UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-9293
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PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 East Main
Ada, Oklahoma 74820
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (580) 436-1234
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered under Section 12 (g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ( ).
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within the past 60 days prior to the date of
the filing: As of March 23, 2001 - $180,162,749.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of March 23, 2001
there were 21,486,395 shares of Common Stock, par value $.01 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Company's definitive proxy statement for its 2001 annual
meeting of shareholders are incorporated into Part III of this Form 10-K by
reference.
PRE-PAID LEGAL SERVICES, INC.
FORM 10-K
For the year ended December 31, 2000
TABLE OF CONTENTS
PART I.
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ITEM 1. DESCRIPTION OF BUSINESS
General
Acquisition of TPN, Inc. d.b.a. The Peoples Network
Acquisition of Universal Fidelity Life Insurance Company
Industry Overview
Description of Memberships
Specialty Legal Service Plans
Provider Law Firms
Marketing
Operations
Quality Control
Competition
Regulation
Employees
Foreign Operations
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Price of and Dividends on the Common Stock
Recent Sales of Unregistered Securities
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Measures of Member retention
Results of Operations:
Comparison of 2000 to 1999
Comparison of 1999 to 1998
Liquidity and Capital Resources
Risk Factors
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
PART III. **
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PART IV.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
SIGNATURES
** Information required by Part III is incorporated by reference from the
Company's definitive proxy statement for its 2001 annual meeting of
shareholders.
PRE-PAID LEGAL SERVICES, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
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General
Pre-Paid Legal Services, Inc. (the "Company") was one of the first
companies in the United States organized solely to design, underwrite and market
legal expense plans. The Company's predecessor commenced business in 1972 and
began offering legal expense reimbursement services as a "motor service club"
under Oklahoma law. In 1976, the Company was formed and acquired its predecessor
in a stock exchange. The Company began offering Memberships independent of the
motor service club product by adding a legal consultation and advice service,
and in 1979 the Company implemented a legal expense benefit which provided for
partial payment of legal fees in connection with the defense of certain civil
and criminal actions. The Company's legal expense plans (referred to as
"Memberships") currently provide for a variety of legal services in a manner
similar to medical reimbursement plans. In most states and provinces, standard
plan benefits include preventive legal services, motor vehicle legal defense
services, trial defense services, IRS audit services and a 25% discount off
legal services not specifically covered by the Membership for an average monthly
Membership fee of approximately $20. Additionally, in most states, the Legal
Shield rider can be added to the standard plan for only $1 per month and
provides members with 24-hour access to a toll-free number for attorney
assistance if the member is arrested or detained.
Plan benefits are generally provided through a network of independent
provider law firms, typically one firm per state or province. Members have
direct, toll-free access to their Provider law firm rather than having to call
for a referral. At December 31, 2000, the Company had 1,064,805 Memberships in
force with members in all 50 states, the District of Columbia and the Canadian
provinces of Ontario and British Columbia. Approximately 90% of such Memberships
were in 28 states and the Canadian province of Ontario.
Acquisition of TPN, Inc. d.b.a. The Peoples Network ("TPN")
TPN was merged into the Company effective October 2, 1998. Since its
inception in 1994, TPN had marketed personal and home care products, personal
development products and services together with PRIMESTAR(R) satellite
subscription television service to its members through a network marketing sales
force. TPN had a sales force of approximately 30,000 distributors at the time of
the acquisition of which approximately 13,000 immediately became Company sales
associates after the acquisition. Due to concentration on Membership sales and
the recruitment of new sales associates after the acquisition, product sales
dramatically declined and were eliminated entirely in 2000. The acquisition
qualified as a "pooling of interests" for financial reporting purposes and
accordingly the 1996 through 1998 financial information contained herein has
been restated to include the operating results of TPN.
Acquisition of Universal Fidelity Life Insurance Company
The Company completed its acquisition of Universal Fidelity Life Insurance
Company ("UFL") on December 30, 1998. UFL, based in Duncan, Oklahoma, was a
subsidiary of Pioneer Financial Services, Inc. ("Pioneer"), which is a member of
the Conseco group of companies. As part of the transaction, Pioneer Life
Insurance Company, a wholly-owned subsidiary of Pioneer, entered into a 100%
coinsurance agreement with UFL assuming all of the assets and liabilities
relating to Medicare supplement and health care business written by UFL. UFL
retained its existing life insurance business with annual premiums of
approximately $1 million and has continued to provide claims processing for the
coinsured Medicare supplement and health care policies and receive full cost
reimbursement for such services. UFL markets primarily to individuals, age 65
and over, in New Mexico, Oklahoma and Texas. The acquisition of UFL was
accounted for using the purchase method of accounting for business combinations.
The transaction has not had a significant effect on the Company's operating
results. UFL continues to market new life and Medicare supplement and health
insurance policies through existing general agency relationships, retaining the
new life insurance business and coinsuring the Medicare supplement and health
policies in their entirety to Pioneer. UFL's operations are fully self-contained
and are supported, as necessary by the Company's various operating departments.
Due to the acquisition of UFL, the Company now has two reportable segments
(legal service plans and life insurance) that have separate operating teams and
infrastructures and that offer different products and services. See Notes to
Consolidated Financial Statements, Note 17 for summarized financial information
concerning the Company's reportable segments.
Industry Overview
Legal service plans, while used in Europe for more than one hundred years
and representing more than a $4 billion European industry, were first developed
in the United States in the late 1960s. Since that time, there has been
substantial growth in the number of Americans entitled to receive various forms
of legal services through legal service plans. According to the latest estimates
developed by the National Resource Center for Consumers of Legal Services
("NRC"), there were 157 million Americans without any type of legal service
plan. The NRC estimates that 115 million Americans were entitled to service
through at least one legal service plan in 1999 although more than half are
"free" plans that generally provide limited benefits on an automatic enrollment
without any direct cost to the individual. The 115 million Americans compares to
4 million in 1981, 15 million in 1985, 58 million in 1990 and 98 million in
1996. The legal service plan industry continues to evolve and market acceptance
of legal service plans, as indicated by the continuing growth in the number of
individuals covered by plans, is increasing.
Legal service plans are offered through various organizations and marketing
methods and contain a wide variety of benefits. Free plans include those
sponsored by labor unions, elder hotlines, the American Association of Retired
Persons and the National Education Association according to NRC estimates, and
accounted for approximately 57% of covered persons in 1999. The NRC estimates
that an additional 26% are covered by employee assistance plans that are also
automatic enrollment plans without direct cost to participants designed to
provide limited telephonic access to attorneys for members of employee groups.
Free plans and employee assistance plans therefore comprise approximately 83% of
covered persons in 1999. Employer paid plans pursuant to which more
comprehensive benefits are offered by the employer as a fringe benefit are
estimated by the NRC to account for approximately 5% of covered persons in 1999.
According to the NRC, the remaining covered persons in 1999 were covered by
individual enrollment plans, other employment based plans, including voluntary
payroll deduction plans, and miscellaneous plans. These plans were estimated by
the NRC to account for approximately 12% of the market in 1999 and represent the
market segment in which the Company primarily competes. According to the NRC,
these plans typically have more comprehensive benefits, higher utilization,
involve higher costs to participants, and are offered on an individual
enrollment or voluntary basis.
Of the current work force covered by legal service plans, only 8% were
estimated by the NRC to be covered by plans having benefits comparable to those
provided by the Company's Memberships. Accordingly, the Company believes that
significant opportunities exist for successful marketing of the Company's
Memberships to employee groups and other individual consumers.
Description of Memberships
The Memberships sold by the Company generally 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 attorneys are licensed to practice.
Because the fixed fee payments by the Company to provider law firms do not vary
based on the type and amount of benefits utilized by the member, this capitated
arrangement provides significant advantages to the Company in managing claims
risk. At December 31, 2000, Memberships subject to the capitated provider law
firm arrangement comprised more than 98% of the Company's active Memberships.
The remaining Memberships (less than 2%) were primarily sold prior to 1987 and
allow members to locate their own lawyer to provide legal services available
under the Membership with the member's lawyer being reimbursed for services
rendered based on usual, reasonable and customary fees, or are in states where
there is no provider law firm in place and the Company's referral attorney
network is utilized.
Family Legal Plan
The Family Legal Plan currently marketed in most jurisdictions by the
Company consists of five basic benefit groups that provide coverage for a broad
range of preventive and litigation-related legal expenses. The Family Legal Plan
accounted for approximately 86.6% of the Company's Membership fees in 2000 and
95% of the outstanding Memberships at December 31, 2000. In addition to the
Family Legal Plan, the Company markets other specialized legal services products
specifically related to employment in certain professions described below.
In 12 states, the Company's plans are available in the Spanish language.
For the Spanish language plans, the provider law firms have both bilingual staff
and lawyers and the Company has bilingual staff for both customer service and
marketing service functions. The Company will continue to evaluate making its
plans available in additional languages in markets where demand for such a
product is expected to be sufficient to justify this additional cost.
In exchange for a fixed monthly, semi-annual or annual payment, members are
entitled to specified legal services. Those individuals covered by the
Membership include the individual who purchases the Membership along with his or
her spouse and never married children living at home up to age 21 or up to age
23 if the children are full time college students. Also included are children up
to age 18 for whom the member is legal guardian and any dependent child,
regardless of age, who is mentally or physically disabled. Each Membership,
other than the Business Owners' Legal Solutions Plan, is guaranteed renewable,
except in the case of fraud or nonpayment of Membership fees. Historically, the
Company has not raised rates to existing members. If new benefits become
available, existing members may choose the newer, more comprehensive plan at a
higher rate or keep their existing Memberships. Memberships are automatically
renewed at the end of each Membership period unless the member cancels prior to
the renewal date or fails to make payment on a timely basis.
The basic legal service plan Membership is sold as a package consisting of
five separate benefit groups. Memberships range in cost from $14.95 to $26.00
per month depending in part on the schedule of benefits, which may vary from
state or province in compliance with regulatory requirements. Benefits for
domestic matters, bankruptcy and drug and alcohol related matters are limited in
most Memberships.
Preventive Legal Services. These benefits generally offer unlimited
toll-free access to a member's provider law firm for advice and consultation on
any legal matter. These benefits also include letters and phone calls on the
member's behalf, review of personal contracts and documents, each up to 10 pages
in length, last will and testament preparation for the member and annual will
reviews at no additional cost.
Automobile Legal Protection. These benefits offer legal assistance for
matters resulting from the operation of a licensed motor vehicle. Members have
assistance available to them at no additional cost for: (a) defense in the court
of original jurisdiction of moving traffic violations deemed meritorious, (b)
defense in the court of original jurisdiction of any charge of manslaughter,
involuntary manslaughter, vehicular homicide or negligent homicide as the result
of a licensed motor vehicle accident, (c) up to 2.5 hours of assistance per
incident for collection of minor property damages (up to $2,000) sustained by
the member's licensed motor vehicle in an accident, (d) up to 2.5 hours of
assistance per incident for collection of personal injury damages (up to $2,000)
sustained by the member or covered family member while driving, riding or being
struck as a pedestrian by a motor vehicle, and (e) up to 2.5 hours of assistance
per incident in connection with an action, including an appeal, for the
maintenance or reinstatement of a member's driver's license which has been
canceled, suspended, or revoked. No coverage under this benefit of the basic
legal service plan is offered to members for pre-existing conditions, drug or
alcohol related matters, or for commercial vehicles over two axles or operation
without a valid license.
Trial Defense. These benefits offer assistance to the member and the
member's spouse through an increasing schedule of benefits based on Membership
year. Up to 60 hours are available for the defense of civil or job-related
criminal charges by the provider law firm in the first Membership year. The
criminal action must be within the scope and responsibility of employment
activities of the member or spouse. Up to 2.5 hours of assistance are available
prior to trial, and the balance is available for actual trial services. The
schedule of benefits under this benefit area increases by 60 hours each
Membership year to: 120 hours in the second Membership year, 3 hours of which
are available for pre-trial services; 180 hours in the third Membership year,
3.5 hours of which are available for pre-trial services; 240 hours in the fourth
Membership year, 4 hours of which are available for pre-trial services, to the
maximum limit of 300 hours in the fifth Membership year, 4.5 hours of which are
available for pre-trial services. This benefit excludes domestic matters,
bankruptcy, deliberate criminal acts, alcohol or drug-related matters, business
matters, and pre-existing conditions.
In addition to the pre-trial benefits of the basic legal plan described
above, there are additional pre-trial hours available as an option, or add-on,
to the basic plan. These optional benefits cost $9.00 per month and add 15 hours
of pre-trial services during the first year of the Membership increasing 5
additional hours each Membership year to the maximum limit of 35 hours in the
fifth Membership year and increases total pre-trial and trial defense hours
available pursuant to the expanded Membership to 75 hours during the first
Membership year to 335 hours in the fifth Membership year. These pre-trial hours
are in addition to those hours already provided by the basic plan so that the
member, in the first year of the Membership, has a combined total of 17.5
pre-trial hours available escalating to a combined total of 39.5 pre-trial hours
in the fifth Membership year. The Company has experienced increased sales of
this option during the last three years.
IRS Audit Protection Services. This benefit offers up to 50 hours of legal
assistance per year in the event the member, spouse or dependent children
receive written notification of an Internal Revenue Service ("IRS") audit or are
summoned in writing to appear before the IRS concerning a tax return. The 50
hours of assistance are available in the following circumstances: (a) up to 1
hour for initial consultation, (b) up to 2.5 hours for representation in
connection with the audit if settlement with the IRS is not reached within 30
days, and (c) the remaining 46.5 hours of actual trial time if settlement is not
achieved prior to litigation. Coverage is limited to audit notification received
regarding the tax return for years during which the Membership is effective.
Representation for charges of fraud or income tax evasion, business and
corporate tax returns and certain other matters are excluded from this benefit.
With pre-trial benefits limited to 2.5 hours to 4.5 hours based on the
Membership year for trial defense (without the pre-trial option described) and
3.5 hours for the IRS audit benefit, these benefits do not ensure complete
pre-trial coverage. In order to receive additional pre-trial IRS audit or trial
defense benefits, a matter must actually proceed to trial. The costs of
pre-trial preparation that exceed the benefits under the Membership are the
responsibility of the member. Provider law firms under the closed panel
Membership have agreed to provide to members any additional pre-trial services
beyond those stipulated in the Membership at a 25% discount from the provider
law firm's customary and usual hourly rate.
Preferred Member Discount. Provider law firms under the closed panel
Membership have agreed to provide to members any legal services beyond those
stipulated in the Membership at a fee discounted 25% from the provider law
firm's customary and usual hourly rate.
Legal Shield Benefit
In most states, the Legal Shield plan can be added to the standard or
expanded Family Legal Plan for $1 per month and provides members with 24-hour
access to a toll-free number for provider law firm assistance if the member is
arrested or detained. The Legal Shield member, if detained, can present their
Legal Shield card to the officer that has detained them to make it clear that
they have access to legal representation and that they are requesting to contact
a lawyer immediately. The benefits of the Legal Shield plan are subject to
conditions imposed by the detaining authority, which may not allow for the
provider law firm to communicate with the member on an immediate basis. There
were approximately 325,000 Legal Shield subscribers at December 31, 2000.
Canadian Family Plan
The Family Legal Plan is currently marketed in the Canadian provinces of
Ontario, British Columbia and Alberta. The Company began operations in Ontario
and British Columbia during 1999 and Alberta in February 2001. The plan
currently marketed in British Columbia provides primarily the preventive legal
services and preferred member discount described above. Benefits of the Ontario
plan include expanded preventive benefits including assistance with Canadian
Government agencies, warranty assistance and small claims court assistance as
well as the preferred member discount. Canadian Membership fees collected during
2000 were approximately $3.8 million in U.S. dollars compared to $1.0 million
collected in 1999. The Company plans to expand operations in other provinces and
territories of Canada.
Specialty Legal Service Plans
In addition to the Family Legal Plan described above, the Company also
offers other specialty or niche legal service plans. These specialty plans
usually contain many of the Family Legal Plan benefits adjusted as necessary to
meet specific industry or prospective member requirements. In addition to those
specialty plans described below, the Company will continue to evaluate and
develop other such plans as the need and market allow.
Business Owners' Legal Solutions Plan
The Business Owners' Legal Solutions plan was developed during 1995 and
provides business oriented legal service benefits for small businesses with 99
or fewer employees. This plan was developed and test marketed in selected
geographical areas and more widely marketed beginning in 1996 at a monthly rate
of $69.00. This plan provides small businesses with legal consultation and
correspondence benefits, contract and document reviews, debt collection
assistance and reduced rates for any non-covered areas. During 1997, the
coverage offered pursuant to this plan was expanded to include trial defense
benefits and Membership in GoSmallBiz.com, an unrelated Internet based service
provider. Through GoSmallBiz.com, members may receive unlimited business
consultations from business consultants and have access to timely small business
articles, educational software, Internet tools and more. This expanded plan is
currently marketed at a monthly rate ranging from $75 to $125 depending on the
number of employees and provides business oriented legal service benefits for
any for-profit business with 99 or fewer employees. This plan is available in 35
states and represented approximately 5.5%, 3.8% and 2.8% of the Company's
Membership fees during 2000, 1999 and 1998, respectively.
Law Officers Legal Plan
The Law Officers Legal Plan, developed in 1991 and marketed to law
enforcement officers, provides 24-hour job-related emergency toll-free access to
a provider law firm and provides legal services associated with administrative
hearings. This plan was designed to meet the legal needs of persons in the law
enforcement profession and is currently marketed at the monthly rate of $16.00
or at a group rate of $14.95. The Company has members covered under the Law
Officers Legal Plan in 24 states. The Law Officers Legal Plan offers the basic
family legal plan benefits described above without the motor vehicle related
benefits. These motor vehicle benefits are available in the Law Officers Legal
Plan only for defense of criminal charges resulting from the operation of a
licensed motor vehicle. Additionally, at no charge to the member, a 24-hour
emergency hotline is available to access the services of the provider law firm
in situations of job-related urgency. The Law Officers Legal Plan also offers
representation at no additional charge for up to ten hours (five hours per
occurrence) for two administrative hearings or inquiries per year and one
pre-termination hearing per Membership year before a review board or arbitrator.
Preparation and/or counsel for post-termination hearings are also available to
members as a schedule of benefits, which increases with each Membership year.
The schedule of benefits is similar to that offered under the Family Legal Plan
Trial Defense, including the availability of the optional pre-trial hours
described above for an additional $9.00 per month. During the years ended
December 31, 2000, 1999 and 1998, the Law Officers Legal Plan accounted for
approximately 4.8%, 2.1% and 2.4%, respectively, of the Company's Membership
fees.
Commercial Driver Legal Plan
The Commercial Driver Legal Plan, developed in 1986, is designed
specifically for the professional truck driver and offers a variety of
driving-related benefits, including coverage for moving and non-moving
violations. This plan provides coverage on a closed panel plan basis for persons
who drive a commercial vehicle. This legal service plan is currently offered in
43 states. In certain states, the Commercial Driver Legal Plan is underwritten
by the Road America Motor Club, an unrelated motor service club. During the
years ended December 31, 2000, 1999 and 1998, this plan accounted for
approximately 2.5%, 1.1% and 1.4%, respectively, of Membership fees. The Plan
underwritten by the Road America Motor Club is available at the monthly rate of
$35.95 or at a group rate of $32.95. Plans underwritten by the Company are
available at the monthly rate of $32.95 or at a group rate of $29.95. Benefits
include the motor vehicle related benefits described above, defense of
Department of Transportation violations and the 25% discounted rate for services
beyond plan scope, such as defense of non-moving violations. The Road America
Motor Club underwritten plan includes bail and arrest bonds and services for
family vehicles.
Home-Based Business Rider
The Home-Based Business plan was designed to provide small business owners
access to commonly needed legal services. It can be added to the Expanded Family
Legal Plan in approved states. To qualify, the business and residence address
must be the same with three or fewer employees and be a for-profit business that
is not publicly traded. Benefits under this plan include unlimited business
telephone consultation, three business contracts per month, three business and
debt collection letters per month and discounted trial defense rates. This plan
also includes Membership in GoSmallBiz.com. This plan is available in 30 states
and represented approximately .6%, .5% and .3% of the Company's Membership fees
during 2000, 1999 and 1998, respectively.
Comprehensive Group Legal Services Plan
The Company introduced in late 1999 the new Comprehensive Group plan,
designed for the large group employee benefit market. This new plan provides all
the benefits of the Family Legal Plan as well as mortgage document preparation,
assistance with uncontested legal situations such as adoptions, name changes,
separations and divorces. Additional benefits include the preparation of health
care power of attorney and living wills or directives to physicians. Although
the Company has not experienced any significant sales of this plan, the Company
expects this plan to improve its competitive position in the large group market.
Provider Law Firms
The Company's Memberships generally allow members to access legal services
through a network of independent provider law firms under contract with the
Company generally referred to as "provider law firms." Provider law firms are
paid a fixed fee on a per capita basis to render services to plan members
residing within the state or province in which the provider law firm attorneys
are licensed to practice. Because the fixed fee payments by the Company to
provider law firms in connection with the Memberships do not vary based on the
type and amount of benefits utilized by the member, this arrangement provides
significant advantages to the Company in managing claims risk. Pursuant to these
Provider law firm arrangements, 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. The Company is, through its members, typically
provides the largest client base of its Provider law firms.
Provider law firms are selected to serve closed panel plan members based on
a number of factors, including recommendations from provider law firms and other
lawyers in the area in which the candidate provider law firm is located and in
neighboring states, investigation by the Company of bar association standing and
client references, evaluation of the education, experience and areas of practice
of lawyers within the firm, on-site evaluations by Company management, and
interviews with lawyers in the firm who would be responsible for providing
services. The vast majority of the Provider firms are "AV" rated by
Martindale-Hubbell, the highest rating possible. Martindale-Hubbell has
maintained ratings for the legal community for over a century. According to
Martindale-Hubbell, its ratings reflect the confidential opinions of bar members
and the judiciary, and attest to the individual lawyer's legal ability and
adherence to professional standards of ethics. The Company regularly conducts
extensive random surveys of members who have used the legal services of the
provider law firms, compiles the results of such surveys and immediately
notifies the provider law firm of the survey results. If a member indicates that
the legal service rendered did not meet his or her expectations, the member is
immediately contacted to resolve the issue.
Each attorney member of the provider law firm rendering services must have
at least two years of experience as a lawyer, unless the Company waives this
requirement due to special circumstances such as instances when the lawyer
demonstrates significant legal experience acquired in an academic, judicial or
similar capacity other than as a lawyer. The Company provides customer service
training to the provider law firms and their support staff through on-site
training that allows the Company to observe the individual lawyers of provider
law firms as they directly assist the members.
The Company systematically monitors the delivery of services provided by
provider law firms to members through periodic member surveys, review of
telephone data and review of member complaints. Additionally, approximately 97%
of members are represented by provider law firms who are connected via
high-speed digital links to the Company's management information systems,
providing additional real time monitoring capability. Problems discovered in
connection with member surveys or complaints are evaluated to determine remedial
actions which the Company might recommend to provider law firms and in the most
extreme cases may result in the termination of a provider law firm. The Company
meets with provider law firms frequently to encourage dialogue and information
sharing relating to the timely and effective delivery of services to members and
requires provider law firms that are not connected to the Company's management
information systems to provide various statistical reports to the Company to
enable the Company to monitor Membership usage.
Agreements with provider law firms: (a) generally permit termination of the
agreement by either party upon 60 days prior written notice, (b) permit the
Company to terminate the Agreement for cause immediately upon written notice,
(c) require the firm to maintain a specified minimum amount of malpractice
insurance, (d) preclude the Company from interference with the lawyer-client
relationship, (e) provide for periodic review of services provided and (f)
provide for protection of the Company's proprietary information.. The Company is
precluded from contracting with other law firms to provide the same service in
the same geographic area, except in situations where the designated law firm has
a conflict of interest, the Company enrolls a group of 500 or more members, or
when the agreement is terminated by either party. Provider law firms are
precluded from contracting with other prepaid legal service companies without
Company approval. Provider law firms receive a fixed monthly payment for each
member who are residents in the service area and are responsible for providing
the Membership benefits without additional remuneration. If a provider law firm
delivers legal services to an open panel member, the law firm is reimbursed for
services rendered according to the open panel Membership.
The Company has had occasional disputes with Provider law firms, some of
which have resulted in litigation. The toll-free telephone lines utilized and
paid for by the Provider law firms are owned by the Company so that in the event
of a termination, the members' calls can be rerouted very quickly. Nonetheless,
the Company believes that its relations with provider law firms are generally
good. At the end of 2000, the Company had provider law firms representing 43
states and two provinces compared to 41 states at the end of 1999 and 38 at the
end of 1998. During the last three years, the Company's relationships with a
total of three provider law firms were terminated by the Company or the provider
law firm.
The Company's agreements with provider law firms require the provider law
firms to indemnify the Company against liabilities resulting from legal services
rendered by the provider law firm.
Marketing
Multi-Level Marketing
The Company markets Memberships through a multi-level marketing program
which encourages individuals to sell Memberships and allows individuals to
recruit and develop their own sales organizations. Commissions are paid only
when a Membership is sold and no commissions are paid based solely on
recruitment. When a Membership is sold, commissions are paid to the associate
making the sale, and to other associates (on average, 11 others) who are in the
line of associates who directly or indirectly recruited the selling associate.
The Company provides training materials, organizes area-training meetings and
designates personnel at the home office specially trained to answer questions
and inquiries from associates. The Company offers various communication avenues
to its sales associates to keep such associates informed of any changes in the
marketing of its Memberships. The primary communication vehicles utilized by the
Company to keep its sales associates informed include extensive use of email, an
interactive voice-mail service, The Connection monthly magazine, the weekly
Communication Show that may be viewed via the Company's Internet webcasts, an
interactive voice response system and the Company's website, prepaidlegal.com.
Multi-level marketing is primarily used for product marketing based on
personal sales since it encourages individual or group face-to-face meetings
with prospective purchasers of the product and has the potential of attracting a
large number of sales personnel within a short period of time. The Company's
marketing efforts towards individuals typically target the middle income family
or individual and seek to educate potential members concerning the benefits of
having ready access to legal counsel for a variety of everyday legal problems.
Memberships with individuals or families sold by the multi-level sales force
constituted 73% of the Company's Memberships in force at December 31, 2000
compared to 75% and 76% at December 31, 1999 and 1998, respectively. Although
other means of payment are available, approximately 70% of fees on Memberships
purchased by individuals or families are paid on a monthly basis by means of
automatic bank draft or credit card.
The Company's marketing efforts towards employee groups, principally on a
payroll deduction payment basis, are designed to permit its sales associates to
reach more potential members with each sales presentation and strive to
capitalize on, among other things, what the Company perceives to be a growing
interest among employers in the value of providing legal service plans to their
employees. Memberships sold through employee groups constituted approximately
27% of total Memberships in force at December 31, 2000 compared to 25% and 24%
at December 31, 1999 and 1998, respectively. The majority of employee group
Memberships are sold to school systems, governmental entities and businesses. No
group accounted for more than 1% of the Company's consolidated revenues from
Memberships during 2000, 1999 or 1998. Substantially all group Memberships are
paid on a monthly basis.
Sales associates are generally engaged as independent contractors and are
provided with training materials and are given the opportunity to participate in
Company training programs. Sales associates are required to complete a specified
training program prior to marketing the Company's Memberships to employee
groups. All advertising and solicitation materials used by sales associates must
be approved by the Company prior to use. A substantial number of the Company's
sales associates market the Company's Memberships on a part-time basis only. At
December 31, 2000, the Company had 242,085 "active" sales associates compared to
204,137 and 159,268 "active" sales associates at December 31, 1999 and 1998,
respectively. A sales associate is considered to be "active" if he or she has
sold at least three new Memberships per quarter or if he or she retains a
personal Membership. During 2000, the Company had 73,826 sales associates who
sold at least one Membership, of which 43,169 (58%) made first time sales,
compared to 64,611 and 51,026 sales associates producing at least one Membership
sale in 1999 and 1998, respectively, of which 41,121 (64%) and 34,522 (68%),
respectively, made first time sales. During 2000, the Company had 11,055 sales
associates who sold more than ten Memberships compared to 8,284 and 5,597 in
1999 and 1998, respectively.
The Company derives revenues from its multi-level marketing sales force,
principally from a one-time enrollment fee of $65 from each new sales associate
for which the Company provides initial marketing supplies and enrollment
services to the associate. In January 1997, the Company implemented a new
combination classroom and field training program, titled Fast Start to Success
("Fast Start"), aimed at increasing the level of new Membership sales per
associate. The Fast Start program provides a direct economic incentive to
existing associates to help train new recruits. Associates who successfully
complete the program by writing three new Memberships and recruiting three new
sales associates or by personally selling five new Memberships within 60 days of
the associate's start date advance through the various commission levels at a
faster rate and qualify for advance commissions. Associates in states that
require the associate to become licensed will have 60 days from the issue date
on their license to complete the same requirements. The program requires a fee
of $184 per new associate that is earned by the Company upon completion of the
training program. Upon successful completion of the program, the sponsoring
associates are paid certain training bonuses. Amounts collected from sales
associates are intended primarily to offset the Company's costs incurred in
recruiting and training and providing materials to sales associates and are not
intended to generate profits from such activities.
Other revenues from sales associates represent the sale of marketing
supplies and promotional materials.
Regional Vice Presidents
The Company has a group of employees that serve as Regional Vice Presidents
("RVPs") responsible for associate activity in a given geographic region and
with the ability to appoint Area Coordinators within the RVP's region. The RVPs
have weekly reporting requirements as well as quarterly sales and recruiting
goals. The RVP and Area Coordinator program provides a basis to effectively
monitor current sales activity, further educate and motivate the sales force and
otherwise enhance the relationships between the associates and the Company. New
products and initiatives will continue to be channeled through the RVPs and Area
Coordinators. At December 31, 2000, the Company had 48 RVPs in place.
Pre-Paid Legal Benefits Association
The Pre-Paid Legal Benefits Association was founded in 1999 with the intent
of providing sales associates the opportunity to have access, at their own
expense, to health insurance and life insurance benefits. Membership in the
Association allows a sales associate to become eligible to enroll in numerous
benefit programs, as well as take advantage of attractive affinity agreements.
Membership in this association is open to sales associates that reach a certain
level within the Company's marketing programs who also maintain an active
personal legal services Membership. The Benefits Association is a separate
association not owned or controlled by the Company and is governed by a 16
member Board of Directors, including four officer positions. None of the
officers or directors of the Benefits Association serve in any such capacity
with the Company. The Benefits Association employs a Director of Associate
Benefits as well as a third-party benefits administration company, both paid by
the Association. Affinity programs available to members of the Benefits
Association include credit cards, long-distance plans including paging, wireless
services and Internet service provider offerings, real estate planning programs
and a travel club. As determined by its Board of Directors, some of the revenue
generated by the Benefits Association through commissions from vendors of the
benefit and affinity programs may be used to make open-market purchases of the
Company's stock for use in stock awards to Benefit Association members based on
criteria established by the Benefits Association.
Cooperative Marketing
The Company is continuing to develop a cooperative marketing strategy
pursuant to which the Company seeks arrangements with insurance and service
companies that have established sales forces. Under such arrangements, the
agents or sales force of the cooperative marketing partner market the Company's
Memberships along with the products already marketed by the partner's agents or
sales force. Such arrangements allow the cooperative marketing partner to
enhance its existing customer relationships and distribution channels by adding
the Company's product to the marketing partner's existing range of products and
services, while the Company is able to gain broader Membership distribution and
access to established customer bases.
The Company has cooperative marketing agreements with the Chicago-based
CNA, one of the 10 largest U.S. insurance companies, and Atlanta-based Primerica
Financial Services ("PFS"), a subsidiary of Citigroup, Inc. PFS is one of the
largest financial services marketing organizations in North America with more
than 100,000 personal financial analysts across the U.S. and Canada. Neither of
these arrangements, which were entered into in the 1997 fourth quarter, produced
significant Membership fees during 2000.
The fee and commission structures in connection with Memberships sold under
cooperative marketing arrangements are generally similar to the structure found
in the Company's multi-level marketing system, although the specific terms of
each cooperative marketing arrangement may vary depending on the strength of and
the specific marketing, training and administrative responsibilities assumed by
the cooperative marketing partner.
The Company has had mixed success with cooperative marketing arrangements
in the past and is unable to predict with certainty what success it will
achieve, if any, under its current cooperative marketing arrangements.
Internet marketing alliances
The Company is actively developing an Internet marketing alliance strategy
pursuant to which the Company will seek arrangements with established Internet
companies, many of which provide content related to legal issues to those
visiting their web sites. Under such proposed alliances, those visiting the
legal content web sites of the alliance partner will have the opportunity to
learn more about legal service plans including the ability to immediately
purchase a Membership on-line. Such arrangements allow the alliance partner to
derive an additional revenue source from those already visiting their websites
and allow the Company to benefit from the tremendous volume of individuals
visiting such sites. The Company anticipates that such alliances will be
additionally designed to enhance its existing customer relationships by making
such legal content available to existing and prospective members. Such alliances
should allow the Company to gain broader Membership distribution and access to
established customer bases.
Operations
The Company's corporate operations involve Membership application
processing, member-related customer service, various associate-related services
including commission payments, receipt of Membership fees, related general
ledger accounting, and managing and monitoring the provider law firm
relationships.
The Company employs a computerized management information system to control
operations costs and monitor benefit utilization. Among other functions, the
system evaluates benefit claims, monitors member use of lawyers, and monitors
marketing/sales data and financial reporting records. The Company believes its
management information system has substantial capacity to accommodate increases
in data flow before substantial upgrades will be required. The Company believes
this excess capacity may enable it to make significant increases in the volume
of its business and the number of members serviced with less than commensurate
increases in administrative costs.
The Company's operations also include departments specifically responsible
for marketing support and regulatory and licensing compliance. The Company has
an internal production staff which has responsibility for the development of new
audio and video sales materials.
Quality Control
In addition to the Company's quality control efforts for provider law firms
described above, the Company also closely monitors the performance of its home
office personnel, especially those who have telephone contact with members or
sales associates. The Company records home office employee telephone calls with
its members and sales associates to assure that Company policies are being
followed and to gather data about recurring problems which may be avoided
through modifications in policies. The Company also uses such recorded calls for
training and recognition purposes.
The Company has an extensive database of referral lawyers who have provided
services to its members for use by members when a designated provider law firm
is not available. Lawyers with whom members have experienced verified service
problems, or are otherwise inappropriate for the panel, are removed from the
Company's list of referral lawyers.
Competition
The Company competes in a variety of market segments in the prepaid legal
services industry, including, among others, individual enrollment plans,
employee benefit plans and certain specialty segments. According to 1999
estimates by NRC, an estimated 19% of the total estimated market in the segments
in which the Company competes is served by a large number of small companies
with regional areas of emphasis. The remaining 81% of such market are served
primarily by the Company and five other principal competitors: Hyatt Legal Plans
(a MetLife company), ARAG Group (formerly Midwest Legal Services), LawPhone/ACS,
National Legal Plan and Legal Services Plan of America (a GE Financial Assurance
Partnership Marketing Group company). For employment-based plans other than
employer paid and employee assistance plans and for individual enrollment plans,
the Company represents approximately 44% of the market share garnered by this
group according to the NRC.
If a greater number of companies seek to enter the prepaid legal services
market, the Company will experience increased competition in the marketing of
its Memberships. However, the Company believes its competitive position is
enhanced by its actuarial database, its existing network of provider attorney
law firms and its ability to tailor products to suit various types of
distribution channels or target markets. Serious competition is most likely from
companies with significant financial resources and advanced marketing
techniques.
Regulation
The Company is regulated by or required to file with or obtain approval of
State Insurance Departments, Secretaries of State, State Bar Associations and
State Attorney General offices depending on individual state opinions of
regulatory responsibility for legal expense plans. The Company is also required
to file with similar government agencies in Canada. While some states or
provinces regulate legal expense plans as insurance or specialized legal expense
products, others regulate them as services.
As of December 31, 2000, the Company or one of its subsidiaries was
marketing new Memberships in 33 states or provinces that require no special
licensing or regulatory compliance. The Company's subsidiaries serve as
operating companies in 16 states that regulate Memberships as insurance or
specialized legal expense products. The most significant of these wholly owned
subsidiaries are Pre-Paid Legal Casualty, Inc. ("PPLCI") and Pre-Paid Legal
Services, Inc. of Florida ("PPLSIF"). Of the Company's total Memberships in
force as of December 31, 2000, 34% were written in jurisdictions that subject
the Company or one of its subsidiaries to insurance or specialized legal expense
plan regulation.
The Company began selling Memberships in the Canadian provinces of Ontario
and British Columbia during 1999 and in Alberta during the first part of 2001.
The Memberships currently marketed by the Company in such provinces do not
constitute an insurance product and therefore are exempt from insurance
regulation.
At December 31, 2000, UFL was licensed to sell life and accident and health
insurance policies in New Mexico, Nebraska, Oklahoma and Texas. These policies
are sold by independent licensed agents through existing general agency
relationships in these states. In the near term, the Company expects these
policies will continue to be sold by UFL's agent network rather than the
Company's sales associates. Prior to selling these insurance policies on behalf
of UFL, existing associates, to the extent necessary, would be required to
obtain the necessary licenses and approvals from these states prior to any sales
activity.
In states with no special licensing or regulatory requirements, the Company
commences operations only when advised by the appropriate regulatory authority
that proposed operations do not constitute conduct of the business of insurance.
There is no assurance that Memberships will be exempt from insurance regulation
even in states or provinces with no specific regulations. In these situations,
the Company or one of its subsidiaries would be required to qualify as an
insurance company in order to conduct business.
PPLCI serves as the operating company in most states where Memberships are
determined to be an insurance product. PPLCI is organized as a casualty
insurance company under Oklahoma law and as such is subject to regulation and
oversight by various state insurance agencies. These agencies regulate the
Company's forms, rates, trade practices, allowable investments and licensing of
agents and sales associates. These agencies also prescribe various reports,
require regular evaluations by regulatory authorities, and set forth-minimum
capital and reserve requirements. The Company's insurance subsidiaries are
routinely evaluated and examined by representatives from the various regulatory
authorities in the normal course of business. Such examinations have not and are
not expected to adversely impact the Company's operations or financial condition
in any material way. The Company believes that all of its subsidiaries meet any
required capital and reserve requirements. Dividends paid by PPLCI are
restricted under Oklahoma law to available surplus funds derived from realized
net profits. UFL is a life and accident and health insurance company under
Oklahoma law and is subject to similar regulations in Oklahoma and the other
states in which it operates.
The Company is required to register and file reports with the Oklahoma
Insurance Commissioner as a member of a holding company system under the
Oklahoma Insurance Holding Company System Regulatory Act. Transactions between
PPLCI, UFL and the Company or any other subsidiary must be at arms-length with
consideration for the adequacy of PPLCI's or UFL's surplus, and must have prior
approval of the Oklahoma Insurance Commissioner. Payment of any dividend by
PPLCI or UFL to the Company from its statutory surplus or net gain from
operations requires approval of the Oklahoma Insurance Commissioner. During
2000, the Company received an $5.0 million dividend from PPLCI and a $5.0
million dividend from UFL after receiving all necessary regulatory approvals.
Any change in control of the Company, defined as acquisition by any method of
more than 10% of the Company's outstanding voting stock, including rights to
acquire such stock by conversion of preferred stock, exercise of warrants or
otherwise, requires approval of the Oklahoma Insurance Commissioner. Holding
company laws in some states, in which PPLCI and UFL operate, such as Texas,
provide for comparable registration and regulation of the Company.
Certain states have enacted special licensing or regulatory requirements
designed to apply only to companies offering legal service products. These
states most often follow regulations similar to those regulating casualty
insurance providers. Thus, the operating company may be expected to comply with
specific minimum capitalization and unimpaired surplus requirements; seek
approval of forms, Memberships and marketing materials; adhere to required
levels of claims reserves, and seek approval of premium rates and agent
licensing. These laws may also restrict the amount of dividends paid to the
Company by such subsidiaries. PPLSIF is subject to restrictions of this type
under the laws of the State of Florida, including restrictions with respect to
payment of dividends to the Company.
As the legal plan industry matures, additional legislation may be enacted
that would affect the Company and its subsidiaries. The Company cannot predict
with any accuracy if such legislation would be adopted or its ultimate effect on
operations, but expects to continue to work closely with regulatory authorities
to minimize any undesirable impact.
The Company's operations are further impacted by the American Bar
Association Model Rules of Professional Conduct ("Model Rules") and the American
Bar Association Code of Professional Responsibility ("ABA Code") as adopted by
various states. Arrangements for payments to a lawyer by an entity providing
legal services to its members are permissible under both the Model Rules and the
ABA Code, so long as the arrangement prohibits the entity from regulating or
influencing the lawyer's professional judgment. The ABA Code prohibits lawyer
participation in closed panel legal service programs in certain circumstances.
The Company's agreements with provider law firms comply with both the Model
Rules and the ABA Code. The Company relies on the lawyers serving as the
designated provider law firms for the closed panel benefits to determine whether
their participation would violate any ethical guidelines applicable to them. The
Company and its subsidiaries comply with filing requirements of state bar
associations or other applicable regulatory authorities.
The Company also is required to comply with state, provincial and federal
laws governing the Company's multi-level marketing approach. These laws
generally relate to unfair or deceptive trade practices, lotteries, business
opportunities and securities. The Company has experienced no material problems
with marketing compliance. In jurisdictions that require associates to be
licensed, the Company receives all applications for licenses from the associates
and forwards them to the appropriate regulatory authority. The Company maintains
records of all associates licensed, including effective and expiration dates of
licenses and all states in which an associate is licensed. The Company does not
accept new Membership sale applications from any unlicensed associate in such
jurisdictions.
Employees
At December 31, 2000, the Company and its subsidiaries employed 559
individuals on a full-time basis, exclusive of independent agents and sales
associates who are not employees. None of the Company's employees are
represented by a union. Management considers its employee relations to be good.
Foreign Operations
The Company began operations in the Canadian provinces of Ontario and
British Columbia during 1999 and Alberta in early 2001 and derived aggregate
revenues, including Membership fees and revenues from associate services, from
Canada of $4.9 million in U.S. dollars during 2000 compared to $2.7 million in
1999. The Company had no foreign revenue from any source during 1998. Due to the
relative stability of the United States and Canadian foreign relations and
currency exchange rates, the Company believes that any risk of foreign
operations or currency valuations is minimal and would not have a material
effect on the Company's financial condition, liquidity or results of operations.
ITEM 2. DESCRIPTION OF PROPERTY
-------------------------------------
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 that is
now used for general office space. The Company currently fully utilizes these
existing facilities and has begun construction of a new home office complex in
Ada located approximately five miles from its current location. The new home
office will be constructed on nearly 100 acres given to the Company by the City
of Ada. Scheduled completion of the estimated $30 million four-building complex,
which will include a sales associate Hall of Fame and six-story tower, is
February, 2003.
In addition to the property described above that is owned by the Company,
the Company opened an additional Customer Care facility in Antlers, Oklahoma
during March 2000, in building space provided at no cost to the Company. This
facility contains approximately 50 Customer Care representatives with the option
of adding another 50 to 100 representatives in the next two years.
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.
ITEM 3. LEGAL PROCEEDINGS
-------------------------------
Subsequent to December 31, 2000, the Company and various of its executive
officers were named in multiple putative securities class action complaints
filed in both the United States District Courts for the Eastern and Western
Districts of Oklahoma seeking unspecified damages on the basis of allegations
that the Company issued false and misleading financial information, primarily
related to the method the Company uses to account for commission advance
receivables from sales associates. These complaints have been transferred to
Western District of Oklahoma where motions to consolidate them into a single
proceeding are pending. As of April 17, 2001, these cases were in the
preliminary procedural stages relating to selection of lead counsel and lead
plaintiffs as required by the Private Securities Litigation Reform Act of 1995
("PSLRA"). After the selection of lead plaintiffs and lead counsel, the Company
expects that an amended and consolidated complaint will be filed. The Company
expects to file a motion to dismiss the complaint. Under PSLRA, discovery is
stayed during the pendency of a motion to dismiss. Costs of defense of these
cases through the motion to dismiss stage are not expected to be material. While
the outcome of these cases is uncertain, the Company believes these actions are
without merit and will vigorously defend these actions. However, an unfavorable
decision in this litigation could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
In January 2001, the Company received inquiries from the Division of
Enforcement of the Securities and Exchange Commission ("SEC") requesting
information relating primarily to the Company's accounting policies for
commission advance receivables from sales associates. Also, in January 2001 the
staff of the SEC's Division of Corporation Finance reviewed the Company's 1999
Form 10-K. The Division of Enforcement's inquiry is informal and does not
constitute a formal investigation or proceeding. In subsequent discussions and
exchanges of correspondence the staff of the Division of Corporation Finance of
the SEC raised issues regarding the Company's accounting policies and requested
additional information from the Company. The Company is cooperating with the
staff of the SEC in providing the requested information and expects to continue
to do so. As of April 20, 2001, these inquiries were proceeding. The Company is
not able to predict what the outcome of these inquiries may be or when they will
be resolved. See Item 7 - Management's Discussion And Analysis Of Financial
Condition And Results Of Operations - Risk Factors.
For additional information concerning the Company's accounting policies for
commission advance receivables, see Item 7 - Management's Discussion And
Analysis Of Financial Condition And Results Of Operations.
The Company is a named defendant in certain other lawsuits arising in the
ordinary course of the Company's business. While the outcome of these lawsuits
cannot be predicted with certainty, the Company does not expect these matters to
have a material adverse effect on the Company's financial condition, liquidity
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
--------------------------------------------------------------------------------
MATTERS
-------
Market Price of and Dividends on the Common Stock
At March 23, 2001, there were 5,161 holders of record (including brokerage
firms and other nominees) of the Company's common stock which is listed on the
New York Stock Exchange under the symbol "PPD." The following table sets forth,
for the periods indicated, the range of high and low sales prices for the common
stock, as reported by the New York Stock Exchange (American Stock Exchange
through May 12, 1999).
High Low
---- ---
2001:
2nd Quarter (through April 24)............................................... $ 19.50 $ 10.04
1st Quarter.................................................................. 28.63 10.05
2000:
4th Quarter.................................................................. $ 48.75 $ 23.56
3rd Quarter.................................................................. 34.44 29.38
2nd Quarter.................................................................. 34.75 26.00
1st Quarter.................................................................. 32.44 19.88
1999:
4th Quarter.................................................................. $ 39.94 $ 19.88
3rd Quarter.................................................................. 39.38 25.56
2nd Quarter.................................................................. 29.63 22.25
1st Quarter.................................................................. 39.25 23.13
The Company has never declared a cash dividend on its common stock. For the
foreseeable future, it is anticipated that earnings generated from the
operations of the Company will be used to finance the Company's growth and to
repurchase shares of its stock and that cash dividends will not be paid to
holders of the common stock. Any decision by the Board of Directors of the
Company to pay cash dividends in the future will depend upon, among other
factors, the Company's earnings, financial condition and capital requirements.
In addition, the Company's ability to pay dividends is dependent in part on its
ability to derive dividends from its subsidiaries. The payment of dividends by
PPLCI and UFL is restricted under the Oklahoma Insurance Code to available
surplus funds derived from realized net profits and requires the approval of the
Oklahoma Insurance Commissioner for any dividend representing more than 10% of
such accumulated available surplus or an amount representing more than the
previous years net profits. During 2000, the Company received a $5 million
dividend from PPLCI and a $5 million dividend from UFL after receiving all
necessary regulatory approvals. PPLSIF is similarly restricted pursuant to the
insurance laws of Florida. At December 31, 2000, neither PPLCI, UFL nor PPLSIF
had funds available for payment of substantial dividends without the prior
approval of the respective insurance commissioners.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------------
The following table sets forth selected financial and statistical data for
the Company as of the dates and for the periods indicated. As a result of the
1998 fourth quarter acquisition of TPN, Inc. ("TPN") that was accounted for as a
pooling of interests, the 1996 through 1998 periods have been restated to
include the operating results of TPN. The 1998 balance sheet data contained
herein reflects the December 30, 1998 acquisition of Universal Fidelity Life
Insurance Company ("UFL") that was accounted for as a purchase transaction and
accordingly, no operating results of UFL prior to 1999 are included in the
income statement data. Beginning in 1999, UFL's operating results are included
in the consolidated financial results. This information is not necessarily
indicative of the Company's future performance. The following information should
be read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto included elsewhere herein.
Year Ended December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------
(In thousands, except ratio, per share and Membership amounts)
Income Statement Data:
Revenues:
Membership fees.................................... $210,442 $157,217 $110,003 $ 76,688 $ 50,582
Associate services................................. 30,372 22,816 17,255 12,143 5,646
Product sales...................................... 1,016 5,888 27,779 41,070 26,425
Other.............................................. 5,822 6,939 2,901 1,867 1,803
---------- ---------- ---------- ---------- ----------
Total revenues.................................... 247,652 192,860 157,938 131,768 84,456
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Membership benefits................................ 70,513 51,833 36,103 25,132 16,871
Commissions........................................ 51,900 36,862 24,011 16,417 10,701
Provision for estimated uncollectible Membership
commission advance receivables.................... 4,734 550 250 300 775
Associate services and direct marketing............ 23,029 16,038 14,738 11,431 4,544
General and administrative expenses................ 23,412 21,360 21,902 20,311 15,150
Product costs...................................... 675 4,174 17,967 27,017 20,568
Life insurance benefits............................ 940 959 - -
Other, net......................................... 1,449 1,157 1,635 1,256 (273)
---------- ---------- ---------- ---------- ----------
Total costs and expenses.......................... 176,652 132,933 116,606 101,864 68,336
---------- ---------- ---------- ---------- ----------
Income before income taxes......................... 71,000 59,927 41,332 29,904 16,120
Provision for income taxes......................... 23,279 20,974 11,122 12,381 5,857
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle............................. 47,721 38,953 30,210 17,523 10,263
Cumulative effect on prior years of change in
method of accounting for Membership commission
advance receivables (2).......................... (4,109) - - - -
---------- ---------- ---------- ---------- ----------
Net income......................................... 43,612 38,953 30,210 17,523 10,263
Less dividends on preferred shares................. 4 10 10 13 15
---------- ---------- ---------- ---------- ----------
Net income applicable to common stockholders....... $ 43,608 $ 38,943 $ 30,200 $ 17,510 $ 10,248
========== ========== ========== ========== ==========
Basic earnings per common share before cumulative
effect of change in accounting principle.......... $ 2.12 $ 1.69 $ 1.29 $ .76 $ .46
Cumulative effect of change in accounting
principle........................................ (.18) - - - -
---------- ---------- ----------- ----------- -----------
Basic earnings per common share.................... $ 1.94 $ 1.69 $ 1.29 $ .76 $ .46
========== ========== =========== =========== ===========
Diluted earnings per common share before
cumulative effect of change in accounting
principle........ ................................ $ 2.10 $ 1.67 $ 1.26 $ .74 $ .44
Cumulative effect of change in accounting
principle.......... .............................. (.18) - - - -
---------- ---------- ----------- ----------- -----------
Diluted earnings per common share.................. $ 1.92 $ 1.67 $ 1.26 $ .74 $ .44
========== ========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic............................. 22,504 23,099 23,456 23,127 22,332
Weighted average number of common shares
outstanding - diluted........................... 22,679 23,374 23,906 23,575 23,319
Pro forma amounts assuming the new method for
accounting for Membership Commission advance
receivables is applied retroactively:
Net income................................... $ 47,721 $ 37,255 $ 28,804 $ 16,728 $ 10,052
Basic earnings per common share........ $ 2.12 $ 1.61 $ 1.23 $ .72 $ .45
Diluted earnings per common share...... $ 2.10 $ 1.59 $ 1.20 $ .71 $ .43
Membership Benefit Cost and Statistical Data:
Membership benefits ratio (1)...................... 33.5% 33.0% 32.8% 32.8% 33.4%
Commissions ratio (1).............................. 24.7% 23.4% 21.8% 21.4% 21.2%
General & administrative expense ratio (1)......... 11.1% 13.6% 19.9% 26.5% 30.0%
Product cost ratio (1)............................. 66.4% 70.9% 64.7% 65.8% 77.8%
New Memberships sold............................... 670,118 525,352 391,827 283,723 194,483
Period end Memberships in force.................... 1,064,805 827,979 603,017 425,381 294,151
Cash Flow Data:
Net cash provided by (used in) operating activities $ 21,990 $ 17,638 $ 10,865 $ 14,472 $ (911)
Net cash provided by (used in) investing activities (6,897) 10,636 (31,427) (6,254) (2,855)
Net cash provided by (used in) financing activities (13,714) (26,687) 1,444 3,464 4,973
Balance Sheet Data:
Membership commission advance receivables (net).... $156,138 $120,713 $ 83,269 $ 55,879 $ 30,852
Total assets....................................... 247,288 193,775 167,903 105,716 66,810
Total liabilities.................................. 100,572 79,311 66,599 36,246 21,654
Stockholders' equity............................... 146,716 114,464 101,304 69,470 45,156
--------------
(1) The Membership benefits ratio, the Commissions expense ratio and the
general and administrative expense ratio represent those costs as a
percentage of Membership fees. The product cost ratio represents product
costs as a percentage of product sales. These ratios do not measure total
profitability because they do not take into account all revenues and
expenses.
(2) See Note 3 to Consolidated Financial Statements for information concerning
the change in accounting principle in 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
General
Prior Year Acquisitions
The consolidated financial statements and related discussions thereof give
retroactive effect to the 1998 merger with TPN, Inc. d.b.a. The People's Network
("TPN") which was accounted for as a pooling of interests. TPN was merged into
the Company in a tax-free exchange of 999,992 shares (after adjustment for
fractional shares) of the Company's common stock effective October 2, 1998.
Additionally, the 1998 consolidated balance sheet data reflects the December 30,
1998 acquisition of Universal Fidelity Life Insurance Company ("UFL") that was
accounted for as a purchase transaction and accordingly, none of the operating
results of UFL are included in any periods prior to 1999. (See Notes to
Consolidated Financial Statements-Note 2 for additional information regarding
these 1998 acquisitions).
Change in Accounting Principle
During 2000, the Company changed its methodology for evaluating the
recoverability of its commission advance receivables from terminated or "D
status" sales associates. See "Risk Factors" in this Item 7 below. "D status"
associates are those that are no longer "active" because they fail to meet the
Company's established vesting requirements by either selling at least three new
Memberships per quarter or retaining a personal Membership. "D status"
associates lose their right to any further commissions earned on Memberships
previously sold at the time they are placed in "D status". As a result, the
Company is entitled to retain all commission earnings that would otherwise be
payable to these terminated associates to recover their unearned commission
receivable balances.
Prior to 2000, the Company "pooled" the activity of this "D status" group
of former associates and accounted for the group and evaluated the
collectibility of their commission advance receivables as if it were a single
associate rather than on an associate by associate basis. The Company determined
that it would change its methodology in 2000 such that the Company now evaluates
the collectibility of "D status" commission advance receivables on an individual
associate basis as it does the advances to its active associates. The cumulative
effect of this change on prior years is reflected separately and resulted in a
reduction of income (net of applicable income taxes of $2.2 million), of
approximately $4.1 million ($.18 per basic and diluted share). The effect of the
change on fiscal 2000 was a reduction in income (net of applicable income taxes
of $1.6 million) of approximately $3.1 million ($.14 per basic and diluted
share).
The Company believes that an evaluation of the collectibility of commission
advance receivables on an associate-by-associate basis is preferable to an
evaluation on a pooled basis because it results in a more refined estimate of
collectibility.
Membership Fees and Membership Benefit Costs
The Company's principal revenues are derived from Membership fees, most of
which are collected on a monthly basis. Memberships are generally guaranteed
renewable and non-cancelable except for fraud, non-payment of Membership fees or
upon written request. Membership fees are recognized in income when due in
accordance with Membership terms, which generally require the holder of the
Membership to remit fees on at least a monthly basis. Approximately 94% of our
members remit their Membership fees to us on a monthly basis. The Company
records any amount received in excess of that currently due as deferred revenue
and recognizes such deferred amount as income when earned. For example, a
payment received representing an annual payment would be recognized as income to
the extent of one month and the remaining 11 months would be deferred in month
one and then ratably recognized as income in each of the succeeding 11 months.
The Company also charges new members, who are not part of an employee group, a
$10 enrollment fee. This fee is deferred and recognized in income over the
estimated life of a Membership .
More than 98% of active Memberships at December 31, 2000 have benefits
delivered by a designated provider law firm with whom the Company has arranged
for the services to be provided in a particular geographic area, typically a
state or province. 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 this
arrangement provides significant advantages to the Company in managing its
claims risk. Pursuant to these Provider law firm arrangements, 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.
Membership benefit costs relating to non-Provider Memberships ("open panel"
Memberships or Memberships in states where a provider law firm is not in place),
which constituted less than 2% of Memberships in force at December 31, 2000, are
based on the usual, reasonable and customary fee for providing the required
services. Such costs are generally paid on a current basis, as most costs are
certain in amount and require only limited investigation. The Company maintains
a reserve for estimated incurred but not reported open panel Membership benefit
costs as well as costs which are in the payment process. These reserves are
reviewed annually by an independent actuary as necessary in conjunction with the
preparation and filing of financial statements and other reports with various
state insurance regulatory authorities. Underwriting risks associated with the
open panel Memberships are managed primarily through contractual benefit
limitations and, as a result, underwriting decisions are not necessarily based
on individual Membership purchases.
Commission Expense
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
consistent with the recognition of the premiums generated by the sale of such
Memberships. Prior to March 1, 1995, the Company's commission program resulted
in recognizing commission expense of approximately 70% of Membership premiums
during the first year of the Membership and approximately 16% in all subsequent
years. The level commission structure results in the Company incurring
commission expense at the rate of approximately 25% - 27% per year for all
Membership years.
Effective April 2001, the Company modified its compensation plan to
consolidate the lower four levels of its compensation structure into two levels.
At the same time, the Company implemented a two-year advance at the lowest
commission level for associates who participate in the training program.
Associates who do not participate in the training program receive only earned
commissions until they meet the advancement qualification requiring them to
produce 50 new memberships in their organization in order to advance to the next
compensation level and qualify for up to 3 years commission advance.
Commission Advances
Prior to January 1997 the Company advanced commissions at the time of sale
of all new Memberships. In January 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 Fast Start training program
that was implemented in 1997. For all sales beginning with the fourth Membership
or all sales made by an associate successfully completing the Fast Start
training program, the Company currently advances commissions at the time of sale
of a new Membership. 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 up 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 five different individuals, each at a different level within
the overall commission structure. This commission advance immediately increases
an associate's obligation to the Company and represents a receivable from the
associates.
Although the Company advances its sales associates up to three years
commission when a membership is sold, the average commission advance paid to its
sales associates as a group is actually less than 3 years because some
associates choose to receive less than a 3-year advance and the Company pays
less than a 3-year advance on some of its specialty products. Also, any residual
commissions due an associate (defined as commission on an individual membership
after the advance has been earned) is retained to reduce any remaining
commission advance receivables prior to being paid to that sales associate. The
average commission advance in 2000, 1999 and 1998 was 2.31, 2.43 and 2.50 years
respectively.
Commission advance receivable activity for years ended December 31, 2000,
1999 and 1998 is as follows:
(in thousands)
--------------
2000 1999 1998
---- ---- ----
Beginning commission advance receivables.................................. $ 125,257 $ 87,263 $ 59,623
Commission advances....................................................... 97,500 74,800 51,400
Recovery of advanced commissions.......................................... (48,255) (36,806) (23,760)
Write-offs................................................................ (7,309) - -
------------ ------------ ------------
Ending commission advance receivables..................................... 167,193 125,257 87,263
Allowance for unrecoverable commission advance receivables................ (11,055) (4,544) (3,994)
Ending commission advance receivables, net................................ ------------ ------------ ------------
$ 156,138 $ 120,713 $ 83,269
============ ============ ============
Commission advance receivables as of December 31, 2000, 1999 and 1998 are
as follows:
(in thousands)
--------------
12/31/00 12/31/99 12/31/98
-------- -------- --------
Active sales associates................................................... $ 146,649 $ 107,257 $ 75,757
"D status" sales associates............................................... 20,544 18,000 11,506
Allowance for unrecoverable commission advance receivables................ (11,055) (4,544) (3,994)
Commission advance receivables, net....................................... ------------ ------------ ------------
$ 156,138 $ 120,713 $ 83,269
============ ============ ============
Projected commission earnings - Active sales associates................... $ 228,269 $ 171,935 $ 110,554
Projected commission earnings - "D status" sales associates............... 26,056 16,369 9,868
Total projected earned commissions........................................ ------------ ------------ ------------
$ 254,325 $ 188,304 $ 120,422
============ ============ ============
------------- ------------- -------------
Projected earned commissions/Commission advance receivables, net........ 163% 156% 145%
------------- ------------- -------------
Commissions are earned by and payable to the associate as Membership
premiums are earned, usually on a monthly basis. The Company reduces Commission
advance receivables or remits payment to an associate, as appropriate, when
commissions are earned. Commission advance receivables on lapsed Memberships are
recovered through commission earnings on an associate's remaining active
Memberships or through a charge-back mechanism. Should a Membership lapse before
the advances have been recovered for each commission level, the Company
generates an immediate "charge-back" to the applicable sales associate to
recapture up to 50% of any unearned advance. This charge-back is deducted from
any future advances that would otherwise be payable to the associate for
additional new Memberships. Any remaining commission advance receivable is
recovered by withholding future residual earned commissions due an associate on
active Memberships. Additionally, even though a commission advance may have been
fully recovered on a particular Membership, no additional commission earnings
from any Membership are paid to an associate until all previous advances on all
Memberships, both active and lapsed, have been recovered.
The Company charges associates a fee on commission advance receivables
relating to lapsed Memberships ("Membership lapse fee"). The fee is determined
by applying the prime interest rate to the commission advance receivable balance
pertaining to lapsed Memberships. The Company realizes and recognizes income
only when the amount of the calculated fee is collected by withholding from cash
commissions payments due the associate, because the Company's ability to recover
fees in excess of current payments is primarily dependant on the associate
selling new Memberships which qualify for commission advances.
The Company has the contractual right to require associates to repay
commission advance receivables from sources other than earned commissions
including cash (a) from all associates either (i) upon termination of the
associate relationship or (ii) when it is ascertained that earned commissions
are insufficient to repay the advance receivables and (b) upon demand, from
agencies or associates who are parties to the associate agreements signed
between October 1989 and July 1992 or July 1992 to August 1998, respectively.
The sources, other than earned commissions, that may be available to recover
associate commission advance receivables are potentially subject to limitation
based on applicable state laws relating to creditors' rights generally.
Historically, the Company has not demanded repayments of the receivables from
associates, including terminated associates, because in the aggregate the
Company's commission advance receivables have been substantially recovered from
estimated future commission earnings, and collection efforts would likely
increase costs and have the potential to disrupt the Company's relationships
with its sales associates. However, the Company regularly reviews the commission
advance receivable status of associates and will exercise its right to require
associates to repay advances when management believes that such action is
appropriate.
"D status" associates are those that are no longer "active" because they
fail to meet the Company's established vesting requirements by selling at least
three new Memberships per quarter or retaining a personal Membership. "D status"
associates lose their right to any further commissions earned on Memberships
previously sold at the time they are placed in "D status". As a result the
Company has no continuing obligation to individually account to these associates
as it does to active associates and is entitled to retain all commission
earnings that would be otherwise payable to these terminated associates. The
Company does continue to reduce the advance commission receivables for
commissions earned on active Memberships previously sold by those associates. "D
status" commission advance receivables were $20.5 million and $18.0 million at
December 31, 2000 and 1999, respectively. Substantially all individual "D
status" associate commission advance receivable balances were less than $1,000
and the average balance was $816 at December 31, 2000.
The Company assesses, at the end of each quarter, on an
associate-by-associate basis, the recoverability of each associate's commission
advance receivable by estimating the associate's future commissions to be earned
on active Memberships. Each active Membership is assumed to lapse in accordance
with the Company's estimated future lapse rate, which is based on the Company's
actual historical Membership retention experience as applied to each active
Membership's year of origin. The lapse rate is based on a 20-year history of
Membership retention rates, which is updated quarterly to reflect actual
experience. The Company also closely reviews current data for any trends that
would affect the historical lapse rate. The sum of all expected future
commissions to be earned for each associate is then compared to that associate's
commission advance receivable balance. An allowance for unrecoverable commission
advance receivables is recorded when expected future commissions to be earned on
active Memberships (aggregated on an associate-by-associate basis) are less than
the commission advance receivable balance. Adjustments to the reserve are
immediately recorded in income. If an associate with an outstanding commission
advance receivable has no active Memberships, the advance is written off. Refer
to "Measures of Member Retention - Expected Economic Life" for a description of
the method used by the Company to estimate future commission earnings.
Further, the Company's analysis of the recoverability of advance commission
receivables is also based on the assumption that the associate does not write
any new Memberships. The Company believes that this assessment methodology is
highly conservative since its actual experience is that many associates do
continue to sell new Memberships and the Company, through its chargeback rights,
gains an additional source to recover advance commission receivables.
Operating Ratios
Three principal operating measures monitored by the Company in addition to
measures of Membership retention are the Membership benefit ratio, commission
ratio and the general and administrative expense ratio. The Membership benefits
ratio, the Commissions ratio and the general and administrative expense ratio
represent those costs as a percentage of Membership fees. The Company strives to
maintain these ratios as low as possible. These ratios do not measure total
profitability because they do not take into account all revenues and expenses.
Cash Flow Considerations Relating to Sales of Memberships
The Company generally advances significant commissions at the time a
Membership is sold. Since approximately 94% 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 advance receivables 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.
Income Tax Matters-Net Operating Losses
The Company has NOLs in the amount of $2.8 million representing the
remaining NOLs of TPN. The Company's wholly owned subsidiary UFL has an
alternative minimum tax ("AMT") credit carryforward of $464,000 that does not
expire. A valuation allowance has been established for these carryforwards as
the Company does not believe it is more likely than not that the tax benefits of
these carryforwards and credits will be realized prior to expiration due in part
to utilization restrictions imposed by Section 382 as discussed below.
The ability of the Company to utilize NOLs and tax credit carryforwards to
reduce future federal income taxes of the Company is subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
One such limitation is contained in Section 382 of the Code which imposes an
annual limitation on the amount of a corporation's taxable income that can be
offset by those carryforwards in the event of a substantial change in ownership
as defined in Section 382 ("Ownership Change"). In general, an Ownership Change
occurs if during a specified three-year period there are capital stock
transactions that result in an aggregate change of more than 50% in the
beneficial ownership of the stock of the Company. However, the Company does not
have control over all possible variables which can affect the Ownership Change
calculation and, accordingly, it is possible that an Ownership Change could
occur in the future. The effect of any such Ownership Change on the Company's
financial condition or results of operations cannot be determined because it is
dependent upon unknown future facts and circumstances at the time of any such
change, including, among others, the amount of any Company's NOLs, the fair
market value of the Company's stock and the Company's other tax attributes. The
acquisition of TPN by the Company constituted an Ownership Change of TPN. As a
result, the ability of the Company to utilize TPN's remaining $2.8 million in
NOLs is limited to approximately $954,000 per year. Although the Company did not
utilize any of the TPN NOL during 1998, it did fully utilize the available
amount during 1999 and 2000. However, due to anticipated continuing growth and
the expected availability of other tax benefits, the Company does not believe it
is more likely than not that the tax benefits of the TPN NOL carryforward will
be realized. The TPN NOL expires in years 2015 through 2018.
Associate Services
The Company derives revenues from services provided to its marketing sales
force from an enrollment fee of approximately $65 from each new sales associate
for which the Company provides initial sales and marketing supplies and
enrollment services to the associate. In January 1997, the Company implemented a
training program ("Fast Start") that allows an associate who successfully
completes the program to advance through the various commission levels at a
faster rate. Associates participating in this program pay a fee of $184. The fee
covers the additional training and materials used in the training program and
are recognized in income upon completion of the training. The Company enrolled
97,617 new sales associates during 2000 compared to 92,644 during 1999 and
75,737 during 1998, resulting in significant increases in associate services
revenues and costs. Associate services also includes revenue recognized on the
sale of marketing supplies and promotional material to associates. The Company's
costs of providing materials and services to associates are reflected as costs
of associate services and direct marketing. Amounts collected from sales
associates are intended primarily to offset the Company's costs incurred in
recruiting, training, monitoring and providing materials to sales associates and
are not intended to generate profits from such activities.
TPN's revenues were primarily comprised of receipts for goods and services
provided by TPN to its distributors and other customers. Distributors were
required to purchase a distributor kit that included training materials and
business support literature. TPN distributors were required to meet certain
sales production levels to be eligible to receive commissions and many
distributors elected to purchase products through an automatic monthly bank or
credit card draft. These practices, which resulted in enhanced product sales,
were discontinued in February 1999.
Insurance operations
UFL retained its existing life insurance business as a part of the
Company's 1998 acquisition of UFL. The life insurance operations of UFL
generated approximately $1 million in life insurance premiums and has continued
to provide claims processing for the coinsured Medicare supplement and health
care policies and receive full cost reimbursement for such services from the
coinsurer. UFL markets primarily to individuals, age 65 and over, in New Mexico,
Oklahoma and Texas.
Product sales and product costs
Product sales consist primarily of the sale of personal and home care
products, jewelry, books, audiocassettes and videotapes focusing on personal
achievement. Other products and services include digital satellite television
subscriptions, Internet access and web sites, long distance and travel services
provided by business partners. The Company has certain alliances with business
partners, whereby sales associates buy products or services provided by such
business partners and in return, the Company receives commissions on the sales
of such goods and services.
Product costs consist primarily of the actual cost paid to acquire such
goods and services. Costs to purchase products and deliver services are included
in Product costs.
Product marketing activities have declined significantly over the last
several years and represents less than 1% of total revenues in 2000. The Company
expects future product sales and costs will be immaterial.
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.
Disclosures About Market Risk
The Company's consolidated balance sheets include a certain amount of
assets and liabilities whose fair values are subject to market risk. Due to the
Company's significant investment in fixed-maturity investments, interest rate
risk represents the largest market risk factor affecting the Company's
consolidated financial position. Increases and decreases in prevailing interest
rates generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, liquidity of the instrument and
other general market conditions.
As of December 31, 2000, 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:
Estimated
fair value
after
Hypothetical hypothetical
change in interest change in
Fair value at rate interest
December 31, (bp = basis points) rate
------------- ------------------- ------------
(Dollars in thousands)
Fixed-maturity investments at December 31, 2000 (1)................ $ 25,480 100 bp increase $ 24,635
200 bp increase 23,773
50 bp decrease 25,882
100 bp decrease 26,261
Fixed-maturity investments at December 31, 1999 (1)................ $ 22,870 100 bp increase $ 21,528
200 bp increase 20,573
50 bp decrease 23,084
100 bp decrease 23,624
--------------------
(1) Excluding short-term investments with a fair value of $3.9 million and $3.3
million at December 31, 2000 and 1999, respectively.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31, 2000 would reduce
the estimated fair value of the Company's fixed-maturity investments by
approximately $1.7 million at that date. At December 31, 1999, and based on
the fair value of fixed-maturity investments of $22.9 million, an
instantaneous 200 basis point increase in market interest rates would have
reduced the estimated fair value of the Company's fixed-maturity
investments by approximately $2.3 million at that date. The Company's
decreased sensitivity to rising interest rates is due to the 25% reduction
of investments with maturities over ten years. The definitive extent of the
interest rate risk is not quantifiable or predictable due to the
variability of future interest rates, but the Company does not believe such
risk is material.
The Company primarily manages its exposure to interest rate risk by
purchasing investments that can be readily liquidated should the interest rate
environment begin to significantly change.
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. In June 2000, the FASB issued SFAS No. 138, which amends certain
provisions of SFAS 133 to clarify four areas causing difficulties in
implementation. The amendment included expanding the normal purchase and sale
exemption for supply contracts, permitting the offsetting of certain foreign
currency derivatives and thus reducing the number of third party derivatives,
permitting hedge fund accounting for foreign currency denominated assets and
liabilities, and redefining interest rate risk to reduce sources of
ineffectiveness. SFAS 133, as amended, applies to all entities and is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company adopted SFAS 133, as amended, on January 1, 2001 as required. The
Company did not hold any derivative instruments at January 1, 2001 and there was
no effect on the consolidated financial statements upon the adoption of SFAS
133.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101") was issued December 1999. This staff bulletin
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective no later than the fourth fiscal quarter of the fiscal years beginning
after December 15, 1999. The Company implemented SAB 101 in the fourth quarter
of 2000. Refer to Note 1 to the consolidated financial statements for a
discussion of the effect on the consolidated financial statements.
Measures of Member Retention
One of the major factors affecting the Company's profitability and cash
flow is the ability of the Company to retain a Membership, and therefore
continue to 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 year of issue, geographic region and
payment method. The Company has historically disclosed its Membership
persistency data as described below under "Membership Persistency". Certain
other measures of Membership retention are described below together with an
explanation of their potential use and limitations.
Membership Persistency
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, 2000, the
Company's annual Membership Persistency rates, using the foregoing method, have
averaged approximately 74.5%. The annual Membership Persistency rates were
71.1%, 73.4% and 73.8% for 2000, 1999 and 1998, 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 2000
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.
Expected Economic Life
Since the Company's Membership Persistency, as defined above, is influenced
by the relative age of total Memberships in force, it will be influenced by
changes in new member enrollment rates. There are other measures of retention
that are independent of these variations in past enrollment rates. One such
measure is the Expected Economic Life of a new member. This is the average
number of years that a new member is expected to continue to renew, computed
based on observed historical data. The following chart sets forth as of December
31, 2000 the Company's overall membership retention rates under the expected
economic life method based on our actual experience over the last 20 years: (For
example, 53.37% of members were still paying 1-year after those members
purchased a membership. Of those 53.37% who were still paying 1-year after
purchasing a membership, 69.27% were still paying 2-years after purchasing a
membership. Thus, 2-years after purchasing a membership, 36.97% (53.37% *
69.27%) remain as paying members, etc.)
Membership Retention
Yearly End of Year Average
Year Retention Members Members
---- --------- ------- -------
0 100.00% 100.00
1 53.37% 53.37 76.69
2 69.27% 36.97 45.17
3 77.52% 28.66 32.82
4 82.34% 23.60 26.13
5 84.96% 20.05 21.83
6 86.68% 17.38 18.72
7 88.32% 15.35 16.37
8 89.51% 13.74 14.55
9 90.54% 12.44 13.09
10 91.32% 11.36 11.90
11 91.90% 10.44 10.90
12 92.72% 9.68 10.06
13 93.18% 9.02 9.35
14 93.24% 8.41 8.72
15 93.10% 7.83 8.12
16 92.46% 7.24 7.54
17 93.37% 6.76 7.00
18 93.49% 6.32 6.54
19 95.41% 6.03 6.18
20 95.19% 5.74 5.89
Using these data, the Expected Economic Life of a new member is computed to
be 3.57 years. Note that this number is based on more than 20 years of
historical Membership retention data, unlike Membership Persistency which is
computed from and determined by the most recent one year period only. The
Expected Economic Life of a new member may be useful for estimating the expected
future stream of revenues from a large pool of new members. This membership
retention data is used by the Company to estimate recoverability of commission
advance receivables provided to associates. The fact that the Expected Economic
Life of a new member is greater than the maximum commission advance of 3.0 years
is important to ensure the collectibility of commission advance receivables.
Average Member Life
A third measure of persistency, commonly used by actuaries for comparing
the longevity of renewable membership services, such as subscriptions, life
insurance services, etc. is the Average Member Life. It is based on a model that
assumes that a fixed number of new members have been historically enrolled in
each previous year, so that the distribution of actual lifetimes of the members
in force mirrors the membership retention rates described above.
Expected Lifetime Value
Years Paid
X
Average Average
Year Members Members
---- ------- -------
0
1 76.69 76.69
2 45.17 90.34
3 32.82 98.45
4 26.13 104.52
5 21.83 109.13
6 18.72 112.29
7 16.37 114.56
8 14.55 116.36
9 13.09 117.81
10 11.90 119.00
11 10.90 119.90
12 10.06 120.72
13 9.35 121.55
14 8.72 122.01
15 8.12 121.80
16 7.54 120.56
17 7.00 119.00
18 6.54 117.72
19 6.18 117.33
20 5.89 117.70
Totals ------------- ---------
357.52 A 2,257.42 B
-----------------------
Expected Membership lifetime value (B / A) 6.31 years of revenue
-----------------------
Using this data, if a fixed number of members had been enrolled in each of
the past twenty years, the current Average Member Life of active members would
be 6.3 years. Note that this is a model distribution for comparison purposes
only. Since Membership enrollment rates have grown significantly over the years,
the Company's actual Membership population is weighted more heavily by recent
new enrollments, hence the average age of the current Membership population will
be lower than this number. It should be noted that the Average Member Life may
be useful for comparison for the Company's member longevity versus other
services, since it is not affected by historical new enrollment rates or rates
of growth, which may vary between services being compared. It is not directly
useful for nor is it used by the Company in any way to assess risks and required
reserves for uncollectible commission advance receivables, or any other
financial factor.
Expected Remaining Economic Life
Since the Company's experience is that the retention rate of a given
generation of new members improves with time since first enrollment, the
Expected Remaining Economic Life of a member also increases with time since
first enrollment. For example, while the Expected Economic Life of a new member
just enrolled is 3.57 years, the Expected Remaining Economic Life of a member
that has already renewed for one year is about 5.2 years. Since the actual
population of members in force at year end is a distribution of ages from zero
to over 20 years, the Expected Remaining Economic Life of the entire population
at large exceeds 3.57 years per member. As of December 31, 2000, based on the
historical data described above, the current Expected Remaining Economic Life of
the actual population is approximately 6.52 years
Results of Operations
Comparison of 2000 to 1999
The Company reported net income applicable to common shares of $43.6
million, or $1.92 per diluted common share, for 2000 after a current year
after-tax charge of $4.1 million relating to the cumulative effect on prior
years of changing the accounting for Membership commission advance receivables
as discussed in Note 3 to the Consolidated Financial Statements. The net income
per diluted share was up 12% from net income applicable to common shares of
$38.9 million, or $1.67 per diluted common share, for 1999. The increase in the
net income applicable to common shares for 2000 is primarily the result of
increases in Membership fees for 2000 as compared to 1999.
Membership fees totaled $210.4 million during 2000 compared to $157.2
million for 1999, an increase of 34%. 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 renewal rate of existing Memberships. New Membership sales increased
28% during 2000 to 670,118 from 525,352 during 1999. At December 31, 2000, there
were 1,064,805 active Memberships in force compared to 827,979 at December 31,
1999, an increase of 29%. Additionally, the average annual fee per Membership
has increased from $238 for all Memberships in force at December 31, 1999 to
$244 for all Memberships in force at December 31, 2000, a 3% 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 83% during 2000 to $1.0 million from $5.9 million in
1999 primarily due to the concentration on Membership sales as opposed to the
sale of goods and services following the TPN acquisition. Product sales are
expected to be immaterial in 2001 and future periods as the Company no longer
encourages product sales.
Associate services revenue increased 33% from $22.8 million for 1999 to
$30.4 million during 2000 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 $16.8 million during 2000 compared to $12.6 million during 1999.
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 $16.8 million and $12.6
million for 2000 and 1999, respectively, in training fees was comprised of $184
from each of approximately 91,432 new sales associates who elected to
participate in Fast Start in 2000 compared to 68,535 that paid the $184 during
1999. New associates electing to participate in Fast Start increased to 94% of
new associates during 2000 from 74% for 1999. Total new associates enrolled
during 2000 were 97,617 compared to 92,644 for 1999, an increase of 5%. While
the number of new associates increased during 2000, 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.
Other income decreased 16 % from $6.9 million to $5.8 million primarily due
the implementation of SAB 101 which reduced enrollment fees recognized during
the fourth quarter of 2000 by $1.4 million.
Primarily as a result of the increase in Membership fees, total revenues
increased to $247.7 million for 2000 from $192.9 million during 1999, an
increase of 28%.
Membership benefits totaled $70.5 million for 2000 compared to $51.8
million for 1999, and represented 33.5% and 33.0% of Membership fees for 2000
and 1999, respectively. This Membership benefit ratio (Membership benefits as a
percentage of Membership fees) should remain near 35% as substantially all
active Memberships provide for a capitated benefit.
Product costs declined more than $3.4 million, or 84%, during 2000 to
$675,00 from $4.2 million for 1999 in conjunction with the 83% decline in
product sales. Product costs as a percentage of product sales were 66% for 2000
compared to 71% during 1999. Product costs are expected to be immaterial in 2001
and future periods as the Company no longer encourages product sales.
Commission expense was $51.9 million for 2000 compared to $36.9 million for
1999, and represented 24.7% and 23.4% of Membership fees for such years.
Commission expense, as a percentage of Membership fees, should remain at or near
25% of Membership fees based on the existing commission structure.
General and administrative expenses during 2000 and 1999 were $23.4 million
and $21.4 million, respectively, and represented 11.1% and 13.6% of Membership
fees for such years. Management expects further gradual decreases in general and
administrative expenses when expressed as a percentage of Membership fees as a
result of certain economies of scale.
Associate services and direct marketing expenses increased to $23.0 million
for 2000 from $16.0 million for 1999 primarily as a result of Fast Start
training bonuses paid of approximately $8.9 million during 2000 compared to $7.5
million in 1999. Additional costs of supplies due to increased enrollment of new
associates, 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.
Other expenses increased 24% from $1.2 million to $1.4 million for 2000
primarily due to $1.7 million litigation settlements during the 4th quarter of
2000 offset by an increase in Membership lapse fee and interest income for 2000
of 41% to $4.8 million from $3.4 million for 1999. Membership lapse fees
increased primarily as a result of increased commission advance receivables,
which, under certain circumstances, incur a fee. Fee income on commission
advance receivables was $1.8 million in 2000 and $1.0 million in 1999. At
December 31, 2000 the Company reported $41.3 million in cash and investments
(after utilizing more than $17.3 million to repurchase approximately 520,000
shares of its common stock) compared to $37.4 million at December 31, 1999.
Depreciation and amortization decreased from $3.1 million for 1999 to $2.8
million for 2000. This decrease was primarily due to increased amortization of
production costs of $425,000 during the 1999 period.
The provision for income taxes increased during 2000 to $23.3 million
compared to $21.0 million for 1999, representing 32.8% and 35.0% of income
before income taxes for 2000 and 1999, respectively.
Dividends paid on outstanding preferred stock decreased to $4,000 for 2000
from $9,700 during 1999. During the second quarter of 2000, all shares of
preferred stock were converted into shares of common stock or repurchased by the
Company.
Comparison of 1999 to 1998
The Company reported net income applicable to common shares of $38.9
million, or $1.67 per diluted common share, for 1999, up 29% from net income
applicable to common shares of $30.2 million, or $1.26 per diluted common share,
for 1998. The increase in the net income applicable to common shares for 1999 is
primarily the result of increases in Membership fees for 1999 as compared to
1998.
Membership fees totaled $157.2 million during 1999 compared to $110.0
million for 1998, 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 renewal rate of existing Memberships. New Membership sales increased
34% during 1999 to 525,352 from 391,827 during 1998. At December 31, 1999, there
were 827,979 active Memberships in force compared to 603,017 at December 31,
1998, an increase of 37%. Additionally, the average annual fee per Membership
has increased from $229 for all Memberships in force at December 31, 1998 to
$238 for all Memberships in force at December 31, 1999, a 4% 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 79% during 1999 to $5.9 million from $27.8 million
in 1998 primarily due to the concentration on Membership sales as opposed to the
sale of goods and services following the TPN acquisition. 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.
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.
Other income increased $4.0 million, or 139 %, from $2.9 million for 1998
to $6.9 million for 1999 primarily due to the inclusion of income from UFL
during 1999 (See Prior Year Acquisitions above) of $2.4 million and an increase
in enrollment fees from $2.7 million for 1998 to $3.5 million for 2000.
Primarily as a result of the increase in Membership fees, total revenues
increased to $192.9 million for 1999 from $157.9 million during 1998, an
increase of 22%.
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 Membership benefit 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.
Product costs declined more than $13.7 million, or 77%, during 1999 to $4.2
million from $18.0 million for 1998 in conjunction with the 79% decline in
product sales. Product costs as a percentage of product sales were 71% for 1999
compared to 65% during 1998. Product costs are expected to decline
proportionately as product sales decline as more emphasis is placed on
Membership sales rather than the sale of goods and services.
Commission expense was $36.9 million for 1999 compared to $24.0 million for
1998, and represented 23.4% and 21.8% of Membership fees for such years.
Commission expense, as a percentage of Membership fees, should remain at or near
25% of Membership fees in future years based on the existing commission
structure.
General and administrative expenses during 1999 and 1998 were $19.4 million
and $21.9 million, respectively, and represented 12.3% and 19.9% of Membership
fees 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.
Other expenses decreased 29% from $1.6 million to $1.2 million for 1999
primarily due to an increase in Membership lapse fees and interest income for
1999 of $865,000 to $3.4 million from $2.6 million for 1998. Membership lapse
fees increased primarily as a result of increased commission advance
receivables, which, under certain circumstances, incur a fee. Fee income on
commission advance receivables was $1.0 million in 1999 and $500,000 in 1998. At
December 31, 1999 the Company reported $37.4 million in cash and investments
(after utilizing more than $29.4 million to repurchase approximately 1.2 million
shares of its common stock) compared to $50.1 million at December 31, 1998.
Depreciation and amortization increased from $2.9 million for 1998 to $3.1
million for 1999. This increase was primarily due in part to increased
amortization of production costs by $425,000.
The Company's Membership benefit ratio, commission expense ratio, product
cost ratio and the general and administrative expense ratio do not measure total
profitability because they do not take into account all revenues and expenses.
The provision for income taxes increased during 1999 to $21.0 million
compared to $11.1 million for 1998, representing 35.0% and 26.9% of income
before income taxes for 1999 and 1998, respectively. The 1998 provision for
income taxes reflects a $3.5 million benefit attributable to a reduction of a
previously established valuation allowance due to the utilization of certain of
the Company's NOL carryforwards.
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.
Liquidity and Capital Resources
General
Consolidated net cash provided by operating activities was $22.0 million,
$17.6 million and $10.9 million for 2000, 1999, and 1998, respectively. Cash
provided by operating activities increased $4.4 million during 2000 compared to
1999 primarily due to the $4.7 million increase in net income.
Net cash used in investing activities was $6.9 million in 2000 as compared
to net cash provided by investing activities of $10.6 million for 1999 and net
cash used in investing activities of $31.4 million for 1998. Due to the 1998 UFL
acquisition 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 $5.6 million during 2000, 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 $13.7 million in 2000 as compared
to $26.7 million in 1999 and net cash provided by financing activities of $1.4
million for 1998. This $13.0 million change during 2000 was mainly comprised of
the decrease of $12.1 million in cash used to reacquire treasury stock as
compared to 1999.
The Company had a consolidated working capital surplus of $26.3 million at
December 31, 2000 compared to $23.3 million at December 31, 1999. The $3.0
million increase in working capital during 2000 was primarily the result of an
increase in the current portion of commission advance receivables of $12.7
million and a $1.9 million increase in Membership income receivable offset by an
increase in deferred product sales revenue, Membership and associate fees of
$12.2 million.
The Company generally advances its associates significant commissions at
the time a Membership is sold. During 2000, the Company advanced commissions of
$97.5 million on new Membership sales compared to $74.8 million for 1999. Since
approximately 94% 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 commissions
earned are retained to recover previous commission advance receivables.
Commission advance receivables were subsequently reduced by earned commissions
payable to associates of $48.3 million and $36.8 million for 2000 and 1999,
respectively. The Company has recorded an allowance of $11.1 million to provide
for estimated uncollectible commission advance receivables which includes an
increase in the allowance of $6.6 million during 2000 and $550,000 during 1999.
The Company announced on April 6, 1999, a stock repurchase program
authorizing management to reacquire up to 500,000 shares of the Company's common
stock. The Board of Directors has increased such authorization from 500,000
shares to 2,000,000 shares during subsequent board meetings. At December 31,
2000, the Company had repurchased 1,748,209 shares under these authorizations
for a total consideration of $48.3 million, an average price of $27.60 per
share. The Board, at its January 16, 2001 meeting, authorized additional 250,000
shares to be repurchased. Stock repurchases will be made at prices that are
considered attractive by management and at such times that management believes
will not unduly impact the Company's liquidity. No time limit has been set for
completion of the repurchase program. Unless the growth in the number of new
Memberships written increases to the extent of consuming substantially all of
the Company's cash flow from operations, it expects to continue to fund its
stock repurchase program from its working capital.
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, 2000 of $41.3 million. The
Company expects to maintain cash and cash equivalent balances on an on-going
basis of approximately $30 million to $40 million in order to meet expected
working capital needs and regulatory capital requirements. Cash balances in
excess of this amount would be used for discretionary purposes such as stock
repurchases. The Company continues to consider incurring indebtedness in order
to continue or increase the rate of stock repurchases, including financing its
new corporate headquarters in order to allow cash flow from operations to
continue to be used to repurchase stock.
Parent Company Funding and Dividends
Although the Company is the operating entity in many jurisdictions, the
Company's subsidiaries serve as operating companies in various states which
regulate Memberships as insurance or specialized legal expense products. The
most significant of these wholly owned subsidiaries are PPLCI, UFL and PPLSIF.
The ability of PPLCI, UFL and PPLSIF to provide funds to the Company is subject
to a number of restrictions under various insurance laws in the jurisdictions in
which PPLCI, UFL and PPLSIF conduct business, including limitations on the
amount of dividends and management fees that may be paid and requirements to
maintain specified levels of capital and reserves. In addition PPLCI and UFL
will be required to maintain its stockholders' equity at levels sufficient to
satisfy various state or provincial regulatory requirements, the most
restrictive of which is currently $3 million for PPLCI. Additional capital
requirements of PPLCI, UFL or PPLSIF will be funded by the Company in the form
of capital contributions or surplus debentures. At December 31, 2000, neither
PPLCI, UFL nor PPLSIF had funds available for payment of substantial dividends
without the prior approval of the respective insurance commissioners.
Forward-Looking Statements
All statements in this report concerning Pre-Paid Legal Services, Inc. (the
"Company") other than purely historical information, including but not limited
to, statements relating to the Company's future plans and objectives,
discussions with the staff of the SEC, expected operating results, and the
assumptions on which such forward-looking statements are based, constitute
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are based
on the Company's historical operating trends and financial condition as of
December 31, 2000 and other information currently available to management. The
Company cautions that the Forward-Looking Statements are subject to all the
risks and uncertainties incident to its business, including but not limited to
risks described below. Moreover, the Company may make acquisitions or
dispositions of assets or businesses, enter into new marketing arrangements or
enter into financing transactions. None of these can be predicted with certainty
and, accordingly, are not taken into consideration in any of the Forward-Looking
Statements made herein. For all of the foregoing reasons, actual results may
vary materially from the Forward-Looking Statements. The Company assumes no
obligation to update the Forward-Looking Statements to reflect events or
circumstances occurring after the date of the statement.
Risk Factors
There are a number of risk factors which could affect our financial
condition or results of operations.
Our future results may be adversely affected if membership persistency or
renewal rates are lower than our historical experience.
The Company has over 20 years of actual historical experience to measure
the expected retention of new members. These retention rates could be adversely
effected by the quality of services delivered by provider law firms, the
existence of competitive products or services, the Company's ability to provide
administrative services to members or other factors. If the Company's membership
persistency or renewal rates are less than the Company has historically
experienced, the Company's cash flow, earnings and growth rates could be
adversely affected.
The Company may not be able to grow memberships and earnings at the same
rate as it has historically experienced.
The Company's year end active memberships have increased 28.6%, 37.3% and
41.8% in the years ended December 31, 2000, 1999 and 1998, respectively. Net
income applicable to common stockholders for the same three years have increased
12.0%, 29.0% and 72.5%, respectively. The Company's ability to grow memberships
and earnings is substantially dependent upon its ability to expand or enhance
the productivity of its sales force, develop additional legal expense products,
develop alternative marketing methods or expand geographically. There is no
assurance that the Company will be able to achieve increases in membership and
earnings growth comparable to its historical growth rates.
The Company is dependent upon the continued active participation of its
principal executive officer.
The success of the Company depends substantially on the continued active
participation of its principal executive officer, Harland C. Stonecipher.
Although the Company's management includes other individuals with significant
experience in the business of the Company, the loss of the services of Mr.
Stonecipher could have a material adverse effect on the Company's financial
condition and results of operations.
There is litigation pending with respect to certain of our accounting
practices that may have a material adverse effect on the Company if adversely
determined.
There are numerous putative class actions pending against the Company in
the United Stated District Court for the Western District of Oklahoma primarily
alleging violations of the federal securities laws in connection with the
Company's accounting policy with respect to commission advance receivables. If
the class actions are resolved adversely to the Company, it could have a
material adverse effect on the Company's financial condition and common stock
price. See "Item 3. Legal Proceedings".
There are SEC inquiries pending with respect to certain of our accounting
practices that may have a material adverse effect on the Company if adversely
determined.
Both the staff of the Division of Enforcement and the staff of the Division
of Corporation Finance of the Securities and Exchange Commission have made
inquiries of the Company relating primarily to the Company's accounting policies
for commission advance receivables from sales associates. See "Legal
Proceedings". The Company continues to discuss these inquiries and issues with
the SEC. While the Company believes that its accounting policies conform to
generally accepted accounting principles in all material respects, there can be
no assurance that the SEC will agree with the Company's position. The Company's
change in accounting principle for evaluating recoverability of commission
advance receivables from terminated associates has not been reviewed by the
staff of the SEC and there is no assurance that they will concur with this
change. If the SEC's inquiries are resolved adversely to the Company, it could
have a material adverse affect on the Company's financial condition and stock
price.
The Company is in a regulated industry and regulations could have an
adverse effect on the Company's ability to conduct its business.
The Company is regulated by or required to file with or obtain approval of
State Insurance Departments, State Bar Associations and State Attorney General's
Offices, depending on individual state positions regarding regulatory
responsibility for prepaid legal expense plans. Regulation of the Company's
activities is inconsistent among the various states in which the Company does
business with some states regulating legal expense plans as insurance or
specialized legal expense products and others regulating such plans as services.
Such disparate regulation requires the Company to structure its memberships and
operations differently in certain states in accordance with the applicable laws
and regulations. The Company's multi-level marketing strategy is also subject to
U.S. federal, Canadian provincial and U.S. state regulation under laws relating
to consumer protection, pyramid sales, business opportunity, lotteries and
multi-level marketing. Changes in the regulatory environment for the Company's
business could increase the compliance costs the Company incurs in order to
conduct its business or limit the jurisdictions in which the Company is able to
conduct business.
The business in which the Company operates is competitive.
There are number of existing and potential competitors that have the
ability to offer competing products that could adversely effect the Company's
ability to grow. In addition, the Company may face competition from a growing
number of Internet based legal sites which the potential to offer legal and
related services at competitive prices. Increased competition could have a
material adverse effect on the Company's financial condition and results of
operations. See "Description of Business - Competition".
The Company is dependent upon the success of its marketing force.
The Company's principal method of product distribution is through
multi-level marketing. The success of a multi-level marketing force is highly
dependent upon the Company's ability to offer a commission and organizational
structure and sales training and incentive program that enable sales associates
to recruit and develop other sales associates to create a "downline". There are
a number of other products and services that use multi-level marketing as a
distribution method and the Company must compete with these organizations to
recruit, maintain and grow its multi-level marketing force. In order to do so,
the Company may be required to increase its marketing costs through increases in
commissions, sales incentives or other features, all of which could adversely
affect the Company's future earnings. In addition, the level of confidence of
the sales associates in the Company's ability to perform is an important factor
in maintaining and growing a multi-level marketing force. Adverse financial
developments concerning the Company, including negative publicity or common
stock price declines, could adversely affect the ability of the Company to
maintain the confidence of its sales force.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
--------------------------------------------------------
PRE-PAID LEGAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report
Consolidated Financial Statements
---------------------------------
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Income - For the years ended December 31, 2000, 1999
and 1998
Consolidated Statements of Comprehensive Income - For the years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - For the years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Changes In Stockholders' Equity - For the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedule
-----------------------------------------
Schedule II. Consolidated Valuation and Qualifying Accounts - For the years
ended December 31, 2000, 1999 and 1998
(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.)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Pre-Paid Legal Services, Inc.:
We have audited the accompanying consolidated balance sheets of Pre-Paid Legal
Services, Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 8 herein. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. 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.
As discussed in Note 3 to the consolidated financial statements, the Company has
changed its method of accounting for Membership commission advance receivables
in 2000.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Tulsa, Oklahoma
April 20, 2001
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
December 31,
--------------------------
2000 1999
------------ ------------
Current assets:
Cash and cash equivalents............................................................................ $ 11,570 $ 10,191
Available-for-sale investments, at fair value........................................................ 2,448 2,252
Membership income receivable......................................................................... 6,780 4,883
Inventories.......................................................................................... 1,542 1,442
Amount due from coinsurer............................................................................ 12,242 12,483
Membership commission advance receivables - current portion.......................................... 45,594 32,885
------------ ------------
Total current assets............................................................................. 80,176 64,136
Available-for-sale investments, at fair value.......................................................... 21,207 19,628
Investments pledged............................................................................. ...... 6,105 5,288
Membership commission advance receivables, net......................................................... 110,544 87,828
Property and equipment, net............................................................................ 11,200 8,361
Deferred member and associate service costs...................................................... ..... 8,494 -
Other assets...................................................................................... .... 9,562 8,534
------------ ------------
Total assets..................................................................................... $ 247,288 $ 193,775
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.................................................................................. $ 6,831 $ 5,252
Deferred product sales revenue, Membership revenue and fees and associate fees....................... 12,532 356
Accident and health reserves......................................................................... 12,242 12,483
Life insurance reserves............................................................... .............. 976 967
Deferred income taxes - current portion.............................................................. 13,951 10,664
Current portion of capital lease obligation.......................................................... 223 348
Accounts payable and accrued expenses................................................................ 7,096 10,768
------------ ------------
Total current liabilities........................................................................ 53,851 40,838
Deferred income taxes, net of current portion.......................................................... 39,065 30,535
Life insurance reserves................................................................................ 7,656 7,733
Capital lease obligation, net of current portion....................................................... - 205
------------ ------------
Total liabilities................................................................................ 100,572 79,311
------------ ------------
Stockholders' equity:
$3.00 cumulative preferred stock, $1 par value; 3 shares authorized, issued and outstanding at
December 31, 1999............................................................................... - 3
1.00 non-cumulative special preferred stock, $1 par value: 18 shares authorized, issued and
outstanding at December 31, 1999................................................................ - 18
Common stock, $.01 par value; 100,000 shares authorized; 24,740 and 24,507 issued
at December 31, 2000 and 1999, respectively........................................................ 247 245
Capital in excess of par value....................................................................... 64,958 59,822
Retained earnings.................................................................................... 132,079 88,471
Accumulated other comprehensive income (loss):
Unrealized losses on investments................................................................... (96) (958)
Unrealized loss from foreign currency translation.................................................. (12) -
Treasury stock, at cost; 2,480 and 1,960 shares held at December 31, 2000 and 1999, respectively..... (50,460) (33,137)
------------ ------------
Total stockholders' equity......................................................................... 146,716 114,464
------------ ------------
Total liabilities and stockholders' equity....................................................... $ 247,288 $ 193,775
============ ============
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
Year Ended December 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues:
Membership fees........................................................... $ 210,442 $ 157,217 $ 110,003
Associate services........................................................ 30,372 22,816 17,255
Product sales............................................................. 1,016 5,888 27,779
Other..................................................................... 5,822 6,939 2,901
----------- ----------- -----------
247,652 192,860 157,938
----------- ----------- -----------
Costs and expenses:
Membership benefits....................................................... 70,513 51,833 36,103
Commissions............................................................... 51,900 36,862 24,011
Provision for estimated uncollectible Membership
commission advance receivables.......................................... 4,734 550 250
Associate services and direct marketing................................... 23,029 16,038 14,738
General and administrative................................................ 23,412 21,360 21,902
Product costs............................................................. 675 4,174 17,967
Life Insurance benefits................................................... 940 959 -
Other, net................................................................ 1,449 1,157 1,635
----------- ----------- -----------
176,652 132,933 116,606
----------- ----------- -----------
Income before income taxes.................................................. 71,000 59,927 41,332
Provision for income taxes.................................................. 23,279 20,974 11,122
----------- ---------- -----------
Income before cumulative effect of change in accounting principle........... 47,721 38,953 30,210
Cumulative effect on prior years of change in method of accounting for
Membership commission advance receivables................................. (4,109) - -
----------- ----------- -----------
Net income.................................................................. 43,612 38,953 30,210
Less dividends on preferred shares.......................................... 4 10 10
----------- ----------- -----------
Net income applicable to common stockholders................................ $ 43,608 $ 38,943 $ 30,200
=========== =========== ===========
Basic earnings per common share before cumulative effect of change in
method of accounting for Membership commission advance receivables........ $ 2.12 $ 1.69 $ 1.29
Cumulative effect on prior years of change in method of accounting for
Membership commission advance receivables................................. (.18) - -
----------- ----------- -----------
Basic earnings per common share............................................. $ 1.94 $ 1.69 $ 1.29
=========== =========== ===========
Diluted earnings per common share before cumulative effect of change in
method of accounting for membership commission advance receivables........ $ 2.10 $ 1.67 $ 1.26
Cumulative effect on prior years of change in method of accounting for
Membership commission advance receivables................................. (.18) - -
----------- ----------- -----------
Diluted earnings per common share........................................... $ 1.92 $ 1.67 $ 1.26
=========== =========== ============
Pro forma amounts assuming the new method of accounting for Membership
commission advance receivables is applied retroactively:
Net income.................................................................. $ 47,721 $ 37,255 $ 28,804
Basic earnings per common share........................................... $ 2.12 $ 1.61 $ 1.23
Diluted earnings per common share......................................... $ 2.10 $ 1.59 $ 1.20
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
Year Ended December 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Net income.................................................................. $ 43,612 $ 38,953 $ 30,210
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment................................... (12) - -
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during period,................ 893 (580) (66)
Less: reclassification adjustment for (gains) losses included
in net income......................................................... (31) (354) 42
----------- ---------- ----------
Other comprehensive income (loss), net of income taxes
of $464, $503 and $13 in 2000, 1999 and 1998, respectively................ 850 (934) (24)
----------- ---------- ----------
Comprehensive income........................................................ $ 44,462 $ 38,019 $ 30,186
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
Year Ended December 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net income.................................................................. $ 43,612 $ 38,953 $ 30,210
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect on prior years of change in method of accounting
for Membership commission advance receivables........................... 4,109 - -
Provision for deferred income taxes...................................... 13,566 14,568 11,122
Provision for uncollectible Membership commission advance receivables.... 4,734 550 250
Depreciation and amortization............................................ 2,792 3,076 2,944
Tax benefit on exercise of stock options................................. 1,044 1,149 912
Compensation expense relating to contribution of stock to ESOP........... 130 86 58
Increase in accrued Membership income.................................... (1,897) (1,288) (1,196)
(Increase) decrease in inventories....................................... (100) 1,146 (472)
Decrease in amount due from coinsurer.................................... 241 15 -
Increase in commission advance receivables............................... (46,481) (37,994) (27,640)
Increase in deferred member and associate service costs.................. (8,494) - -
Increase in other assets................................................. (1,028) (1,877) (304)
Increase in accrued Membership benefits.................................. 1,579 1,444 1,159
Increase (decrease) in deferred revenues................................. 12,176 (3,576) (805)
Decrease in accident and health reserves................................. (241) (15) -
(Decrease) increase in life insurance reserves........................... (68) 19 -
(Decrease) increase in accounts payable and accrued expenses............. (3,684) 1,382 (5,373)
----------- ----------- -----------
Net cash provided by operating activities.............................. 21,990 17,638 10,865
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of UFL, net of cash acquired................................. - - (18,995)
Additions to property and equipment...................................... (5,631) (2,659) (4,926)
Purchases of investments - held to maturity.............................. - - (36,116)
Proceeds from sales of investments - held to maturity.................... - - 23,718
Maturities of investments - held-to-maturity............................. - - 4,892
Purchases of investments - available for sale............................ (8,501) (11,077) -
Maturities and sales of investments - available for sale................. 7,235 24,372 -
----------- ----------- -----------
Net cash (used in) provided by investing activities................ (6,897) 10,636 (31,427)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock....................................... 4,110 3,348 2,216
(Decrease) increase in capital lease obligations......................... (330) (593) 766
Purchases of treasury stock.............................................. (17,323) (29,432) (1,528)
Redemption of preferred stock............................................ (167) - -
Dividends paid on preferred stock........................................ (4) (10) (10)
----------- ----------- -----------
Net cash (used in) provided by financing activities................ (13,714) (26,687) 1,444
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....................... 1,379 1,587 (19,118)
Cash and cash equivalents at beginning of year............................. 10,191 8,604 27,722
----------- ----------- -----------
Cash and cash equivalents at end of year................................... $ 11,570 $ 10,191 $ 8,604
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest................................................... $ 10 $ 23 $ 47
=========== =========== ===========
Income taxes paid........................................................ $ 9,102 $ 3,060 $ -
=========== =========== ===========
Purchases of property and equipment under capital leases................. $ - $ - $ 1,104
=========== =========== ===========
Assets acquired in acquisition of UFL.................................... $ - $ - $ 44,598
=========== =========== ===========
Liabilities assumed in acquisition of UFL................................ $ - $ - $ 23,929
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY
(Amounts and shares in 000's, except dividend rates and par values)
Year Ended December 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Preferred Stock - $1 par value, 400 shares authorized, issued and outstanding
---------------
in one series designated as follows:
$3.00 Cumulative Convertible Preferred Stock, authorized 5 shares; shares
--------------------------------------------
issued and outstanding at beginning of year (3 in 2000, 1999 and 1998). $ 3 $ 3 $ 3
Shares exchanged for common stock (2 in 2000)............................ (2) - -
Shares redeemed (1 in 2000).............................................. (1) - -
----------- ----------- -----------
Shares issued and outstanding at end of year (3 in 1999 and 1998)........ - 3 3
----------- ----------- -----------
Special Preferred Stock - $1 par value, 500 shares authorized; series of
-----------------------
fixed annual dividends $1, non-cumulative, convertible, shares issued and 18 18 23
outstanding at beginning of year (18 in 2000, 18 in 1999 and 23 in 1998)
Shares exchanged for common stock (11 in 2000 and 5 in 1998)............... (11) - (5)
Shares redeemed (7 in 2000)................................................ (7) - -
----------- ----------- -----------
Shares issued and outstanding at end of year (18 in 1999 and 1998)......... - 18 18
----------- ----------- -----------
Common Stock - $.01 par value, shares authorized 100,000; shares issued and
------------
outstanding at beginning of year (24,507 in 2000, 24,321 in 1999 and
24,151 in 1998)........................................................ 245 243 242
Shares issued during year:
Conversion of Preferred Stock (30 in 2000, 2 in 1999 and 17 in 1998).... - - -
Contributed to Company's employee stock ownership plan (6 in 2000, 3
in 1999 and 2 in 1998).................................................. - - -
Exercise of stock options and warrants (198 in 2000, 184 in 1999 and
151 in 1998)............................................................ 2 2 1
----------- ----------- -----------
Shares issued and outstanding at end of year (24,740 in 2000, 24,507 in 1999
and 24,321 in 1998)..................................................... 247 245 243
----------- ----------- -----------
Capital in Excess of Par Value
------------------------------
Balance at beginning of year.............................................. 59,822 55,241 52,051
Exercise of stock options............................................... 4,108 3,345 2,215
Income tax benefit related to exercise of stock options................. 1,044 1,149 912
Redemption or conversion of preferred stock............................. (146) 1 5
Stock contribution to employee stock ownership plan..................... 130 86 58
----------- ----------- -----------
Balance at end of year.................................................... 64,958 59,822 55,241
----------- ----------- -----------
Retained Earnings
-----------------
Balance at beginning of year.............................................. 88,471 49,528 19,328
Net income................................................................ 43,612 38,953 30,210
Cash dividends on preferred shares........................................ (4) (10) (10)
----------- ----------- -----------
Balance at end of year.................................................... 132,079 88,471 49,528
----------- ----------- -----------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
(Amounts and shares in 000's, except dividend rates and par values)
Unrealized gains (losses) on available-for-sale investments (net of income
--------------------------------------------------------------------------
taxes):
-------
Balance at beginning of year.............................................. $ (958) $ (24) $ -
Unrealized holding gains (losses) arising during period................. 893 (580) (66)
Less: reclassification adjustment for (gains) losses
included in net income................................................ (31) (354) 42
----------- ----------- -----------
Balance at end of year.................................................... (96) (958) (24)
----------- ----------- -----------
Unrealized losses from foreign currency translation:
----------------------------------------------------
Balance at beginning of year.............................................. - - -
Unrealized losses arising during period................................. (12) - -
----------- ----------- -----------
Balance at end of year.................................................... (12) - -
Treasury stock
--------------
Balance at beginning of year (1,960 shares in 2000, 797 in 1999 and 747 in
1998)..................................................................... (33,137) (3,705) (2,177)
Shares repurchased (520 shares in 2000, 1,163 in 1999 and 50 in 1998 ).. (17,323) (29,432) (1,528)
----------- ----------- -----------
Balance at end of year (2,480 shares in 2000, 1,960 in 1999 and
797 in 1998)............................................................ (50,460) (33,137) (3,705)
----------- ----------- -----------
Total Stockholders' Equity................................................ $ 146,716 $ 114,464 $ 101,304
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in tables are in thousands unless otherwise indicated)
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Pre-Paid Legal Services, Inc. (the "Company") develops and markets legal
service plans (referred to as "Memberships"). The Memberships sold by the
Company 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 do not vary based on the type and amount of benefits utilized by the
member, this capitated arrangement provides significant advantages to the
Company in managing claims risk. At December 31, 2000, Memberships subject to
the provider law firm arrangement comprised more than 98% of the Company's
active Memberships. The remaining Memberships (less than 2%) were primarily sold
prior to 1987 and allow members to locate their own lawyer to provide legal
services available under the Membership with the member's lawyer being
reimbursed for services rendered based on usual, reasonable and customary fees.
Memberships are generally guaranteed renewable and Membership fees are
principally collected on a monthly basis, although approximately 2% of Members
have elected to pay their fees in advance on an annual, semi-annual or quarterly
basis. The Memberships are marketed primarily in 28 states and the provinces of
Ontario and British Columbia by an independent sales force referred to as
"Associates".
During the fourth quarter of 1998, the Company completed the acquisition of
TPN, Inc. d.b.a. The People's Network ("TPN") and Universal Fidelity Life
Insurance Company ("UFL"). Since its inception in late 1994, TPN had marketed
personal and home care products, personal development products and services
together with PRIMESTAR(R) satellite subscription television service to its
members through a network marketing sales force. UFL is an Oklahoma domiciled
life and accident and health insurer.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("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)
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 11 for additional information regarding PPL Agency, Inc.). The primary
subsidiaries of the Company include Pre-Paid Legal Casualty, Inc. ("PPLCI"),
Pre-Paid Legal Services, Inc. of Florida ("PPLSIF") and UFL. All significant
intercompany accounts and transactions have been eliminated.
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.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Commissions
The Company has a level Membership commission schedule of approximately 25%
of Membership fees. This commission schedule results in the Company incurring
commission expense related to the sale of its legal expense plans on a basis
consistent with the collection of the fees generated by the sale of such
Memberships. The Company currently advances the equivalent of up to three years
of commissions on new Membership sales. In January 1997, the Company implemented
a new policy whereby associates do not receive advance commissions on the first
three Memberships submitted unless the associate successfully completes a
Company training program, produces three Memberships and recruits three
associates within 60 days from becoming an associate.
Effective April 2001, the Company modified its compensation plan to
consolidate the lower four levels of its compensation structure into two levels.
At the same time, the Company implemented a two-year advance at the lowest
commission level for associates who participate in the training program.
Associates who do not participate in the training program receive only earned
commissions until they meet the advancement qualification requiring them to
produce 50 new memberships in their organization in order to advance to the next
compensation level and qualify for up to 3 years commission advance.
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 and
expensed at the time of sale and were subject to recovery only in the event of
returned goods or refunds.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, certificates
of deposit, other short-term investments, receivables and trade payables. Fair
value estimates have been determined by the Company, using available market
information and appropriate valuation methodologies. The carrying value of cash,
certificates of deposit, other short-term investments, net receivables and trade
payables are considered to be representative of their respective fair value, due
to the short term nature of these instruments.
Investments
The Company classifies its investments held as available for sale and
accounts for them at fair value with unrealized gains and losses, net of taxes,
excluded from earnings and reported as other comprehensive income.
All investment securities are adjusted for amortization of premiums and
accretion of discounts. Amortization of premiums and accretion of discounts are
recorded to income over the contractual maturity or estimated life of the
individual investment on the level yield method. Gain or loss on sale of
investments is based upon the specific identification method. Income earned on
the Company's investments in certain state and political subdivision debt
instruments is not generally taxable for federal income tax purposes.
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, 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.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the estimated useful lives of the related assets
or the period of the lease, whichever is shorter. Maintenance and repairs are
expensed as incurred and renewals and betterments are capitalized.
Deferred Costs
Deferred costs represent the direct incremental expenses the Company incurs
in enrolling new members and new associates. Deferred costs for enrolling new
members include the cost of the Membership kit and salary and benefit costs for
employees who process Membership enrollments. Deferred costs for enrolling new
associates include bonuses paid to individuals involved in recruiting the
associate and salary and benefit costs of employees who process associate
enrollments. Such costs are deferred to the extent of the lesser of actual costs
incurred or the amount of the related fee charged for such services. (Refer to
Note 1 - Revenue Recognition). Deferred costs are amortized to expense over the
estimated life of the Memberships or the estimated average active period of
associates, as applicable. At December 31, 2000 the estimated life of a
Membership and the average active service periods of associates were 3.6 years
and one year, respectively.
Revenue Recognition
Membership fees are recognized in income when due in accordance with
Membership terms, which generally require the holder of the Membership to remit
fees on at least a monthly basis. Approximately 94% of the Company's members
remit their Membership fees on a monthly basis. The Company records Membership
fees received in excess of that currently due as deferred revenue and recognize
such deferred amount as income when due. However, since approximately 94% of
members choose to remit their Membership payments monthly (approximately 70% by
automatic bank draft and credit card), such Membership fees are both "paid" and
"due" within the same monthly reporting period.
Associate services revenue includes one-time non-refundable enrollment fees
of $65 from each new sales associate and fees of $184 paid by associates
participating in the Company's training program. The fee for the training
program is recognized upon completion of the training. The enrollment fee is for
sales and promotional materials, bonuses paid to individuals who recruit and
sponsor the associates and enrollment services provided to the associate.
Revenue from and costs of the sales and promotional materials (approximately
$18) is recognized when the materials are delivered to the associates. The
remaining $47 of revenues and related costs are deferred and recognized over the
estimated average active service period of associates which at December 31, 2000
is estimated to be one year.
The Company charges a $10 enrollment fee to new members who are not part of
an employee group. This fee is deferred and amortized to income over the
estimated life of the Membership which at December 31, 2000 is 3.6 years.
Coinsurance Receivable and Accident and Health Reserves
The Company has coinsured 100% of the accident and health policy
liabilities of UFL pursuant to a coinsurance agreement. The amount due from
coinsurer is therefore equal to the estimated accident and health reserves.
Accident and health reserves is an estimate of outstanding claims, including an
actuarial estimate of claims incurred but not reported, based upon historical
claims experience, modified for current trends and changes in benefit coverage,
which factors could vary as claims are ultimately settled. The Company believes
the coinsurer will be able to honor all contractual commitments under the
coinsurance agreement, based on its periodic reviews of financial statements,
insurance industry reports and reports filed with state insurance departments.
Commission Advance Receivables
Commission advance receivables represent a receivable from associates for
the unearned portion of commissions advanced to associates on sales of
Memberships. Commissions are earned as Membership fees are earned, usually on a
monthly basis. Up to fifty-percent of commission advance receivables on lapsed
Memberships are recovered from sales commissions due the associate on the sale
of new Memberships. The remaining commission advance receivables on lapsed
Memberships are recovered from earned commissions due an associate on remaining
active Memberships. If there are no new sales made by the associate, 100% of the
commission advance receivable is recovered from commissions due the associate on
prior sales.
The Company charges associates a fee on commission advance receivables
relating to lapsed Memberships. The fee is determined by applying the prime
interest rate to the commission advance receivable balance pertaining to lapsed
Memberships. The Company realizes and recognizes income only when the amount of
the calculated fee is collected by withholding from cash commissions payments
due the associate, because the Company's ability to recover fees in excess of
current payments is primarily dependent on the associate selling new Memberships
which qualify for commission advances.
"D status" associates are those that are no longer "active" because they
fail to meet the Company's established vesting requirements by selling at least
three new Memberships per quarter or retaining a personal Membership. "D status"
associates lose their right to any further commissions earned on Memberships
previously sold at the time they are placed in "D status". As a result the
Company is no longer required to pay commissions that would be otherwise payable
to these terminated associates.
The Company assesses, at the end of each quarter, on an
associate-by-associate basis, the recoverability of each associate's commission
advance receivable by estimating the associate's future commissions to be earned
on active Memberships. Each active Membership is assumed to lapse in accordance
with the Company's estimated future lapse rate, which is based on the Company's
actual historical Membership retention experience as applied to each active
Membership's year of origin. The lapse rate is based on a 20-year history of
Membership retention rates, which is updated quarterly to reflect actual
experience. The Company also reviews current data for any trends that would
affect the historical lapse rate. The sum of all expected future commissions to
be earned for each associate is then compared to that associate's commission
advance receivable balance. An allowance for unrecoverable commission advance
receivables is recorded for any deficiency of expected future commissions to be
earned on active Memberships (aggregated on an associate-by-associate basis).
Adjustments to the reserve are immediately recorded in income. If an associate
with an outstanding commission advance receivable has no active Memberships ,
the advance receivable is written off.
Further, the Company's analysis of the recoverability of commission advance
receivables is also based on the assumption that the associate does not write
any new Memberships. The Company believes that this assessment methodology is
conservative since its actual experience is that many associates do continue to
sell new policies and the Company, through its chargeback rights, gains an
additional source to recover commission advance receivables.
Goodwill
Goodwill, included in Other Assets, primarily represents the excess of
acquisition costs over the value assigned to the net assets acquired in the 1998
UFL business combination and is being amortized on the straight-line method over
a period of ten years. The carrying amount of goodwill is reviewed for
recoverability using estimated undiscounted cash flows for the business acquired
over the remaining amortization periods. Goodwill amortization for 2000 and 1999
was $83,000 in both years. Since the UFL acquisition was effective December 30,
1998, no amortization expense was charged to earnings during 1998. The
unamortized goodwill balance at December 31, 2000 and 1999 is $679,000 and
$747,000, respectively.
Membership Benefits Liability
The Membership benefits liability represents per capita amounts due
provider law firms on closed panel Memberships and claims reported but not paid
and actuarially estimated claims incurred but not reported on open panel
Memberships. The Company calculates the benefit liability costs on open panel
Memberships based on completion factors that 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.
Life Insurance Reserves
Life insurance reserves are actuarially determined based on life insurance
in-force and estimated claims occurrences. The aggregate reserve for life
insurance policies is an amount which is considered adequate to provide future
guaranteed benefits as they become payable under the provisions of the insurance
policies issued by UFL and remaining in force. The policy reserve is the
aggregate result of an actuarial computation on each policy or group of
policies.
Income Taxes
The Company accounts for income taxes using the 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, the Company generally considers all future
events other than the enactment of changes in the tax law or rates.
Deferred income taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
The Company records deferred tax assets related to the recognition of future tax
benefits of temporary differences and net operating loss and tax credit
carryforwards. To the extent that realization of such benefits is not considered
more likely than not, the Company establishes a valuation allowance to reduce
such assets to estimated realizable value.
Cash and Cash Equivalents
The Company considers all highly liquid unpledged investments with
maturities of three months or less at time of acquisition to be cash
equivalents.
Long-Lived Assets
The Company reviews long-lived assets to be held and used in operations
when events or changes in circumstances indicate that the assets might be
impaired. The carrying value of long-lived assets is considered impaired when
the identifiable undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved. Losses on
long-lived assets to be disposed of are determined in a similar manner, except
that fair values are reduced by disposal costs.
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. For employee and board member
stock options, the Company has adopted the disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") in preparing its financial statement disclosures.
Stock options granted to associates and other non-employees after December
15, 1995 are accounted for at fair value in accordance with SFAS 123.
Segment Information
The Company began applying the requirements of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131") in its 1999 financial statements, the
first year the Company operated in more than one segment. Operating segments are
defined in the statement as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker(s) in deciding how to allocate resources and in
assessing performance. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. Required disclosures are
presented in Note 17.
New Accounting Standard Adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") was issued in June 1998. This Statement, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative and
the resulting designation. SFAS 133, as amended, applies to all entities and is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company adopted SFAS 133, as amended, on January 1, 2001 as required. The
Company did not hold any derivative instruments at January 1, 2001 and there was
no effect on the consolidated financial statements upon the adoption of SFAS
133.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101") was issued December 1999. This Staff Bulletin
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101
was effective no later than the fourth fiscal quarter of the fiscal years
beginning after December 15, 1999. The Company implemented SAB 101 in the fourth
quarter of 2000, and has deferred the non-refundable $10 Membership and $47 of
the associate enrollment fees and the related direct incremental costs
associated with services provided members and associates in return for such
fees. These deferred revenues and related costs will be amortized to income over
the estimated life of the Membership or the estimated average active service
period of associates which at December 31, 2000 were 3.6 years and one year,
respectively. The deferred revenue and cost amounts at December 31, 2000 were
$8.5 million. The implementation of SAB 101 did not result in a cumulative
effect type adjustment in the consolidated income statement for the year ended
December 31, 2000 since direct incremental costs of providing the services
related to the enrollment of members and associates were equal to or greater
than the fees charged for such services. These excess direct incremental costs
are recognized in income as incurred.
Codification of Statutory Accounting Principles
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles (the "Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting to state insurance departments, is effective January 1, 2001. However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices. The State of Oklahoma will require adoption
of the Codification for the preparation of statutory financial statements
effective January 1, 2001. The Company estimates that the adoption of the
Codification will increase the statutory capital and surplus of its regulated
subsidiaries as of January 1, 2001 by approximately $1.3 million.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
Note 2 - Merger and Acquisition
Effective October 2, 1998, the Company issued 999,992 shares of its common
stock in exchange for all of the outstanding common stock of TPN based on a
conversion ratio of 345 shares of the Company's common stock for each share of
TPN common stock. The merger qualified as a tax-free reorganization and was
accounted for as a pooling of interests.
The Company completed its acquisition of UFL on December 30, 1998. UFL,
based in Duncan, Oklahoma, was a subsidiary of Pioneer Financial Services, Inc.
("Pioneer"), which is a subsidiary of the Conseco group of companies. The
Company paid $20.7 million in cash to Pioneer in exchange for all of the
outstanding capital stock of UFL, which had assets and liabilities at December
31, 1998 with carrying values of $43.9 million and $24.0 million, respectively,
which approximated their fair values. This acquisition was accounted for by the
purchase method of accounting for business combinations. The accompanying
consolidated statements of income include revenues and expenses related to this
operating segment of the Company subsequent to its acquisition. The transaction
has not had a material effect on the Company's operating results. As a part of
the transaction, Pioneer Life Insurance Company, a wholly-owned subsidiary of
Pioneer, entered into a 100% coinsurance agreement with UFL assuming all of the
assets and liabilities relating to Medicare supplement and health care business
written by UFL. UFL retained its existing life insurance business (2000 and 1999
premiums were $1.2 million and $1.0 million, respectively) and continues to
provide claims processing for the coinsured Medicare supplement and health care
policies and receives full cost reimbursement for such services. During 2000 and
1999, premium income and benefits expense for this coinsurance business (each of
which were fully ceded to the coinsuring party) were $31.0 million and $22.5
million, and $33.1 million and $24.1 million, respectively.
Note 3 - Change in Accounting Principle
During 2000, the Company changed its methodology for evaluating the
recoverability of its commission advance receivables from terminated or "D
status" sales associates. "D status" associates are those that fail to meet the
Company's established vesting requirements (i.e., associates that do not sell at
least three new Memberships per quarter or do not retain a personal Membership).
"D status" associates lose their right to any further commissions earned on
Memberships previously sold at the time they are placed in "D status" and as a
result, the Company is entitled to retain all commission earnings that would be
otherwise payable to these terminated associates to recover their commission
advance receivable balance. See Note 13 - Commitments and Contingencies.
Prior to 2000, the Company "pooled" the activity of this "D status" group
of former associates and accounted for the group and evaluated the
collectibility of their commission advance receivables as if it were a single
associate rather than on an associate by associate basis. The Company determined
that it would change its methodology in 2000 such that the Company now evaluates
the collectibility of "D status" commission advance receivables on an individual
associate basis, as it does the commission advance receivables of its active
associates. The cumulative effect of this change on prior years is reflected
separately and resulted in a reduction in income (net of applicable taxes of
$2.2 million) of approximately $4.1 million ($.18 per basic and diluted share).
The effect of the change on fiscal 2000 resulted in a reduction of income (net
of applicable income taxes of $1.6 million) of approximately $3.1 million ($.14
per basic and diluted share).
The Company believes that an evaluation of the collectibility of commission
advance receivables on an associate-by-associate basis is preferable to an
evaluation on a pooled basis because it results in a more refined estimate of
collectibility.
Note 4 - Investments
A summary of the amortized cost, unrealized gains and losses and fair
values of the Company's investments at December 31, 2000 and 1999 follows:
December 31, 2000
---------------------------------------------------
Amortized Gross Unrealized Fair
Available-for-Sale Cost Gains Losses Value
------------------ ----------- --------- --------- -----------
U.S. Government obligations........................ $ 13,203 $ 138 $ (227) $ 13,114
Corporate obligations.............................. 9,291 50 (121) 9,220
Equity securities.................................. 417 12 - 429
Obligations of state and political subdivisions.... 3,146 26 (26) 3,146
Certificates of deposit............................ 3,851 - - 3,851
----------- --------- --------- -----------
Total.............................................. $ 29,908 $ 226 $ (374) $ 29,760
=========== ========= ========= ===========
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 contractual maturities of the Company's available-for-sale investments
in debt securities and certificates of deposit at December 31, 2000 by maturity
date follows:
Amortized
Cost Fair Value
---------- -----------
One year or less................................... $ 6,241 $ 6,223
Two years through five years....................... 9,942 9,963
Five years through ten years....................... 6,292 6,325
More than ten years................................ 7,016 6,820
----------- -----------
Total.............................................. $ 29,491 $ 29,331
=========== ===========
The Company's investment securities are included in the accompanying
consolidated balance sheets at December 31, 2000 and 1999 as follows.
December 31,
-------------------------
2000 1999
----------- -----------
Available-for-sale investments (current)........... $ 2,448 $ 2,252
Available-for-sale investments (non-current)....... 21,207 19,628
Investments pledged................................ 6,105 5,288
----------- -----------
Total.............................................. $ 29,760 $ 27,168
=========== ===========
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 is as
follows:
December 31,
-------------------------
2000 1999
---------- ------------
Certificates of deposit........................... $ 2,451 $ 1,774
Obligation of state and political subdivisions.... 130 100
U. S. Government obligations...................... 3,524 3,414
----------- -----------
Total $ 6,105 $ 5,288
=========== ===========
Sales of investments during 2000 were not significant. Proceeds from sales
of investment securities available-for-sale were $18,150,000 in 1999 resulting
in gross realized gains of $700,000 and gross realized losses of $155,000.
Proceeds from sales of investment securities held-to-maturity were $23,718,000
in 1998, resulting in gross realized gains of $17,500 and gross realized losses
of $81,500.
Note 5 - Inventories
Inventories consist of the following:
December 31,
2000 1999
Personal and home care, and personal
developement inventory.................... $ 198 $ 618
Jewelry inventory........................... 613 763
Sales and promotional materials............. 1,160 873
Less: Inventory reserve..................... (429) (812)
----------- -----------
Total $ 1,542 $ 1,442
=========== ===========
Note 6 - Commission Advance Receivables
The Company advances its sales associates a maximum of 3 years commission
when a membership is sold. However, the average commission advance paid to sales
associates as a group is actually less than 3 years because some associates
choose to receive less than a 3-year advance and some of the Company's specialty
products pay less than a 3-year advance. Also, any residual commissions due an
associate (defined as commission on an individual membership after the advance
has been earned) is retained to reduce any remaining commission advance
receivables prior to being paid to that sales associate. The average commission
advance in 2000, 1999 and 1998 was 2.31, 2.43 and 2.50 years respectively.
Commission advance receivable activity for years ended December 31, 2000,
1999 and 1998 is as follows:
2000 1999 1998
---- ---- ----
Beginning commission advance receivables............................... $ 125,257 $ 87,263 $ 59,623
Commission advances.................................................... 97,500 74,800 51,400
Recovery of advanced commissions....................................... (48,255) (36,806) (23,760)
Write-offs............................................................. (7,309) - -
------------ ------------ ------------
Ending commission advance receivables.................................. 167,193 125,257 87,263
Allowance for unrecoverable commission advance receivables............. (11,055) (4,544) (3,994)
------------ ------------ ------------
Ending commission advance receivables, net............................. $ 156,138 $ 120,713 $ 83,269
============ ============ ============
Commission advance receivables as of December 31, 2000, 1999 and 1998 are
as follows:
12/31/00 12/31/99 12/31/98
------------ ------------ ------------
Active sales associates................................................ $ 146,649 $ 107,257 $ 75,757
"D status" sales associates............................................ 20,544 18,000 11,506
Allowance for unrecoverable commission advance receivables............. (11,055) (4,544) (3,994)
------------ ------------ ------------
Net commission advance receivables..................................... $ 156,138 $ 120,713 $ 83,269
============ ============ ============
The Company examines, at the end of each quarter, on an
associate-by-associate basis, the estimated recoverability of each associate's
commission advance receivable by estimating the associate's future commission
earnings. The future commission earnings are estimated based on each associate's
active memberships at the end of the reporting period and the related future
commission earnings expected to be derived from such active memberships. Each
active membership is assumed to lapse in accordance with the Company's estimated
future lapse rate, which is based on the Company's actual historical membership
retention experience as applied to each active membership's year of origin. The
data used is based on a 20-year history of membership retention rates, which is
updated annually to reflect actual experience. The Company also closely reviews
current data for any trends that would affect the historical data. The aggregate
of all estimated future commission earnings for each associate is then compared
to that associate's commission advance receivable balance.
The allowance for uncollectible commission advance receivables is adjusted
to the amount of the estimated deficiency of expected future commission earnings
on active memberships of associates. Any adjustment in the reserve account is
recorded in the provision for estimated uncollectible Membership commission
advance receivables. Commission advance receivables that do not have any related
outstanding Memberships are charged to the allowance for uncollectible advance
commission receivables.
Note 7 - Property and Equipment
Property and equipment is comprised of the following:
Estimated December 31,
Useful Life 2000 1999
----------- ----------- -----------
Equipment, furniture and fixtures.......... 3-10 years $ 11,350 $ 11,896
Computer software.......................... 3 years 3,513 4,537
Building and improvements.................. 20 years 3,265 2,835
Automotive................................. 3 years 338 250
Land....................................... 170 110
----------- -----------
18,636 19,628
Accumulated depreciation................... (7,436) (11,267)
----------- -----------
Property and equipment, net................ $ 11,200 $ 8,361
=========== ===========
The net carrying value of capitalized leased assets was $560,000 and
$790,000 at December 31, 2000 and 1999, respectively.
Note 8 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses is comprised of the following:
December 31,
----------- -----------
2000 1999
----------- -----------
Accounts payable................................... $ 2,155 $ 2,816
Fast Start training bonuses payable................ 845 2,421
Current income tax liability....................... 567 2,197
Other.............................................. 3,529 3,334
----------- -----------
Total.............................................. $ 7,096 $ 10,768
=========== ===========
Note 9 - Income Taxes
The provision for income taxes consists of the following:
Year Ended December 31,
------------------------------------
2000 1999 1998
----------- ----------- ------------
Current income taxes:
Federal.................................. $ 9,076 $ 5,339 $ -
State.................................... 637 1,067 -
----------- ----------- -----------
9,713 6,406 -
Deferred................................... 13,566 14,568 11,122
----------- ----------- -----------
Total provision for income taxes......... $ 23,279 $ 20,974 $ 11,122
=========== =========== ===========
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate is as follows:
Year Ended December 31,
-----------------------------------
2000 1999 1998
---------- ---------- ----------
Statutory Federal income tax rate.......... 35.0% 35.0% 35.0%
Change in valuation allowance.............. (1.1) - (8.2)
Tax exempt interest........................ (.1) - (.1)
State income taxes......................... 1.1 1.5 1.0
Other...................................... (2.1) (1.5) (.8)
--------- --------- ---------
Effective income tax rate.................. 32.8% 35.0% 26.9%
========= ========== =========
Deferred tax liabilities and assets at December 31, 2000 and 1999 are
comprised of the following:
December 31,
-----------------------
2000 1999
----------- -----------
Deferred tax liabilities:
Commissions advanced......................... $ 54,647 $ 42,206
Unrealized investment gains (net)............ - 467
Deferred member and associate service cost... 2,973 -
Depreciation................................. 687 356
----------- -----------
Total deferred tax liabilities............ 58,307 43,029
----------- -----------
Deferred tax assets:
Expenses not yet deducted for tax purposes... 1,203 728
Unrealized loss on investments............... 55 516
Deferred Membership revenues and fees and
associate fees............................ 4,386 -
Pre-merger net operating loss carryforward... 979 1,637
General Business Credit carryforward......... - 261
AMT Credit carryforward...................... 464 586
----------- -----------
Total deferred tax assets................. 7,087 3,728
Valuation allowance for deferred tax assets.. (1,796) (1,898)
----------- -----------
Total net deferred tax assets............. 5,291 1,830
----------- -----------
Net deferred tax liability................... $ (53,016) $ (41,199)
=========== ===========
At December 31, 2000, the Company has NOLs in the amount of $2.8 million
representing remaining NOLs of TPN generated prior to the merger date. A
valuation allowance has been established for the TPN NOLs, UFL's AMT credit
carryforward and UFL's expenses not yet deducted for tax purposes. At December
31, 1999, the Company had established a valuation allowance for the general
business and rehabilitation tax credit carryfowards and the TPN NOLS. 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 and anticipated
continued growth. However, carryforwards of $954,000 will be utilized in the
2000 income tax returns and accordingly, were also realized for financial
reporting purposes.
The exercise of certain stock options which have been granted under the
Company's various stock option plans give rise to compensation which is
includable in the taxable income of the option grantee and deductible by the
Company for federal and state income tax purposes. Such compensation results
from increases in the fair market value of the Company's common stock subsequent
to the date of grant of the applicable exercised stock options, and in
accordance with Accounting Principles Board Opinion No. 25, such compensation is
not recognized as an expense for financial accounting purposes and the related
tax benefits are recorded in capital in excess of par value.
Note 10 - Stockholders' Equity
During 2000 and 1999, the Company's $3.00 Cumulative Convertible Preferred
Stock, consisting of 2,133 shares and 111 shares, respectively, were converted
into 5,609 shares of Common Stock and during 2000, 1,027 shares were redeemed
for a value of $25,675. At December 31, 2000, all such shares had been converted
or redeemed. Each share of $3.00 Cumulative Convertible Preferred Stock was
previously entitled to receive cumulative cash dividends at the annual rate of
$3 per share, payable quarterly, was convertible into 2.5 shares of Common Stock
and was redeemable at the option of the Company at $25 per share.
During 2000, 1999 and 1998, the Company's Special Preferred Stock,
consisting of 7,032 shares, 391 shares and 4,766 shares, respectively, were
converted into 42,661 shares of Common Stock and during 2000, 10,585 shares were
redeemed for a value of $141,204. At December 31, 2000 all such shares had been
converted or redeemed. Each share of the Special Preferred Stock was previously
entitled to a non-cumulative annual dividend of $1.00 per share, was convertible
into 3.5 shares of Common Stock and was redeemable at the option of the Company
at $13.34 per share, plus all accumulated and unpaid dividends
The Company announced on April 6, 1999, a stock repurchase program
authorizing management to reacquire up to 500,000 shares of the Company's common
stock. The Board of Directors has increased such authorization from 500,000
shares to 2,000,000 shares during subsequent board meetings. At December 31,
2000, the Company had repurchased 1,748,209 shares under these authorizations
for a total consideration of $48.3 million, an average price of $27.60 per
share. The Board, at its January 16, 2001 meeting, authorized additional 250,000
shares to be repurchased.
The Company's ability to pay dividends is dependent in part on its ability
to derive dividends from its subsidiaries. The payment of dividends by PPLCI and
UFL is restricted under the Oklahoma Insurance Code to available surplus funds
derived from realized net profits. At December 31, 2000, PPLCI and UFL did not
have funds available for payment of significant dividends without the approval
of the Oklahoma Insurance Commissioner.
Note 11 - Related Party Transactions
The Company's Chairman, Harland C. Stonecipher, is the owner of PPL Agency,
Inc. ("Agency"). The Company has agreed to indemnify and hold harmless the
Chairman for any personal losses incurred as a result of his ownership of this
corporation and any income earned by Agency accrues to the Company. The Company
provides management and administrative services for Agency, for which it
receives specified management fees and expense reimbursements.
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 2000, 1999
and 1998 of $122,000, $121,000 and $119,000, respectively, through its sales of
insurance products of an unaffiliated company. Agency had net income for the
year ended December 31, 2000 of $11,661 and net losses for the years ended
December 31, 1999 and 1998 of $18,148 and $10,694, respectively, after incurring
commissions earned by the Chairman of $50,000, $49,000 and $47,000,
respectively, and annual management fees paid to the Company of $36,000 for
2000, 1999 and 1998.
Mr. Stonecipher and Shirley A. Stonecipher own Stonecipher Aviation LLC
("SA") and Mr. and Mrs. Stonecipher together with Wilburn L. Smith, President
and a director of the Company, own S & S Aviation LLC ("S&SA"). The Company has
agreed to reimburse SA and S&SA for certain expenses pertaining to trips made by
Company personnel for Company business purposes using aircraft owned by SA and
S&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 2000, 1999 and
1998, the Company paid $264,000, $276,000 and $279,000, respectively, to SA as
reimbursement for such transportation expenses. S&SA was organized during 2000,
and the Company paid $372,000 to S&SA during such year as reimbursement for such
transportation expenses.
The Company indemnified Mr. Stonecipher for litigation expenses and
settlement costs in connection with a lawsuit filed by Frank Jaques, a former
director of the Company, in 1999 against Mr. Stonecipher in the District Court
of Pontotoc County, Oklahoma. Mr. Jaques claimed damages relating to an
agreement between Mr. Jaques and Mr. Stonecipher relating to a stock
subscription agreement with the Company which Mr. Stonecipher entered into in
order to obtain the approval of the Oklahoma Securities Department for the
Company's original intrastate public offering in 1977. The stock subscription
agreement was executed by Mr. Stonecipher for the benefit of the Company in his
capacity as the Chairman and founder. The Board of Directors determined that the
requirements for indemnification under the Company's Bylaws had been satisfied
and that Mr. Stonecipher was entitled to such indemnification. In 2000, the
Company reimbursed Mr. Stonecipher $130,370 for litigation expenses, and in
2001, the Company reimbursed him for $802 in litigation expenses and $275,000
for settlement of the case which was accrued as of December 31, 2000.
Wilburn L. Smith, President and a director of the Company, has loans from
the Company made in December 1992, December 1996 and October 1998. The largest
aggregate balance of the loans during the year ended December 31, 2000 was
$515,000. The outstanding balance of the loans as of December 31, 2000 was
$478,600. The 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 Mr. Smith's
commissions from the Company. Mr. Smith also owns corporations or partnerships
not affiliated with the Company but engaged in the marketing of the Company's
legal service memberships and which earn commissions from sales of memberships.
These entities earned commissions, net of amounts passed through as commissions
to their sales agents, during 2000, 1999 and 1998 of $13,000, $14,000 and
$39,000, respectively.
Randy Harp, Chief Operating Officer and a director of the Company, has
loans from the Company made in December 2000. The largest aggregate balance of
these loans during the year ended December 31, 2000 was $350,000. The
outstanding balance of these loans as of December 31, 2000 was $350,000. These
loans bear annual interest at the rate of 3% in excess of the prime rate,
adjusted on January 1 of each year.
John W. Hail, a director of the Company, served as Executive Vice
President, Director and Agency Director of the Company from July 1986 through
May 1988 and also served as Chairman of the Board of Directors of TVC Marketing,
Inc., which was the exclusive marketing agent of the Company from April 1984
through September 1985. Pursuant to agreements between Mr. Hail and the Company
entered into during the period in which Mr. Hail was an executive officer of the
Company, Mr. Hail receives override commissions from renewals of certain
memberships initially sold by the Company during such period. During 2000, 1999
and 1998, such override commissions on renewals totaled $89,593, $90,839 and
$93,867, respectively. Mr. Hail also owns interests ranging from 12% to 100% in
corporations not currently affiliated with the Company, including TVC Marketing,
Inc., but which were engaged in the marketing of the Company's legal service
memberships and which earn renewal commissions from memberships previously sold.
These entities earned renewal commissions, net of amounts passed through as
commissions to their sales agents, during 2000, 1999 and 1998 of $313,005,
$301,021 and $284,344, respectively.
David A. Savula, a director of the Company, is actively engaged as an
independent contractor in the marketing of the Company's legal service
memberships. During 2000, 1999 and 1998, Mr. Savula received from the Company
$936,427, $815,460 and $651,215, respectively, pursuant to a previous agreement
with the Company providing for the payment to Mr. Savula of override commissions
and other fees with respect to commissions earned by, and new sales associate
sponsorships within, the Company's multilevel marketing sales force, as well as
amounts received pursuant to his individual associate agreement.
The Company also has notes receivable from certain marketing consultants
who provide significant marketing-related services to the Company. Such notes
aggregated approximately $2.6 million and $2.0 million at December 31, 2000 and
1999, respectively, and bear interest at the rate of 10%.
Note 12 - Leases
At December 31, 2000, the Company was committed under noncancelable
operating and capital leases, principally for buildings and equipment. Aggregate
rental expense under all operating leases was $49,600, $113,000 and $468,000 in
2000, 1999 and 1998, respectively. At December 31, 2000, minimum rentals for
capital leases for the year ending December 31, 2001 is $224,000.
Note 13 - Commitments and Contingencies
As of December 31, 2000, the Company recorded a charge of $1.5 million
representing an amount negotiated on January 23, 2001 to settle a lawsuit
involving multiple plaintiffs. This settlement offer was unexpectedly received
in a settlement conference and management believed that it was in the best
interest of the Company to promptly settle this matter.
Subsequent to December 31, 2000, the Company and various of its executive
officers were named in multiple putative securities class action complaints
filed in both the United States District Courts for the Eastern and Western
Districts of Oklahoma seeking damages on the basis of allegations that the
Company issued false and misleading financial information, primarily related to
the method the Company uses to account for commission advance receivables from
sales associates. These complaints have been transferred to Western District of
Oklahoma where motions to consolidate them into a single proceeding are pending.
As of April 20, 2001, these cases were in the preliminary procedural stages
relating to selection of lead counsel and lead plaintiffs as required by the
Private Securities Litigation Reform Act of 1995 ("PSLRA"). After the selection
of lead plaintiffs and lead counsel, the Company expects that an amended and
consolidated complaint will be filed. The Company expects to file a motion to
dismiss the complaint. Under PSLRA, discovery is stayed during the pendency of a
motion to dismiss. Costs of defense of these cases through the motion to dismiss
stage are not expected to be material. While the outcome of these cases is
uncertain, the Company believes these actions are without merit and will
vigorously defend these actions. However, an unfavorable decision in this
litigation could have a material adverse effect on the Company's financial
position, results of operations and cash flows.
In January 2001, the Company received inquiries from the Division of
Enforcement of the Securities and Exchange Commission ("SEC") requesting
information relating primarily to the Company's accounting policies for
commission advance receivables from sales associates. Also, in January 2001 the
staff of the SEC's Division of Corporation Finance reviewed the Company's 1999
Form 10-K. The Division of Enforcement's inquiry is informal and does not
constitute a formal investigation or proceeding. In subsequent discussions and
exchanges of correspondence the staff of the Division of Corporation Finance of
the SEC raised issues regarding the Company's accounting policies and requested
additional information from the Company. The Company is cooperating with the
staff of the SEC in providing the requested information and expects to continue
to do so. As of April 20, 2001, these inquiries were proceeding. The Company is
not able to predict what the outcome of these inquiries may be or when they will
be resolved.
The Company is a named defendant in certain other lawsuits arising in the
ordinary course of the Company's business. While the outcome of these lawsuits
cannot be predicted with certainty, the Company does not expect these matters to
have a material adverse effect on the Company's financial condition, liquidity
or results of operations.
Note 14 - Stock Options and Purchase Plan
The Company has a stock option plan (the "Plan") under which the Board of
Directors (the "Board") or its Stock Option Committee (the "Committee") may
grant options to purchase shares of the Company's common stock. The Plan permits
the granting of options to directors, officers and employees of the Company to
purchase the Company's common stock at not less than the fair value at the time
the options are granted. The Plan provides for option grants to acquire up to
2,000,000 shares and permits the granting of incentive stock options as defined
under Section 422 of the Internal Revenue Code at an exercise price for each
option equal to the market price of the Company's common stock on the date of
the grant and a maximum term of 10 years. Options not qualifying as incentive
stock options under the Plan have a maximum term of 15 years. The Board or
Committee determines vesting of options granted under the Plan. No options may
be granted under the Plan after December 12, 2005.
The Plan provides for automatic grants of options to non-employee directors
of the Company. Under the Plan, each incumbent non-employee director and any new
non-employee director receives options to purchase 10,000 shares of common stock
on March 1 of each year. The options granted each year are immediately
exercisable as to 2,500 shares and vest in additional increments of 2,500 shares
on the following June 1st, September 1st, and December 1st in the year of grant,
subject to continued service by the non-employee director during such periods.
Options granted to non-employee directors under the Plan have an exercise price
equal to the closing price of the common stock on the date of grant.
The Company in 1995 and 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 based on production and recruiting results or for achieving a
specified level within the Company's marketing structure. The exercise price for
December 1995 grants was equal to the closing stock price on such date and the
exercise price for July 1997 grants was $27.00 (which exceeded market). The
options granted for production during July 1997 expired pursuant to their terms
on July 31, 1998, and the options granted December 14, 1995 expired on December
14, 2000.
The Company also has other options outstanding. These grants 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 (755,332 options with a weighted average
exercise price of $28.53) were terminated.
A summary of the status of the Company's total stock option activity as of
December 31, 2000, 1999 and 1998 for the years ended on those dates is presented
below:
2000 1999 1998
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year..... 1,083,019 $ 26.38 1,306,700 $ 24.85 808,100 $ 16.75
Granted.............................. 355,892 32.06 720,000 29.45 717,500 32.05
Exercised............................ (226,937) 21.09 (183,349) 18.46 (150,700) 14.71
Terminated........................... (12,888) 28.17 (760,332) 28.56 (68,200) 27.00
----------- --------- ---------- --------- ---------- ---------
Outstanding at end of year........... 1,199,086 $ 29.06 1,083,019 $ 26.38 1,306,700 $ 24.85
========== ========= ========== ========= ========== =========
Options exercisable at year end...... 1,117,086 $ 28.96 1,030,519 $ 26.31 839,700 $ 24.56
========== ========= ========== ========= ========== =========
The following table summarizes information about stock options outstanding
at December 31, 2000:
Weighted Average
Remaining Weighted Average
Range of Exercise Prices Number Outstanding Contractual Life Exercise Price
------------------------- ------------------ ---------------- ----------------
$14.25 - $19.00 206,667 1.29 $ 14.61
$22.56 - $33.75 676,499 3.02 29.14
$35.88 - $43.13 315,920 1.77 38.32
------------------ ---------------- ----------------
1,199,086 2.39 $ 29.06
================== ================ ================
The following table summarizes information about stock options exercisable
at December 31, 2000:
Weighted Average
Remaining Weighted Average
Range of Exercise Prices Number Outstanding Contractual Life Exercise Price
------------------------ ------------------ ---------------- ----------------
$14.25 - $19.00 206,667 1.29 $ 14.61
$22.56 - $33.75 594,499 2.87 28.98
$35.88 - $43.13 315,920 1.77 38.32
------------------ --------------- ----------------
1,117,086 2.27 $ 28.96
================== ============== ===============
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," ("SFAS 123") establishes a fair value method and disclosure
standards for stock-based employee compensation arrangements, such as stock
purchase plans and stock options. It also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
nonemployees, requiring that such transactions be accounted for based on fair
value. As allowed by SFAS 123, the Company continues to follow the provisions of
Accounting Principles Board Opinion No. 25 and related interpretations for its
employee compensation arrangements, and discloses the pro forma effects of
applying SFAS 123. Had compensation cost for the Company's employee-related
stock option plans, including options granted to RVPs, been determined based on
the fair value at the grant dates for awards under the Plan consistent with the
method of SFAS 123, the Company's net income and earnings per share for 2000,
1999 and 1998 would have been reduced to the pro forma amounts indicated below:
2000 1999 1998
----------- ----------- -----------
Net income applicable to common stockholders:
As reported................................ $ 43,608 $ 38,943 $ 30,200
Pro forma.................................. 39,591 35,931 21,671
Basic earnings per common share:
As reported................................ $ 1.94 $ 1.69 $ 1.29
Pro forma.................................. 1.76 1.56 .92
Diluted earnings per common share:
As reported................................ $ 1.92 $ 1.67 $ 1.26
Pro forma.................................. 1.75 1.54 .91
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 5.15% for 2000, 6.09% for 1999 and 5.00% for 1998;
expected life of 3-5 years; and expected volatility for the years ending
December 31, 2000, 1999 and 1998 were 63.4%, 64.1% and 63.5%, respectively.
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
2000, 1999 and 1998 of $130,000, $86,150, and $58,027 based on annual
contributions of Company stock of 5,500 shares, 2,800 shares and 1,900 shares,
respectively.
Note 15 - Earnings Per Share
Basic earnings per common share are computed by dividing net income
applicable to common stockholders by the weighted average number of shares of
common stock outstanding during the year.
Diluted earnings per common share are computed by dividing net income
applicable to common stockholders by the weighted average number of shares of
common stock and common stock equivalents outstanding during the year. The $3.00
Cumulative Convertible Preferred stock and the Special Preferred stock are
considered to be dilutive common stock equivalents for all periods and the
number of shares issuable on conversion of the $3.00 Cumulative Convertible
Preferred stock and the Special Preferred Stock is added to the weighted average
number of common shares. At December 31, 2000 all such shares had been converted
or redeemed. The weighted average number of common shares is also increased by
the number of shares issuable on the exercise of options less the number of
common shares assumed to have been purchased with the proceeds from the exercise
of the options pursuant to the treasury stock method; those purchases are
assumed to have been made at the average price of the common stock during the
respective period.
Year Ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Basic Earnings Per Share:
Earnings:
Income before cumulative effect of change in accounting principle......... $ 47,721 $ 38,953 $ 30,210
Cumulative effect on prior years of change in method of accounting for
Membership commission advance receivables............................... (4,109) - -
----------- ----------- -----------
Net income................................................................. 43,612 38,953 30,210
Less dividends on preferred shares......................................... 4 10 10
----------- ----------- -----------
Net income applicable to common stockholders............................... $ 43,608 $ 38,943 $ 30,200
=========== =========== ===========
Shares:
Weighted average shares outstanding...................................... 22,504 23,099 23,456
=========== =========== ===========
Basic earnings per common share before cumulative effect of change in
accounting method....................................................... $ 2.12 $ 1.69 $ 1.29
Cumulative effect on prior years of change in method of accounting for
Membership commission advance receivables................................ (.18) - -
----------- ----------- -----------
Basic earnings per common share............................................ $ 1.94 $ 1.69 $ 1.29
=========== =========== ===========
Diluted Earnings Per Share:
Earnings:
Income before cumulative effect of change in accounting principle.......... $ 47,721 $ 38,953 $ 30,210
Cumulative effect on prior years of change in method of accounting for
Membership commission advance receivables................................ (4,109) - -
----------- ----------- -----------
Income available to common stockholders after assumed conversions.......... $ 43,612 $ 38,953 $ 30,210
=========== =========== ===========
Shares:
Weighted average shares outstanding........................................ 22,504 23,099 23,456
Assumed conversion of preferred stock...................................... 35 70 81
Assumed exercise of options................................................ 140 205 369
----------- ----------- -----------
Weighted average number of shares, as adjusted............................. 22,679 23,374 23,906
=========== =========== ===========
Diluted earnings per common share before cumulative effect on prior years of
change in accounting method for Membership commission advance receivables $ 2.10 $ 1.67 $ 1.26
Cumulative effect on prior years of change in method of accounting for
Membership commission advance receivables................................ (.18) - -
----------- ----------- -----------
Diluted earnings per common share.......................................... $ 1.92 $ 1.67 $ 1.26
=========== =========== ===========
Note 16 - Selected Quarterly Financial Data (Unaudited)
Following is a summary of the unaudited interim results of operations for
the years ended December 31, 2000 and 1999.
Selected Quarterly Financial Data
(In thousands)
Effect of
Net Income Change in
as Accounting
Previously Principle Net Income
Revenues Reported (1) as Restated
-------- ---------- ---------- -----------
2000
First quarter... $55,933 $11,392 $(4,512) $ 6,880
Second quarter.. 60,200 12,659 (785) 11,874
Third quarter... 65,616 14,360 (729) 13,631
Fourth quarter.. 65,903 12,389 (1,162) 11,227
1999
First quarter... $43,647 $8,782 - $ 8,782
Second quarter.. 47,128 9,872 - 9,872
Third quarter... 48,128 9,870 - 9,870
Fourth quarter... 53,957 10,429 - 10,429
Quarterly Earnings Per Share Data
Basic earnings Basic Diluted
per common earnings Diluted earnings earnings
share as Effect of change per share, per common share Effect of change per share
previously accounting principle as as previously in accounting as
reported (1) restated reported principle (1) restated
2000
First quarter........$ .51 $ (.20) $ .31 $ .50 $ (.20) $ .30
Second quarter........ .56 (.04) .52 .56 (.04) .52
Third quarter......... .64 (.03) .61 .63 (.03) .60
Fourth quarter........ .55 (.05) .50 .55 (.05) .50
1999
First quarter........$ .37 $ - $ .37 $ .37 $ - $ .37
Second quarter........ .43 - .43 .42 - .42
Third quarter......... .43 - .43 .42 - .42
Fourth quarter........ .46 - .46 .46 - .46
(1) Refer to Note 3 to Consolidated Financial Statements.
Note 17 - Segment Information
The Company derived approximately 99% and 98% of its revenues and net
income from the sale of legal service plans and directly related activities
during 2000 and 1999, respectively. Revenues and net income from the Company's
other operating segment (life insurance, through UFL acquired in December 1998)
were approximately 1% and 2% of each of the respective consolidated totals for
2000 and 1999, respectively. UFL markets term life insurance products primarily
to individuals, age 65 and over, in New Mexico, Oklahoma and Texas. The
following table sets forth the composition of the segments and total Company
revenues, net income and identifiable assets for the years ended December 31,
2000 and 1999.
Year Ended December 31,
--------------------------
2000 1999
------------ ------------
Revenues:
Legal service plans and directly related activities:
Legal service plan Membership fees.................... $ 210,442 $ 157,217
Associate services.................................... 30,372 22,816
Product sales......................................... 1,016 5,888
Other................................................. 3,232 3,809
------------ ------------
Total............................................. $ 245,062 $ 189,730
------------ ------------
Life insurance segment (UFL):
Life premiums and other income........................ 2,590 3,130
------------ ------------
Total............................................. $ 2,590 $ 3,130
------------ ------------
Total.......................................... $ 247,652 $ 192,860
============ ============
Interest Income:
Legal service plans and directly related activities... $ 1,839 $ 1,311
Life insurance segment (UFL).......................... 1,098 1,094
------------ ------------
Interest income.................................. $ 2,937 $ 2,405
============ ============
Net Income:
Legal service plans and directly related activities... $ 42,963 $ 38,127
Life insurance segment (UFL).......................... 649 826
------------ ------------
Net Income........................................ $ 43,612 $ 38,953
============ ============
Assets:
Legal service plans and directly related activities... $ 222,472 $ 163,755
Life insurance segment (UFL).......................... 24,816 30,020
Total assets...................................... ------------ ------------
$ 247,288 $ 193,775
============ ============
Substantially all of the Company's business is currently conducted in the
United States. Revenues from the Company's Canadian legal service plan
operations for 2000 and 1999 were $3.8 million and $1.0 million, respectively.
The Company has no significant long-lived assets located in Canada.
Depreciation and amortization, income taxes and capital expenditures for
UFL are not significant.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-------------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
None.
PART III
In accordance with the provisions of General Instruction G (3),
information required by Items 10, 11, 12 and 13 of Form 10-K are incorporated
herein by reference to the Company's Proxy Statement for the Annual Meeting of
Shareholders to be filed prior to April 30, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
------------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Consolidated Financial Statements
and Consolidated Financial Statement Schedule set forth on page
32 of this report.
(2) Financial Statement Schedule: See Index to Consolidated Financial
Statements and Consolidated Financial Statement Schedule set
forth on page 32 of this report.
(3) Exhibits: For a list of the documents filed as exhibits to this report,
see the Exhibit Index following the signatures to this report.
(b) Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: April 23, 2001 By: /s/ Randy Harp
-------------------------------------------
Randy Harp
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Position Date
---- -------- ----
/s/ Harland C. Stonecipher Chairman of the Board of Directors April 23, 2001
---------------------------------------------------
Harland C. Stonecipher (Principal Executive Officer)
/s/ Wilburn L. Smith President and Director April 23, 2001
---------------------------------------------------
Wilburn L. Smith
/s/ Kathleen S. Pinson Vice President, Controller and April 23, 2001
---------------------------------------------------
Kathleen S. Pinson Director
/s/ Randy Harp Chief Operating Officer, April 23, 2001
---------------------------------------------------
Randy Harp Director
(Principal Financial Officer)
/s/ Steve Williamson Chief Financial Officer, April 23, 2001
---------------------------------------------------
Steve Williamson (Principal Accounting Officer)
/s/ Peter K. Grunebaum Director April 23, 2001
---------------------------------------------------
Peter K. Grunebaum
/s/Shirley A. Stonecipher Director April 23, 2001
---------------------------------------------------
Shirley A. Stonecipher
/s/ John W. Hail Director April 23, 2001
---------------------------------------------------
John W. Hail
/s/ David A. Savula Director April 23, 2001
---------------------------------------------------
David A. Savula
/s/ Martin H. Belsky Director April 23, 2001
---------------------------------------------------
Martin H. Belsky
/s/ John Addison Director April 23, 2001
---------------------------------------------------
John Addison
SCHEDULE II
PRE-PAID LEGAL SERVICES, INC.
Consolidated Valuation And Qualifying Accounts
For the Three-Year Period Ended December 31, 2000
(Amounts in 000's)
Additions
Balance at Charged to Balance at
Beginnning Cost and End of
Description of Year Expenses Write-offs Year
--------------------------------------------------------- ----------- ------------- ------------ -----------
Year Ended December 31, 2000:
Allowance for unrecoverable commission advance
receivables - (non-current) (1)...................... $ 4,544 $ 13,820 $ 7,309 $ 11,055
=========== =========== =========== ===========
Allowance for doubtful receivables................... $ 213 $ - $ - $ 213
=========== =========== =========== ===========
Inventory valuation reserve.......................... $ 812 $ - $ 383 $ 429
=========== =========== =========== ===========
Year Ended December 31, 1999:
Allowance for unrecoverable commission advance
receivables - (non-current).......................... $ 3,994 $ 550 $ - $ 4,544
=========== =========== =========== ===========
Allowance for doubtful receivables................... $ 213 $ - $ - $ 213
=========== =========== =========== ===========
Inventory valuation reserve.......................... $ - $ 812 $ $ 812
=========== =========== =========== ===========
Year Ended December 31, 1998:
Allowance for unrecoverable commission advance
receivables - (non-current).......................... $ 3,744 $ 250 $ - $ 3,994
=========== =========== =========== ===========
Allowance for doubtful receivables................... $ 213 $ - $ - $ 213
=========== =========== =========== ===========
Inventory valuation reserve.......................... $ 160 $ - $ 160 $ -
=========== =========== =========== ===========
Note (1) - Additions charged to cost and expenses for 2000 includes $9,086
relating to the change in method of accounting for Membership commission advance
receivables. See Note 3 to the Consolidated Financial Statements.
INDEX TO EXHIBITS
Exhibit No.
----------- Description
------------
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (Incorporated by reference to Exhibit 4.1 of the Company's Report
on Form 8-K dated January 10, 1997)
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to
Exhibit 3.1 of the Company's Report on Form 10-Q for the period ended
September 30, 1996)
*10.1Employment Agreement effective January 1, 1993 between the Company and
Harland C. Stonecipher (Incorporated by reference to Exhibit 10.1 of the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1992)
*10.2Agreements between Shirley Stonecipher, New York Life Insurance Company
and the Company regarding life insurance policy covering Harland C.
Stonecipher (Incorporated by reference to Exhibit 10.21 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1985)
*10.3Amendment dated January 1, 1993 to Split Dollar Agreement between Shirley
Stonecipher and the Company regarding life insurance policy covering
Harland C. Stonecipher (Incorporated by reference to Exhibit 10.3 of the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1992)
*10.4Form of New Business Generation Agreement Between the Company and Harland
C. Stonecipher (Incorporated by reference to Exhibit 10.22 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1986)
*10.5Amendment to New Business Generation Agreement between the Company and
Harland C. Stonecipher effective January, 1990 (Incorporated by reference
to Exhibit 10.12 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1992)
*10.6 Amendment No. 1 to Stock Option Plan, as amended effective May 2000
*10.7Demand Note of Wilburn L. Smith and Carol Smith dated December 11, 1992 in
favor of the Company (Incorporated by reference to Exhibit 10.15 of the
Company's Form SB-2 filed February 8, 1994)
*10.8Demand Note of Wilburn L. Smith and Carol Smith dated December 31, 1996 in
favor of the Company (Incorporated by reference to Exhibit 10.8 of the
Company's Form 10-K filed for the year ending December 31, 1997)
*10.9Security Agreement between the Company, Wilburn L. Smith and Carol Smith
dated December 11, 1992 (Incorporated by reference to Exhibit 10.16 of the
Company's Form SB-2 filed February 8, 1994)
*10.10 Letter Agreements dated July 8, 1993 and March 7, 1994 between the
Company and Wilburn L. Smith (Incorporated by reference to Exhibit 10.17 of
the Company's Form 10-KSB filed for the year ending December 31, 1993)
10.11Agreement and Plan of Reorganization dated as of September 23, 1998
between the Company and TPN, Inc. (Incorporated by reference to Exhibit 2.1
of the Company's Current Report on Form 8-K dated October 2, 1998)
10.12Stock Purchase Agreement dated as of October 5, 1998 between the Company
and Pioneer Financial Services, Inc. (Incorporated by reference to Exhibit
2.1 of the Company's Current Report on Form 8-K dated December 30, 1998)
*10.13 Demand Note of Wilburn L. Smith dated October 8, 1998 in favor of the
Company (Incorporated by reference to Exhibit 10.13 of the Company's Form
10-K filed for the year ended December 31, 1998)
*10.14 Stock option agreement with David A. Savula dated February 6, 1998
(Incorporated by reference to Exhibit 10.14 of the Company's Form 10-K
filed for the year ended December 31, 1998)
*10.15 Stock option agreement with David A. Savula dated July 2, 1998
(Incorporated by reference to Exhibit 10.15 of the Company's Form 10-K
filed for the year ended December 31, 1998)
*10.16 Stock option agreement with David A. Savula dated July 2, 1998
(Incorporated by reference to Exhibit 10.16 of the Company's Form 10-K
filed for the year ended December 31, 1998)
10.17 Demand Note of Randy Harp dated December 22, 2000 in favor of the Company
18.1 Letter re: Change in accounting principles
21.1 List of Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
99.1 Press release dated April 13, 2001
99.2 Press release dated April 2, 2001
99.3 Press release dated March 16, 2001
--------------------
* Constitutes a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
EXHIBIT 10.6
AMENDMENT NO. 1
TO
STOCK OPTION PLAN
(as amended and restated effective March 6, 1997)
OF
PRE-PAID LEGAL SERVICES, INC.
A. The Board of Directors of Pre-Paid Legal Services, Inc. (the
"Corporation") has the authority pursuant to Section 9 of the Corporation's
Stock Option Plan (the "Plan") to amend the Plan from time to time, and the
Board of Directors deems it desirable and in the best interests of the
Corporation to amend the Plan to increase the number of shares of Common Stock
in respect of which options may be granted under the Plan from 1,000,000 shares
to 2,000,000 shares.
B. The amendment of the Plan set forth herein shall be conditioned upon,
and is subject in all respects to, the approval of the shareholders of the
Corporation. If such approval is not obtained, this amendment shall be of no
further force or effect.
NOW, THEREFORE, BE IT RESOLVED, that the Plan be and hereby is amended as
follows:
1. The second sentence of Section 3 of the Plan is hereby amended in its
entirety to read as follows:
"Subject to adjustment in accordance with the provisions of subparagraph
6.6 hereof, the total number of shares of Common Stock of the Corporation
on which options may be granted under the Plan shall not exceed in the
aggregate 2,000,000 shares."
STOCK OPTION PLAN
OF
PRE-PAID LEGAL SERVICES, INC.
(as amended and restated effective March 6, 1997)
1. Purpose. This Amended and Restated Stock Option Plan ("Plan") is
-------
intended as an incentive and to encourage stock ownership by certain key
employees, officers and directors of Pre-Paid Legal Services, Inc.
("Corporation") and of its Subsidiaries (as hereinafter defined) in order to
increase their proprietary interest in the Corporation's success.
2. Administration. The Plan shall be administered by the Board of Directors
--------------
of the Corporation, which shall determine the persons who shall participate in
the Plan and the extent of their participation; provided, however, that the
Board of Directors shall have the authority to appoint a committee of not less
than two members of the Board ("Stock Option Committee") to administer the Plan
and to make determinations concerning the granting of options thereunder. The
interpretation and construction by the Board of any provisions of the Plan or
any option granted under it and any determination by the Board or the Stock
Option Committee pursuant to any provision of the Plan or any such option shall
be final and conclusive.
No member of the Board of Directors or the Stock Option Committee shall be
liable for any action or determination made in good faith, and the members shall
be entitled to indemnification and reimbursement in the manner provided in the
Corporation's Certificate of Incorporation, or as otherwise permitted by law.
3. Stock. The stock subject to the options and other provisions of the Plan
-----
shall be shares of the Corporation's authorized but unissued Common Stock or
treasury stock, as determined by the Board of Directors. Subject to adjustment
in accordance with the provisions of Subparagraph 6.6 hereof, the total number
of shares of Common Stock of the Corporation on which options may be granted
under the Plan shall not exceed in the aggregate 1,000,000 shares. In the event
that any outstanding option under the Plan for any reason expires or is
terminated prior to the end of the period during which options may be granted,
the shares of Common Stock allocable to the unexercised portion of such option
may again be subject to an option under the Plan.
4. Terms and Conditions of Incentive Options. Options may be granted under
-----------------------------------------
this Plan which qualify as Incentive Stock Options ("Incentive Options") under
Section 422A of the Internal Revenue Code. Incentive Options granted pursuant to
the Plan shall comply with and be subject to the following special terms and
conditions:
4.1 Eligibility. The individuals who shall be eligible to receive
-----------
Incentive Stock Options under this Plan shall be such key employees
(including officers and directors who are employees) of the Corporation, or
of any corporation (hereinafter called a "Subsidiary") in which the
Corporation has a proprietary interest by reason of stock ownership or
otherwise, including any corporation in which the Corporation acquires a
proprietary interest after the adoption of this Plan (but only if the
Corporation owns, directly or indirectly, stock possessing not less than
50% of the total combined voting power of all classes of stock in the
corporation), as the Board of Directors of the Corporation shall determine
from time to time.
4.2 Limitation on Aggregate Value of Shares Subject to Incentive
-----------------------------------------------------------------
Option. The aggregate fair market value (determined in accordance with
------
Section 6.3) as of the date of the grant of shares with respect to which
options are exercisable for the first time by an optionee during any
calendar year shall not exceed $100,000.
4.3 Limitation for Certain Shareholders. Any person who owns stock
-------------------------------------
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Corporation or its Subsidiaries may not
receive an Incentive Option under the Plan, unless at the time an option is
granted to such person the option price is at lease one hundred ten percent
(110%) of the fair value market value of the shares and the option is not
exercisable after the expiration of five (5) years from the date of the
grant. For purposes of this Section 4.3 a person shall be considered as
owning the shares owned, directly or indirectly, by or for his brothers and
sisters (whether in whole or half blood), spouse, ancestors, and lineal
descendants, and the shares owned, directly or indirectly, by and for a
corporation, partnership, estate or trust shall be considered as being
owned proportionately by or for its shareholders, partners or
beneficiaries.
4.4 Term of Incentive Option. Each Incentive Option granted under the
------------------------
Plan shall not be exercisable more than 10 years from the date the option
is granted.
5. Terms and Conditions of Non-Incentive Options. In addition to Incentive
Options, options not qualifying as Incentive Options may be granted under this
Plan ("Non-Incentive Options"). Certain special terms and conditions apply to
Non-Incentive Options, as set forth below:
5.1 Eligibility. The individuals who shall be eligible for the grant
-----------
of Non-Incentive Options shall be directors, officers and employees of the
Corporation or any Subsidiary (as defined in Section 4.1 above) as the
Board of Directors or the Stock Option Committee shall determine from time
to time.
5.2 Term of Option. Any Non-Incentive Option granted under the Plan
--------------
shall be for a term as determined at the time of grant by the Board of
Directors or the Stock Option Committee but not to exceed 15 years from the
date of grant.
6. Terms and Conditions for All Options. The following terms and conditions
------------------------------------
shall apply to all options granted under the Plan.
6.1 Medium and Time of Payment. The option price shall be payable in
--------------------------
United States Dollars upon the exercise of the option and may be paid in
cash or by certified check, bank draft or money order payable to the order
of the Corporation, or if so determined by the Board of Directors or the
Stock Option Committee, the option price may be paid in property or in
installment payments.
6.2 Number of Shares. The option shall state the total number of
-----------------
shares to which it pertains.
6.3 Option Price. The option price shall be determined by the Board of
------------
Directors or the Stock Option Committee but shall be not less than the fair
market value of the shares of Common Stock of the Corporation on the date
of the granting of the option. For this purpose, fair market value means
the last sales price of the shares of Common Stock on any national
securities exchange on which the shares are listed on the day on which such
value is to be determined or, if no shares were traded on such day, on the
next preceding day on which shares were traded, as reported by such
exchange, by National Quotation Bureau, Inc. or other national quotation
service. If the Common Stock is not listed on a national securities
exchange, fair market value means the last sales price of the shares of
Common Stock in the over-the-counter market on the date on which such vale
is to be determined or, if no shares were traded on such day, on the next
preceding day on which the shares were traded, as reported on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) or
other national quotation service. If at any time shares of Common Stock are
not traded on an exchange or in the over-the-counter market, fair market
value shall be the value determined by the Board of Directors or the Stock
Option Committee, taking into consideration those factors affecting or
reflecting value that they deem appropriate. For purposes of determining
the exercise price of any Incentive Option, fair market value shall in any
event be determined in accordance with Section 422 of the Internal Revenue
Code.
6.4 Date of Exercise. Options shall be exercisable at the rate of 20%
----------------
of the number of shares covered thereby per year beginning one year from
the date of grant, unless otherwise provided by the Board of Directors or
the Stock Option Committee at the time the option is granted. After
becoming exercisable, the option may be exercised at any time and from time
to time in whole or in part until termination of the option as set forth in
Sections 4.5, 5.2 or 6.5.
6.5 Termination of Employment; Death of Employee. In the event that an
--------------------------------------------
optionee's employment by the Corporation shall terminate, his option
whether or not then exercisable shall terminate immediately; provided,
however, that if the termination is not as a result of embezzlement, theft,
other violation of law, or termination by the Corporation for cause, the
optionee shall have the right to exercise his option (to the extent
exercisable at the date of termination) at any time within 30 days after
such termination; provided, further, that if any termination of employment
is related to retirement with the consent of the Corporation the optionee
shall have the right to exercise his option (to the extent exercisable up
to the date of retirement) at any time within 3 months after such
retirement; and provided, further, that if the optionee shall die while in
the employment of the Corporation or within the period of time after
termination of employment or retirement during which he was entitled to
exercise his option as herein provided, his estate, personal
representative, or beneficiary shall have the right to exercise his option
(to the extent exercisable at the date of death) at any time within 12
months from the date of his death.
Retirement by an optionee at his normal retirement date in accordance
with provisions of any retirement plan of the Corporation or a Subsidiary
under which the optionee is then covered shall be deemed to be a retirement
with the consent of the Corporation. Whether any other termination of
employment is to be considered a retirement with the consent of the
Corporation and whether an authorized leave of absence on military or
government service or for other reasons shall constitute a termination of
employment for the purposes of the Plan, shall be determined by the Board
of Directors or Stock Option Committee, which determination shall be final
and conclusive; provided, however, that where the period of leave exceeds
90 days and where the individual's employment is not guaranteed by statute
or contract, the employment relationship will be deemed to have been
terminated on the 91st day of any leave. Employment by the Corporation
shall be deemed to include employment by, and to continue during any period
in which an optionee is in the employment of, a Subsidiary.
6.6 Recapitalization. The aggregate number of shares of Common Stock
----------------
on which options may be granted to persons participating under the Plan,
the number of shares thereof covered by each outstanding option, and the
price per share thereof in each such option, shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of
Common Stock of the Corporation resulting from a subdivision or
consolidation of shares or other capital adjustment, or the payment of a
stock dividend or other increase or decrease in such shares, effected
without receipt of consideration by the Corporation; provided, however,
that any fractional shares resulting from any such adjustment shall be
eliminated.
In the event of a change in the Corporation's Common Stock which is
limited to a change in the designation thereof to "Capital Stock" or other
similar designation, or a change in the par value thereof, or from par
value to no par value, without increase in the number of issued shares, the
shares resulting from any such change shall be deemed to be Common Stock
within the meaning of the Plan.
6.7 Reorganization of Corporation. Subject to any required action by
-----------------------------
the stockholders, if the Corporation shall be the surviving or resulting
corporation in any merger or consolidation which does not result in change
of control of the Corporation, any option granted hereunder shall pertain
to and apply to the securities to which a holder of the number of shares of
Common Stock subject to the option would have been entitled. In the event
of a dissolution or liquidation of the Corporation or a merger or
consolidation in which the Corporation is not the surviving or resulting
corporation or which results in a change in control of the Corporation, or
a tender or exchange offer which results in a change in control of the
Corporation, the Board of Directors or the Stock Option Committee shall
determine: (i) whether all or any part of the unexercised portion of any
option outstanding under the Plan shall terminate; (ii) whether the options
hall become immediately exercisable; or (iii) whether such options may be
exchanged for options covering securities of any surviving or resulting
corporation, subject to the agreement of any such surviving or resulting
corporation, on terms and conditions substantially similar to an option
hereunder.
6.8 Assignability. No option shall be assignable or transferable
-------------
except by will or by the laws of descent and distribution. During the
lifetime of an optionee, the option shall be exercisable only by him.
6.9 Optionee's Agreement. If, at the time of the exercise of any
---------------------
option, it is necessary or desirable, in order to comply with any
applicable laws or regulations relating to the sale of securities, that the
optionee exercising the option shall agree that he will purchase the shares
that are subject to the option for investment and not with any present
intention to resell the same, the optionee will, upon the request of the
Corporation, execute and deliver to the Corporation an agreement to such
effect.
6.10 Rights as a Stockholder. An optionee shall have no rights as a
------------------------
stockholder with respect to shares covered by his option until the date of
the issuance of the shares to him and only after such shares are fully
paid.
6.11 Other Provisions. The option agreements authorized under the Plan
----------------
may contain such other provisions as the Board of Directors shall deem
advisable.
7. Non Employee Director Options. Notwithstanding anything elsewhere in the
-----------------------------
Plan to the contrary, each person who is a member of the Board of Directors of
the Corporation but who is not an employee of the Corporation (a "Non-Employee
Director") shall be eligible for grants of stock options under the Plan in
accordance with the provisions of this Section 7. The following provisions of
this Section 7 shall apply to the granting of stock options to Non-Employee
Directors.
7.1 Grant of Options. Each individual who is a Non-Employee Director
----------------
on December 12, 1995 shall receive an initial option grant to purchase
7,500 shares of the Common Stock of the Corporation. Each Non-Employee
Director shall receive subsequent grants of stock options to purchase
10,000 shares of Common Stock on March 1st of each year commencing on March
1, 1996 and each year thereafter during the term of the Plan, subject to
there being at the time of any such grant sufficient remaining shares of
Common Stock available for awards under the Plan. No options shall be
granted pursuant to this Section 7 after any date that the Non-Employee
Director becomes employed by the Corporation or ceases to be a director of
the Corporation. All stock options granted to the Non-Employee Directors
shall consist of options that do not qualify as incentive stock options
under the Internal Revenue Code.
7.2 Purchase Price. The purchase price for each share placed under an
--------------
option for a Non-Employee Director shall be equal to 100% of the fair
market value of such share on the date the option is granted (as determined
pursuant to Section 6.3 hereof).
7.3 Vesting and Term. Except as otherwise provided in Section 13
-----------------
hereof, (i) the initial options to purchase 7,500 shares granted as of
December 12, 1995 shall be fully vested and immediately exercisable on the
date of grant and (ii) the options to purchase 10,000 shares to be granted
as of March 1st of each year shall be fully vested and immediately
exercisable as to 2,500 shares on the date of grant and shall vest and
become exercisable in additional increments of 2,500 shares on June 1st,
September 1st and December 1st in the year the option is granted; provided,
however, that it shall be a condition to the vesting of each incremental
portion of the option that the Non-Employee Director continue to be a
Non-Employee Director of the Corporation through the applicable vesting
date. The period during which a Non-Employee Director option may be
exercised shall be five years from the date of grant, subject to earlier
termination as provided in Section 7.5 below.
7.4 Exercise of Options. Options granted pursuant to this Section 7,
-------------------
to the extent the option has vested and become exercisable, may be
exercised in whole or in part from time to time by written notice to the
Corporation accompanied by a certified or bank cashier's check payable to
the Corporation for the aggregate purchase price of the number of shares
being purchased.
7.5 Removal for Cause; Death of Non-Employee Director. In the event
---------------------------------------------------
that a Non-Employee Director is removed from the Board of Directors for
cause in accordance with applicable law and the Certificate of
Incorporation and By-Laws of the Corporation, options granted to such
Non-Employee Director pursuant to this Section 7 shall terminate as of the
date of such removal and the Non-Employee Director shall have no further
rights to exercise any portion of such options. If a Non-Employee Director
shall die while serving on the Board of Directors or within any period of
time during which any options granted pursuant to this Section 7 are
exercisable as provided herein, the Non-Employee Director's estate,
personal representative, or beneficiary shall have the right to exercise
the options (to the extent exercisable at the date of death) at any time
within 12 months from the date of death. Notwithstanding any of the
foregoing, in no event may an option granted pursuant to this Section 7 be
exercised more than five years after the date of grant.
7.6 Changes. All options granted to Non-Employee Directors shall be
-------
subject to the provisions of Section 6.6 ("Recapitalization") and Section
6.7 ("Reorganization of Corporation") hereof.
8. Term of Plan. No stock option shall be granted pursuant to the Plan
------------
after December 12, 2005.
9. Amendments. The Board of Directors may from time to time amend, alter,
----------
suspend, or discontinue the Plan or alter or amend (including decrease of option
price by cancellation and substitution of options or otherwise) any and all
option agreements granted thereunder; provided, however, that no such action of
the Board of Directors may, without approval of the stockholders, alter the
provisions of the Plan so as to (a) materially increase the benefits accruing to
participants under the Plan; (b) materially increase the number of securities
which may be issued under the Plan; or (c) materially modify the requirements as
to eligibility for participation in the Plan; and provided, further, that no
amendment may, without the consent of the optionee, affect any then outstanding
options or unexercised portions thereof.
10. No Obligation to Exercise Option. The granting of an option shall
-----------------------------------
impose no obligation upon the optionee to exercise such an option.
11. Registration under Securities Act of 1933. Provided that the
----------------------------------------------
Corporation is filing reports with the Securities and Exchange Commission
pursuant to Section 15(d) of the Securities Exchange Act of 1934 or has a class
of equity securities registered pursuant to the Securities Exchange Act of 1934,
the Corporation will use its best efforts to cause the Common Stock which may be
acquired pursuant to the exercise of any option to be registered under the
Securities Act of 1933.
12. Stockholder Approval. The Plan (as previously amended and restated
---------------------
through December 12, 1995) has been submitted to and approved by the
stockholders of the Corporation. The amendment and restatement of the Plan
effective as of March 6, 1997 shall not be conditioned upon subsequent
stockholder approval.
EXHIBIT 10.17
PROMISSORY NOTE
December 22, 2000 $330,373.00
FOR VALUE RECEIVED, the undersigned hereby promises to pay to the order of
Pre-Paid Legal Services, Inc., an Oklahoma corporation ("Company"), the
principal sum of Three Hundred Thirty Thousand Three Hundred Seventy Three and
no/100 dollars ($330,373.00), together with interest thereon at the rate of ten
percent (10%) per annum from the Effective Date. Payments pursuant to this Note
shall be made at the offices of the Company, 321 East Main Street, Ada, Oklahoma
74820 or such other place as the holder may designate in writing, in lawful
currency of the United States of America.
The undersigned agrees to pledge all of his current and future commissions
derived from all existing and future memberships from all of his associate
accounts with Company or its subsidiaries and options to purchase Company common
stock that undersigned now has or acquires during the term of this Note or until
its final payment. The Company is not required to rely on the above security for
the payment of this Note in the case of default, but may proceed directly
against the Promisor.
The undersigned agrees that if, and as often as, this Note is placed in the
hands of an attorney for collection or to defend or enforce any of the holder's
rights hereunder, the undersigned will pay to the holder such holder's
reasonable attorneys' fees, together with all court costs and other expenses of
collection, defense or enforcement incurred by such holder.
The undersigned and all endorsers, sureties, guarantors and other persons
who may be liable for all or any part of this obligation severally waive
presentment for payment, protest, demand and notice of nonpayment. Such parties
consent to any extension of time (whether one or more) of payment hereof, or
release of any party liable for the payment of this obligation. Any such
extension or release may be made without notice to any such party and without
discharging such party's liability hereunder.
The Promisor reserves the right to prepay this Note (in whole or in part)
prior to the Due Date with no prepayment penalty.
No renewal or extension of this Note, delay in enforcing any right of the
Company under this Note, or assignment by Company of this Note shall affect the
liability of the Promisor. All rights of the Company under this Note are
cumulative and may be exercised concurrently or consecutively at the Company's
option.
This Note shall be construed in accordance with the laws of the State of
Oklahoma.
If any one or more of the provisions of this Note is determined to be
unenforceable, in whole or in part, for any reason, the remaining provisions
shall remain fully operative.
All payments of principal and interest on this Note shall be paid in the
legal currency of the United States.
IN WITNESS HEREOF, this Note has been executed and delivered effective this
22nd of December 2000 (the "Effective Date").
/s/ Randy Harp
-----------------------------------------------------
Randy Harp ("Promisor")
EXHIBIT 18.1
April 20, 2001
Pre-Paid Legal Services, Inc.
321 East Main Street
Ada, Oklahoma 74821
Dear Sirs/Madam:
We have audited the financial statements of Pre-Paid Legal Services, Inc. (the
"Company") as of December 31, 2000 and 1999, and for each of the three years in
the period ended December 31, 2000, included in your Annual Report on Form 10-K
to the Securities and Exchange Commission and have issued our report thereon
dated April 20, 2001, which expresses an unqualified opinion and includes an
explanatory paragraph concerning a change in the Company's method of accounting
for advance commission balances. Note 3 to such financial statements contains a
description of your adoption during the year ended December 31, 2000 of a change
in the method used by the Company to estimate the recoverability of advance
commission balances which represents a change in accounting principles. In our
judgment, such change is to an alternative accounting principle that is
preferable under the circumstances.
Yours truly,
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Tulsa, Oklahoma
EXHIBIT 21.1
EXHIBIT 21.1
PRE-PAID LEGAL SERVICES, INC.
Subsidiaries of Registrant
State or Percentage of
Province Ownership by
Name of Subsidiary Incorporation Registrant
Pre-Paid Legal Casualty, Inc. Oklahoma 100%
American Legal Services, Inc. Oklahoma 100%
Pre-Paid Legal Services, Inc. of Florida Oklahoma 100%
C & A Investments, Inc. Oklahoma 100%
Pre-Paid Legal Administrators, Inc. Oklahoma 100%
Justice 900, Inc. Oklahoma 100%
Legal Service Plans of Virginia, Inc. Virginia 100%
Universal Fidelity Life Insurance Company Oklahoma 100%
Pre-Paid Canadian Holdings, L.L.C. Oklahoma 100%
National Pre-Paid Legal Services of Georgia 100% owned by
Mississippi, Inc. Pre-Paid Legal
Services, Inc. of
Florida
Pre-Paid Legal Services of Tennessee, Inc. Tennessee 100% owned by
Pre-Paid Legal
Casualty, Inc.
PPL Legal Care of Canada Corporation Nova Scotia, 100% owned by
Canada Pre-Paid Canadian
Holdings, L.L.C.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-82144, No. 33-62663, No. 333-53183, No. 333-53187, No. 333-69769 and No.
333-38386 on Form S-8 of Pre-Paid Legal Services, Inc. of our report dated April
20, 2001 appearing in this Annual Report on Form 10-K of Pre-Paid Legal
Services, Inc. for the year ended December 31, 2000.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Tulsa, Oklahoma
April 26, 2001
EXHIBIT 99.1
For Immediate Release Company Melanie Lawson
Friday, April 13, 2001 Contact: (580) 436-1234
Pre-Paid Announces Delayed Filing Of Annual Report On Form 10-K
ADA, OK, April 13, 2001 - Pre-Paid Legal Services, Inc. (NYSE:PPD), today
reported that it does not expect to file its Annual Report on Form 10-K on its
extended April 16, 2001 due date because of the additional time required to
complete its evaluation of comments received from the staff of the Securities
and Exchange Commission relating to certain aspects of its accounting for
commission advances. As previously reported, the staff of the Securities and
Exchange Commission ("SEC") has inquired into Pre-Paid's accounting for
commission advances.
Although the Company continues to believe that the accounting treatment
historically afforded to commission advances is acceptable under generally
accepted accounting principles, in light of preliminary comments received from
the staff of the SEC, the Company has determined, with the concurrence of its
independent auditors, to adopt a new, more conservative method for evaluating
the recoverability of its commission advances and will no longer "pool"
commission advances for terminated or "D status" associates for purposes of
evaluating recoverability. This change in the Company's recoverability
evaluation methodology results in a change in accounting principle that will be
reflected in the Company's financial statements for the year ended December 31,
2000. Based on preliminary estimates, the aggregate effect of the change is
expected to reduce fiscal 2000 net income by approximately $7.2 million ($.32
per basic and diluted share). The cumulative effect of this change on prior
years will be reflected as a separate charge and is expected to result in a
reduction of fiscal 2000 net income of approximately $4.1 million ($.18 per
basic and diluted share). The effect of the change on fiscal 2000 is expected to
result in a further reduction of fiscal 2000 net income of approximately $3.1
million ($.14 per basic and diluted share).
Due to the change described above, the Company now expects to release first
quarter 2001 earnings on April 23, 2001. The accounting change described above
is expected to result in an additional after-tax charge for the first quarter of
2001 of approximately $600,000 ($.03 per basic and diluted share).
The Company expects to file its 10-K containing audited financial
statements incorporating these changes in the near future. The SEC staff has not
reviewed or approved the Company's proposed changes and is expected to continue
its review.
About Pre-Paid Legal Services
-----------------------------
Pre-Paid Legal Services develops and markets legal service plans across
North America. The plans provide for legal service benefits, including unlimited
attorney consultation, will preparation, traffic violation defense,
automobile-related criminal charges defense, letter writing, document
preparation and review and a general trial defense benefit. More information can
be located at the Company's homepage on the worldwide web at
http://www.prepaidlegal.com.
Statements in this press release, including those pertaining to the
Company's efforts to resolve accounting questions raised by the staff of the SEC
and the effect of those efforts on the Company's financial statements, other
than purely historical information, including estimates, projections and
statements relating to the Company's future plans and objectives and expected
operating results, and statements of the assumptions underlying such statements,
constitute forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements contained herein
are based on certain assumptions which may not be correct. They are subject to
all of the risks and uncertainties incident to the Company's business which are
described in the reports and statements filed by the Company with the Securities
and Exchange Commission, including (among others) those listed in the Company's
Form 10-K. Please refer to page 1 of the Company's 1999 Form 10-K for a more
complete description of the factors that could cause actual results to differ
materially from those described in the forward-looking statements. In addition,
the statements regarding the Company's efforts to resolve accounting questions
raised by the SEC staff and the likely effect on the Company's business are
subject to the risk that the SEC staff may not concur in the position of the
Company with respect to the issues under discussion, including the Company's
accounting for commission advances. The Company undertakes no duty to update any
of the forward-looking statements in this press release. ###
EXHIBIT 99.2
For Immediate Release Company Melanie Lawson
Monday, April 2, 2001 Contact: (580) 436-1234
Pre-Paid Legal Extends Time For Filing Of Annual Report On Form 10-K
ADA, OK, April 2, 2001 - Pre-Paid Legal Services, Inc. (NYSE:PPD),
announced today that its Annual Report on Form 10-K required to be filed with
the Securities and Exchange Commission ("SEC") on April 2, 2001 will not be
timely filed.
As previously reported, the SEC has inquired into Pre-Paid's accounting for
commission advances. The Company subsequently received additional comments from
the SEC staff and is reviewing these comments with its independent public
accountants. Pre-Paid intends to continue working with the staff to resolve
their questions. As a result, Pre-Paid is unable to finalize its financial
statements for the year ended December 31, 2000, and has filed an automatic 15
day extension of time to file its Annual Report on Form 10-K.
About Pre-Paid Legal Services
-----------------------------
Pre-Paid Legal Services develops and markets legal service plans across
North America. The plans provide for legal service benefits, including unlimited
attorney consultation, will preparation, traffic violation defense,
automobile-related criminal charges defense, letter writing, document
preparation and review and a general trial defense benefit. More information can
be located at the Company's homepage on the worldwide web at
http://www.prepaidlegal.com.
Statements in this press release other than purely historical information,
including estimates, projections and statements relating to the Company's future
plans and objectives and expected operating results, and statements of the
assumptions underlying such statements, constitute forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934. The
forward-looking statements contained herein are based on certain assumptions
which may not be correct. They are subject to all of the risks and uncertainties
incident to the Company's business which are described in the reports and
statements filed by the Company with the Securities and Exchange Commission,
including (among others) those listed in the Company's Form 10-K. Please refer
to page 1 of the Company's 1999 Form 10-K for a more complete description of the
factors that could cause actual results to differ materially from those
described in the forward-looking statements. The Company undertakes no duty to
update any of the forward-looking statements in this press release.
EXHIBIT 99.3
For Immediate Release Company Melanie Lawson
Friday, March 16, 2001 Contact: (580) 436-1234
Pre-Paid Legal Services Confirms Inquiry
ADA, OK, March 16, 2001 - Pre-Paid Legal Services, Inc. (NYSE:PPD),
confirmed as reported in today's Wall Street Journal that the Company has
responded to a confidential informal inquiry by the Ft. Worth Office of the
Division of Enforcement of the Securities and Exchange Commission ("SEC") and
has responded to confidential comments made by the SEC's Division of Corporation
Finance regarding the Company's 1999 Form 10-K.
Randy Harp, Chief Operating Officer commented, "As we expected when the
recent class actions were filed, we have received inquiries from both the
Division of Enforcement and the Division of Corporation Finance of the SEC
requesting information relating to our accounting policies for commission
advances to sales associates. These are informal inquiries and do not constitute
a formal investigation or proceeding. We are cooperating with the staff of the
SEC and providing the requested information and expect to continue to do so. We
are not able to predict what the outcome of these inquiries may be or when they
will be resolved, but we are requesting the SEC to attempt to resolve them as
expeditiously as possible."
About Pre-Paid Legal Services
-----------------------------
Pre-Paid Legal Services develops and markets legal service plans across
North America. The plans provide for legal service benefits, including unlimited
attorney consultation, will preparation, traffic violation defense,
automobile-related criminal charges defense, letter writing, document
preparation and review and a general trial defense benefit. More information can
be located at the Company's homepage on the worldwide web at
http://www.prepaidlegal.com.
Statements in this press release, including those contained in the comments
above by Randy Harp, other than purely historical information, including
estimates, projections and statements relating to the Company's future plans and
objectives and expected operating results, and statements of the assumptions
underlying such statements, constitute forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. The
forward-looking statements contained herein are based on certain assumptions
which may not be correct. They are subject to all of the risks and uncertainties
incident to the Company's business which are described in the reports and
statements filed by the Company with the Securities and Exchange Commission,
including (among others) those listed in the Company's Form 10-K. Please refer
to page 1 of the Company's 1999 Form 10-K for a more complete description of the
factors that could cause actual results to differ materially from those
described in the forward-looking statements. The Company undertakes no duty to
update any of the forward-looking statements in this press release.