costs will continue to be funded out of cash flow from operations. The vast majority of the Company's Year 2000 remediation plan has been accomplished by the Company's internal programming staff and costs were not incremental costs to the Corporation, but rather represented the redeployment of existing information technology resources. Although concentration on Year 2000 compliance has delayed other programming projects, such delays have not had and are not expected to have a material adverse impact on the Company's financial condition or results of operations.
Accounting Standard to be Adopted Statement of Financial Accounting Standards 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 the Company recognize all derivatives as either assets or liabilities in the balance sheet 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. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 that deferred the effective date of SFAS 133 for one year. The Company will adopt SFAS 133 on January 1, 2001 as required. SFAS 133 applies to all entities and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company believes that it holds no derivative instruments at December 31, 1999.
Associate services revenue increased 32% from $17.3 million for 1998 to $22.8 million during 1999 as a result of more new associates recruited and as a result of Fast Start which resulted in the Company receiving training fees of approximately $12.6 million during 1999 compared to $9.3 million during 1998. The field training program, titled Fast Start to Success ("Fast Start"), is aimed at increasing the level of new Membership sales per 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 three new sales associates or personally sell five memberships within 60 days of becoming an associate. The $12.6 million and $9.3 million for 1999 and 1998, respectively, in training fees was comprised of $184 from each of approximately 68,535 new sales associates who elected to participate in Fast Start in 1999 compared to 50,622 that paid the $184 during 1998. New associates electing to participate in Fast Start increased to 74% of new associates during 1999 from 67% for 1998. Total new associates enrolled during 1999 were 92,644 compared to 75,737 for 1998, an increase of 22%. While the number of new associates increased during 1999, the number of new Memberships sold, at least partially as a result of the Fast Start program, increased even more 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 (including training bonuses paid), providing associate services and other direct marketing expenses.
Membership benefits totaled $51.8 million for 1999 compared to $36.1 million for 1998, and represented 33% of Membership fees for both 1999 and 1998. This loss ratio (Membership benefits as a percentage of Membership fees) should remain near 35% as the portion of active Memberships that provide for a capitated benefit continues to increase.
General and administrative expenses during 1999 and 1998 were $19.4 million and $21.9 million, respectively, and represented 10% and 14% of total revenues for such years. Management expects further gradual decreases in general and administrative expenses when expressed as a percentage of total revenues as a result of certain economies of scale and the integration of TPN and UFL operations.
Associate services and direct marketing expenses increased to $16.0 million for 1999 from $14.7 million for 1998 primarily as a result of Fast Start training bonuses paid of approximately $7.5 million during 1999 compared to $6.3 million in 1998. Additional costs of supplies due to increased purchases by associates and higher staffing requirements for associate related service departments also contributed to the increase. These expenses also include the costs of providing associate services and marketing costs other than commissions that are directly associated with new Membership sales.
Dividends paid on outstanding preferred stock decreased to $9,700 for 1999 from $9,800 during 1998 and is attributable to the conversion of additional shares of $3.00 Cumulative Convertible Preferred Stock into common stock.
Comparison of 1998 to 1997 The Company reported net income applicable to common shares of $30.2 million, or $1.26 per diluted common share, for 1998, up 72% from net income applicable to common shares of $17.5 million, or $.74 per diluted common share, for 1997. The increase in the net income applicable to common shares for 1998 is primarily the result of increases in Membership fees for 1998 as compared to 1997.
Membership fees totaled $110.0 million during 1998 compared to $76.7 million for 1997, an increase of 43%. Membership fees and their impact on total revenues in any period are determined directly by the number of active Memberships in force during any such period. The active Memberships in force are determined by both the number of new Memberships sold in any period together with the persistency, or renewal rate, of existing Memberships. New Membership sales increased 38% during 1998 to 391,827 from 283,723 during 1997. At December 31, 1998, there were 603,017 active Memberships in force compared to 425,381 at December 31, 1997, an increase of 42%. Additionally, the average annual fee per Membership has increased from $225 for all Memberships in force at December 31, 1997 to $229 for all Memberships in force at December 31, 1998, a 2% increase, as a result of a higher portion of active Memberships containing the additional pre-trial hours benefit at an additional cost to the member together with increased sales of the Business Owners' Legal Solutions plan.
Product sales declined 32% during 1998 to $27.8 million from $41.1 million in 1997 primarily due to the acquisition of TPN and the resulting concentration on Membership sales as opposed to the sale of goods and services. The trend of declining product sales is expected to continue as the array of goods and services previously available for sale through TPN is dramatically narrowed and sales efforts are more closely focused on the sale of new Memberships and the recruitment of new sales associates.
Interest income for 1998 increased 53% to $2.6 million from $1.7 million for 1997. Interest income increased as a result of increases in the average investments outstanding. At December 31, 1998 the Company reported $50.1 million in cash and investments compared to $35.4 million at December 31, 1997.
Primarily as a result of the increase in Membership fees, total revenues increased to $160.5 million for 1998 from $133.4 million during 1997, an increase of 20%.
Associate services and direct marketing expenses increased to $14.7 million for 1998 from $11.4 million for 1997 primarily as a result of Fast Start training bonuses paid of approximately $6.3 million during 1998 compared to $4.4 million in 1997. Additional costs of supplies due to increased purchases by associates and higher staffing requirements for associate related service departments also contributed to the increase. These expenses also include the costs of providing associate services and marketing costs other than commissions that are directly associated with new Membership sales.
General Consolidated net cash provided by operating activities was $17.6 million, $9.9 million and $14.5 million for 1999, 1998, and 1997, respectively. Cash provided by operating activities increased $7.7 million during 1999 compared to 1998 primarily due to the $8.7 million increase in net income, an increase in deferred income taxes of $3.4 million, a decrease in inventories of $1.6 million and an increase in the reduction of accounts payable and accrued expenses of $7.9 million which was offset by the $10.6 million increase in commission advances and the $2.8 million decrease in deferred revenue.
Net cash provided by investing activities was $10.6 million in 1999 as compared to net cash used in investing activities of $31.4 million and $6.3 million for 1998 and 1997, respectively. Due to the 1998 UFL acquisition previously discussed and the resulting requirement for $20.7 million as cash consideration to Pioneer, the Company liquidated a substantial portion of its investments classified as held-to-maturity. Although the Company previously had demonstrated its intent and capability to hold such investments until their scheduled maturities, the conversion of such investments to cash as part of the UFL transaction prior to their scheduled maturities resulted in all remaining investments of the Company, including the $25 million investment portfolio of UFL, being classified as available-for-sale investments. In addition to capital expenditures of $2.7 million during 1999, the Company liquidated a portion of its available-for-sale investments in order to reacquire shares of the Company's common stock.
Net cash used in financing activities was $26.6 million in 1999 as compared to net cash provided by financing activities of $2.4 million and $3.5 million for 1998 and 1997, respectively. This $29.0 million change was comprised primarily of $29.4 million used to reacquire treasury stock.
The Company had a consolidated working capital surplus of $35.3 million at December 31, 1999 compared to $21.2 million at December 31, 1998. The $14.1 million increase in working capital during 1999 was primarily the result of an increase in the current portion of commission advances of $11.6 million and a $3.6 million decrease in deferred product sales revenue.
The Company generally advances significant commissions at the time a Membership is sold. During 1999, the Company advanced commissions of $74.8 million on new Membership sales compared to $51.4 million for 1998. Since approximately 92% of Membership fees 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 Membership fees 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 $35.5 million and $23.0 million for 1999 and 1998, respectively. The Company has recorded an allowance of $4.5 million to provide for estimated uncollectible commission advances which includes an increase in the allowance of $550,000 during 1999.
The Company believes that it has significant ability to finance expected future growth in Membership sales based on its existing amount of cash and cash equivalents and unpledged investments at December 31, 1999 of $32.1 million.
Consolidated Financial Statements - --------------------------------- Consolidated Balance Sheets - December 31, 1999 and 1998 Consolidated Statements of Income - For the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income - For the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - For the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes In Stockholders' Equity - For the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedule - ----------------------------------------- Schedule II. Consolidated Valuation and Qualifying Accounts - For the years ended December 31, 1999, 1998 and 1997 (All other schedules have been omitted since the required information is not applicable or because the information is included in the consolidated financial statements or the notes thereon.)
We have audited the statements of operations, shareholders' deficit and cash flows of TPN, Inc. d.b.a. The People's Network (a Texas corporation) ("TPN") for the year ended December 31,1997, prior to the restatement (and, therefore, are not presented herein) for the merger of Pre-Paid Legal Services, Inc. ("Pre-Paid") with TPN on October 2, 1998, which has been accounted for as a pooling of interests as described in Notes 1 and 2 to the Pre-Paid consolidated financial statements. These financial statements are the responsibility of TPN's management. Our responsibility is to express an opinion on these financial statements based on our audit.
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 law firms ("provider law firms") under contract with the Company. Provider law firms are paid a fixed fee on a capitated basis to render services to plan members residing within the state or province in which the provider law firm is licensed to practice. Because the fixed fee payments by the Company to provider law firms in connection with closed panel plans do not vary based on the type and amount of benefits utilized by the member, the closed panel plans provide significant advantages to the Company in managing claims risk. Membership benefit costs relating to open panel Memberships, which constituted approximately 3% of Memberships in force at December 31, 1999, are based on the usual, reasonable and customary fee for providing the required services. Memberships are generally guaranteed renewable and are marketed primarily in 28 states and the province of Ontario by an independent sales force referred to as "Associates". Membership fees are principally collected on a monthly basis.
Basis of Presentation The consolidated financial statements have been prepared in accordance with generally accepted accounting principles which vary in some respects from statutory accounting principles used when reporting to state insurance regulatory authorities. The consolidated financial statements give retroactive effect, as a result of applying the pooling of interests accounting method, to the merger with TPN, which was effective October 2, 1998. The UFL acquisition, on December 30, 1998, was accounted for by the purchase method of accounting for business combinations. (See Note 2)
Foreign Currency Translation The financial results of the Company's Canadian operations are measured in its local currency and then translated into U.S. dollars. All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year. The accumulated translation gains or losses resulting from the changes in the exchange rates were insignificant at December 31, 1999, and accordingly the Company has not recorded any translation adjustments as other comprehensive income.
Prior to February 1999, TPN distributors received commissions from the sale of personal and home care products, personal development products, communication services and satellite subscription sales. These commissions were paid to the distributor actually making the sale as well as other distributors in his organization. Commissions on goods and services were not advanced and averaged approximately 32% of the product sales price. These commissions were paid at the time of sale and subject to recovery only in the event of returned goods or refunds.
Inventories Inventories include the cost of materials and packaging and are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method for the personal and home care and personal development inventory and the average cost method for sales and promotional materials. Cost of jewelry is determined using the retail-inventory method.
Production Costs Production costs include all direct and indirect costs of producing shows for broadcast on the private television network and are recorded at cost and amortized on the straight-line method over the shorter of three years or the period the program is broadcast.
Commission Advances Commission advances represent the unearned portion of commissions advanced to Associates on sales of Memberships. Commissions are earned as Membership fees are collected, usually on a monthly basis. The Company reduces Commission advances as Membership fees are paid and commissions earned. Unearned commission advances on lapsed Memberships are recovered through collection of fees on an associate's remaining active Memberships. At December 31, 1999 and 1998, the Company had an allowance of $4.5 million and $4.0 million, respectively, to provide for estimated uncollectible balances. The Company charges interest at the prime rate on unearned commission advances relating to Memberships that cancel subsequent to the advance being made and prior to the advance being fully earned.
Stock-Based Compensation Compensation expense is recorded with respect to stock option grants and restricted stock awards to employees and board members using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"). This method calculates compensation expense on the measurement date as the excess of the current market price of the underlying Company stock over the amount the employee is required to pay for the shares, if any. The expense is recognized over the vesting period of the grant or award. The Company has adopted the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation," in preparing its financial statement disclosures.
December 31, 1999 ------------------------------------------ Amortized Gross Unrealized Fair Available-for-Sale Cost Gains Losses Value - ------------------ --------- ------- ---------- -------- U.S. Government obligations........ $ 18,752 $ - $(1,532) $ 17,220 Corporate obligations.............. 3,930 - (354) 3,576 Equity securities.................. 417 588 - 1,005 Obligations of state and political subdivisions..................... 2,402 - (176) 2,226 Certificates of deposit............ 3,141 - - 3,141 Total.............................. --------- ------- -------- -------- $ 28,642 $ 588 $(2,062) $ 27,168 ========= ======= ======== =========
The Company's investment securities are included in the accompanying consolidated balance sheets at December 31, 1999 and 1998 as follows.
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 fair value of investments pledged to state regulatory agencies as follows: December 31, -------------------- 1999 1998 --------- --------- Certificates of deposit............................ $ 1,774 $ 1,772 Obligation of state and political subdivisions..... 100 100 U. S. Government obligations....................... 3,414 1,050 --------- --------- Total $ 5,288 $ 2,922 ======== ========
The net carrying value of capitalized leased assets was $790,000 and $1.0 million at December 31, 1999 and 1998, respectively.
December 31, ----------------- 1999 1998 ------- ------- Accounts payable................... $ 1,652 $ 2,442 Fast Start training bonuses payable 2,421 853 Accrued expenses................... 1,133 1,751 Accounts payable of UFL............ 1,164 2,283 Current tax liability.............. 2,197 - Other.............................. 2,201 2,057 ------- ------- Total $10,768 $ 9,386 ======= =======
December 31, ------------------- 1999 1998 -------- -------- Deferred tax liabilities: Commissions advanced ............................ $ 42,206 $ 28,650 Unrealized investment gains (net)................ 467 467 Depreciation .................................... 356 224 -------- -------- Total deferred tax liabilities.................. 43,029 29,341 -------- --------
The Company has general business and rehabilitation tax credit carryforwards of approximately $261,000 expiring primarily in 2000 to 2001, and an alternative minimum tax ("AMT") credit carryforward of $586,000 that does not expire. The Company has NOLs in the amount of $4.7 million representing the NOLs of TPN generated prior to the merger date. A valuation allowance has been established for the general business and rehabilitation tax credit carryforwards and the TPN NOLs as the Company does not believe it is more likely than not that the tax benefits of these carryforwards will be realized prior to their expiration, in part due to utilization restrictions imposed by the Internal Revenue Code.
At December 31, 1999, the Company was committed under noncancelable operating and capital leases, principally for buildings and equipment. Aggregate rental expense under all operating leases was $112,659, $468,000 and $379,000 in 1999, 1998 and 1997, respectively. At December 31, 1999, minimum rentals for operating and capital leases in succeeding years ending December 31 are:
In February 1999, a lawsuit was filed against the Company by a building owner seeking to recover unspecified damages and attorneys' fees for an alleged breach of a lease agreement between the owner and TPN. Management has indicated it plans to vigorously contest this suit and believes that any loss resulting from the suit would not have a material impact on the Company's financial position, results of operations or cash flows in future years.
The following table summarizes information about stock options outstanding at December 31, 1999 issued pursuant to the Plan:
The following table summarizes information about stock options exercisable at December 31, 1999 issued pursuant to the Plan:
The Company, effective July 3, 1995, December 14, 1995 and July 22, 1997, also 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 options granted December 14, 1995 were issued to qualifying associates achieving a specified level within the Company's marketing structure. 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, the exercise price for December 1995 grants was equal to the closing stock price on such date 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 expired pursuant to their terms on July 31, 1998. The options granted December 14, 1995 expire on December 14, 2000. Activity related to these plans is as follows:
The following table summarizes information about stock options outstanding at December 31, 1999 issued to marketing associates:
Weighted Average Remaining Weighted Average Range of Exercise Prices Number Outstanding Contractual Life Exercise Price - ------------------------ ------------------ ----------------- ---------------- $8.25 2,500 .96 $ 8.25 ================== ================= ================
In addition to those options issued pursuant to the Plan and those options issued to non-employee marketing associates in the two preceding tables, the Company has other options outstanding. All grants during 1999, 1998 and 1997 were made to Regional Vice Presidents ("RVP") (marketing employees) of the Company and marketing consultants. The exercise price is equal to the closing stock price on the day the RVP was appointed by the Company or the date the options were granted to the marketing consultants. Effective December 31, 1999, the unvested portion of the outstanding RVP options were terminated as reflected in the table below. The Company will continue to evaluate potential stock option plans for the RVPs. A summary of the status of such options as of December 31, 1999, 1998 and 1997 and changes during the years ended on those dates is presented below:
Net income applicable to common stockholders: As reported.................. $ 38,943 $ 30,200 $ 17,510 Pro forma.................... 35,931 21,671 16,387
Basic earnings per common share: As reported.................. $ 1.69 $ 1.29 $ .76 Pro forma.................... 1.56 .92 .71
The estimated fair value of options granted to employees, including RVPs, 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 6.09% for 1999 and 5.00% for 1998 and 1997; expected life of 3-7 years; and expected volatility ranging from 30% to 64%.
In accordance with SFAS 123, the Company recorded compensation expense related to the issuance of stock options to non-employee marketing associates of $100,000 during 1997. The weighted average fair value of options granted that met the minimum exercise criteria during 1997 was $1.07 per share. The fair value of each stock option grant to marketing associates was measured on the date of the 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% for 1997; expected life of 1 year; and expected volatility ranging from 30% to 49%.
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 1999, 1998 1997 of $86,150, $58,027 and $55,785 based on annual contributions of Company stock of 2,800 shares, 1,900 shares and 3,000 shares, respectively.
The Company had taxable income for 1998 and the Company's tax expense for 1998 was reduced in the fourth quarter to reflect management's current estimate of the utilization of certain NOLs for which a valuation allowance had been previously established. Due to this reduction in tax expense, fourth quarter 1998 earnings were increased $3.5 million, or 15 cents per diluted share.
Life insurance segment (UFL): Interest income.................................... 1,094 - Other (includes $1.0 million life premiums)...... 3,130 - --------- --------- Total........................................... 4,224 - --------- --------- Total........................................ $ 196,240 $ 160,453 ========= =========