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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000311657-02-000007.txt : 20020414
<SEC-HEADER>0000311657-02-000007.hdr.sgml : 20020414
ACCESSION NUMBER: 0000311657-02-000007
CONFORMED SUBMISSION TYPE: 10-K/A
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20020208
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PRE PAID LEGAL SERVICES INC
CENTRAL INDEX KEY: 0000311657
STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE CARRIERS, NEC [6399]
IRS NUMBER: 731016728
STATE OF INCORPORATION: OK
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-09293
FILM NUMBER: 02531925
BUSINESS ADDRESS:
STREET 1: 321 E MAIN ST
CITY: ADA
STATE: OK
ZIP: 74820
BUSINESS PHONE: 5804361234
MAIL ADDRESS:
STREET 1: 321 E MAIN
STREET 2: P O BOX 145
CITY: ADA
STATE: OK
ZIP: 74820
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K/A
<SEQUENCE>1
<FILENAME>form10ka2000.txt
<DESCRIPTION>FORM 10K/A FOR YEAR ENDED DECEMBER 31, 2000
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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
--------------------------------------------------------------
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
------------------- ----------------
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 December 31, 2001 - $337,527,947.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of December 31,
2001 there were 20,814,806 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.
- -------
Introductory Statement
ITEM 1. DESCRIPTION OF BUSINESS
General
Acquisition of TPN, Inc. d.b.a. The Peoples Network
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.
- --------
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
Foward Looking Statements
Risk Factors
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
PART III. **
- ---------
PART IV.
- --------
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.
Introductory Statement
As previously reported, in January 2001 and May 2001, the staff of the
Division of Corporation Finance of the Securities and Exchange Commission
("SEC") reviewed the Company's 1999 and 2000 Forms 10-K, respectively. On May
11, 2001, the Company received a letter from the staff of the Division of
Corporation Finance advising that, after reviewing the Company's Forms 10-K, it
was the position of the Division that the Company's accounting for commission
advance receivables was not in accordance with generally accepted accounting
principles (GAAP). The Company subsequently appealed this decision to the Chief
Accountant of the SEC. On July 25, 2001, the Company announced that the Chief
Accountant concurred with the prior staff opinion of the Division of Corporation
Finance. The Company subsequently announced that it would not pursue any further
appeals and that it would amend its previously filed SEC reports to restate the
Company's financial statements to reflect the SEC's position that the Company's
advance commission payments should be expensed ratably over the first month of
the related membership. Partially as a result of the SEC's position, the Company
and its prior independent auditor, Deloitte & Touche, mutually agreed that a
change in auditor would be made and the Company on September 17, 2001 engaged
Grant Thornton LLP to audit its restated consolidated financial statements for
the years ended December 31, 2000, 1999 and 1998. After further consultations
with the staff of the SEC, this new audit has now been completed. The
accompanying financial statements have been restated primarily due to the change
in accounting treatment pertaining to the advance commission payments and
related revenue recognition changes to be consistent with such treatment (the
"restatement"), and due to the effect of the Company's sale on December 31, 2001
of Universal Fidelity Life Insurance Co. (UFL), which is reported as and
referred to as "discontinued operations" as discussed in Note 4 to the
Consolidated Financial Statements. Additionally, the Company implemented SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101") effective January 1, 2000 and has deferred the
non-refundable $10 Membership fees 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. At the time of the original filing we
estimated the direct incremental costs related to the non-refundable Membership
fee and associate enrollment fee to be in excess of $10 and $47, respectively.
Based upon further review, estimated direct incremental costs of $7 for the
Membership fee and $40 for the associate enrollment fee have been deferred. The
implementation of SAB 101 resulted in a cumulative effect type charge of $1.0
million ("Cumulative effect"), net of tax, in the consolidated income statement
for the year ended December 31, 2000. The effects of the restatement,
discontinued operations and SAB 101 reduced total assets from $247 million, as
originally reported at December 31, 2000, to $78 million, reduced total
liabilities from $100 million to $36 million (primarily due to the elimination
of deferred taxes related to the receivables) and therefore reduced
stockholders' equity from $147 million to $42 million. These items also reduced
net income from $43.6 million, or $1.92 per diluted share, to $20.5 million, or
$0.90 per diluted share. See Notes 2, 4 and 16 to the Consolidated Financial
Statements, for a summary of the effects of these items on previously reported
results of operations.
This amended and restated Form 10-K/A for the year ended December 31, 2000
includes restated consolidated financial statements for the years ended December
31, 2000, 1999 and 1998, audited by Grant Thornton LLP as described above. This
10-K also contains amended disclosures regarding various aspects of the
Company's marketing plan and commission advances.
ITEM 1. DESCRIPTION OF BUSINESS
- -------------------------------------
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 that 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.
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.
On December 31, 2001 the Company completed the sale of its wholly owned
subsidiary UFL. The Company received a $2.8 million dividend and $1.2 million
from the sale of 100% of UFL stock. As a result of this sale, as required by
discontinued operations accounting, UFL's net assets of $4.5 million and $7.9
million have been segregated on the Consolidated Balance Sheets as of December
31, 2000 and 1999, respectively. UFL's results of operations of $649,000 and
$826,000, net of tax, have also been segregated in the Consolidated Statements
of Income for the years ended December 31, 2000 and 1999, respectively.
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.
According to the census bureaus of the United States and Canada, currently
the two geographic areas in which the Company operates, the number of households
in the combined area exceeds 125 million as of December 31, 2000. Since the
Company has always disclosed its members in terms of Memberships and individuals
covered by the Membership include the individual who purchases the Membership
together 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, the
Company believes that its market share should be viewed as a percentage of
households. Historically, the Company's primary market focus has been the
"middle" eighty percent of such households rather than the upper and lower ten
percent segments based on the Company's belief that the upper ten percent may
already have a relationship with an attorney or law firm and the lower ten
percent may not be able to afford the cost of a legal service plan. As a
percentage of this defined "middle" market of approximately 100 million
households, the Company currently has a 1% share of the estimated market based
on its existing 1.1 million active memberships and, over the last 28 years, an
additional 2% of households have previously purchased, but no longer own,
memberships. The Company routinely remarkets to previous members and reinstated
approximately 48,000 Memberships during 2000.
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 ("open panel") 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 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, review of 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, through its members, is typically the
largest client base of its Provider law firms.
Provider law firms are selected to serve 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 that 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
that 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. At December 31, 2000, the Company had
242,085 "vested" sales associates compared to 204,137 and 159,268 "vested" sales
associates at December 31, 1999 and 1998, respectively. A sales associate is
considered to be "vested" if he or she has personally sold at least three new
Memberships per quarter or if he or she retains a personal Membership. A vested
associate is entitled to continue to receive commissions on prior sales after
all previous commission advances have been recovered. However, a substantial
number of vested associates do not continue to market the membership as they are
not required to do so in order to continue to be vested. During 2000, the
Company had 73,826 sales associates who personally sold at least one Membership,
of which 43,169 (58%) made first time sales. During 1999 and 1998 the Company
had 64,611 and 51,026 sales associates producing at least one Membership sale,
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 personally
sold more than ten Memberships compared to 8,284 and 5,597 in 1999 and 1998,
respectively. A substantial number of the Company's sales associates market the
Company's Memberships on a part-time basis only.
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 that 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 that 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.
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 extraordinary
dividend by PPLCI or UFL to the Company requires approval of the Oklahoma
Insurance Commissioner. During 2000, the Company received a $5.0 million
dividend from PPLCI and a $5.0 million dividend from UFL after receiving all
necessary regulatory approvals. On December 31, 2001 the Company completed the
sale of its wholly owned subsidiary 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
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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 in 2001. Scheduled completion of the estimated $30 million complex, which
will include a sales associate Hall of Fame and six-story tower, is May 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 by the City of Antlers 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. On December 31, 2001 the Company completed the sale of UFL,
which included the sale of these offices.
ITEM 3. LEGAL PROCEEDINGS
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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 used 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. An amended and consolidated complaint was filed on June
14, 2001, and the Company filed a motion to dismiss the complaint on July 24,
2001. The plaintiffs filed a response to the motion to dismiss on September 4,
2001 and the Company's reply brief was filed on September 24, 2001. Under the
Private Securities Litigation Reform Act of 1995, 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 and May 2001, the staff of the Division of Corporation
Finance of the Securities and Exchange Commission ("SEC") reviewed the Company's
1999 and 2000 Forms 10-K, respectively. On May 11, 2001, the Company received a
letter from the staff of the Division of Corporation Finance advising that,
after reviewing the Company's Forms 10-K, it was the position of the Division
that the Company's accounting for commission advance receivables was not in
accordance with GAAP. The Company subsequently appealed this decision to the
Chief Accountant of the SEC. On July 25, 2001, the Company announced that the
Chief Accountant concurred with the prior staff opinion of the Division of
Corporation Finance. The Company subsequently announced that it would not pursue
any further appeals and that it would amend its previously filed SEC reports to
restate the Company's financial statements to reflect the SEC's position that
the Company's advance commission payments should be expensed when paid.
Also, in January 2001, the Company received inquiries from the Division of
Enforcement of the SEC requesting information relating primarily to the
Company's accounting policies for commission advance receivables from sales
associates. The Division of Enforcement's inquiries were informal and did not
constitute a formal investigation or proceeding. The Company is unable to
determine the ultimate outcome of this inquiry, including whether the Division
of Enforcement will continue the inquiry subsequent to the Company's decision to
restate its financial statements. As of January 2002, the Company has had no
further contact from the Division of Enforcement.
See "Introductory Statement" on page 1 for further information concerning
the restatement.
See the Company's Forms 10-Q for the quarters ending March 31, June 30 and
September 30, 2001 for additional information concerning legal proceedings.
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 December 31, 2001, there were 5,437 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).
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
2002:
1st Quarter (through January 25)............................................. $ 23.70 $ 20.97
2001:
4th Quarter ................................................................. $ 22.25 $ 15.05
3rd Quarter.................................................................. 22.48 15.80
2nd Quarter.................................................................. 24.75 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
</TABLE>
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. During 2001, the Company received a $2.8 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 UFL nor PPLSIF had funds available for payment of substantial
dividends without the prior approval of the respective insurance commissioners.
PPLCI had approximately $5 million in surplus funds available for payment of an
ordinary dividend.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------------
See "Introductory Statement" on page 1.
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 following information has been
restated from previously filed financial data to reflect the restatement
discussed in the Introductory Statement, the December 2001 sale of UFL that is
reported as discontinued operations and the cumulative effect of adopting SAB
101. 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.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- --------- --------- ---------
Income Statement Data: (In thousands, except ratio, per share and Membership amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Membership fees................................... $211,763 $153,918 $107,393 $ 74,555 $ 49,125
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............................................. 3,232 3,809 2,901 1,867 1,803
--------- --------- --------- --------- ---------
Total revenues.................................. 246,383 186,431 155,328 129,635 82,999
--------- --------- --------- --------- ---------
Costs and expenses:
Membership benefits............................... 69,513 51,089 35,465 24,684 16,511
Commissions....................................... 96,614 74,333 50,652 38,717 29,230
Associate services and direct marketing........... 23,251 15,815 14,738 11,431 4,544
General and administrative expenses............... 21,524 19,280 21,902 20,311 15,150
Product costs..................................... 675 4,174 17,967 27,017 20,568
Other, net........................................ 4,403 3,226 2,152 1,626 42
--------- --------- --------- --------- ---------
Total costs and expenses........................ 215,980 167,917 142,876 123,786 86,045
--------- --------- --------- --------- ---------
Income from continuing operations before income
taxes and cumulative effect of change in
accounting principle................................ 30,403 18,514 12,452 5,849 (3,046)
Provision for income taxes.......................... 9,550 6,480 1,013 3,962 (851)
--------- --------- --------- --------- ---------
Income from continuing operations before cumulative
effect of change in accounting principle.......... 20,853 12,034 11,439 1,887 (2,195)
Income from operations of discontinued UFL segment
(net of applicable income tax benefit (expense)
of $387 and ($444) for year 2000 and 1999,
respectively)..................................... 649 826 - - -
--------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle.............................. 21,502 12,860 11,439 1,887 (2,195)
Cumulative effect of adoption of SAB 101 (net of
applicable income tax benefit of $546)............ (1,013) - - - -
--------- --------- --------- --------- ---------
Net income............................................ 20,489 12,860 11,439 1,887 (2,195)
Less dividends on preferred shares.................. 4 10 10 13 15
--------- --------- --------- --------- ---------
Net income applicable to common stockholders.......... $ 20,485 $ 12,850 $ 11,429 $ 1,874 $ (2,210)
--------- --------- --------- --------- ---------
Basic earnings per common share from continuing
operations before cumulative effect of accounting
change.............................................. $ .93 $ .52 $ .49 $ .08 $ (.10)
Basic earnings per common share from discontinued
operations........................................ .03 .04 - - -
--------- --------- --------- --------- ---------
Basic earnings per common share before cumulative
effect of change in accounting principle.......... .96 .56 .49 .08 (.10)
Cumulative effect of adoption of SAB 101.............. (.05) - - - -
--------- --------- --------- --------- ---------
Basic earnings per common share....................... $ .91 $ .56 $ .49 $ .08 $ (.10)
--------- --------- --------- --------- ---------
Diluted earnings per common share from continuing
operations before cumulative effect of accounting $ .92 $ .51 $ .48 $ .08 $ (.10)
change..............................................
Diluted earnings per common share from discontinued
operations........................................ .03 .04 - - -
-------- -------- --------- --------- ---------
Diluted earnings per common share before cumulative
effect of accounting change....................... .95 .55 .48 .08 (.10)
Cumulative effect of adoption of SAB 101.............. (.05) - - - -
-------- -------- --------- --------- ---------
Diluted earnings per common share..................... $ .90 $ .55 $ .48 $ .08 $ (.10)
-------- -------- --------- --------- ---------
Pro forma amounts assuming adoption of SAB 101 is
retroactively applied:
Net income.......................................... $ 21,502 $ 12,786 $ 11,155 $ 1,726 $ (2,375)
Basic earnings per common share..................... $ .96 $ .55 $ .48 $ .07 $ (.11)
Diluted earnings per common share................... $ .95 $ .55 $ .47 $ .07 $ (.10)
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
Membership Benefit Cost and Statistical Data:
Membership benefits ratio (1)....................... 32.8% 33.2% 33.0% 33.1% 33.6%
Commissions ratio (1)............................... 45.6% 48.3% 47.2% 51.9% 59.6%
General & administrative expense ratio (1).......... 10.2% 12.5% 20.4% 27.2% 30.8%
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) continuing operating
activities......................................... $ 23,201 $ 17,031 $ 11,295 $ 14,472 $ (911)
Net cash (used in) provided by continuing investing
activities......................................... (7,965) 12,070 (33,531) (6,254) (2,855)
Net cash (used in) provided by continuing financing
activities......................................... (13,714) (26,687) 1,444 3,464 4,973
Balance Sheet Data:
Total assets........................................ $ 77,766 $ 58,156 $ 68,789 $ 57,745 $ 30,499
Total liabilities................................... 35,999 25,518 23,218 25,237 6,351
Stockholders' equity 41,767 32,638 45,571 32,508 24,148
</TABLE>
(1) The Membership benefits ratio, the Commissions 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
General
Restatement
See "Introductory Statement" on page 1 for information concerning the
restatement of financial statements.
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. (See
Notes to Consolidated Financial Statements-Note 3 for additional information
regarding this 1998 acquisition).
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 ratably over the
related service period in accordance with Membership terms, which generally
require the holder of the Membership to remit fees on an annual, semi-annual or
monthly basis. Approximately 94% of members remit their Membership fees on a
monthly basis. The Company also charges new members, who are not part of an
employee group, a $10 enrollment fee. This enrollment fee and related direct
incremental costs are 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 Payments to Associates
Beginning with new Memberships written after March 1, 1995, the Company
implemented a level commission schedule with up to a three-year advance
commission payment. Prior to March 1, 1995, the Company's commission program
provided for advance commission payments to associates of approximately 70% of
first year Membership premiums on new Membership sales and commissions were
earned by the associate at a rate of approximately 16% in all subsequent 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. Effective
October 1, 2001 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.
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 commission payments 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. The commission advance immediately
increases an associate's unearned advance commission payment balance to the
Company.
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) are retained to reduce any remaining unearned
commission advance payments 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.
The Company expenses the entire advance commissions ratably over the first
month of the related membership. As a result of this accounting policy, the
Company's commission expenses are all recognized over the first month of a
Membership and there is no commission expense recognized for the same Membership
during the remainder of the advance period. The Company tracks its advance
commission payments outstanding for internal purposes of analyzing its
commission advance program. While not recorded as an asset, unearned commission
payments to associates for the following years ended December 31 were:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(Amounts In 000's)
<S> <C> <C> <C>
Beginning unearned advance commission payments (1)................... $ 125,257 $ 87,263 $ 59,623
Advance commission payments, net..................................... 97,500 74,800 51,400
Earned commissions applied........................................... (48,255) (36,806) (23,760)
Advance commission payment write-offs (2)............................ (7,309) - -
----------- ----------- -----------
Ending unearned advance commission payments before estimated
unrecoverable payments (1)......................................... 167,193 125,257 87,263
Estimated unrecoverable advance commission payments (1) (3).......... (11,055) (4,544) (3,994)
----------- ----------- -----------
Ending unearned advance commission payments, net (1)................. $ 156,138 $ 120,713 $ 83,269
----------- ----------- -----------
</TABLE>
(1) These amounts do not represent fair value, as they do not take into
consideration timing of estimated recoveries.
(2) In 2000, the Company began writing off unearned advanced commission
balances when the associate had no remaining active memberships since the
associate would no longer have any future commission earnings.
(3) Increase in estimated unrecoverable payments in 2000 due to change in
evaluation methodology such that the Company now evaluates the recoverability of
non-vested associate commission advance receivables on an individual associate
basis as it does the advances to its active associates. Previously, the Company
"pooled" the activity of non-vested associates and evaluated the recoverability
of commissions as if the group of non-vested associates were a single associate.
The ending unearned advance commission payments, net, above includes net
unearned advance commission payments to non-vested associates of $14.2 million,
$9.9 million and $5.9 million for December 31, 2000, 1999, 1998 respectively. As
such, at December 31, 2000 future commission payments and related expense will
be reduced as unearned advance commission payments of $141.9 million are
recovered. Commissions are earned by the associate as Membership premiums are
earned by the Company, usually on a monthly basis. The Company reduces unearned
advance commission payments or remits payment to an associate, as appropriate,
when commissions are earned. 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 unearned advance commission payment may be recovered by withholding
future residual earned commissions due to an active 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 unearned advance commission
payments relating to lapsed Memberships ("Membership lapse fee"). The fee that
is recorded on the associates unearned commission payments account is determined
by applying the prime interest rate to the unearned advance commission balance
pertaining to lapsed Memberships. The Company realizes and recognizes this fee
only when the amount of the calculated fee is collected by withholding from cash
commission payments due the associate. The fees collected reduce commission
expense. The Company's ability to recover these fees 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
unearned advance commission payments from sources other than earned commissions
including cash (a) from all associates either (i) upon termination of the
associate relationship, which includes but is not limited to when an associate
becomes non-vested or (ii) when it is ascertained that earned commissions are
insufficient to repay the unearned advance commission payments 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 unearned advance commission payments are potentially
subject to limitation based on applicable state laws relating to creditors'
rights generally. Historically, the Company has not demanded repayments of the
unearned advance commissions from associates, including terminated associates,
because collection efforts would likely increase costs and have the potential to
disrupt the Company's relationships with its sales associates. This business
decision by the Company has a significant effect on the Company's cash flow by
electing to defer collection of advance payments of which approximately $11.1
million were not expected to be collected from future commissions at December
31, 2000. However, the Company regularly reviews the unearned advance commission
payments status of associates and will exercise its right to require associates
to repay advances when management believes that such action is appropriate.
Non-vested associates are those that are no longer "vested" 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. Non-vested
associates lose their right to any further commissions earned on Memberships
previously sold at the time they become non-vested. 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 unearned advance commission payments for commissions
earned on active Memberships previously sold by those associates. Substantially
all individual non-vested associate unearned advance commission payments were
less than $1,000 and the average balance was $816 at December 31, 2000.
Although the advance payments are expensed ratably over the first month of
the related Membership, the Company assesses, at the end of each quarter, on an
associate-by-associate basis, the recoverability of each associate's unearned
advanced commission payments 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
unearned advance commission payment balance. The Company estimates unrecoverable
advance commission payments when expected future commissions to be earned on
active Memberships (aggregated on an associate-by-associate basis) are less than
the unearned advance commission payment balance. If an associate with an
outstanding unearned advance commission balance has no active Memberships, the
unearned advance commission payment 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 unearned advance
commission payments 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 some associates do
continue to sell new Memberships and the Company, through its chargeback rights,
gains an additional source to recover unearned advance commission payments.
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 unearned advance commission payments 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 of the Internal Revenue Code
of 1986 as discussed below.
The ability of the Company to utilize NOLs and tax credit carryforwards to
reduce future federal income taxes 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 is
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 significant 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. On December 31, 2001 the Company completed the sale of UFL
(See Note 4 to the Consolidated Financial Statements).
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 including certificates of deposit. 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:
<TABLE>
<CAPTION>
Estimated fair
Hypothetical change value after
in interest rate hypothetical
Fair value (bp = basis points) change in interest
at December 31, rate
--------------- -------------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
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
</TABLE>
- --------------------
(1) Excluding short-term investments with a fair value of $3.9 million and $3.3
million at December 31, 2000 and 1999, respectively. Includes UFL
investments with a fair value of $9.1 and $13.7 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 Standards 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 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.
In July 2001, the Financial Accounting Standards Board issued new
pronouncements: SFAS 141, "Business Combinations"; SFAS 142, "Goodwill and Other
Intangible Assets"; and SFAS 143, "Accounting for Asset Retirement Obligations."
SFAS 141, which requires the purchase method of accounting for all business
combinations, applies to all business combinations initiated after June 30, 2001
and to all business combinations accounted for by the purchase method that are
completed after June 30, 2001. SFAS 141 will not apply to the Company unless it
enters into a future business combination. SFAS 142 requires that goodwill as
well as other intangible assets be tested annually for impairment. In addition,
the Statement eliminates the current requirement to amortize goodwill or
intangible assets with indeterminate lives, and is effective for fiscal years
beginning after December 15, 2001. SFAS 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long-lived asset. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The Company does not expect SFAS 142 or 143 to materially impact
its reported results.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", (SFAS 144") is effective for the Company for the fiscal year beginning
January 1, 2002, and addresses accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business." SFAS 144 retains the
fundamental provisions of SFAS No. 121 and expands the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company
estimates that the new standard will not have a material impact on its financial
statements but is still in the process of evaluating the impact on its financial
statements.
Accounting Change
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.
The following measures of membership retention include members who are also
sales associates and have a financial incentive to retain the Membership in
order to continue to receive commissions. At December 31, 2000, memberships held
by associates represented approximately 23% of total memberships. The Company's
experience indicates that retention of sales associate members is approximately
10% better than non-associate members. At these levels of membership base and
retention, the Company does not expect overall retention measures to vary
materially as a result of any changes in commission practices that might affect
retention rates of sales associates members differently than non associate
members.
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 unearned
advance commission payments 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 the recoverability of unearned advance commission payments.
Average Member Life
A third measure of retention, 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 ---------- ----------
357.57 A 2,257.44 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 the estimated
unrecoverable advance commission payments , 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 $20.5
million, or $.90 per diluted common share, for 2000. The net income per diluted
share was up 59% from net income applicable to common shares of $12.9 million,
or $.55 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 $211.8 million during 2000 compared to $153.9
million for 1999, an increase of 38%. 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.
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.
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.
Other income decreased $600,000, or 15%, from $3.8 million to $3.2 million
primarily due to the change in accounting principle relating to the adoption of
SAB 101.
Primarily as a result of the increase in Membership fees, total revenues
increased to $246.4 million for 2000 from $186.4 million during 1999, an
increase of 32%.
Membership benefits totaled $69.5 million for 2000 compared to $51.1
million for 1999, and represented 32.8% and 33.2% 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.
Commissions to associates increased 30% to $96.6 million for 2000 compared
to $74.3 million for 1999, and represented 45.6% and 48.3% of Membership fees
for such years. Commissions to associates are primarily dependent on the number
of new memberships sold during a period. New memberships sold during 2000
totaled 670,118, a 28% increase from the 525,352 sold during 1999.
Associate services and direct marketing expenses increased to $23.3 million
for 2000 from $15.8 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.
General and administrative expenses during 2000 and 1999 were $21.5 million
and $19.3 million, respectively, and represented 10.2% and 12.5% 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.
Product costs declined more than $3.4 million, or 84%, during 2000 to
$675,000 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.
Other expenses increased 36% from $3.2 million to $4.4 million for 2000
primarily due to $1.7 million litigation settlements during the 4th quarter of
2000 offset by an increase in interest income for 2000 of 21% to $2.9 million
from $2.4 million for 1999. At December 31, 2000 the Company reported $31.5
million in cash and investments (after utilizing more than $17.3 million to
repurchase approximately 520,000 shares of its common stock) compared to $22.8
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 $9.6 million
compared to $6.5 million for 1999, representing 31.4% and 35.0% of income from
continuing operations 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 redeemed by the
Company.
The results of operations of the UFL segment have been segregated and
reported as discontinued operations in the Consolidated Statements of Income.
Income from discontinued operations, net of income tax, are $649,000, net of tax
benefit of $387,000 and $826,000 net of tax expense of $444,000 for the years
ended December 31, 2000 and 1999, respectively.
Comparison of 1999 to 1998
The Company reported net income applicable to common shares of $12.9
million, or $.55 per diluted common share, for 1999, up 12% from net income
applicable to common shares of $11.4 million, or $.48 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 $153.9 million during 1999 compared to $107.4
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.
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.
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.
Other income increased $0.9 million, or 31%, from $2.9 million for 1998 to
$3.8 million for 1999 primarily due to 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 $186.4 million for 1999 from $155.3 million during 1998, an
increase of 20%.
Membership benefits totaled $51.1 million for 1999 compared to $35.5
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.
Commissions to associates increased 47% to $74.3 million for 1999 compared
to $50.7 million for 1998, and represented 48.3% and 47.2% of Membership fees
for such years. Commissions to associates are primarily dependent on the number
of new memberships sold during a period. New memberships sold during 1999
totaled 525,352, a 34% increase from the 391,827 sold during 1998.
Associate services and direct marketing expenses increased to $15.8 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.
General and administrative expenses during 1999 and 1998 were $19.3 million
and $21.9 million, respectively, and represented 12.5% and 20.4% 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.
Product costs declined by $13.8 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.
Other expenses increased 50% from $2.2 million to $3.2 million for 1999. At
December 31, 1999 the Company reported $22.8 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 $22.1 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 provision for income taxes increased during 1999 to $6.5 million
compared to $1.0 million for 1998, representing 35.0% and 8.1% of income from
continuing operations 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 $23.2 million,
$17.0 million and $11.3 million for 2000, 1999, and 1998, respectively. Cash
provided by operating activities increased $6.2 million during 2000 compared to
1999 primarily due to the $8.0 million increase in net income.
Net cash (used in) provided by investing activities was $(8.0) million,
$12.1 million and $(33.5) million for 2000, 1999 and 1998, respectively. 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. Also during 2000 and
1999 the Company received dividends of $5.0 million and $12.5 million,
respectively from UFL. In addition to capital expenditures of $5.6 million and
$2.6 million during 2000 and 1999, respectively, 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 consolidated working capital of $7.3 million at December
31, 2000 compared to $8.0 million at December 31, 1999. The $700,000 decrease in
working capital during 2000 was primarily the result of an increase in deferred
revenue and fees of $7.3 million, a decrease in net assets of discontinued
operations of $3.4 million and an increase in Membership benefits of $1.6
million offset by an increase in cash of $1.5 million, a $1.4 million increase
in Membership income receivable, an increase in deferred member and associate
costs of $5 million, a decrease in accounts payable and accrued expenses of $2.0
million and an increase in net current deferred income tax assets of $1.5
million.
The Company generally advances significant commissions to associates at the
time a Membership is sold. The Company expenses these advances ratably over the
first month of the related Membership. During 2000, the Company paid advance
commissions to associates 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. See page 19 to 22 for additional information on advance
commission payments.
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 4,000,000 shares during subsequent board meetings. At December 31,
2000, the Company had repurchased 1,733,209 shares under these authorizations
for a total consideration of $48.3 million, an average price of $27.60 per
share. 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.
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 $27.2 million. The
Company expects to maintain cash and cash equivalent balances on an on-going
basis of approximately $15 million to $25 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 treasury
stock purchases. The Company continues to consider incurring indebtedness in
order to finance its new corporate headquarters in order to allow cash flow from
operations to continue to be used to purchase treasury stock.
Subsequent event
On November 6, 2001, the Company entered into a $17.5 million line of
credit with Bank of Oklahoma, N.A. in order to fund additional treasury stock
purchases. The line of credit provides for immediate funding of up to $17.5
million with scheduled repayments beginning February 15, 2002 and ending
November 15, 2002 with interest at the Libor rate plus 2% per annum or the prime
rate minus 1/2 percent per annum as selected by the Company. The loan is secured
by the Company's rights to receive membership fees on a portion of its
memberships. The terms of this loan have various covenants customary for similar
transactions.
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 that
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 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 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 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. Additional capital requirements of PPLCI or PPLSIF will be
funded by the Company in the form of capital contributions or surplus
debentures. At December 31, 2000, neither UFL nor PPLSIF had funds available for
payment of substantial dividends without the prior approval of the respective
insurance commissioners. PPLCI had approximately $5 million in surplus funds
available for payment of an ordinary dividend.
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
affected 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
59%, 12% and 609%, 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 prior 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 prior accounting policy with respect to commission advances. 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.
See Introductory Statement on page 1.
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 pre-paid 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 a number of existing and potential competitors that have the
ability to offer competing products that could adversely affect the Company's
ability to grow. In addition, the Company may face competition from a growing
number of Internet based legal sites with 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
Report of Independent Certified Public Accountants
Consolidated Financial Statements
Consolidated Balance Sheets (Restated) - December 31, 2000 and 1999
Consolidated Statements of Income (Restated) - For the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Comprehensive Income (Restated) - For the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows (Restated) - For the years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Changes In Stockholders' Equity (Restated) - For the
years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements (Restated)
Consolidated Financial Statement Schedules
Schedule II. Consolidated Valuation and Qualifying Accounts (Restated) - 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.)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Stockholders
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, cash flows and changes in stockholders' equity for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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, the consolidated financial statements referred to above
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.
As discussed in Note 2, the consolidated financial statements referred to
above have been restated primarily to change the accounting treatment for
payments to associates for membership commission advances and related revenue
recognition to be consistent with such treatment. Additionally, as discussed in
Note 1 the Company changed certain of its revenue recognition policies as a
result of the adoption of Staff Accounting Bulletin No. 101 "Revenue Recognition
in Financial Statements."
We have also audited Schedule II for each of the three years in the period
ended December 31, 2000. In our opinion, this schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information therein.
Grant Thornton LLP
Oklahoma City, Oklahoma
January 30, 2002
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (Restated)
(Amounts and shares in 000's, except par values)
ASSETS
December 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 10,866 $ 9,344
Available-for-sale investments, at fair value........................................ 1,953 1,868
Membership income receivable......................................................... 4,563 3,154
Inventories.......................................................................... 1,542 1,442
Net assets of discontinued operations................................................ 4,504 7,940
Deferred member and associate service costs.......................................... 11,606 6,611
Prepaid product commissions.......................................................... - 125
Deferred income taxes................................................................ 4,361 2,860
---------- ----------
Total current assets............................................................. 39,395 33,344
Available-for-sale investments, at fair value.......................................... 14,412 8,092
Investments pledged.................................................................... 4,306 3,523
Property and equipment, net............................................................ 10,501 7,608
Deferred member and associate service costs............................................ 2,513 -
Other assets........................................................................... 6,639 5,589
---------- ----------
Total assets................................................................... $ 77,766 $ 58,156
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.................................................................. $ 6,831 $ 5,252
Deferred revenue and fees............................................................ 18,130 10,843
Current portion of capital lease obligation.......................................... 223 348
Accounts payable and accrued expenses................................................ 6,865 8,870
---------- ----------
Total current liabilities.......................................................... 32,049 25,313
Deferred revenue and fees............................................................ 3,083 -
Deferred income taxes ............................................................... 867 -
Capital lease obligation, net of current portion..................................... - 205
---------- ----------
Total liabilities................................................................ 35,999 25,518
---------- ----------
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.................................................................... 27,130 6,645
Accumulated other comprehensive income (loss)........................................ (108) (958)
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....................................................... 41,767 32,638
---------- ----------
Total liabilities and stockholders' equity..................................... $ 77,766 $ 58,156
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Restated)
(Amounts in 000's, except per share amounts)
Year Ended December 31,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Membership fees................................................................ $ 211,763 $ 153,918 $ 107,393
Associate services............................................................. 30,372 22,816 17,255
Product sales.................................................................. 1,016 5,888 27,779
Other.......................................................................... 3,232 3,809 2,901
---------- ---------- ----------
246,383 186,431 155,328
---------- ---------- ----------
Costs and expenses:
Membership benefits............................................................ 69,513 51,089 35,465
Commissions.................................................................... 96,614 74,333 50,652
Associate services and direct marketing........................................ 23,251 15,815 14,738
General and administrative..................................................... 21,524 19,280 21,902
Product costs.................................................................. 675 4,174 17,967
Other, net..................................................................... 4,403 3,226 2,152
---------- ---------- ----------
215,980 167,917 142,876
---------- ---------- ----------
Income from continuing operations before income taxes and cumulative effect of
change in accounting principle................................................. 30,403 18,514 12,452
Provision for income taxes....................................................... 9,550 6,480 1,013
---------- ---------- ----------
Income from continuing operations before cumulative effect of change in accounting
principle...................................................................... 20,853 12,034 11,439
Income from operations of discontinued UFL segment (net of applicable income tax
benefit (expense) of $387 and ($444) for year 2000 and 1999, respectively)..... 649 826 -
---------- ---------- ----------
Income before cumulative effect of change in accounting principle................ 21,502 12,860 11,439
Cumulative effect of adoption of SAB 101 (net of applicable income
tax benefit of $546)........................................................... (1,013) - -
---------- ---------- ----------
Net income....................................................................... 20,489 12,860 11,439
Less dividends on preferred shares............................................... 4 10 10
---------- ---------- ----------
Net income applicable to common stockholders..................................... $ 20,485 $ 12,850 $ 11,429
---------- ---------- ----------
Basic earnings per common share from continuing operations before cumulative
effect of accounting change.................................................... $ .93 $ .52 $ .49
Basic earnings per common share from discontinued operations..................... .03 .04 -
---------- --------- ---------
Basic earnings per common share before cumulative effect of accounting change.... .96 .56 .49
Cumulative effect of adoption of SAB 101......................................... (.05) - -
---------- --------- ---------
Basic earnings per common share.................................................. $ .91 $ .56 $ .49
---------- --------- ---------
Diluted earnings per common share from continuing operations before cumulative
effect of accounting change.................................................... $ .92 $ .51 $ .48
Diluted earnings per common share from discontinued operations................... .03 .04 -
---------- --------- ---------
Diluted earnings per common share before cumulative effect of accounting change.. .95 .55 .48
Cumulative effect of adoption of SAB 101......................................... (.05) - -
---------- --------- ---------
Diluted earnings per common share................................................ $ .90 $ .55 $ .48
---------- --------- ---------
Pro forma amounts assuming adoption of SAB 101 is retroactively applied:
Net Income..................................................................... $ 21,502 $ 12,786 $ 11,155
---------- --------- ---------
Basic earnings per common share................................................ $ .96 $ .55 $ .48
---------- --------- ---------
Diluted earnings per common share.............................................. $ .95 $ .55 $ .47
---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Restated)
(Amounts in 000's)
Year Ended December 31,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net income....................................................................... $ 20,489 $ 12,860 $ 11,439
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
---------- ---------- ----------
862 (934) (24)
---------- ---------- ----------
Other comprehensive income (loss), net of income taxes
of $464, $503 and $13 in 2000, 1999 and 1998, respectively..................... 850 (934) (24)
---------- ---------- ----------
Comprehensive income............................................................. $ 21,339 $ 11,926 $ 11,415
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated)
(Amounts in 000's)
Year Ended December 31,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 20,489 $ 12,860 $ 11,439
Cumulative change in accounting principle.......................................... 1,013 - -
Adjustments to reconcile net income to net cash provided by operating activities:
Income from UFL's discontinued operations........................................ (649) (826) -
Provision for deferred income taxes.............................................. (550) 518 1,013
Depreciation and amortization.................................................... 2,770 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............................................ (1,409) (782) (820)
(Increase) decrease in inventories............................................... (100) 1,146 (472)
Decrease in prepaid product commissions.......................................... 125 1,259 752
Increase in deferred member and associate service costs.......................... (8,521) (1,552) (1,871)
(Increase) decrease in other assets.............................................. (1,059) (2,259) 193
Increase in accrued Membership benefits.......................................... 1,579 1,444 1,159
Increase (decrease) in deferred revenues......................................... 10,370 (785) 1,429
(Decrease) increase in accounts payable and accrued expenses and other........... (2,031) 1,697 (5,441)
---------- ---------- ----------
Net cash provided by operating activities of continuing operations............. 23,201 17,031 11,295
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of UFL............................................................... - - (20,669)
Dividends received from UFL...................................................... 5,000 12,500 -
Additions to property and equipment.............................................. (5,577) (2,577) (4,926)
Purchases of investments - held to maturity...................................... - - (36,116)
Proceeds from sales of investments - held to maturity............................ - - 23,288
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......................... 1,113 13,224 -
---------- ---------- ----------
Net cash (used in) provided by investing activities of continuing operations (7,965) 12,070 (33,531)
---------- ---------- ----------
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 of continuing operations (13,714) (26,687) 1,444
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents............................... 1,522 2,414 (20,792)
Cash and cash equivalents at beginning of year..................................... 9,344 6,930 27,722
---------- ---------- ----------
Cash and cash equivalents at end of year........................................... $ 10,866 $ 9,344 $ 6,930
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Net cash used in discontinued operations......................................... $ (143) $ (827) $ -
---------- ---------- ----------
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
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Restated)
(Amounts and shares in 000's, except dividend rates and par values)
Year Ended December 31,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
$3.00 Cumulative Convertible Preferred Stock - $ 1 par value, 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
outstanding at beginning of year (18 in 2000 and 1999 and 23 in 1998)......... 18 18 23
Shares exchanged for common stock (7 in 2000 and 5 in 1998)..................... (7) - (5)
Shares redeemed (11 in 2000).................................................... (11) - -
---------- ---------- ----------
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 (Accumulated Deficit)
Balance at January 1, 1998, as previously reported.............................. 19,328
Prior period adjustment (Note 2 to the Consolidated Financial Statements)..... (36,962)
---------- ---------- -----------
Balance at beginning of year, as restated....................................... 6,645 (6,205) (17,634)
Net income.................................................................... 20,489 12,860 11,439
Cash dividends on preferred shares............................................ (4) (10) (10)
--------- ---------- -----------
Balance at end of year.......................................................... 27,130 6,645 (6,205)
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Restated) (continued) (Amounts and shares in 000's,
except dividend rates and par values)
Year Ended December 31,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Accumulated other comprehensive income (loss):
Balance at beginning of year.............................................. (958) (24) -
Other comprehensive income (loss)....................................... 850 (934) (24)
---------- ---------- ----------
Balance at end of year.................................................... (108) (958) (24)
---------- ---------- ----------
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..................................................................... $ 41,767 $ 32,638 $ 45,571
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
Except for per share amounts, 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 6% of Members
have elected to pay their fees in advance on an annual, semi-annual or quarterly
basis. 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 the Memberships are marketed
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 and Restatement
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 3)
As discussed in Note 2, the accompanying consolidated financial statements
have been restated primarily due to the change in accounting treatment
pertaining to the advance commission payments and related revenue recognition
changes to be consistent with such treatment (the "restatement"), and due to the
effect of the Company's sale on December 31, 2001 of UFL, which is reported as
and referred to as "discontinued operations" (see Note 4).
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") and
Pre-Paid Legal Services, Inc. of Florida ("PPLSIF"). 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 to Associates
The Company has a level Membership commission schedule of approximately 25%
of Membership fees. 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. Effective
October 1, 2001 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.
The Company expenses advance commissions ratably over the first month of
the related Membership. As a result of this accounting policy, the Company's
commission expenses are recorded in the first month of a Membership and there is
no commission expense recognized for the same Membership during the remainder of
the advance period.
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, short-term investments, debt and equity securities, 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, 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 Member and Associate Costs
Deferred costs represent the direct incremental expenses the Company incurs
in enrolling new members and new associates and that portion of payments made to
provider law firms and Associates related to deferred Membership revenue.
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. Deferred costs are amortized to expense over the same period as
the related deferred revenue.
Revenue Recognition
Membership fees are recognized in income ratably over the related service
period 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.
Membership fees received in advance for Membership periods beyond the balance
sheet date are included in Deferred revenue and fees.
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 direct incremental 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 and related direct incremental costs are 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 and
these items are included in Net Assets of Discontinued Operations. 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.
Goodwill
Goodwill, included in Net Assets of Discontinued Operations, 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 and claims reported but not paid and actuarially estimated
claims incurred but not reported on other Memberships (less than 2%). The
Company calculates the benefit liability on other 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
and these items are included in Net Assets of Discontinued Operations.
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 Standards Issued
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.
In July 2001, the Financial Accounting Standards Board issued new
pronouncements: SFAS 141, "Business Combinations"; SFAS 142, "Goodwill and Other
Intangible Assets"; and SFAS 143, "Accounting for Asset Retirement Obligations."
SFAS 141, which requires the purchase method of accounting for all business
combinations, applies to all business combinations initiated after June 30, 2001
and to all business combinations accounted for by the purchase method that are
completed after June 30, 2001. SFAS 141 will not apply to the Company unless it
enters into a future business combination. SFAS 142 requires that goodwill as
well as other intangible assets be tested annually for impairment. In addition,
the Statement eliminates the current requirement to amortize goodwill or
intangible assets with indeterminate lives, and is effective for fiscal years
beginning after December 15, 2001. SFAS 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long-lived asset. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The Company does not expect SFAS 142 or143 to materially impact
its reported results.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", (SFAS 144") is effective for the Company for the fiscal year beginning
January 1, 2002, and addresses accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business." SFAS 144 retains the
fundamental provisions of SFAS No. 121 and expands the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company
estimates that the new standard will not have a material impact on its financial
statements but is still in the process of evaluating the impact on its financial
statements.
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's adoption of the Codification increased
the statutory capital and surplus of its regulated subsidiaries as of January 1,
2001 by $798,000.
Accounting Change
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 implementation of SAB 101 resulted in a cumulative effect type
adjustment of $1.0 million, net of tax, which decreased net income for the year
ended December 31, 2000. See Note 2.
Note 2 - Restatement
As previously reported, in January 2001 and May 2001, the staff of the
Division of Corporation Finance of the Securities and Exchange Commission
("SEC") reviewed the Company's 1999 and 2000 Forms 10-K, respectively. On May
11, 2001, the Company received a letter from the staff of the Division of
Corporation Finance advising that, after reviewing the Company's Forms 10-K, it
was the position of the Division that the Company's accounting for commission
advance receivables was not in accordance with generally accepted accounting
principles (GAAP). The Company subsequently appealed this decision to the Chief
Accountant of the SEC. On July 25, 2001, the Company announced that the Chief
Accountant concurred with the prior staff opinion of the Division of Corporation
Finance. The Company subsequently announced that it would not pursue any further
appeals and that it would amend its previously filed SEC reports to restate the
Company's financial statements to reflect the SEC's position that the Company's
advance commission payments should be expensed ratably over the first month of
the related membership. Partially as a result of the SEC's position, the Company
and its prior independent auditor, Deloitte & Touche, mutually agreed that a
change in auditor would be made and the Company on September 17, 2001 engaged
Grant Thornton LLP to audit its restated consolidated financial statements for
the years ended December 31, 2000, 1999 and 1998. After further consultations
with the staff of the SEC, this new audit has now been completed. The
accompanying financial statements have been restated primarily due to the change
in accounting treatment pertaining to the advance commission payments and
related revenue recognition changes to be consistent with such treatment (the
"restatement"), and due to the effect of the Company's sale on December 31, 2001
of UFL, which is reported as and referred to as "discontinued operations" as
discussed in Note 4 to the Consolidated Financial Statements. Additionally, the
Company implemented SEC Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements," ("SAB 101") effective January 1, 2000 and has deferred
the non-refundable $10 Membership fees 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. At the time of the original
filing we estimated the direct incremental costs related to the non-refundable
Membership fee and associate enrollment fee to be in excess of $10 and $47,
respectively. Based upon further review, estimated direct incremental costs of
$7 for the Membership fee and $40 for the associate enrollment fee have been
deferred. The implementation of SAB 101 resulted in a cumulative effect type
charge of $1.0 million ("Cumulative effect"), net of tax, in the consolidated
income statement for the year ended December 31, 2000. The effects of the
restatement, discontinued operations and SAB 101 reduced total assets from $247
million, as originally reported at December 31, 2000, to $78 million, reduced
total liabilities from $100 million to $36 million (primarily due to the
elimination of deferred taxes related to the receivables) and therefore reduced
stockholders' equity from $147 million to $42 million. These items also reduced
net income from $43.6 million, or $1.92 per diluted share, to $20.5 million, or
$0.90 per diluted share. See Notes 2, 4 and 16 to the Consolidated Financial
Statements, for a summary of the effects of these items on previously reported
results of operations. A summary of the effects of these items on previously
reported results of operations follows:
<TABLE>
<CAPTION>
As Effect of
Originally Effect of Adoption of Discontinued
reported Restatement SAB 101 Operations Restated
---------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
2000
- -------------------------------------------------------
Revenues............................................... $ 247,652 $ 1,321 $ - $ (2,590) $246,383
Costs and expenses..................................... 176,652 41,173 483 (2,328) 215,980
---------- ---------- ---------- ---------- ---------
Income from continuing operations before income taxes
and cumulative change in accounting principle........ 71,000 (39,852) (483) (262) 30,403
Provision (benefit) for income taxes................... 23,279 (13,948) (168) 387 9,550
---------- ---------- ---------- ---------- ---------
Income from continuing operations before cumulative
effect of change in accounting principle............. 47,721 (25,904) (315) (649) 20,853
Income from discontinued operations.................... - - - 649 649
Cumulative effect of change in accounting principle.... (4,109) 4,109 (1,013) - (1,013)
---------- ---------- ---------- ---------- ---------
Net income............................................. 43,612 (21,795) (1,328) - 20,489
Dividends on preferred shares.......................... 4 - - - 4
---------- ---------- ---------- ---------- ---------
Net income applicable to common shareholders........... $ 43,608 $ (21,795) $ (1,328) $ - $ 20,485
---------- ---------- ---------- ---------- ---------
Basic EPS.............................................. $ 1.94 $ (.97) $ (.06) $ - $ .91
---------- ---------- ---------- ---------- ---------
Diluted EPS............................................ $ 1.92 $ (.96) $ (.06) $ - $ .90
---------- ---------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
As
Originally Effect of Discontinued
reported Restatement Operations Restated
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
1999
- -----------------------------------------------------------
Revenues............................................... $ 192,860 $ (3,299) $ (3,130) $ 186,431
Costs and expenses..................................... 132,933 36,844 (1,860) 167,917
---------- ---------- ---------- ----------
Income from continuing operations before income taxes.. 59,927 (40,143) (1,270) 18,514
Provision for income taxes............................. 20,974 (14,050) (444) 6,480
---------- ---------- ---------- ----------
Income from continuing operations...................... 38,953 (26,093) (826) 12,034
Income from discontinued operations.................... - - 826 826
---------- ---------- ---------- ----------
Net income............................................. 38,953 (26,093) - 12,860
Dividends on preferred shares.......................... 10 - - 10
---------- ---------- ---------- ----------
Net income applicable to common shareholders........... $ 38,943 $ (26,093) $ - $ 12,850
---------- ---------- ---------- ----------
Basic EPS.............................................. $ 1.69 $ (1.13) $ - $ .56
---------- ---------- ---------- ----------
Diluted EPS............................................ $ 1.67 $ (1.12) $ - $ .55
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
As
Originally Effect of
reported Restatement Restated
---------- ----------- -----------
<S> <C> <C> <C>
1998
- -----------------------------------------------------------
Revenues............................................... $ 157,938 $ (2,610) $ 155,328
Costs and expenses..................................... 116,606 26,270 142,876
---------- ---------- ----------
Income before income taxes............................. 41,332 (28,880) 12,452
Provision for income taxes............................. 11,122 (10,109) 1,013
---------- ---------- ----------
Net income............................................. 30,210 (18,771) 11,439
Dividends on preferred shares.......................... 10 - 10
---------- ---------- ----------
Net income applicable to common shareholders........... $ 30,200 $ (18,771) $ 11,429
---------- ---------- ----------
Basic EPS.............................................. $ 1.29 $ (.80) $ .49
---------- ---------- ----------
Diluted EPS............................................ $ 1.26 $ (.78) $ .48
---------- ---------- ----------
</TABLE>
Note 3 - 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 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 4 - Discontinued Operations
On December 31, 2001 the Company completed the sale of its wholly owned
subsidiary UFL. The Company received a $2.8 million dividend and $1.2 million
from the sale of 100% of UFL stock. Net assets of $4.5 million and $7.9 million
have been segregated on the December 31, 2000 and 1999 Consolidated Balance
Sheets, respectively. The sale is not expected to have a significant impact on
reported earnings or stockholders' equity for 2001. Assets and liabilities of
UFL's discontinued operations were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
2000 1999
---------- ------------
<S> <C> <C>
Cash............................................... $ 704 $ 847
Available-for-sale investments, current............ 495 384
Amount due from coinsurer.......................... 12,242 12,483
Available-for-sale investments, non-current........ 6,795 11,536
Investment pledged................................. 1,799 1,765
Property and equipment, net........................ 699 753
Goodwill, net...................................... 616 693
Other assets....................................... 2,082 2,252
----------- -----------
Total assets....................................... 25,432 30,713
----------- -----------
Accident and health reserves....................... 12,242 12,483
Life insurance reserves, current................... 976 967
Accounts payable and accrued expenses.............. 54 1,590
Life insurance reserves, non-current............... 7,656 7,733
----------- -----------
Total Liabilities.................................. 20,928 22,773
----------- -----------
Net assets of UFL's discontinued operations........ $ 4,504 $ 7,940
----------- -----------
</TABLE>
The results of operations of the UFL segment have been segregated and reported
as discontinued operations in the Consolidated Statements of Income. Cash flow
impacts of discontinued operations have been segregated in the Consolidated
Statements of Cash Flows. Details of income from discontinued operations, net of
income tax, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenues............................................................... $ 2,590 $ 3,130
---------- ----------
Income from discontinued operations, net of tax benefit (expense) of
$387 and ($444) for year 2000 and 1999, respectively................. $ 649 $ 826
---------- ----------
</TABLE>
Note 5 - 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:
<TABLE>
<CAPTION>
December 31, 2000
--------------------------------------------------
Amortized Gross Unrealized Fair
Available-for-Sale Cost Gains Losses Value
- ------------------ ----------- -------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Government obligations........................ $ 9,636 $ 116 $ (219) $ 9,533
Corporate obligations.............................. 3,842 10 (90) 3,762
Equity securities.................................. 417 12 - 429
Obligations of state and political subdivisions.... 3,095 26 (25) 3,096
Certificates of deposit............................ 3,851 - - 3,851
---------- -------- -------- ----------
Total.............................................. $ 20,841 $ 164 $ (334) $ 20,671
---------- -------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------
Amortized Gross Unrealized Fair
Available-for-Sale Cost Gains Losses Value
- ------------------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Government obligations........................ $ 3,563 $ - $ (28) $ 3,535
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.............................................. $ 13,453 $ 588 $ (558) $ 13,483
---------- -------- -------- ----------
</TABLE>
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:
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
----------- -----------
<S> <C> <C>
One year or less................................... $ 4,148 $ 4,131
Two years through five years....................... 7,559 7,586
Five years through ten years....................... 3,300 3,311
More than ten years................................ 5,417 5,214
---------- ----------
Total.............................................. $ 20,424 $ 20,242
---------- ----------
</TABLE>
The Company's investment securities are included in the accompanying
consolidated balance sheets at December 31, 2000 and 1999 as follows.
<TABLE>
<CAPTION>
December 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Available-for-sale investments (current)........... $ 1,953 $ 1,868
Available-for-sale investments (non-current)....... 14,412 8,092
Investments pledged................................ 4,306 3,523
---------- ----------
Total.............................................. $ 20,671 $ 13,483
---------- ----------
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
------------------------
2000 1999
--------- ----------
<S> <C> <C>
Certificates of deposit............................ $ 2,451 $ 1,774
Obligation of state and political subdivisions..... 132 100
U. S. Government obligations....................... 1,723 1,649
---------- ----------
Total $ 4,306 $ 3,523
---------- ----------
</TABLE>
Sales of investments during 2000 and 1999 were not significant. Proceeds
from sales of investment securities held-to-maturity were $23.7 million in 1998,
resulting in gross realized gains of $17,500 and gross realized losses of
$81,500. Due to the UFL acquisition on December 30, 1998, as discussed in Note
3, and the resulting requirement for $20.7 million cash consideration to
Pioneer, the Company liquidated a substantial portion of its investments
previously classified as held-to-maturity resulting in all remaining investments
of the Company being transferred to the available-for-sale classification with
an unrealized loss of $24,000.
Note 6 - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
Personal and home care, and personal development inventory...... $ 198 $ 618
Jewelry inventory............................................... 613 763
Sales and promotional materials................................. 1,160 873
Less: Inventory reserve......................................... (429) (812)
--------- ---------
Total........................................................... $ 1,542 $ 1,442
--------- ---------
</TABLE>
Note 7 - Property and Equipment
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
Estimated -------------------------
Useful Life 2000 1999
------------ ---------- ----------
<S> <C> <C> <C>
Equipment, furniture and fixtures.......... 3-10 years $ 11,112 $ 11,109
Computer software.......................... 3 years 4,224 4,537
Building and improvements.................. 20 years 2,898 2,835
Automotive................................. 3 years 138 250
Land....................................... 170 110
---------- ----------
18,542 18,841
Accumulated depreciation................................. (8,041) (11,233)
---------- ----------
Property and equipment, net.............................. $ 10,501 $ 7,608
---------- ----------
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
Accounts payable................................... $ 2,154 $ 1,620
Fast Start training bonuses payable................ 845 2,346
Current income tax liability....................... 760 1,813
Other.............................................. 3,106 3,091
--------- ---------
Total.............................................. $ 6,865 $ 8,870
--------- ---------
</TABLE>
Note 9 - Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Current income taxes:
Federal.................................. $ 9,463 $ 4,895 $ -
State.................................... 637 1,067 -
--------- --------- ---------
10,100 5,962 -
Deferred................................... (550) 518 1,013
--------- --------- ---------
Total provision for income taxes......... $ 9,550 $ 6,480 $ 1,013
--------- --------- ---------
</TABLE>
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Statutory Federal income tax rate.......... 35.0% 35.0% 35.0%
Change in valuation allowance.............. (3.4) - (34.0)
Tax exempt interest........................ (.2) - (.4)
State income taxes......................... 2.6 1.5 4.2
Other...................................... (2.6) (1.5) 3.3
------- ------- -------
Effective income tax rate.................. 31.4% 35.0% 8.1%
------- ------- -------
</TABLE>
Deferred tax liabilities and assets at December 31, 2000 and 1999 are
comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Unrealized investment gains (net)............ $ - $ 11
Deferred member and associate service costs.. 4,942 2,314
Depreciation................................. 683 356
----------- -----------
Total deferred tax liabilities............ 5,625 2,681
----------- -----------
Deferred tax assets:
Expenses not yet deducted for tax purposes... 1,636 1,746
Unrealized loss on investments............... 58 -
Deferred revenue and fees.................... 7,425 3,795
Pre-merger net operating loss carryforward... 979 1,637
General business credit carryforward......... - 261
----------- -----------
Total deferred tax assets................. 10,098 7,439
Valuation allowance for deferred tax assets.. (979) (1,898)
----------- -----------
Total net deferred tax assets............. 9,119 5,541
----------- -----------
Net deferred tax asset....................... $ 3,494 $ 2,860
----------- -----------
</TABLE>
At December 31, 2000, the Company has NOLs in the amount of $2.8 million
that expire in 2015 through 2018 representing remaining NOLs of TPN generated
prior to the merger date. A valuation allowance has been established for the TPN
NOLs. At December 31, 1999, the Company had established a valuation allowance
for the general business and rehabilitation tax credit carryforwards 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.
However, NOLs of $954,000 and general business credits of $261,000 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 4,000,000 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 Company's ability to pay dividends is dependent in part on its ability
to derive dividends from its subsidiaries. The payment of dividends by PPLSIF
and UFL is restricted under various insurance laws to available surplus funds
derived from realized net profits. At December 31, 2000, neither PPLSIF nor UFL
had funds available for payment of significant dividends without the approval of
the Oklahoma Insurance Commissioner. PPLCI had approximately $5 million in
surplus funds available for payment of an ordinary dividend.
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 that 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 are $223,000.
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 unspecified damages on the basis of allegations
that the Company issued false and misleading financial information, primarily
related to the method the Company used 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. An amended and consolidated complaint was filed on June
14, 2001, and the Company filed a motion to dismiss the complaint on July 24,
2001. The plaintiffs filed a response to the motion to dismiss on September 4,
2001 and the Company's reply brief was filed on September 24, 2001. Under the
Private Securities Litigation Reform Act of 1995, 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.
Also, in January 2001, the Company received inquiries from the Division of
Enforcement of the SEC requesting information relating primarily to the
Company's accounting policies for commission advance receivables from sales
associates. The Company has had no further contact from the Division of
Enforcement. The Division of Enforcement's inquiries were informal and did not
constitute a formal investigation or proceeding. The Company is unable to
determine the ultimate outcome of this inquiry, including whether the Division
of Enforcement will continue the inquiry subsequent to the Company's decision to
restate its financial statements.
On June 7, 2001 and August 3, 2001, shareholder derivative actions were
filed by alleged company shareholders, Bruce A. Hansen and Donna L. Hansen, and
Roger Strykowski, respectively, against all of the directors of the Company
seeking unspecified actual and punitive damages on behalf of the Company based
on allegations of breach of fiduciary duty, corporate waste and mismanagement by
the defendant directors. The derivative actions are in the preliminary pleading
stage. The complaints allege that the defendant directors caused the Company to
violate generally accepted accounting principles and federal securities laws by
improperly capitalizing commission expenses, caused the Company to allegedly pay
increased salaries and bonuses based upon financial performance which was
allegedly improperly inflated and caused the Company to expend significant
dollars in connection with the defense of its accounting policy, including cost
incurred in connection with the defense of the securities class actions
described above, and in connection with repurchase of its own shares on the open
market at allegedly artificially inflated prices. The Company believes that
these derivative actions are related to the securities class actions described
above and may be intended to circumvent the restrictions on the securities class
actions imposed by the Private Securities Litigation Reform Act of 1995. While
the outcome of these cases is uncertain, based on the information currently
available to the Company, it appears that the complaints should be dismissed
because the plaintiffs failed to make or excuse the requisite demand that the
Company pursue the claims of alleged misconduct.
In the second quarter of 2001 and through January 4, 2002, multiple
lawsuits were filed against the Company, certain sales associates and other
unnamed defendants in Alabama state courts by current or former members seeking
unspecified actual and punitive damages for alleged breach of contract and fraud
in connection with the sale of memberships. As of January 30, 2002, the Company
was aware of 20 separate lawsuits involving approximately 110 plaintiffs that
have been filed in multiple counties in Alabama and it is possible that
additional cases will be filed. These cases make allegations similar to
allegations made in cases previously filed against the Company in Alabama state
courts by multiple plaintiffs which was previously settled for a payment of $1.5
million to settle claims by 97 separate claimants. In January 2002, one of the
law firms representing individual plaintiffs filed a putative class action on
behalf of all Alabama residents purchasing memberships seeking damages and
injunctive relief based on alleged failures to provide coverage under the
memberships. Based on the Company's preliminary investigation of the new cases,
the facts involved are in many respects significantly different from the facts
involved in the case the company previously settled. These cases are all in the
preliminary stages and the ultimate outcome is not determinable.
On June 29, 2001, an action was filed in the District Court of Canadian
County, Oklahoma by Gina Cotwitz against the Company. This action is a putative
class action on behalf of all sales associates of the Company and alleges
violations of the Oklahoma Consumer Protection Act, the Oklahoma Uniform
Consumer Credit Code and breach of contract in connection with certain of the
Company's practices relating to advancing commissions to sales associates. The
Company has filed an answer denying the plaintiff's claims and raising
affirmative defenses and intends to vigorously defend this case. The case is in
the preliminary stages and the ultimate outcome is not determinable.
The Company is a defendant in various other legal proceedings that are
routine and incidental to its business. The Company will vigorously defend its
interests in these proceedings. While the ultimate outcome of these proceedings
is not determinable, the Company does not currently anticipate that these
contingencies will result in any material adverse effect to its financial
condition or results of operation.
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:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
---------- --------- ---------- --------- ---------- ---------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 2000:
<TABLE>
<CAPTION>
Weighted Average
Remaining Weighted Average
Range of Exercise Prices Number Outstanding Contractual Life Exercise Price
- -------------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$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
------------------ ---------------- ---------------
</TABLE>
The following table summarizes information about stock options exercisable
at December 31, 2000:
<TABLE>
<CAPTION>
Weighted Average
Remaining Weighted Average
Range of Exercise Prices Number Outstanding Contractual Life Exercise Price
- -------------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$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
------------------ ---------------- ---------------
</TABLE>
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:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net income applicable to common stockholders:
As reported................................ $ 20,485 $ 12,850 $ 11,429
Pro forma.................................. 16,468 9,793 2,900
Basic earnings per common share:
As reported................................ $ .91 $ .56 $ .49
Pro forma.................................. .73 .42 .12
Diluted earnings per common share:
As reported................................ $ .90 $ .55 $ .48
Pro forma.................................. .73 .42 .12
</TABLE>
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 through the
conversion/redemption date 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.
<TABLE>
<CAPTION>
Year Ended December 31,
Basic Earnings Per Share: 2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Earnings:
- --------
Income from continuing operations before cumulative effect of change in
accounting principle........................................................ $ 20,853 $ 12,034 $ 11,439
Less dividends on preferred shares............................................ 4 10 10
--------- --------- ---------
Income from continuing operations before cumulative effect of change in
accounting principle applicable to common stockholders...................... $ 20,849 $ 12,024 $ 11,429
--------- --------- ---------
Shares:
- -------
Weighted average shares outstanding........................................... 22,504 23,099 23,456
--------- --------- ---------
Diluted Earnings Per Share:
Earnings:
- ---------
Income from continuing operations before cumulative effect of change in
accounting principle available to common stockholders after assumed
conversions................................................................. $ 20,853 $ 12,034 $ 11,439
--------- --------- ---------
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
--------- --------- ---------
</TABLE>
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
Revenues
as Discontinued
previously Operations Effect of Restated
reported (2) Restatement Revenues
---------- ----------- ----------- --------
2000
- -------------
First quarter... $ 55,933 $ (1,173) $ 1,105 $55,865
Second quarter.. 60,200 (512) (133) 59,555
Third quarter... 65,616 (106) 176 65,686
Fourth quarter.. 65,903 (799) 173 65,277
1999
- -------------
First quarter... $ 43,647 $ (1,590) $ (663) $41,394
Second quarter.. 47,128 (1,577) (1,196) 44,355
Third quarter... 48,128 (345) (211) 47,572
Fourth quarter.. 53,957 382 (1,229) 53,110
<TABLE>
<CAPTION>
Selected Quarterly Financial Data
Net Income Effect of Effect of Discontinued
as previously Restatement Adoption of Restated Net Operations
reported (1) SAB 101 Income (2) (3)
------------- ------------ ----------- ------------ -------------
2000
- --------------------
<S> <C> <C> <C> <C> <C>
First quarter....... $ 6,880 $ (970) $ (1,099) $ 4,811 $ 143
Second quarter...... 11,874 (8,365) (90) 3,419 229
Third quarter....... 13,631 (6,533) (85) 7,013 227
Fourth quarter...... 11,227 (5,926) (55) 5,246 50
1999
- --------------------
First quarter....... $ 8,782 $ (5,130) $ - $ 3,652 $ 160
Second quarter...... 9,872 (7,624) - 2,248 491
Third quarter....... 9,870 (6,319) - 3,551 173
Fourth quarter...... 10,429 (7,020) - 3,409 2
</TABLE>
<TABLE>
<CAPTION>
Quarterly Earnings Per Share Data
---------------------------------
Basic EPS Effect of Effect of Discontinued
as previously Restatement Adoption of Restated Operations
reported (1) SAB 101 Basic EPS (2) (3)
------------- ------------ ----------- ------------ -------------
2000
- --------------------
<S> <C> <C> <C> <C> <C>
First quarter....... $ .31 $ (.04) $ (.05) $ .22 $ .01
Second quarter...... .52 (.37) (.01) .14 .01
Third quarter....... .61 (.29) - .32 .01
Fourth quarter...... .50 (.26) - .24 -
1999
- --------------------
First quarter....... $ .37 $ (.22) $ - $ .15 $ .01
Second quarter...... .43 (.33) - .10 .02
Third quarter....... .43 (.28) - .15 .01
Fourth quarter...... .46 (.30) - .16 -
Diluted EPS Effect of Effect of Discontinued
as previously Restatement Adoption of Restated Operations
reported (1) SAB 101 Diluted EPS (2) (3)
------------- ------------ ----------- ------------ -------------
2000
- --------------------
First quarter....... $ .30 $ (.04) $ (.05) $ .21 $ .01
Second quarter...... .52 (.36) (.01) .15 .01
Third quarter....... .60 (.29) - .31 .01
Fourth quarter...... .50 (.27) - .23 -
1999
- --------------------
First quarter....... $ .37 $ (.22) $ - $ .15 $ .01
Second quarter...... .42 (.32) - .10 .02
Third quarter....... .42 (.27) - .15 .01
Fourth quarter...... .46 (.30) - .16 -
</TABLE>
(1) Refer to Note 2 to Consolidated Financial Statements.
(2) Refer to Note 4 to Consolidated Financial Statements.
(3) Amounts pertaining to Discontinued Operations are included in the
previously reported column.
Note 17 - Segment Information
The Company previously reported UFL as a segment. On December 31, 2001 the
Company completed the sale of UFL and as a result has made the disclosures
required by discontinued operations accounting, see Note 4 to Consolidated
Financial Statements.
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.
Note 18 - Subsequent Events
On November 6, 2001, the Company entered into a $17.5 million line of
credit with Bank of Oklahoma, N.A. in order to fund additional treasury stock
purchases. The line of credit provides for immediate funding of up to $17.5
million with scheduled repayments beginning February 15, 2002 and ending
November 15, 2002 with interest at the Libor rate plus 2% per annum or the prime
rate minus 1/2 percent per annum as selected by the Company. The loan is secured
by the Company's rights to receive membership fees on a portion of its
memberships. The terms of this loan have various covenants customary for similar
transactions.
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 35 of this report.
(2) Financial Statement Schedule: See Index to Consolidated Financial
Statements and Consolidated Financial Statement Schedule set
forth on page 35 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: February 1, 2002 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Position Date
/s/ Harland C. Stonecipher Chairman of the Board of Directors February 1, 2002
- ----------------------------------------------------
Harland C. Stonecipher (Principal Executive Officer)
/s/ Wilburn L. Smith President and Director February 1, 2002
- ----------------------------------------------------
Wilburn L. Smith
/s/ Kathleen S. Pinson Vice President, Controller and February 1, 2002
- ----------------------------------------------------
Kathleen S. Pinson Director
/s/ Randy Harp Chief Operating Officer, February 1, 2002
- ----------------------------------------------------
Randy Harp Director
(Principal Financial Officer)
/s/ Steve Williamson Chief Financial Officer, February 1, 2002
- ----------------------------------------------------
Steve Williamson (Principal Accounting Officer)
/s/ Peter K. Grunebaum Director February 1, 2002
- ----------------------------------------------------
Peter K. Grunebaum
/s/Shirley A. Stonecipher Director February 1, 2002
- ----------------------------------------------------
Shirley A. Stonecipher
/s/ John W. Hail Director February 1, 2002
- ----------------------------------------------------
John W. Hail
/s/ David A. Savula Director February 1, 2002
- ----------------------------------------------------
David A. Savula
/s/ Martin H. Belsky Director February 1, 2002
- ----------------------------------------------------
Martin H. Belsky
/s/ John Addison Director February 1, 2002
- ----------------------------------------------------
John Addison
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE II
PRE-PAID LEGAL SERVICES, INC.
Consolidated Valuation And Qualifying Accounts (Restated)
For the Three-Year Period Ended December 31, 2000
(Amounts in 000's)
Additions
Charged to Balance at
Balance at Cost and End of Year
Beginning Expenses Write-offs
Description of Year
- --------------------------------------------------------- ---------- ---------- ---------- ----------
Year Ended December 31, 2000:
<S> <C> <C> <C> <C>
Allowance for doubtful receivables................... $ 213 $ - $ - $ 213
---------- ---------- ---------- ----------
Inventory valuation reserve.......................... $ 812 $ - $ 383 $ 429
---------- ---------- ---------- ----------
Year Ended December 31, 1999:
Allowance for doubtful receivables................... $ 213 $ - $ - $ 213
---------- ---------- ---------- ----------
Inventory valuation reserve.......................... $ - $ 812 $ - $ 812
---------- ---------- ---------- ----------
Year Ended December 31, 1998:
Allowance for doubtful receivables................... $ 213 $ - $ - $ 213
---------- ---------- ---------- ----------
Inventory valuation reserve.......................... $ 160 $ - $ 160 $ -
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit No.
-----------
<S> <C>
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)
*10.1 Employment 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)
*10.2 Agreements 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)
*10.3 Amendment 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)
*10.4 Form 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)
*10.5 Amendment 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 (Incorporated by reference to
Exhibit 10.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000)
*10.7 Demand 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)
*10.8 Demand 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)
*10.9 Security 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)
10.11 Agreement 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)
10.12 Stock 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 (Incorporated by
reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended December
31, 2000)
10.18 Loan agreement dated November 6, 2001 between Bank of Oklahoma, N.A. and the Company (Incorporated
by reference to Exhibit 10.18 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2000)
10.19 Security agreement dated November 6, 2001 between Bank of Oklahoma, N.A. and the Company
(Incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2000)
21.1 List of Subsidiaries of the Company (Incorporated by reference to Exhibit 21.1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000)
99.1 Press release dated April 13, 2001 (Incorporated by reference to Exhibit 99.1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000)
99.2 Press release dated April 2, 2001 (Incorporated by reference to Exhibit 99.2 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000)
99.3 Press release dated March 16, 2001 (Incorporated by reference to Exhibit 99.3 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000)
- --------------------
* Constitutes a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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