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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-9293
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PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 East Main
Ada, Oklahoma 74820
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (580) 436-1234
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $0.01 Par Value American 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 X No
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 February 25, 1999 - $521,267,790.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of February 25,
1999 there were 23,654,345 shares of Common Stock, par value $.01 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Company's definitive proxy statement for its 1999 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, 1998
TABLE OF CONTENTS
PART I.
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ITEM 1. DESCRIPTION OF BUSINESS
General
Acquisition of TPN, Inc. d.b.a. The Peoples Network
Acquisition of Universal Fidelity Life Insurance Company
Industry Overview
Description of Memberships
Provider Attorneys
Marketing
Operations
Quality Control
Competition
Regulation
Employees
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Price of and Dividends on the Common Stock
Recent Sales of Unregistered Securities
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Results of Operations:
Comparison of 1998 to 1997
Comparison of 1997 to 1996
Liquidity and Capital Resources
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
PART III. **
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PART IV.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
SIGNATURES
** Information required by Part III is incorporated by reference from the
Company's definitive proxy statement for its 1999 annual meeting of
shareholders.
PRE-PAID LEGAL SERVICES, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
Forward-Looking Statements
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All statements in this report concerning Pre-Paid Legal Services, Inc.
(the "Company") other than purely historical information, including, but not
limited to, statements by suppliers of data processing equipment and services,
government agencies, and other third parties as to Year 2000 compliance and
costs, statements relating to the Company's future plans and objectives,
expected operating results and assumptions relating to future performance
constitute "Forward-Looking Statements" within the meaning of 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, 1998 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 relating to the
marketing of its Memberships, Membership persistency, regulation and competition
risks and the risk relating to the continued active participation of its
principal executive officer, Harland C. Stonecipher. 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.
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
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General
Pre-Paid Legal Services, Inc. was one of the first companies in the
United States organized solely to design, underwrite and market legal expense
plans. The Company's predecessor commenced business in 1972 and began offering
legal expense reimbursement services as a "motor service club" under Oklahoma
law. In 1976, the Company was formed and acquired its predecessor in a stock
exchange. The Company began offering Memberships independent of the motor
service club product by adding a legal consultation and advice service, and in
1979 the Company implemented a legal expense benefit which provided for partial
payment of legal fees in connection with the defense of certain civil and
criminal actions. The Company's legal expense plans (referred to as
"Memberships") currently provide for or reimburse a portion of the legal fees
associated with a variety of legal services in a manner similar to medical
reimbursement plans. At December 31, 1998, the Company had 603,017 Memberships
in force with members in all 50 states, and the District of Columbia.
Approximately 90% of such Memberships were in 26 states.
Acquisition of TPN, Inc. d.b.a. The Peoples Network ("TPN")
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. 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 12,000 have become Company sales associates since the acquisition.
The personal development products and services are delivered to the sales force
and subscribers via the Company's own full time channel known as the "SUCCESS
CHANNEL" on the PRIMESTAR(R) digital satellite network. The acquisition of TPN
is expected to significantly increase the size and effectiveness of the
Company's sales force through the integration of the TPN sales force and by
greatly enhancing the Company's ability to communicate with the combined sales
force via the full time, 24 hours per day, 7 days a week "SUCCESS CHANNEL." It
is expected that the Company will utilize this communications platform for
recruiting of new and additional sales associates, sales training, motivation,
personal development and product sales. This acquisition represents a valuable
long-term communications platform for the Company's future growth and expansion.
The ability to communicate with people in their homes or offices via digital
satellite broadcasting technology is expected to further the Company's
recruiting and training of new and additional sales associates as well as
existing associates. The acquisition qualified as a "pooling of interests" for
financial reporting purposes and accordingly the 1995 through 1998 financial
information contained herein has been restated to include the operating results
of TPN.
Acquisition of Universal Fidelity Life Insurance Company
The Company completed its acquisition of Universal Fidelity Life
Insurance Company ("UFL") on December 30, 1998. UFL, based in Duncan, Oklahoma,
was a subsidiary of Pioneer Financial Services, Inc. ("Pioneer"), which is a
member of the Conseco group of companies. The terms of the acquisition provided
that UFL's accident and health insurance policies would be 100% coinsured by a
subsidiary of Conseco. UFL will retain the existing life business with 1998
annual premiums of approximately $1 million. The Company transferred $20.7
million in cash to Pioneer in exchange for all of the outstanding capital stock
of UFL, before consideration of a $12.5 million extraordinary dividend payable
by UFL to the Company at the Company's discretion, resulting in net
consideration paid of $8.2 million. 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 UFL's Medicare supplement and health care business written by UFL.
UFL will retain its existing life insurance business and will continue to
provide claims processing for the coinsured Medicare supplement and health care
policies and receive full cost reimbursement for such services. December 31,
1998 assets remaining in UFL after the purchase but before the dividend included
$28.0 million in cash and investments, $835,000 relating to real estate,
computer systems and furniture and fixtures (occupied and utilized by UFL) and
$15.0 million of receivables generated in the ordinary course of business,
including a coinsurance receivable of $12.5 million. December 31, 1998
liabilities of UFL remaining after the transaction include life insurance
reserves of $8.7 million, accident and health reserves of $12.5 million and
other ordinary course of business accrued liabilities of $2.3 million and
deferred income taxes of $467,000. The acquisition of UFL was accounted for
using the purchase method of accounting for business combinations.
Although the transaction is not expected to have a material effect on
the Company's operating results in the near term, UFL will continue 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 will be supported as
necessary by the Company's various operating departments.
At the same time as the acquisition of UFL, the Company entered into a
marketing alliance with Conseco designed to allow Conseco's 160,000 agents to
offer the Company's legal plans to their customers. It is expected that Conseco
will focus primarily on their existing group accounts. The UFL acquisition
provided the Company with a potentially significant new marketing partner as
well as an opportunity to manufacture specialty insurance products for the
benefit of its sales associates.
Industry Overview
Legal service plans, while used in Europe for many years, 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 estimates
developed by the National Resource Center for Consumers of Legal Services
("NRC") during 1997, (the latest information available from NRC) there were 105
million Americans entitled to service through at least one legal service plan,
compared 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. The types of plans
offered include "free" plans that generally provide limited benefits on an
automatic enrollment basis without any direct cost to the individual user. Free
plans include those sponsored by labor unions, the American Association of
Retired Persons, the National Education Association and military services and,
according to NRC estimates, accounted for approximately 50% of covered persons
in 1997. The NRC estimates that an additional 29% 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. 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 6% of covered persons in 1997.
According to the NRC, the remaining covered persons in 1997 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 15% of the market in 1997 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 10% was
estimated by the NRC to be covered by plans having benefits comparable to those
provided by the Company's Memberships. Accordingly, the Company believes that
significant opportunities exist for successful marketing of the Company's
Memberships to employee groups and other individual consumers.
Description of Memberships
The Company has offered legal services under two types of Memberships:
closed panel and open panel. Since 1987, substantially all of the Memberships
sold by the Company have been closed panel Memberships that allow members to
access legal services through a network of independent attorneys ("provider
attorneys") under contract with the Company. Provider attorneys are paid a fixed
fee on a per capita basis to render services to plan members residing within the
state in which the provider attorney is licensed to practice. Because the fixed
fee payments by the Company to provider attorneys in connection with closed
panel plans do not vary based on the type and amount of benefits utilized by the
member, the closed panel plans provide significant advantages to the Company in
managing claims risk. At December 31, 1998, closed panel Memberships comprised
approximately 94% of the Company's active Memberships. Prior to 1987, the
Company sold primarily open panel Memberships which allow members to locate
their own attorney to provide legal services available under the Membership with
the member's attorney being reimbursed for services rendered based on usual,
reasonable and customary fees.
The Family Legal Plan currently marketed by the Company consists of
five basic benefits that provide coverage for a broad range of preventive and
litigation-related legal expenses. The Family Legal Plan accounted for
approximately 94% of the outstanding Memberships at December 31, 1998. In
addition to the Family Legal Plan, the Company markets other specialized legal
services products specifically related to employment in certain professions. 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. 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 attorney and
provides legal services associated with administrative hearings. The School
Teachers Legal Plan, developed in 1993 and marketed to school employees, also
provides legal services associated with administrative hearings. The Business
Owners' Legal Solutions plan was developed during 1995 and marketed in selected
geographical areas. This plan provides business oriented legal service benefits
for small businesses with 99 or fewer employees.
In 11 states, the Company's plans are available in the Spanish
language. For the Spanish language plans, the provider law firms have bilingual
staff and attorney resources 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. 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 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 benefits known as "Titles." Memberships range in cost from
$10.00 to $25.00 per month depending in part on the schedule of benefits, which
varies from state to state in compliance with regulatory requirements, and on
certain other state regulations. Benefits for most corporate and commercial
matters are excluded from open panel Memberships. Benefits for domestic matters,
bankruptcy and drug and alcohol related matters are limited in all Memberships.
Title I: Preventive Legal Services. This benefit offers unlimited
toll-free access to a member's provider attorney firm for any legal matter. This
Title also offers last will and testament preparation for the member and annual
will reviews at no additional cost. Document review benefits and letter writing
benefits are also Title I benefits.
Title I benefits offered on the open panel plan basis permit half-hour
consultations for personal legal matters with the attorney of choice and pay an
attorney's reasonable fee for covered consultations. This benefit, however, does
not provide for a duplication of services previously billed relating to the same
matter per Membership in a 90-day period. The member is responsible for any fees
incurred as a result of legal work in addition to the half-hour consultation or
legal assistance provided under this benefit.
Title II: Automobile Legal Protection. This benefit offers 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 Title 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.
Title III: Trial Defense. This Title offers assistance to the member
and the member's spouse through an increasing schedule of benefits based on
Membership year. Up to 60 hours of attorney time are available for the defense
of civil or job-related criminal charges 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 Title 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 Title 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 incrementing 5
additional hours each Membership year to the maximum limit of 35 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.
Title IV: 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 Title.
With pre-trial benefits limited to 2.5 hours to 4.5 hours based on the
Membership year under Title III (without the pre-trial option described) and 3.5
hours under Title IV, these Titles do not ensure complete pre-trial coverage. In
order to receive additional Title III or IV 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 attorneys
under the closed panel Membership have agreed to provide to members any legal
service beyond those stipulated in the Membership at a 25% discount from the
provider's customary and usual hourly rate.
Title II, III and IV benefits available on an open panel plan basis
provide comparable benefits with limitations based on fees incurred rather than
hours of service.
Title V: Preferred Member Discount. Provider attorneys under the closed
panel Membership have agreed to provide to members any legal services beyond
those stipulated in the Membership at a fee discounted 25% from the provider's
customary and usual hourly rate.
Commercial Driver Legal Plan
The Commercial Driver Legal Plan provides coverage on a closed panel
plan basis for persons who drive a commercial vehicle. The Company has members
covered under the Commercial Driver's Legal Plan in 28 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,
1998, 1997 and 1996, this plan accounted for approximately 1.4%, 2.2% and 3.5%,
respectively, of Membership premiums. The Plan is available at the monthly rate
of $35.95 or at a group rate of $32.95. Benefits include Title II, defense of
Department of Transportation violations and the 25% discounted rate for services
beyond plan scope, such as defense of non-moving violations, bail and arrest
bonds, and services for family vehicles.
Law Officers Legal Plan
The Law Officers Legal Plan was designed in 1991 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 21 states. The Law Officers Legal
Plan offers the basic plan benefits of Titles I, III, IV and V. Title II is
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 attorney 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 is 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 Title III, 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, 1998, 1997 and 1996, the Law Officers Legal Plan
accounted for approximately 2.4%, 2.2% and 2.4%, respectively, of the Company's
Membership premiums.
Business Owners' Legal Solutions Plan
The Business Owners' Legal Solutions Plan was developed during 1995 and
test marketed in selected geographical areas and more widely marketed beginning
in 1996 at a monthly rate of $69.00. During 1997, the coverage offered pursuant
to this plan was expanded to include trial defense benefits and membership in
the Fran Tarkenton Small Business NETwork(TM) ("FTSBN"). Through the FTSBN,
members may receive products, services and information from a group of affinity
partners, including certificates valued at over $2,000 in free and discounted
services from such affinity partners. 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 26 states and
represented approximately 2.8%, 2.1% and 2.4% of the Company's Membership
premiums during 1998, 1997 and 1996, respectively.
Provider Attorneys
The Company currently markets Memberships on a closed panel basis.
Closed panel Memberships allow members to access legal services through a
network of independent attorneys under contract with the Company generally
referred to as "provider attorneys." Provider attorneys are paid a fixed fee on
a per capita basis to render services to plan members residing within the state
in which the provider attorney is licensed to practice. Because the fixed fee
payments by the Company to provider attorneys in connection with closed panel
Memberships do not vary based on the type and amount of benefits utilized by the
member, the closed panel Memberships provide significant advantages to the
Company in managing claims risk. Prior to 1987, the Company sold Memberships on
an open panel basis. Open panel Memberships allow members to locate their own
attorney to provide legal services available under the Membership. Members'
attorneys are reimbursed for services rendered according to a payment schedule
commonly termed "usual, reasonable, and customary" relevant to the average cost
of legal services in their area. At December 31, 1998, closed panel Memberships
comprised approximately 94% of the Company's active Memberships while open panel
Memberships accounted for the remainder.
Provider attorney firms are selected to serve closed panel plan members
based on a number of factors, including recommendations from provider attorneys
and other attorneys in the area in which the candidate provider attorney 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 attorneys within the firm, on-site
evaluations by Company management, and interviews with attorneys 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.
Each member of the provider attorney firm rendering services must have
at least two years of experience as an attorney, unless the Company waives this
requirement due to special circumstances such as instances when the attorney
demonstrates significant legal experience acquired in an academic, judicial or
similar capacity other than as an attorney.
Agreements with provider attorney 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
attorney-client relationship, and (e) provide for periodic review of services
provided. 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 attorneys are precluded from contracting with other prepaid legal
service companies without Company approval. Provider attorneys receive a fixed
monthly payment for each closed plan member who are residents in the service
area and are responsible for providing the Membership benefits without
additional remuneration. If a closed panel Membership provider attorney delivers
legal services to an open panel member, the attorney is reimbursed for services
rendered according to the open panel Membership.
The Company has had occasional disputes with provider attorneys, some
of which have resulted in litigation. The toll-free telephone lines utilized and
paid for by the Provider attorneys 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 attorneys are generally
good. At the end of 1998, the Company had 36 provider attorney firms compared to
35 provider attorney firms at the end of 1997 and 30 at the end of 1996. During
the last three years, the Company's relationships with a total of three provider
attorney firms were terminated by the Company or the provider attorney firm for
reasons other than the lack of a sufficient number of members in the geographic
area to support the use of the provider attorney firm.
The Company's agreements with provider attorney firms require the
provider attorney firms to indemnify the Company against liabilities resulting
from legal services rendered by the provider attorney firm.
Marketing
Multi-Level Marketing
The Company markets Memberships through a multi-level marketing program
which encourages individuals to sell Memberships and allows individuals to
recruit and develop their own sales organizations. Commissions are paid only
when a Membership is sold and are not based solely on recruitment. When a
Membership is sold, commissions are paid to the associate making the sale, and
to other associates (often as many as 10 others) who are in the line of
associates who directly or indirectly recruited the selling associate. Each
sales associate is responsible for monitoring the progress and sales practices
of the associates recruited by him or her. 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.
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 76% of the Company's Memberships in force at December 31, 1998, 1997
and 1996. Although other means of payment are available, approximately 56% of
premiums on Memberships purchased by individuals or families are paid on a
monthly basis by means of automatic bank draft.
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
24% of total Memberships in force at December 31, 1998, 1997 and 1996. 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 1998, 1997 or 1996.
Sales associates under the Company's multi-level marketing system are
generally engaged as independent contractors and are provided with training
guides and are given the opportunity to participate in Company training
programs. Sales associates are required to complete a specified training program
prior to marketing the Company's Memberships to employee groups. All advertising
and solicitation materials used by sales associates must be approved by the
Company prior to use. A substantial number of the Company's sales associates
market the Company's Memberships on a part-time basis only. At December 31,
1998, the Company had 159,268 "active" sales associates compared to 123,470 and
110,350 "active" sales associates at December 31, 1997 and 1996, respectively. A
sales associate is considered to be "active" if he or she has originated at
least three new Memberships per quarter or if he or she retains a personal
Membership. During 1998, the Company had 51,026 sales associates who sold at
least one Membership, of which 34,522 (68%) made first time sales, compared to
37,404 and 32,290 sales associates producing at least one Membership sale in
1997 and 1996, respectively, of which 25,909 (69%) and 24,715 (77%),
respectively, made first time sales.
As part of the TPN merger, the Company made certain special offers to
the existing sales force of TPN to encourage them to become part of the
Company's marketing effort. Active TPN associates attending the convention at
the time of the merger announcement and participating in an auto draft program
to have their accounts drafted for $50 per month for three months were allowed
to participate in the Company's Fast Start program without any additional cost
for the first 30 days. Active TPN associates not present at the time of the
merger announcement but participating in the drafting procedure were able to
participate in the training program for $25 if done within the first 30 days
after the merger. Active TPN associates participating in the auto draft program
that did not attend the Fast Start program within the first 30 days were charged
$59 to attend the training provided they do so prior to December 31, 1998.
Inactive associates, associates not participating in the auto draft program or
not paying the required fee by year end were charged the standard fee of $249.
During the first 30 days, approximately 12,000 former TPN distributors became
sales associates for the Company and began to market Memberships.
The Company derives revenues from services provided to its multi-level
marketing sales force, principally from a one-time enrollment fee of $65 from
each new sales associate and the sale of marketing supplies and promotional
materials to associates. In January 1997, the Company implemented a new self
funded 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 positive impact of the program is reflected in the increase
in new Memberships written and new sales associates recruited per successful
Fast Start associate. Associates successfully completing Fast Start during 1998
produced 3.4 times more new Memberships and recruited 2.7 times more new sales
associates than non-Fast Start qualified associates. 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 one new sales associate within 15 days of the
associate's Fast Start training advance through the various commission levels at
a faster rate. The program requires a one-time training fee of $184 per new
associate, or a total of $249 including the one time enrollment fee of $65
described above, and upon successful completion of the program provides for the
payment of certain training bonuses and covers the additional training materials
used in the program. Amounts collected from sales associates are intended
primarily to offset the Company's direct and indirect costs incurred in
recruiting, monitoring and providing materials to sales associates and are not
intended to generate material profits from such activities.
During July 1996, the Company promoted 14 of its field leaders to the
position of Regional Vice President ("RVP") and has since removed and added RVPs
based on their performance. At December 31, 1998, there were 26 RVPs in place.
Each RVP is responsible for associate activity in a given geographic region and
has 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.
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 the Travelers Group, 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 premiums during 1998. Additionally, on
October 6, 1998, the Company announced a marketing alliance designed to allow
the 160,000 agents who represent Carmel, Indiana-based Conseco's insurance
companies to offer the Company's legal plans to their customers. It is expected
that Conseco will focus primarily on their existing group accounts. This
arrangement did not result in any Membership sales during 1998.
The premium 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.
Product and satellite subscription sales
Prior to the merger, TPN had developed and derived most of their
revenues from their "Global Mall" collection of personal and home care products,
jewelry, books, audiocassettes and videotapes focusing on personal achievement.
Personal achievement and motivational speakers and coaches who became faculty
members of TPN made available their existing products as well as developed new
TPN content specific products. Other products and services sold by TPN include
satellite television subscriptions for the PRIMESTAR(R) digital satellite
network, Internet access and web sites, long distance and travel services. These
services were provided by various business partners that compensated TPN and its
distributors on a commission basis. Subsequent to the merger, the Company
evaluated the various products and services offered and has significantly
reduced the number of such goods and services that will continue to be offered.
The Company has identified approximately 25 core products that historically have
generated the majority of TPN's product sales. These core products, together
with the line of personal development products offered and developed by TPN
faculty members, will continue to be offered to the Company's sales associates.
The Company is focused on continuing and increasing the number of digital
satellite subscriptions sold in order to increase the number of SUCCESS CHANNEL
viewers and thereby increase the value of this communications platform.
Operations
The Company's corporate operations involve Membership application
processing, member-related customer service, various associate-related services
including commission payments, receipt of premiums, related general ledger
accounting, and managing and processing benefit claims.
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 attorneys,
calculates average amount of claims incurred, processed and paid by benefit
category, 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.
Additionally, as a result of the TPN merger, the Company has moved all former
TPN operations to its headquarters and consolidated such activities within its
existing departments with the exception of the production staff of approximately
eight people and related equipment. The production staff is responsible in part
for the development of new audio and video sales materials as well as the
continued development and day-to-day operation of the SUCCESS CHANNEL.
Quality Control
The Company systematically monitors the delivery of services provided
by provider attorneys to members through periodic member surveys and review of
member complaints. Additionally, approximately 85% of members are represented by
provider attorneys who are connected via high-speed digital links to the
Company's management information systems, providing additional real time
monitoring capability. Problems discovered in connection with member surveys or
complaints are evaluated to determine remedial actions which the Company might
recommend to provider attorneys and in the most extreme cases may result in the
termination of a provider attorney. The Company meets with provider attorneys
frequently to encourage dialogue and information sharing relating to the timely
and effective delivery of services to members and requires provider attorneys
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.
The Company has an extensive database of attorneys who have provided
services to its members. Attorneys with whom members have experienced service
problems are not listed on the Company's referral list for use by members when a
designated provider attorney is not available.
The Company also closely monitors the performance of its home office
personnel, especially those who have telephone contact with members or sales
associates. The Company records home office employee telephone calls with its
members and sales associates to assure that Company policies are being followed
and to gather data about recurring problems which may be avoided through
modifications in policies.
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 1997
estimates by NRC, an estimated 21% 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 79% of such market is served
primarily by the Company and five other principal competitors: Hyatt Legal
Services, ARAG Group (formerly Midwest Legal Services), LawPhone, National Legal
Plan and the Signature Group.
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 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. While some states regulate
legal expense plans as insurance or specialized legal expense products, others
regulate them as services.
As of December 31, 1998, the Company or one of its subsidiaries was
marketing new Memberships in 31 states that require no special licensing or
regulatory compliance. The Company's subsidiaries serve as operating companies
in 15 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, 1998,
34% were written in jurisdictions that subject the Company or one of its
subsidiaries to insurance or specialized legal expense plan regulation.
At December 31, 1998, UFL was licensed to sell life and accident and
health insurance policies in New Mexico, Nebraska, Oklahoma and Texas. These
policies are sold by independent licensed agents through existing general agency
relationships in these states. In the near term, the Company expects these
policies will continue to be sold by UFL's agent network rather than the
Company's sales associates. Prior to selling these insurance policies on behalf
of UFL, existing associates, to the extent necessary, would be required to
obtain the necessary licenses and approvals from these states prior to any sales
activity.
In states with no special licensing or regulatory requirements, the
Company commences operations only when advised by the appropriate regulatory
authority that proposed operations do not constitute conduct of the business of
insurance. There is no assurance that Memberships will be exempt from insurance
regulation even in states 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. Dividends paid by PPLCI are restricted under
Oklahoma law to available surplus funds derived from realized net profits.
The Company is required to register and file reports with the Oklahoma
Insurance Commissioner as a member of a holding company system under the
Oklahoma Insurance Holding Company System Regulatory Act. Transactions between
PPLCI, UFL and the Company or any other subsidiary must be at arms-length with
consideration for the adequacy of PPLCI's or UFL's surplus, and must have prior
approval of the Oklahoma Insurance Commissioner. Payment of any dividend by
PPLCI or UFL to the Company from its statutory surplus or net gain from
operations requires approval of the Oklahoma Insurance Commissioner. 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, the Company anticipates enactment
of additional legislation 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 attempt 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 an attorney 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 attorney's professional judgment. The ABA Code prohibits
attorney participation in closed panel legal service programs in certain
circumstances. The Company's agreements with provider attorney firms comply with
both the Model Rules and the ABA Code. The Company relies on the attorneys
serving as the designated attorneys 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 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, 1998, the Company and its subsidiaries employed 480
individuals on a full-time basis, exclusive of independent agents and sales
associates. None of the Company's employees are represented by a union.
Management considers its employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The executive and administrative offices of the Company and its
subsidiaries are located at 321 East Main Street, Ada, Oklahoma. These offices,
containing approximately 40,000 square feet of office space, are owned by the
Company. Additionally, during 1998, the Company completed construction of its
Customer Care facility next to the Company's material distribution center. Both
buildings are located approximately five miles from the Company's administrative
offices. This new Customer Care structure contains approximately 10,000 square
feet of office and call center space and is adjacent to the material
distribution center constructed during 1997 containing 8,600 square feet of
inventory, package assembly and shipping space. While the Company currently
fully utilizes these existing facilities, management believes that it will have
no difficulty in securing additional facilities in close proximity to its office
building if necessary for future expansion.
The executive and administrative offices of Universal Fidelity Life
Insurance Company ("UFL"), a wholly owned subsidiary, are located at 2211 North
Highway 81 in Duncan, Oklahoma. These offices, containing approximately 20,000
square feet of office space, were constructed in 1986 and are owned by UFL.
Additionally, UFL completed construction during 1993 on a separate 2,400 square
foot climate-controlled building used primarily for printing activities and
equipment storage. The Company currently fully utilizes these facilities but
owns several acres of additional real estate at this location that could be used
for future business expansion.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is a defendant in an action brought by Aetna Life Insurance
Company ("Aetna") against the Company and Primedia Workplace Learning, Inc., and
Primedia, Inc. in the District Court of Dallas County, which was filed on
February 9, 1999. Aetna alleges that the Company's predecessor in interest, TPN,
Inc., breached an agreement to lease certain premises in Dallas, Texas and is
liable to Aetna for damages for such breach. In the alternative, Aetna alleges
that the Primedia defendants are liable for damages to Aetna for failure to
properly vacate the leased premises under the terms of an indemnity agreement in
Aetna's favor. Aetna seeks damages for unpaid rent and other charges from
November 1, 1998 until the earlier of the releasing of the premises involved or
the expiration of the five year term of the lease, at the rate of approximately
$35,000 per month, plus pre- and post-judgment interest, attorneys fees and
costs. The Company intends to vigorously defend this action and believes the
Primedia defendants are liable under the terms of their indemnity agreement.
Therefore, the Company does not expect the action to have a material adverse
effect on the Company's financial condition, liquidity or results of operations.
The Company is a named defendant in certain other lawsuits arising in
the ordinary course of the Company's business. While the outcome of these
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on the Company's financial condition,
liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
Market Price of and Dividends on the Common Stock
At February 25, 1999, there were 5,209 holders of record (including
brokerage firms and other nominees) of the Company's common stock which is
listed on the American 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 American Stock Exchange.
High Low
1999:
1st Quarter (through February 25).................... $ 39.25 $ 27.50
1998:
4th Quarter.......................................... $ 34.75 $ 13.50
3rd Quarter.......................................... 40.50 21.50
2nd Quarter.......................................... 41.31 30.00
1st Quarter.......................................... 44.19 28.50
1997:
4th Quarter.......................................... $ 34.63 $ 25.50
3rd Quarter.......................................... 30.31 21.13
2nd Quarter.......................................... 24.63 14.00
1st Quarter.......................................... 19.13 14.50
The Company has never declared a cash dividend on its common stock. For
the foreseeable future, it is anticipated that any earnings that may be
generated from the operations of the Company will be used to finance the
Company's growth 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. PPLSIF is similarly restricted pursuant to the insurance laws of
Florida. At December 31, 1998, neither PPLCI nor PPLSIF had funds available for
payment of dividends without the prior approval of the respective insurance
commissioners.
Recent Sales of Unregistered Securities
In connection with the Company's acquisition of TPN described elsewhere
herein, the Company issued to the former security holders of TPN 999,992 shares
of the Company's common stock (after adjustment for fractional shares) in
exchange for all of the outstanding stock and certain warrants of TPN. Such
shares of common stock of the Company were issued in reliance upon the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended. Among the facts supporting the Company's reliance on such exemption are
that the former security holders of TPN consisted of a relatively small number
of holders, that the security holders were either accredited investors or were,
alone or with their advisors, capable of evaluating the merits and risks of the
transaction, that the security holders acquired the common stock for their own
accounts and not with a view toward distribution and that the certificates
evidencing the common stock contain appropriate restrictive legends.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following table sets forth selected financial and statistical data
for the Company as of the dates and for the periods indicated. As a result of
the 1998 fourth quarter acquisition of TPN, Inc. ("TPN") that was accounted for
as a pooling of interests, the 1995 through 1998 periods have been restated to
include the operating results of TPN, which was formed in August 1994 but did
not commence significant operations until 1995. The 1998 balance sheet data
contained herein reflects the December 30, 1998 acquisition of Universal
Fidelity Life Insurance Company ("UFL") that was accounted for as a purchase
transaction and accordingly, no operating results of UFL are included in the
income statement data. Certain reclassifications have been made to conform to
current year presentation. This information is not necessarily indicative of the
Company's future performance. The following information should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere herein.
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Income Statement Data: (In thousands, except ratio, per share and Membership amounts)
Revenues:
Membership premiums.......................................... $110,003 $ 76,688 $ 50,582 $ 31,290 $ 22,852
Product sales................................................ 27,779 41,070 26,425 22,214 -
Associate services........................................... 17,255 12,143 5,646 3,183 912
Interest income.............................................. 2,576 1,689 1,303 1,344 466
Other........................................................ 2,840 1,814 1,678 1,352 379
-------- -------- -------- -------- --------
Total revenues............................................. 160,453 133,404 85,634 59,383 24,609
-------- -------- -------- -------- --------
Costs and expenses:
Membership benefits.......................................... 36,103 25,132 16,871 10,574 7,990
Product costs................................................ 17,967 27,017 20,568 17,102 -
Commissions.................................................. 24,261 16,717 11,476 7,708 6,788
General and administrative expenses.......................... 21,902 20,311 15,150 13,194 4,260
Associate services and direct marketing...................... 14,738 11,431 4,544 2,573 1,539
Depreciation................................................. 2,944 2,026 533 477 410
Premium taxes............................................... 1,206 866 372 242 226
-------- -------- -------- -------- --------
Total costs and expenses................................... 119,121 103,500 69,514 51,870 21,213
-------- -------- -------- -------- --------
Income before income taxes..................................... 41,332 29,904 16,120 7,513 3,396
Provision (benefit) for income taxes........................... 11,122 12,381 5,857 2,526 (319)
-------- -------- -------- -------- --------
Net income..................................................... 30,210 17,523 10,263 4,987 3,715
Less dividends on preferred shares............................. 10 13 15 125 465
-------- -------- -------- -------- --------
Net income applicable to common stockholders................... $ 30,200 $ 17,510 $ 10,248 $ 4,862 $ 3,250
======== ======== ======== ======== ========
Basic earnings per common share................................ $ 1.29 $ .76 $ .46 $ .24 $ .28
Diluted earnings per common share.............................. 1.26 .74 .44 .22 .24
Weighted average number of common shares outstanding - basic... 23,456 23,127 22,332 19,947 11,603
Weighted average number of common shares outstanding - diluted. 23,906 23,575 23,319 22,408 15,566
====================================================================
Membership Benefit Cost and Statistical Data:
Loss ratio (1)................................................. 32.8% 32.8% 33.4% 33.8% 35.0%
Product cost ratio (1)......................................... 64.7% 65.8% 77.8% 77.0% -
Expense ratio (1).............................................. 34.4% 32.2% 35.1% 39.5% 47.9%
New Memberships sold........................................... 391,827 283,723 194,483 109,922 45,893
Period end Memberships in force................................ 603,017 425,381 294,151 203,535 144,438
Cash Flow Data:
Net cash provided by (used in) operating activities............ $ 9,895 $ 14,472 $ (911) $ 998 $ 3,040
Net cash provided by (used in) investing activities............ (31,427) (6,254) (2,855) 2,968 254
Net cash provided by (used in) financing activities............ 2,414 3,464 4,973 (7,895) 3,802
Balance Sheet Data:
Total assets................................................... $167,903 $105,716 $ 66,810 $ 40,118 $ 18,154
Total liabilities.............................................. 66,599 36,246 21,654 12,233 2,347
Stockholders' equity ......................................... 101,304 69,470 45,156 27,885 15,807
- -----------
(1) The loss ratio represents Membership benefit costs as a percentage of
Membership premiums. The product cost ratio represents product costs as a
percentage of product sales. The expense ratio represents the total of
commissions, general and administrative expenses and premium taxes as a
percentage of Membership premiums and 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
Acquisitions
The consolidated financial statements and related discussions thereof
give retroactive effect to the merger with TPN, Inc. d.b.a. The People's Network
("TPN"), which has been 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. The
consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for the years ended December 31, 1998, 1997
and 1996 include the results of operations and cash flows for TPN. The period
from inception through December 31, 1995 is included in TPN's 1995 financial
statements. The consolidated balance sheets as of December 31, 1998 and 1997
include the financial position of TPN on such dates. Additionally, the 1998
consolidated balance sheet data reflects the December 30, 1998 acquisition of
Universal Fidelity Life Insurance Company ("UFL") that was accounted for as a
purchase transaction and accordingly, none of the operating results of UFL are
included in any periods. (See Notes to Consolidated Financial Statements-Note 2
for additional information regarding these acquisitions).
Of the shares of Company common stock issued in the TPN merger, 125,000
shares were placed in escrow pending the resolution of certain possible and
specified contingencies, including contingencies relating to pending or
threatened litigation against TPN at the time of the Merger.
Membership Premiums and Membership Benefit Costs
The Company's principal revenues are derived from Membership premiums,
most of which are collected on a monthly basis. Memberships are generally
guaranteed renewable and non-cancelable except for fraud, non-payment of
Membership premiums or upon written request by the member.
Membership benefit costs vary depending on the type of Membership.
Closed panel plans provide the Membership benefits through a designated provider
attorney with whom the Company has arranged for the services to be provided in a
particular geographic area. Provider attorneys receive a fixed monthly payment
for each member in their service area and are responsible for providing the
Membership benefits without additional remuneration. The fixed cost aspect of
closed panel plans provides significant advantages to the Company in managing
its claims risk. Under closed panel plans, the Company has the ability to more
effectively monitor the quality of legal services provided and, due to the
volume of claims that may be directed to particular provider attorney law firms,
has access to larger, more diversified law firms. At December 31, 1998,
approximately 94% of the Company's Memberships were closed panel plans compared
to 91% at December 31, 1997.
Membership benefit costs relating to open panel Memberships, which
constituted approximately 6% of Memberships in force at December 31, 1998, 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.
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 or sell products or services provided by
such business partners and in return, the Company receives commissions on the
sales of such goods and services and compensates the selling associates with a
commission.
Revenues from these transactions are included in Product sales in the Statement
of Income.
Product costs consist primarily of the commissions paid to selling
associates together with the actual cost paid to acquire such goods and
services. Costs to purchase products and deliver services are included in
Product costs in the Statement of Income
Commissions
Beginning with new Memberships written after March 1, 1995, the Company
implemented a level commission schedule which results in the Company incurring
commission expense related to the sale of its legal expense plans on a basis
more consistent with the collection of the premiums generated by the sale of
such Memberships. Prior to March 1, 1995, the Company had incurred much higher
commissions (approximately 70%) during the first year of the Membership with
substantially lower commissions (approximately 16%) in all subsequent years. The
level commission structure results in the Company incurring commissions at the
rate of approximately 25% per year for all Membership years.
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 new training program that
was implemented at the same time. For all sales beginning with the fourth
Membership or all sales made by an associate successfully completing the new
training program, the Company currently advances commissions at the time of sale
of a new Membership. 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 11, the overall initial advance may be paid to
more than twenty different individuals, each at a different level within the
overall commission structure. This commission advance immediately increases an
associate's account with the Company and represents prepaid commissions on
active Memberships.
Should a Membership lapse before the advances have been recovered for
each commission level, the Company immediately generates a "charge-back" to the
applicable sales associate to recapture 50% of any unearned advance. This
charge-back is immediately deducted from any future advances that would
otherwise be payable to the associate for additional new Memberships. The
Company historically has been able to immediately recover the majority of such
charge-backs. Any remaining unrecovered advance on a Membership that has lapsed
represents a receivable from the associate and is reflected as commission
advances and is categorized as current or non-current based on the expected
recovery period. Additionally, even though a commission advance may have been
fully recovered on a particular Membership, no additional commission earnings
from any Membership will be paid to an associate until all previous advances on
all Memberships, both active and lapsed, have been recovered. During 1998, 22%
of all associates submitting new Memberships accounted for 75% of all such new
Memberships produced thereby further enhancing the recovery of commission
advances.
The Company's commission advance policy exposes the Company to the risk
of uncollectible commission advances particularly for associates who do not
receive commissions on a large number of Memberships or who experience below
average Membership persistency. The Company closely monitors such commission
advances to ensure maximum recoverability and maintains a recoverability reserve
which at December 31, 1998 and 1997, was $4.0 million and $3.7 million,
respectively.
Associates also receive compensation when associates sponsored by them
or other associates that they have sponsored in their organization successfully
complete the new training program implemented by the Company on January 4, 1997.
In order to successfully qualify, the new associate going through the training
program must produce 3 new Memberships and recruit 1 new associate within 15
days of receiving the training.
TPN distributors receive commissions from the sale of personal and home
care products, personal development products, communication services and
satellite subscription sales. These commissions are paid to the distributor
actually making the sale as well as other distributors in his organization.
Commissions on goods and services are not advanced and have averaged
approximately 32% of the product sales price. These commissions are paid at the
time of sale and subject to recovery only in the event of returned goods or
refunds.
Membership Persistency
One of the major factors affecting the Company's profitability and cash
flow is Membership persistency, which represents the ability of the Company to
retain a Membership, and therefore receive premiums, once it has been written.
The Company monitors its overall Membership persistency rate, as well as the
persistency rates with respect to Memberships sold by individual associates and
agents and persistency rates with respect to Membership sales by geographic
region and payment method. The Company's Membership persistency rate measures
the number of Memberships in force at the end of a year as a percentage of the
total of (i) Memberships in force at the beginning of such year, plus (ii) new
Memberships sold during such year. From 1981 through the year ended December 31,
1998, the Company's annual Membership persistency rates, using the foregoing
method, have averaged approximately 75%. The annual Membership persistency rates
were 73.8%, 73.6% and 73.9% for 1998, 1997 and 1996, 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 be 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 1998 period. The
Company's financial condition and results of operations may be materially
adversely affected if the persistency rates of existing and new Memberships are
materially lower than the Company's historical experience.
Operating Ratios
Three principal operating measures monitored by the Company in addition
to Membership persistency are the loss ratio, product cost ratio and the expense
ratio. The loss ratio represents Membership benefit costs as a percentage of
Membership premiums. The product cost ratio represents product costs as a
percentage of product sales. The expense ratio represents the total of
commissions, general and administrative expenses and premium taxes as a
percentage of Membership premiums and product sales. 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 92% of Membership premiums are collected
on a monthly basis, a significant cash flow deficit is created at the time a
Membership is sold. This deficit is reduced as monthly premiums are remitted and
no additional commissions are paid on the Membership until all previous
commission advances have been fully recovered. 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
At December 31, 1998, the Company had net operating loss carryforwards
("NOLs") for Federal regular and alternative minimum tax purposes of
approximately $3.0 million and $2.6 million, respectively, expiring in 2011 and
2012. In addition, the Company had general business and rehabilitation tax
credit carryforwards of approximately $307,000 expiring primarily in 1999 to
2001, and an alternative minimum tax ("AMT") credit carryforward of $366,000
that does not expire. No valuation allowance has been established for these
deferred tax assets as the Company believes it is more likely than not that the
tax benefits of such deferred tax assets will be realized. The Company generated
taxable income for the year ended December 31, 1998 of $11.5 million and
utilized NOLs originally generated in 1986 through 1995 in their entirety and
$2.3 million of the $2.8 million NOL originally generated in 1996. Tax expense
for 1998 was reduced during the fourth quarter of 1998 through a reduction in a
previously established valuation allowance to reflect this utilization of
deferred tax benefits. Additionally, the Company has NOLs in the amount of $5.7
million representing the NOLs of TPN as of the acquisition date. A valuation
allowance has been established for these NOLs as the Company does not believe it
is more likely than not that the tax benefits of these carryforwards will be
realized due to utilization restrictions imposed by Section 382 discussed below.
The ability of the Company to utilize NOLs and tax credit carryforwards
to reduce future federal income taxes of the Company is subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
One such limitation is contained in Section 382 of the Code which imposes an
annual limitation on the amount of a corporation's taxable income that can be
offset by those carryforwards in the event of a substantial change in ownership
as defined in Section 382 ("Ownership Change"). In general, an Ownership Change
occurs if during a specified three-year period there are capital stock
transactions that result in an aggregate change of more than 50% in the
beneficial ownership of the stock of the Company. However, the Company does not
have control over all possible variables which can affect the Ownership Change
calculation and, accordingly, it is possible that an Ownership Change could
occur in the future. The effect of any such Ownership Change on the Company's
financial condition or results of operations cannot be determined because it is
dependent upon unknown future facts and circumstances at the time of any such
change, including, among others, the amount of the 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 $5.7 million in NOLs is
limited to $978,500 per year.
Associate Services
The Company derives revenues from services provided to its marketing
sales force, principally from a one-time enrollment fee of approximately $65
from each new sales associate and the sale of marketing supplies and promotional
materials to associates on an ongoing basis. 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 one-time
fee of $249 instead of the $65 fee. The increased fee covers the additional
training and materials used in the training program. The Company enrolled 75,737
new sales associates during 1998 compared to 58,121 during 1997 and 69,789
during 1996, resulting in significant increases in associate services revenues
and costs. The Company's direct 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 direct and indirect costs incurred in recruiting, monitoring and
providing materials to sales associates and are not intended to generate
material profits from such activities.
TPN's revenues were primarily comprised of receipts for goods and
services provided by TPN to their 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,
have been discontinued in February 1999.
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, 1998, substantially all of the Company's investments
were in investment grade (rated Baa or higher) fixed-maturity investments,
interest-bearing money market accounts and a collateralized repurchase
agreement. The Company does not hold any investments classified as trading
account assets or derivative financial instruments.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on the Company's fixed-maturity investment
portfolio. It is assumed that the changes occur immediately and uniformly, with
no effect given to any steps that management might take to counteract that
change. The hypothetical changes in market interest rates reflect what could be
deemed best and worst case scenarios. The fair values shown in the following
table are based on contractual maturities. Significant variations in market
interest rates could produce changes in the timing of repayments due to
prepayment options available. The fair value of such instruments could be
affected and, therefore, actual results might differ from those reflected in the
following table:
Estimated fair
value after
Hypothetical change hypothetical
Fair value at in interest rate change in
December 31, 1998 (bp=basis points) interest rate
----------------- ------------------- --------------
(Dollars in thousands)
Fixed-maturity investments (1)............ $35,790 100 bp increase $ 35,142
200 bp increase 33,988
50 bp decrease 36,831
100 bp decrease 37,304
- --------------------
(1) Excluding short-term investments with a fair value of $2.4 million.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31, 1998 would reduce
the estimated fair value of the Company's fixed-maturity investments by
approximately $1.8 million at that date.
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.
Year 2000 Issues
The Company has conducted a comprehensive review of its systems,
including both information technology (e.g. computer databases) and
non-information technology systems (e.g. building utilities) that use date data,
to identify the systems that could be affected by the "Year 2000" issue and has
developed a plan to resolve the issue. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's affected programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
Testing and conversion of system applications commenced during 1993 and
was substantially completed during 1998. Testing of the Company's information
technology systems (as modified for Year 2000 issues) with system dates set
beyond January 1, 2000 successfully occurred in February 1999. Costs incurred
through the end of 1998 have been immaterial and expensed as incurred and the
remaining total cost of the Company's remediation efforts is expected to be less
than $50,000, substantially all of which will be incurred on further testing
during the remainder of 1999. Any additional Year 2000 costs will continue to be
funded out of cash flow from operations. A significant portion of the Company's
Year 2000 remediation plan has been and will continue to be accomplished by the
Company's internal programming staff and while such efforts will continue on
Year 2000 programming, these costs are not likely to be incremental costs to the
Corporation, but rather will represent the redeployment of existing information
technology resources. Although concentration on Year 2000 compliance has delayed
other programming projects, such delays have not had and are not expected to
have a material adverse impact on the Company's financial condition or results
of operations.
The Company is also exposed to the risk that one or more of its vendors
or service providers could experience Year 2000 problems that impact the ability
of such vendor or service provider to provide goods and services. Though this is
not considered as significant a risk with respect to the suppliers of goods, due
to the availability of alternative suppliers, the disruption of certain
services, such as utilities, could, depending upon the extent of the disruption,
have a material adverse impact on the Company's operations. Further, the Company
must rely on other entities such as the Federal Reserve and its member banks
whose Year 2000 readiness efforts it does not control. The Company relies on
such entities for the timely processing of its monthly Automated Clearing House
transactions and credit card transactions. Should these entities fail in their
efforts to become Year 2000 compliant, the Company would immediately convert to
monthly invoices until such time as all necessary entities become Year 2000
compliant. Although such actions would be inconvenient and more costly to
process, it is not expected to materially affect the Company's long term
business outlook. The Company has initiated a comprehensive program to assess
the Year 2000 compliance of its key vendors and service providers in order to
determine the extent to which the Company is vulnerable to such third parties
that fail to remedy their own Year 2000 issues. In this regard, the Company has
initiated formal communications with its significant vendors and financial
institutions to assess their Year 2000 readiness. No material costs related to
Year 2000 compliance efforts by the Company regarding such third parties have
been incurred to date. To date these efforts have not revealed any vendor or
service provider Year 2000 issue that the Company believes would have a material
adverse impact on the Company's operations. However, the Company has no means of
ensuring that its vendors or service providers will be Year 2000 ready, and the
inability of vendors or service providers to complete their Year 2000 resolution
process in a timely fashion could have an adverse impact on the Company's
financial position or results of operations.
The Company presently believes based on its knowledge and
representations of third parties that, with modifications to existing software
and conversion to new software, the Year 2000 issue will not pose significant
operational problems for the Company's computer systems as so modified and
converted. However, if such modifications and conversions are not completed in a
timely fashion, the Year 2000 issue may have a material adverse impact on the
operations of the Company.
Accounting Standard to be Adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") was issued in June
1998. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires the Company recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. The Company will adopt SFAS 133 on January 1, 2000 as required.
This Statement applies to all entities and is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company believes that it
holds no derivative instruments at December 31, 1998.
Results of Operations
Comparison of 1998 to 1997
The Company reported net income applicable to common shares of $30.2
million, or $1.26 per diluted common share, for 1998, up 72% from net income
applicable to common shares of $17.5 million, or $.74 per diluted common share,
for 1997. The increase in the net income applicable to common shares for 1998 is
primarily the result of increases in Membership premiums for 1998 as compared to
1997.
Membership premiums totaled $110.0 million during 1998 compared to
$76.7 million for 1997, an increase of 43%. Membership premiums and their impact
on total revenues in any period are determined directly by the number of active
Memberships in force during any such period. The active Memberships in force are
determined by both the number of new Memberships sold in any period together
with the persistency, or renewal rate, of existing Memberships. New Membership
sales increased 38% during 1998 to 391,827 from 283,723 during 1997. At December
31, 1998, there were 603,017 active Memberships in force compared to 425,381 at
December 31, 1997, an increase of 42%. Additionally, the average annual premium
per Membership has increased from $225 for all Memberships in force at December
31, 1997 to $229 for all Memberships in force at December 31, 1998, a 2%
increase, as a result of a higher portion of active Memberships containing the
additional pre-trial hours benefit at an additional cost to the member together
with increased sales of the Business Owners' Legal Solutions plan.
Product sales declined 32% during 1998 to $27.8 million from $41.1
million in 1997 primarily due to the acquisition of TPN and the resulting
concentration on Membership sales as opposed to the sale of goods and services.
The trend of declining product sales is expected to continue as the array of
goods and services previously available for sale through TPN is dramatically
narrowed and sales efforts are more closely focused on the sale of new
Memberships and the recruitment of new sales associates.
Associate services revenue increased 42% from $12.1 million for 1997 to
$17.3 million during 1998 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 $9.3 million during 1998 compared to $5.7 million during 1997. The
combination classroom and field training program, titled Fast Start to Success
("Fast Start"), is aimed at increasing the level of new Membership sales per
associate. The positive impact of the program is reflected in the increase in
new Memberships written and new sales associates recruited per Fast Start
associate. Fast Start requires a training fee of $184 per new associate and upon
successful completion of the program provides for the payment of certain
training bonuses. In order to be deemed successful for Fast Start purposes, the
new associate must write three new Memberships and recruit one new sales
associate within 15 days of the associate's Fast Start training. The $9.3
million and $5.7 million for 1998 and 1997, respectively, in training fees was
comprised of $184 from each of approximately 50,622 new sales associates who
elected to participate in Fast Start in 1998 compared to 28,900 that paid the
$184 and 14,500 existing associates that paid $25 during 1997. New associates
enrolled during 1998 were 75,737 compared to 58,121 for 1997, an increase of
30%. While the number of new associates increased during 1998, 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 bonuses paid, providing associate services and
other direct marketing expenses.
Interest income for 1998 increased 53% to $2.6 million from $1.7
million for 1997. Interest income increased as a result of increases in the
average investments outstanding. At December 31, 1998 the Company reported $50.1
million in cash and investments compared to $35.4 million at December 31, 1997.
Primarily as a result of the increase in Membership premiums, total
revenues increased to $160.5 million for 1998 from $133.4 million during 1997,
an increase of 20%.
Membership benefits totaled $36.1 million for 1998 compared to $25.1
million for 1997, and represented 33% of Membership premiums for both 1998 and
1997. This loss ratio (Membership benefits as a percentage of Membership
premiums) should remain near 35% as the portion of active Memberships that
provide for a capitated benefit continues to increase.
Product costs declined more than $9.0 million, or 33%, during 1998 to
$18.0 million from $27.0 million for 1997 in conjunction with the 32% decline in
product sales. Product costs as a percentage of product sales were 65% for 1998
compared to 66% during 1997. Product costs are expected to decline
proportionately as product sales decline as more emphasis is placed on
Membership sales rather than the sale of goods and services.
Commission expense was $24.3 million for 1998 compared to $16.7 million
for 1997, and represented 22% of Membership premiums for 1998 and 1997.
Commission expense, as a percentage of Membership premiums, should remain at or
near 25% of Membership premiums in future years.
General and administrative expenses during 1998 and 1997 were $21.9
million and $20.3 million, respectively, and represented 14% and 15% of total
revenues for such years. Although the total amount of general and administrative
expenses increased approximately $1.6 million during 1998, these expenses, as a
percent of total revenues, decreased 1%. This trend of gradual increases in the
total dollar amount of these expenses but decreases when expressed as a
percentage of total revenues should continue as a result of certain economies of
scale pertaining to the Company's operating leverage.
Associate services and direct marketing expenses increased to $14.7
million for 1998 from $11.4 million for 1997 primarily as a result of Fast Start
training bonuses paid of approximately $6.3 million during 1998 compared to $4.4
million in 1997. Additional costs of supplies due to increased purchases by
associates and higher staffing requirements for associate related service
departments also contributed to the increase. These expenses also include the
costs of providing associate services and marketing costs other than commissions
that are directly associated with new Membership sales.
Due to continuing annual property and equipment additions, depreciation
increased from $2.0 million for 1997 to $2.9 million for 1998.
The Company's expense ratio, which represents commissions, general and
administrative expenses and premium taxes as a percentage of Membership premiums
and product sales, was 34% for 1998 compared to 32% for 1997. The product cost
ratio, which represents product costs as a percentage of product sales, was 65%
during 1998 compared to 66% for 1997. The loss ratio, product cost ratio and the
expense ratio do not measure total profitability because they do not take into
account all revenues and expenses.
Provision for income taxes decreased during 1998 to $11.1 million
compared to $12.4 million for 1997, representing 26.9% and 41.4% of income
before income taxes for 1998 and 1997, 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 deferred tax benefits. Tax expense for 1997 exceeded established
statutory rates due to TPN's establishment of a $1.9 million valuation allowance
pertaining to previously recorded deferred tax assets.
Dividends paid on outstanding preferred stock decreased to $9,800 for
1998 from $13,000 during 1997 and is attributable to the conversion of shares of
$3.00 Cumulative Convertible Preferred Stock into common stock.
Comparison of 1997 to 1996
The Company reported net income applicable to common shares of $17.5
million, or $.74 per diluted common share, for 1997, up 71% from net income
applicable to common shares of $10.2 million, or $.44 per diluted common share,
for 1996. The increase in the net income applicable to common shares for 1997 is
primarily the result of increases in all revenue categories for 1997 as compared
to 1996.
Membership premiums totaled $76.7 million during 1997 compared to $50.6
million for 1996, an increase of 52%. Membership premiums and their impact on
total revenues in any period are determined directly by the number of active
Memberships in force during any such period. The active Memberships in force are
determined by both the number of new Memberships sold in any period together
with the persistency, or renewal rate, of existing Memberships. New Membership
sales increased 46% during 1997 to 283,723 from 194,483 during 1996. At December
31, 1997, there were 425,381 active Memberships in force compared to 294,151 at
December 31, 1996. Additionally, the average annual premium per Membership has
increased from $216 for all Memberships in force at December 31, 1996 to $225
for all Memberships in force at December 31, 1997, a 4.0% increase, as a result
of a higher portion of active Memberships containing the additional pre-trial
hours benefit at an additional cost to the member together with increased sales
of the Business Owners' Legal Solutions Plan.
Product sales increased 55% during 1997 to $41.1 million from $26.4
million in 1996 as the number of sales associates selling goods and services
increased and the number of products available for sale increased. The sale of
new satellite television subscriptions also increased.
Associate services revenue increased 115% from $5.6 million for 1996 to
$12.1 million during 1997 primarily as a result of Fast Start that resulted in
the Company receiving training fees of approximately $5.7 million during 1997.
The $5.7 million in training fees was comprised of $184 from each of
approximately 28,900 new sales associates who elected to participate in Fast
Start and training fees of $25 from each of approximately 14,500 existing
associates who participated in the program. New associates enrolled during 1997
were 58,121 compared to 69,789 for 1996, a decrease of 17%. The Company believes
that the decline in new associate enrollment during 1997 is primarily
attributable to the increased costs associated with the Fast Start program.
However, while the number of new associates decreased during 1997, the number of
new Memberships sold, at least partially as a result of the Fast Start program,
increased significantly. Future revenues from associate services will depend
primarily on the number of new associates enrolled and the number who choose to
participate in the Company's training program, but the Company expects that such
revenues will continue to be largely offset by the direct and indirect cost to
the Company of training bonuses paid, providing associate services and other
direct marketing expenses.
Interest income for 1997 increased 30% to $1.7 million from $1.3
million for 1996. Interest income increased as a result of increases in the
average investments outstanding. At December 31, 1997 the Company reported $35.4
million in cash and investments compared to $21.1 million at December 31, 1996.
Primarily as a result of the increase in Membership premiums, total
revenues increased to $133.4 million for 1997 from $85.6 million during 1996, an
increase of 56%.
Membership benefits totaled $25.1 million for 1997 compared to $16.9
million for 1996, and represented 33% of Membership premiums for both 1997 and
1996. This loss ratio (Membership benefits as a percentage of Membership
premiums) should remain near 35% as the portion of active Memberships that
provide for a capitated benefit continues to increase.
Product costs increased more than $6.4 million, or 31%, during 1997 to
$27.0 million from $20.6 million for 1996 in conjunction with the 55% increase
in product sales. Product costs as a percentage of product sales were 66% for
1997 compared to 78% during 1996.
Commission expense was $16.7 million for 1997 compared to $11.5 million
for 1996, and represented 22% and 23% of Membership premiums for 1997 and 1996,
respectively. Commission expense, as a percentage of Membership premiums, should
remain at or near 25% of Membership premiums in future years.
General and administrative expenses during 1997 and 1996 were $20.3
million and $15.2 million, respectively, and represented 15% and 18% of total
revenues for such years. Although the total amount of general and administrative
expenses increased approximately $5.2 million during 1997, these expenses, as a
percent of total revenues, decreased 3%. This trend of gradual increases in the
total dollar amount of these expenses but decreases when expressed as a
percentage of total revenues should continue as a result of certain economies of
scale pertaining to the Company's operating leverage.
Associate services and direct marketing expenses increased to $11.4
million for 1997 from $4.5 million for 1996 primarily as a result of
approximately $4.4 million in Fast Start training bonuses paid, additional costs
of supplies due to increased purchases by associates and higher staffing
requirements. These expenses also include the costs of providing associate
services and marketing costs other than commissions that are directly associated
with new Membership sales.
Due to property and equipment additions during 1997 of $3.6 million,
depreciation increased from $533,000 for 1996 to $2.0 million for 1997.
The Company's expense ratio, which represents commissions, general and
administrative expenses and premium taxes as a percentage of Membership premiums
and product sales, was 32% for 1997 compared to 35% for 1996. The product cost
ratio, which represents product costs as a percentage of product sales, was 66%
during 1997 compared to 78% for 1996. The loss ratio, product cost ratio and the
expense ratio do not measure total profitability because they do not take into
account all revenues and expenses.
Provision for income taxes increased significantly during 1997 to $12.4
million compared to $5.9 million for 1996, which represented an increase from
36.3% of income before income taxes during 1996 to 41.4% of income before income
taxes for 1997. In 1997 TPN established a valuation allowance of $1.9 million
for the portion of its deferred tax asset that TPN believed more likely than not
would not be realized because it was unlikely that it would generate sufficient
taxable income to realize the benefits from its deferred tax benefits.
Dividends paid on outstanding preferred stock decreased to $13,000 for
1997 from $15,000 during 1996 and is attributable to the conversion of shares of
$3.00 Cumulative Convertible Preferred Stock into common stock.
Liquidity and Capital Resources
General
Consolidated net cash provided by operating activities was $9.9 million
and $14.5 million for 1998 and 1997, respectively, compared to net cash used in
operating activities of $911,000 for 1996. Cash provided by operating activities
decreased $4.6 million during 1998 compared to 1997 primarily due to the $12.7
million increase in net income and an increase of $1.3 million in prepaid
product commissions which was offset by the $11.1 million decrease in accounts
payable and accrued expenses, the $5.2 million increase in commission advances,
the $1.2 million decrease in the provision for deferred income taxes and $1.6
million decrease in deferred revenue.
Due to the UFL acquisition previously discussed and the resulting
requirement for $20.7 million as cash consideration to Pioneer, the Company
liquidated a substantial portion of its investments previously classified as
held-to-maturity. Although the Company previously had demonstrated its intent
and capability to hold such investments until their scheduled maturities, the
conversion of such investments to cash as part of the UFL transaction prior to
their scheduled maturities resulted in all remaining investments of the Company,
including the $25 million investment portfolio of UFL, being classified as
available-for-sale investments. In addition to capital expenditures of $4.9
million during 1998, the Company has continued to move larger portions of its
cash and cash equivalents into longer-term investments resulting in net cash
used in investing activities of $31.4 million.
Net cash provided by financing activities decreased $1.1 million during
1998 to $2.4 million from $3.5 million for 1997 as a result of $1.5 million used
to reacquire treasury stock and only offset by $500,000 increase in capital
lease obligations. In 1996, the Company had net cash provided by financing
activities of $5.0 million, primarily as a result of exercise proceeds of stock
options and stock issuances of $4.9 million.
The Company had a consolidated working capital surplus of $21.2 million
at December 31, 1998 compared to $34.8 million at December 31, 1997. The $13.6
million decrease in working capital during 1998 was primarily the result of
decreases in cash and the current portion of investments of $21.0 million due to
longer term investments and the $970,000 increase in life insurance reserves
partially offset by increases in the current portion of commission advances of
$5.5 million and decreases in accounts payable and accrued expenses of $2.6
million.
The Company generally advances significant commissions at the time a
Membership is sold. During 1998, the Company advanced commissions of $51.4
million on new Membership sales compared to $38.1 million for 1997. Since
approximately 92% of Membership premiums are collected on a monthly basis, a
significant cash flow deficit is created at the time a Membership is sold. This
deficit is reduced as monthly premiums are remitted and no additional
commissions are paid on the Membership until all previous commission advances
have been fully recovered. Commission advances were subsequently reduced by
commission earnings of $23.0 million and $14.9 million for 1998 and 1997,
respectively. The Company has recorded an allowance of $4.0 million to provide
for estimated uncollectible commission advances which includes an increase in
the allowance of $250,000 during 1998.
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, 1998 of $47.2
million.
Parent Company Funding and Dividends
Although the Company is the operating entity in many jurisdictions, the
Company's subsidiaries serve as operating companies in various states which
regulate Memberships as insurance or specialized legal expense products. The
most significant of these wholly owned subsidiaries are PPLCI, UFL and PPLSIF.
The ability of PPLCI, UFL and PPLSIF to provide funds to the Company is subject
to a number of restrictions under various insurance laws in the jurisdictions in
which PPLCI, UFL and PPLSIF conduct business, including limitations on the
amount of dividends and management fees that may be paid and requirements to
maintain specified levels of capital and reserves. In addition PPLCI and UFL
will be required to maintain its stockholders' equity at levels sufficient to
satisfy various state regulatory requirements, the most restrictive of which is
currently $3 million for PPLCI. Additional capital requirements of PPLCI, UFL or
PPLSIF will be funded by the Company in the form of capital contributions or
surplus debentures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
- ---------------------------------------------------
PRE-PAID LEGAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report of Deloitte & Touche LLP
Report of Independent Public Accountants of Arthur Andersen LLP
Report of Independent Auditors of Ernst & Young LLP
Consolidated Financial Statements
- ---------------------------------
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - For the years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Comprehensive Income - For the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - For the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes In Stockholders' Equity - For the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedule
- -----------------------------------------
Schedule II. Consolidated Valuation and Qualifying Accounts - For the years
ended December 31, 1998, 1997 and 1996
(All other schedules have been omitted since the required information is not
applicable or because the information is included in the consolidated
financial statements or the notes thereon.)
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders of
Pre-Paid Legal Services, Inc.:
We have audited the accompanying consolidated balance sheets of Pre-Paid Legal
Services, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed at Item 8 herein. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. The consolidated financial
statements give retroactive effect to the merger of the Company and TPN, Inc.
d.b.a. The People's Network ("TPN"), which has been accounted for as a pooling
of interests as described in Note 2 to the consolidated financial statements. We
did not audit the balance sheet of TPN as of December 31, 1997, or the related
statements of income, changes in stockholders' equity, and cash flows of TPN for
the years ended December 31, 1997 and 1996, which statements reflect total
assets constituting 13% of the related consolidated financial statement total,
and total revenues constituting 31% of the related consolidated financial
statement totals for each of the years ended December 31, 1997 and 1996. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for TPN for
1997 and 1996, is based solely on the reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Pre-Paid Legal Services, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
based on our audits and (as to the amounts included for TPN) the reports of
other auditors, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Deloitte & Touche LLP
Tulsa, Oklahoma
March 3, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
TPN, Inc. dba The People's Network:
We have audited the balance sheet of TPN, Inc. dba The People's Network (a Texas
corporation) ("TPN"), as of December 31,1997, and the related statements of
operations, shareholders' deficit and cash flows for the year then ended, prior
to the restatement (and, therefore, are not presented herein) for the merger of
Pre-Paid Legal Services, Inc. ("Pre-Paid") with TPN on October 2, 1998, which
has been accounted for as a pooling of interests as described in Notes 1 and 2
to the Pre-Paid consolidated financial statements. These financial statements
are the responsibility of TPN's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TPN, Inc. d.b.a. The Peoples
Network as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 27, 1998, (except with respect to
the merger of Pre-Paid Legal Services Inc.
with TPN, Inc. as discussed in Note 2, as to
which the date is September 24, 1998, the
date of the definitive merger agreement)
Report of Independent Auditors
Board of Directors
TPN, Inc. dba The Peoples Network
We have audited the consolidated balance sheet of TPN, Inc. dba The Peoples
Network (the Company) as of December 31, 1996, and the related statements of
operations, shareholders' deficit, and cash flows for the year then ended (not
presented separately herein). 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 audit.
We conducted our audit in accordance with generally accepted auditing standards
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TPN, Inc. dba The Peoples
Network at December 31, 1996 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1, the financial statements for the year ended December 31,
1996 have been restated to record compensation expense in connection with the
transfer of common stock from the majority shareholder of the Company to an
employee of the Company.
ERNST & YOUNG LLP
Dallas, Texas
September 10, 1997,
except for Note 1, as to which the date is
March 12, 1999
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
December 31,
-----------------------
1998 1997
-------- --------
Current assets:
Cash and cash equivalents.................................................................. $ 8,604 $ 27,722
Available-for-sale investments, at fair value.............................................. 2,368 -
Held-to-maturity investments............................................................... - 4,242
Accrued Membership income.................................................................. 3,595 2,399
Inventories................................................................................ 2,588 2,116
Prepaid product commissions................................................................ 1,384 2,136
Amount due from coinsurer.................................................................. 12,498 -
Membership commission advances - current portion........................................... 21,224 15,705
-------- --------
Total current assets................................................................... 52,261 54,320
Available-for-sale investments, at fair value................................................. 36,207 -
Held-to-maturity investments.................................................................. - 650
Investments pledged.......................................................................... 2,922 2,772
Membership commission advances, net.......................................................... 60,661 38,038
Property and equipment, net.................................................................. 7,678 5,226
Production costs, net........................................................................ 1,373 1,008
Other........................................................................................ 6,801 3,702
-------- --------
Total assets........................................................................... $167,903 $105,716
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits......................................................................... $ 3,808 $ 2,649
Deferred product sales revenue.............................................................. 3,932 4,737
Accident and health reserves................................................................ 12,498 -
Life insurance reserves..................................................................... 970 -
Current portion of capital lease obligation................................................. 487 142
Accounts payable and accrued expenses....................................................... 9,386 12,009
-------- --------
Total current liabilities............................................................... 31,081 19,537
Deferred income taxes......................................................................... 27,148 16,471
Life insurance reserves....................................................................... 7,711 -
Capital lease obligation, net of current portion.............................................. 659 238
-------- --------
Total liabilities....................................................................... 66,599 36,246
-------- --------
Stockholders' equity:
Preferred stock, $1 par value; authorized 400 shares; 3 issued and
outstanding as follows:
$3.00 Cumulative Convertible Preferred Stock, 3 shares authorized, issued and outstanding
at December 31, 1998 and 1997, respectively; liquidation value of......................... 3 3
Special preferred stock, $1 par value; authorized 500 shares, issued and outstanding
in one series designated as follows:
$1.00 Non-Cumulative Special Preferred Stock, 18 and 23 shares
authorized, issued and outstanding at December 31, 1998 and 1997,
respectively; liquidation value of $240 and $304 at December 31, 1998 and 1997,
respectively............................................................................ 18 23
Common stock, $.01 par value; 100,000 shares authorized; 24,321 and 24,151 issued
at December 31, 1998 and 1997, respectively............................................... 243 242
Capital in excess of par value.............................................................. 55,241 52,051
Retained earnings........................................................................... 49,528 19,328
Accumulated other comprehensive income:
Unrealized gains (losses) on investments.................................................. (24) -
Less: Treasury stock at cost; 797 and 747 shares held at December 31, 1998 and 1997,
respectively............................................................................ (3,705) (2,177)
-------- --------
Total stockholders' equity................................................................ 101,304 69,470
-------- --------
Total liabilities and stockholders' equity.............................................. $167,903 $105,716
======== ========
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- ---------- --------
Revenues:
Membership premiums........................ $110,003 $ 76,688 $ 50,582
Product sales.............................. 27,779 41,070 26,425
Associate services......................... 17,255 12,143 5,646
Interest income............................ 2,576 1,689 1,303
Other...................................... 2,840 1,814 1,678
-------- -------- --------
160,453 133,404 85,634
-------- -------- --------
Costs and expenses:
Membership benefits........................ 36,103 25,132 16,871
Product costs.............................. 17,967 27,017 20,568
Commissions................................ 24,261 16,717 11,476
General and administrative................. 21,902 20,311 15,150
Associate services and direct marketing.... 14,738 11,431 4,544
Depreciation............................... 2,944 2,026 533
Premium taxes.............................. 1,206 866 372
-------- -------- --------
119,121 103,500 69,514
-------- -------- --------
Income before income taxes................... 41,332 29,904 16,120
Provision for income taxes................... 11,122 12,381 5,857
-------- -------- --------
Net income................................... 30,210 17,523 10,263
Less dividends on preferred shares........... 10 13 15
-------- -------- --------
Net income applicable to common stockholders. $ 30,200 $ 17,510 $ 10,248
======== ======== ========
Basic earnings per common share.............. $ 1.29 $ .76 $ .46
======== ======== ========
Diluted earnings per common share............ $ 1.26 $ .74 $ .44
======== ======== ========
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Net income.............................. $ 30,210 $ 17,523 $ 10,263
-------- -------- --------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains (losses)
arising during period............ (24) - -
-------- -------- --------
Other comprehensive income.............. (24) - -
-------- -------- --------
Comprehensive income.................... $ 30,186 $ 17,523 $ 10,263
======== ======== ========
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- --------- --------
Cash flows from operating activities:
Net income........................................................... $ 30,210 $ 17,523 $ 10,263
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for stock grant, stock transfer and associate stock
options......................................................... - 644 1,122
Provision for deferred income taxes................................ 11,122 12,293 5,857
Depreciation and amortization...................................... 2,944 2,026 533
Net changes in asset and liability accounts, net of effects of
purchase of UFL:
Increase in accrued Membership income............................ (1,196) (689) (672)
Increase in commission advances.................................. (28,142) (22,891) (18,381)
Increase in other assets......................................... (304) (678) (1,360)
Increase in inventories.......................................... (472) (489) (1,270)
Decrease (increase) in prepaid product commissions............... 752 (513) (622)
(Decrease) increase in deferred revenue.......................... (805) 771 1,390
Increase in Membership benefits.................................. 1,159 787 315
(Decrease) increase in accounts payable and accrued expenses..... (5,373) 5,688 1,914
-------- -------- --------
Net cash provided by (used in) operating activities............ 9,895 14,472 (911)
-------- -------- --------
Cash flows from investing activities:
Acquisition of UFL, net of cash acquired........................... (18,995) - -
Additions to property and equipment and production costs........... (4,926) (3,619) (1,592)
Purchases of held-to-maturity investments.......................... (36,116) (3,035) (1,374)
Proceeds from sales of held-to-maturity investments................ 23,718 - -
Maturities of held-to-maturity investments......................... 4,892 400 111
-------- -------- --------
Net cash used in investing activities.......................... (31,427) (6,254) (2,855)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common and preferred stock................... 3,186 3,229 4,904
Increase in capital lease obligations.............................. 766 248 84
Purchase of treasury stock......................................... (1,528) - -
Dividends paid on preferred stock.................................. (10) (13) (15)
-------- -------- --------
Net cash provided by financing activities...................... 2,414 3,464 4,973
-------- -------- --------
Net (decrease) increase in cash and cash equivalents................. (19,118) 11,682 1,207
Cash and cash equivalents at beginning of year....................... 27,722 16,040 14,833
-------- -------- --------
Cash and cash equivalents at end of year............................. $ 8,604 $ 27,722 $ 16,040
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest............................................. $ 47 $ 36 $ 28
======== ======== ========
Purchases of property and equipment under capital leases........... $ 1,104 $ 445 $ 63
======== ======== ========
Assets acquired in acquisition of UFL.............................. $ 44,598 $ - $ -
======== ======== ========
Liabilities assumed in acquisition of UFL.......................... $ 23,929 $ - $ -
======== ======== ========
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts and shares in 000's, except dividend rates and par values)
Year Ended December 31,
------------------------------------
1998 1997 1996
--------- -------- ----------
Preferred Stock - $1 par value, 400 shares authorized; issued and outstanding in
one series designated as follows:
$3.00 Cumulative Convertible Preferred Stock, authorized 5 shares; shares $ 3 $ 5 $ 5
issued and outstanding at beginning of year (3 in 1998, 5 in 1997 and 1996)
Shares exchanged for Common Stock (2 in 1997)............................... - (2) -
------- ------- -------
Shares issued and outstanding at end of year (3 in 1998 and 1997, 5 in 1996),
liquidation value of $55 at December 31, 1998............................. 3 3 5
------- ------- -------
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 (23 in 1998, 32 in 1997 and 45 in 1996).... 23 32 45
Shares exchanged for Common Stock (5 in 1998, 9 in 1997 and 13 in 1996)....... (5) (9) (13)
------- ------- -------
Shares issued and outstanding at end of year (18 in 1998, 23 in 1997 and 32 in
1996), liquidation value of $240 at December 31, 1998....................... 18 23 32
------- ------- -------
Common Stock - $.01 par value, shares authorized 100,000; shares issued and
outstanding at beginning of year (24,151 in 1998, 23,459 in 1997 and 22,513
in 1996).................................................................... 242 235 225
Shares issued during year:
Conversion of Preferred Stock (17 in 1998, 38 in 1997 and 46 in 1996)....... - - 1
Contributed to Company's employee stock ownership plan (2 in 1998,
3 in 1997, and 5 in 1996)................................................... - - -
Exercise of stock options and warrants (151 in 1998, 651 in 1997 and 895 in
1996)....................................................................... 1 7 9
------- ------- -------
Shares issued and outstanding at end of year (24,321 in 1998, 24,151 in 1997
and 23,459 in 1996)......................................................... 243 242 235
------- ------- -------
Capital in Excess of Par Value
Balance at beginning of year.................................................. 52,051 45,243 38,217
Issuance of common stock.................................................... - - 2,940
Exercise of stock options and warrants...................................... 2,215 3,267 2,225
Income tax benefit related to exercise of stock options..................... 912 2,930 997
Stock grant and transfer.................................................... - 544 804
Conversion of preferred stock............................................... 5 11 14
Stock contribution to employee stock ownership plan......................... 58 56 46
------- ------- -------
Balance at end of year........................................................ 55,241 52,051 45,243
------- ------- -------
Retained Earnings (Deficit)
Balance at beginning of year.................................................. 19,328 1,818 (8,430)
Net Income.................................................................... 30,210 17,523 10,263
Cash dividends................................................................ (10) (13) (15)
------- ------- -------
Balance at end of year........................................................ 49,528 19,328 1,818
------- ------- -------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
(Amounts and shares in 000's, except dividend rates and par values)
Unrealized gains/losses on investments:
Balance at beginning of year.................................................. $ - $ - $ -
Decline in market of available-for-sale investments......................... (24) - -
-------- -------- --------
Balance at end of year........................................................ (24) - -
-------- -------- --------
Treasury stock
Balance at beginning of year (747 shares)..................................... (2,177) (2,177) (2,177)
Shares repurchased during 1998 (50 in 1998)................................... (1,528) - -
-------- -------- --------
Balance at end of year (797 shares)........................................... (3,705) (2,177) (2,177)
-------- -------- --------
Total Stockholders' Equity.................................................... $101,304 $ 69,470 $ 45,156
======== ======== ========
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in tables are in thousands unless otherwise indicated)
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Pre-Paid Legal Services, Inc. (the "Company") underwrites and markets
legal service plans (referred to as "Memberships") which provide for or
reimburse a portion of legal fees incurred by members in connection with
specified matters. The Company has offered legal services under two types of
Memberships: closed panel and open panel. Since 1987, substantially all of the
Memberships sold by the Company have been closed panel Memberships that allow
members to access legal services through a network of independent attorneys
("provider attorneys") under contract with the Company. Membership benefit costs
relating to open panel Memberships, which constituted approximately 6% of
Memberships in force at December 31, 1998, are based on the usual, reasonable
and customary fee for providing the required services. Memberships are generally
guaranteed renewable and are marketed primarily in 26 states by an independent
sales force referred to as "Associates". Membership premiums are principally
collected on a monthly basis.
During the fourth quarter of 1998, the Company completed the
acquisition of TPN, Inc. d.b.a. The People's Network ("TPN") and Universal
Fidelity Life Insurance Company ("UFL"). Since its inception in late 1994, TPN
had marketed personal and home care products, personal development products and
services together with PRIMESTAR(R) satellite subscription television service to
its members through a network marketing sales force. UFL is an Oklahoma
domiciled life and accident and health insurer.
Basis of Presentation
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles which vary in some respects from
statutory accounting principles used when reporting to state insurance
regulatory authorities. Certain reclassifications have been made to conform to
current year presentation. 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 was accounted for by the purchase method of accounting for business
combinations. (See Note 2)
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, as well as those of PPL Agency, Inc.
(See Note 8 for additional information regarding PPL Agency, Inc.) The primary
subsidiaries of the Company include Pre-Paid Legal Casualty, Inc. ("PPLCI"),
Pre-Paid Legal Services, Inc. of Florida ("PPLSIF") and UFL. All significant
intercompany accounts and transactions have been eliminated.
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
Effective March 1, 1995, the Company implemented a level membership
commission schedule of approximately 25% of annual premium revenue for all
Membership years. This commission schedule results in the Company incurring
commission expense related to the sale of its legal expense plans on a basis
consistent with the collection of the premiums generated by the sale of such
Memberships. The Company currently advances the equivalent of three years of
commissions on new Membership sales. In January 1997, the Company implemented a
new policy whereby associates receive only earned commissions on the first three
Memberships submitted unless the associate successfully completes a training
program which includes an intensive one-day training seminar, produces three
Memberships and recruits one associate within 15 business days from their
training date. Prior to March 1, 1995, first year commissions payable on the
sale of a Membership, and earned in the first Membership year, were
approximately 70% of annual Membership premiums while renewal commissions
(payable as earned after the first Membership year) were approximately 16% of
annual premiums.
TPN distributors receive commissions from the sale of personal and home
care products, personal development products, communication services and
satellite subscription sales. These commissions are paid to the distributor
actually making the sale as well as other distributors in his organization.
Commissions on goods and services are not advanced and have averaged
approximately 32% of the product sales price. These commissions are paid at the
time of sale and subject to recovery only in the event of returned goods or
refunds.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash,
certificates of deposit, other short-term investments, receivables and trade
payables. Fair value estimates have been determined by the Company, using
available market information and appropriate valuation methodologies. The
carrying value of cash, certificates of deposit, other short-term investments,
net receivables and trade payables are considered to be representative of their
respective fair value, due to the short term nature of these instruments.
Investment Securities
The Company accounts for its investments in debt and equity securities
in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115").
Investments classified as trading are accounted for at fair value,
available-for-sale investments are accounted for at fair value with unrealized
gains and losses, net of taxes, excluded from earnings and reported as a
separate component of stockholders' equity, and held-to-maturity investments are
accounted for at amortized cost.
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. Due to the UFL acquisition and
the requirement for $20.6 million as cash consideration paid, the Company
liquidated a substantial portion of its investments previously 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. Gain or loss on sale of investments is based
upon the specific identification method. Income earned on the Company's
investments in state and political subdivisions is not taxable.
Inventories
Inventories include the cost of materials and packaging and are stated
at the lower of cost or market. Cost is determined using the first-in, first-out
("FIFO") method for the personal and home care and personal development
inventory. 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.
Production Costs
Production costs include all direct and indirect costs of producing
shows for broadcast on the private television network and are recorded at cost
and amortized on the straight-line method over the shorter of three years or the
period the program is broadcast.
Revenue Recognition
Membership premiums are recognized in income when due in accordance
with Membership terms which generally require the holder of the Membership to
remit premiums on a monthly basis. Memberships are canceled for nonpayment of
premium after ninety days. Premiums due but not collected at the end of an
accounting period are recorded as accrued Membership income; a provision for
uncollectible premiums, if any, is recorded currently. Revenues from Associates'
training program fees and sales of marketing supplies are recognized as income
when cash is received. Revenues for product sales are recognized when products
are shipped or services provided.
Coinsurance Receivable and Accident and Health Reserves
The Company has coinsured 100% of its accident and health policy
liabilities pursuant to a coinsurance agreement. The amount due from coinsurer
is therefore equal to the estimated accident and health reserves. The Company
believes the coinsurer will be able to honor all contractual commitments under
the coinsurance agreement, based on its periodic reviews of financial
statements, insurance industry reports and reports filed with state insurance
departments.
Commission Advances
Commission advances represent the unearned portion of commissions
advanced to Associates on sales of Memberships. Commissions are earned as
premiums are collected, usually on a monthly basis. The Company reduces
Commission advances as premiums are paid and commissions earned. Unearned
commission advances on lapsed Memberships are recovered through collection of
premiums on an associate's active Memberships. At December 31, 1998 and 1997,
the Company had an allowance of $4.0 million and $3.7 million, respectively, to
provide for estimated uncollectible balances. The Company charges interest at
the prime rate on unearned commission advances relating to Memberships that
canceled subsequent to the advance being made.
Goodwill
Goodwill represents the excess of acquisition costs over the value
assigned to the net assets acquired in business combinations and is amortized on
the straight-line method over a period of ten years. The carrying amount of
goodwill is reviewed using estimated undiscounted cash flows for the business
acquired over the remaining amortization periods. Since the UFL acquisition was
effective December 30, 1998, no amortization expense was charged to earnings
during 1998.
Membership Benefit Liability
The Membership benefit liability represents claims reported but not
paid and actuarially estimated claims incurred but not reported on open panel
Memberships and per capita amounts due provider attorneys on closed panel
Memberships. The Company calculates the benefit liability costs on open panel
Memberships based on completion factors that consider historical claims
experience based on the dates that claims are incurred, reported to the Company
and subsequently paid. Processing costs related to these claims are accrued
based on an estimate of expenses to process such claims.
Life Insurance Reserves
Incurred but not reported claim estimates are actuarially estimated
based on life insurance in-force and estimated claims occurrences.
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 or sell products or services provided by
such business partners and in return, the Company receives commissions on the
sales of such goods and services and compensates the selling associates with a
commission. Revenues from these transactions are included in product sales in
the consolidated statements of income.
Product costs consist primarily of the commissions paid to selling
associates together with the actual cost paid to acquire such goods and
services. Costs to purchase products and deliver services are included in
product costs in the consolidated statements of income
Deferred Revenue
Until January 1999, the Company sold merchandise certificates to
certain of its sales associates. These certificates can be used to purchase
products from the Company and expire one year from the date of issuance.
Deferred revenue represents the anticipated value of certificates to be redeemed
for products based on expected redemption rates of certificates issued.
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 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 periodically 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 the carrying amounts of those assets. 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 using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"). This method
calculates compensation expense on the measurement date as the excess of the
current market price of the underlying Company stock over the amount the
employee is required to pay for the shares, if any. The expense is recognized
over the vesting period of the grant or award. The Company has adopted the
disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation,"
in preparing its financial statement disclosures.
Accounting Standard to be Adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") was issued in June 1998. This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires 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. This Statement
applies to all entities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company believes that it holds no derivative
instruments at December 31, 1998.
Note 2 - Merger and Acquisition
Effective October 2, 1998, the Company issued 999,992 shares of its
common stock in exchange for all of the outstanding common stock of TPN based on
a conversion ratio of 345 shares of the Company's common stock for each share of
TPN common stock. The merger qualified as a tax-free reorganization and has been
accounted for as a pooling of interests. Net revenues and net income applicable
to common stockholders reported by the individual companies prior to the merger
were as follows:
Nine Months
Ended
September 30, Year Ended December 31,
-----------------------
1998 1997 1996
------------ ---------- ---------
(Unaudited)
Net revenues:
Company....................................... $ 94,003 $ 92,468 $ 59,208
TPN........................................... 23,497 40,936 26,426
---------- --------- ---------
Combined......................................... 117,500 133,404 85,634
========== ========= =========
Net income applicable to common stockholders:
Company....................................... 19,978 18,777 12,455
TPN........................................... (1,690) (1,267) (2,207)
--------- --------- ---------
Combined......................................... $ 18,288 $ 17,510 $ 10,248
========= ========= =========
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. 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 UFL's Medicare supplement and health care business written by UFL.
UFL will retain its existing life insurance business (1998 premiums were
approximately $1.0 million) and will continue to provide claims processing for
the coinsured Medicare supplement and health care policies and receive full cost
reimbursement for such services.
Assets and liabilities remaining in UFL at December 31, 1998 include
$28.0 million in cash and investments, $835,000 relating to real estate,
computer systems and furniture and fixtures (occupied and utilized by UFL) and
$15.0 million of receivables generated in the ordinary course of business
including a coinsurance receivable of $12.5 million. December 31, 1998
liabilities of UFL remaining after the transaction include life insurance
reserves of $8.7 million, accident and health reserves of $12.5 million and
other ordinary course of business accrued liabilities of $2.3 million and
deferred income taxes of $467,000. The transaction is not expected to have a
material effect on the Company's operating results in the near term. This
acquisition was accounted for by the purchase method of accounting for business
combinations. The assets acquired and the liabilities assumed were recorded at
fair value, which approximated their historical carrying amounts, and excess
cost representing the consideration paid in excess of identifiable net assets of
$770,000 was recorded as goodwill. The accompanying consolidated statements of
income do not include any revenues or expenses related to this acquisition prior
to the closing date. Following are the Company's pro forma results for 1998 and
1997 including UFL's life insurance business assuming the acquisition occurred
on January 1, 1997:
Year Ended December 31,
-----------------------
1998 1997
---------- ---------
Net revenues:
As reported................................ $ 160,453 $ 133,404
Pro forma.................................. 162,507 135,307
Net income applicable to common stockholders:
As reported................................ $ 30,200 $ 17,510
Pro forma.................................. 31,026 18,132
Basic earnings per common share:
As reported................................ $ 1.29 $ .76
Pro forma.................................. 1.32 .78
Diluted earnings per common share:
As reported................................ $ 1.26 $ .74
Pro forma.................................. 1.30 .77
Note 3 - Investment Securities
A summary of the amortized cost, unrealized gains and losses and fair
values of investment securities at December 31, 1998 and 1997 follows:
December 31, 1998
-----------------------------------------------
Amortized Gross Unrealized Fair
Available-for-Sale Cost Gains Losses Value
- ------------------ ---------- --------- ------------ ---------
U.S. Government obligations........................ $ 6,155 $ 15 $ (69) $ 6,101
Corporate obligations.............................. 29,809 60 (16) 29,853
Obligations of state and political subdivisions.... 2,218 8 (22) 2,204
--------- ------- ------- --------
Total.............................................. $ 38,182 $ 83 $ (107) $ 38,158
========= ======= ======= ========
December 31, 1997
-----------------------------------------------
Amortized Gross Unrealized Fair
Held-to-Maturity Cost Gains Losses Value
- ---------------- ---------- --------- ------------ ---------
U.S. Government obligations........................ $ 3,200 $ 3 $ - $ 3,203
Obligations of state and political subdivisions.... 300 - - 300
--------- ------- ------- --------
Total.............................................. $ 3,500 $ 3 $ - $ 3,503
========= ======= ======= ========
A comparison of the amortized cost and fair value of the Company's
available-for-sale investment securities at December 31, 1998 by maturity date
follows:
Amortized
Cost Fair Value
One year or less......................... $ 6,198 $ 6,195
Two years through five years............. 22,961 22,940
Five years through ten years............. 6,001 6,001
More than ten years...................... 3,022 3,022
--------- ---------
Total.................................... $ 38,182 $ 38,158
========= =========
The Company's investment securities are included in the accompanying
consolidated balance sheets at December 31, 1998 and 1997 as follows.
December 31,
----------------------
1998 1997
--------- ---------
Held-to-maturity investments-current portion....... $ - $ 1,875
Available-for-sale investments-current portion..... 801 -
Held-to-maturity investments....................... - 650
Available-for-sale investments..................... 36,207 -
Investments pledged................................ 1,150 975
-------- --------
Total.............................................. $ 38,158 $ 3,500
======== ========
Remaining amounts included in these balance sheet captions represent
certificates of deposit.
The Company is required to pledge investments to various state
insurance departments as a condition to obtaining authority to do business in
certain states. The Company has investments pledged to state regulatory agencies
as follows:
December 31,
---------------------
1998 1997
--------- ---------
Certificates of deposit............................ $ 1,772 $ 1,797
Obligation of state and political subdivisions..... 100 300
U. S. Government obligations....................... 1,050 675
-------- --------
Total $ 2,922 $ 2,772
======== ========
Note 4 - Inventories
Inventory consists of the following:
December 31,
----------------------
1998 1997
--------- ---------
Personal and home care, and personal
development inventory........................ $ 958 $ 937
Jewelry inventory............................... 952 662
Sales and promotional materials................. 678 677
Less: Inventory reserve......................... - (160)
-------- --------
Total inventory $ 2,588 $ 2,116
======== ========
Note 5 - Property and Equipment
Property and equipment is comprised of the following:
Estimated December 31,
----------------
Useful Life 1998 1997
------------ ------- ------
Equipment, furniture and fixtures........ 3-10 years $11,442 $ 7,874
Computer software........................ 5 years 3,258 2,809
Building and improvements................ 20 years 4,026 1,918
Automotive............................... 3 years 231 231
Land..................................... 110 110
------- -------
19,067 12,942
Accumulated depreciation................. (11,389) (7,716)
------- -------
Property and equipment, net.............. $ 7,678 $ 5,226
======= =======
The net carrying value of capitalized leased assets was $1.0 million
and $531,000, at December 31, 1998 and 1997, respectively.
Note 6 - Income Taxes
The provision for income taxes consists of the following:
Year Ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
Current.................................. $ - $ 88 $ -
Deferred................................. 11,122 12,293 5,857
-------- -------- --------
Total provision for income taxes......... $ 11,122 $ 12,381 $ 5,857
======== ======== ========
A reconciliation of the statutory Federal income tax rate to the
effective income tax rate is as follows:
Year Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Statutory Federal income tax rate........ 34.0% 34.0% 34.0%
Change in valuation allowance............ (8.2) 6.4 2.9
Tax exempt interest...................... (.1) (.2) (.2)
State income taxes and other............. 1.2 1.2 (.4)
-------- -------- --------
Effective income tax rate................ 26.9% 41.4% 36.3%
======== ======== ========
Deferred tax liabilities and assets at December 31, 1998 and 1997 are
comprised of the following:
December 31,
---------------------
1998 1997
--------- ---------
Deferred tax liabilities:
Commissions advanced......................... $ 28,650 $ 18,784
Unrealized investment gains (net)............ 467 -
Depreciation................................. 224 -
-------- --------
Total deferred tax liabilities............ 29,341 18,784
-------- --------
Deferred tax assets:
Expenses not yet deducted for tax purposes... 449 445
Depreciation................................. - 14
Net operating loss carryforward.............. 1,053 5,099
Pre-merger net operating loss carryforward... 1,980 -
General Business Credit carryforward......... 325 325
AMT Credit carryforward...................... 366 366
-------- --------
Total deferred tax assets................. 4,173 6,249
Valuation allowance for deferred tax assets.. (1,980) (3,936)
-------- --------
Total net deferred tax assets............. 2,193 2,313
-------- --------
Net deferred liability....................... $(27,148) $(16,471)
======== ========
At December 31, 1998, the Company had net operating loss carryforwards
("NOLs") for Federal regular and alternative minimum tax purposes of
approximately $3.0 million and $2.6 million, respectively, expiring in 2011 and
2012. In addition, the Company had general business and rehabilitation tax
credit carryforwards of approximately $307,000 expiring primarily in 1999 to
2001, and an alternative minimum tax ("AMT") credit carryforward of $366,000
that does not expire. No valuation allowance has been established for these
deferred tax assets as the Company believes it is more likely than not that the
tax benefits of such deferred tax assets will be realized. The Company generated
taxable income for the year ended December 31, 1998 of $11.5 million and
utilized NOLs originally generated in 1986 through 1995 in their entirety and
$2.3 million of the $2.8 million NOL originally generated in 1996. Tax expense
for 1998 was reduced during the fourth quarter of 1998 through a reduction in a
previously established valuation allowance to reflect this utilization of NOLs,
not including those attributable to pre-merger activity of TPN. The Company has
NOLs in the amount of $5.7 million representing the NOLs of TPN as of the merger
date. A valuation allowance has been established for these NOLs as the Company
does not believe it is more likely than not that the tax benefits of these
carryforwards will be realized due to utilization restrictions imposed by the
Internal Revenue Code.
The exercise of 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 7 - Stockholders' Equity
Each share of $3.00 Cumulative Convertible Preferred Stock is entitled
to receive cumulative cash dividends at the annual rate of $3 per share, payable
quarterly, is convertible into 2.5 shares of Common Stock and is redeemable at
the option of the Company at $25 per share. The $3.00 Cumulative Convertible
Preferred Stock had a liquidation value of $55,000 at December 31, 1998. During
1997 and 1996, $3.00 Cumulative Convertible Preferred Stock consisting of 1,714
and 40 shares was converted into 4,385 shares of Common Stock. No shares were
converted during 1998.
Each share of the Special Preferred Stock is entitled to a
non-cumulative annual dividend of $1.00 per share, is convertible into 3.5
shares of Common Stock and is redeemable at the option of the Company at $13.34
per share, plus all accumulated and unpaid dividends. The Special Preferred
Stock had a liquidation value of $240,227 at December 31, 1998. During 1998,
1997 and 1996, Special Preferred Stock consisting of 4,766, 9,767 and 12,812
shares, respectively, were converted into 95,708 shares of Common Stock.
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 is restricted under the Oklahoma Insurance Code to available surplus funds
derived from realized net profits. At December 31, 1998, PPLCI did not have
funds available for payment of dividends without the approval of the Oklahoma
Insurance Commissioner.
Note 8 - Related Party Transactions
The Company's Chairman 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 1998, 1997 and 1996 of $119,000, $110,000 and $130,000, respectively,
through its sales of insurance products of an unaffiliated company. Agency had a
net loss for the years ended December 31, 1998 and 1997 of $10,694 and $12,500,
respectively, and net income for the year ended December 31, 1996 of $6,700
after incurring commissions earned by the Chairman of $47,000, $50,000 and
$49,000 respectively, and annual management fees paid to the Company of $36,000
for 1998 and $72,000 for 1997 and 1996.
The Chairman and his wife own Stonecipher Aviation LLC ("SA"). The
Company has agreed to reimburse SA for certain expenses pertaining to trips made
by Company personnel for Company business purposes using aircraft owned by SA.
Such reimbursement represents the pro rata portion of direct operating expenses,
such as fuel, maintenance, pilot fees and landing fees, incurred in connection
with such aircraft based on the relative number of flights taken for Company
business purposes versus the number of other flights during the applicable
period. No reimbursement is made for depreciation, capital expenditures or
improvements relating to such aircraft. During 1998 and 1997, the Company paid
$279,000 and $192,000, respectively, to SA as reimbursement for such
transportation expenses.
An executive officer (President) and director of the Company has loans
from the Company made in December 1992, December 1996 and October 1998. The
largest aggregate balance of these loans during the year ended December 31, 1998
was $504,000. The outstanding balance of these loans as of December 31, 1998 was
$501,737. These loans bear annual interest at the rate of 3% in excess of the
prime rate, adjusted on January 1 of each year, and are secured by commissions
due from the Company. This individual also owns interests ranging from 10% to
67% in corporations or partnerships not affiliated with the Company but engaged
in the marketing of the Company's 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 1998, 1997 and 1996 of
$39,000, $49,000 and $54,000, respectively.
Note 9 - Leases
At December 31, 1998, the Company was committed under noncancelable
operating and capital leases, principally for buildings and equipment. Aggregate
rental expense under all operating leases was $468,000, $379,000 and $363,000 in
1998, 1997 and 1996, respectively. Minimum rentals for operating and capital
leases in succeeding years ending December 31 are:
Capital Operating
Year Leases Leases
---- --------- -----------
1999 $ 521 $ 62
2000 407 10
2001 247 1
-------- -------
Total 1,175 $ 73
=======
Less: Amount representing interest................ 29
--------
Present value of net minimum capital lease
payments....................................... 1,146
--------
Less: Current installments of obligations under
capital leases................................. 487
--------
Obligations under capital leases, net of current
installments .................................. $ 659
========
Note 10 - Commitments and Contingencies
During February 1999, a suit was filed against the Company by a
building owner seeking to recover unspecified damages and attorneys' fees for an
alleged breach of a lease agreement between the owner and TPN. Management has
indicated its plans to vigorously contest this suit and believes that any loss
resulting from the suit would not have a material impact on the Company's
financial position, results of operations or cash flows in future years.
The Company is a named defendant in certain other lawsuits arising in
the ordinary course of the Company's business. While the outcome of these
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on the Company's financial condition,
liquidity or results of operations.
Note 11 - Stock Options and Purchase Plan
The Company has a stock option plan ("Plan") under which the Board of
Directors ("Board") or its Stock Option Committee ("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
1,000,000 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 will have a maximum term of 15 years. Vesting of
options granted under the Plan is determined by the Board or Committee. 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 will receive options to purchase 10,000 shares
of common stock on March 1 of each year commencing March 1, 1996. The options to
be granted on March 1 of each year will be immediately exercisable as to 2,500
shares and will 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.
A summary of the status of the Company's Plan as of December 31, 1998,
1997 and 1996 and changes during the years ending on those dates is presented
below:
1998 1997 1996
--------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ----------- --------- ----------- -------- -------------
Outstanding at beginning of year..... 300,000 $ 12.39 410,000 $ 6.78 405,000 $ 5.40
Granted.............................. 247,500 35.65 185,000 14.49 45,000 13.50
Exercised............................ (60,000) 9.55 (285,000) 5.55 (40,000) .38
Terminated........................... - - (10,000) 16.00 - -
------- -------- -------- -------- ------- -------
Outstanding at end of year........... 487,500 $ 24.55 300,000 $ 12.39 410,000 $ 6.78
======= ======== ======= ======== ======= =======
Options exercisable at year end...... 472,500 $ 24.26 290,000 $ 12.27 385,000 $ 6.18
======= ======== ======= ======== ======= =======
The following table summarizes information about stock options
outstanding at December 31, 1998 issued pursuant to the Plan:
Weighted Average
Remaining Weighted Average
Number Outstanding Contractual Life Exercise Price
------------------- ------------------- -------------------
Range of Exercise Prices
$8.13 - $10.38 65,000 2.01 $ 9.34
$14.25 - $25.56 195,000 3.20 15.63
$33.75 - $43.13 227,500 3.88 36.54
----------- -------- ---------
487,500 3.36 $ 24.55
=========== ======== =========
The Company, effective July 3, 1995, December 14, 1995 and July 22,
1997 adopted stock option plans for its marketing associates whereby the
associates could earn stock options based upon their production and recruiting
efforts. These options were issued to qualifying associates at each month end
from July 1995 through March 1996 and for the month of July 1997 based on the
month's production and recruiting results. The options granted December 14, 1995
were issued to qualifying associates achieving a specified level within the
Company's marketing structure. The exercise price is equal to the closing stock
price on the last trading day of each respective month for all grants from July
1995 through March 1996, the exercise price for December 1995 grants was equal
to the closing stock price on such date and the exercise price for the July 1997
grants was $27.00 (which exceeded market). The options granted from July 1995
through March 1996 expired pursuant to their terms on July 31, 1997 and the
options granted for production during July 1997 expired pursuant to their terms
on July 31, 1998. The options granted December 14, 1995 expire on December 14,
2000. Activity related to these plans is as follows:
1998 1997 1996
---------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------------ --------- ----------- ---------- -----------
Outstanding at beginning of year........ 101,350 $ 26.54 350,092 $ 10.00 298,225 $ 8.02
Granted................................. - - 100,000 27.00 177,133 12.50
Exercised............................... (30,650) 27.00 (135,125) 10.26 (70,516) 8.95
Terminated.............................. (68,200) 27.00 (213,617) 10.01 (54,750) 8.63
-------- -------- -------- -------- ------- --------
Outstanding at end of year.............. 2,500 $ 8.25 101,350 $ 26.54 350,092 $ 10.00
======== ======== ======= ======== ======= ========
Options exercisable at year end......... 2,500 $ 8.25 101,350 $ 26.54 350,092 $ 10.00
======== ======== ======= ======== ======= ========
The following table summarizes information about stock options
outstanding at December 31, 1998 issued to marketing associates:
Weighted Average
Remaining Weighted Average
Range of Exercise Prices Number Outstanding Contractual Life Exercise Price
------------------------- -------------------- -------------------- --------------------
$8.25 2,500 1.96 $ 8.25
==================== ==================== ====================
In addition to those options issued pursuant to the Plan and those
options issued to non-employee marketing associates in the two preceding tables,
the Company has other options outstanding. All grants during 1998, 1997 and 1996
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 consultant. A summary of the status of
such options as of December 31, 1998, 1997 and 1996 and changes during the years
ending on those dates is presented below:
1998 1997 1996
----------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------- ---------------------- ------------------------
Outstanding at beginning of year..... 406,750 $ 17.53 337,050 $ 5.92 1,029,656 $ 1.47
Granted.............................. 470,000 30.15 300,000 17.85 92,000 19.00
Exercised............................ (60,050) 13.59 (230,300) .96 (784,606) 1.62
Terminated........................... - - - - - -
------- -------- -------- -------- --------- -------
Outstanding at end of year........... 816,700 $ 25.08 406,750 $ 17.53 337,050 $ 5.92
======= ======== ======= ======== ======= =======
Options exercisable at year end...... 364,700 $ 25.07 42,750 $ 13.04 245,050 $ 1.00
======= ======== ====== ======== ======= =======
The following table summarizes information about stock options other
than those included in the Plan or issued to marketing associates outstanding at
December 31, 1998:
Weighted Average
Remaining Weighted Average
Range of Exercise Prices Number Outstanding Contractual Life Exercise Price
------------------------- ---------------------- ---------------------- ----------------------
$14.00 - $19.00 346,700 4.74 $ 16.34
$23.38 - $31.94 310,000 4.65 27.30
$34.19 - $43.13 160,000 4.79 39.71
---------------------- ---------------------- ----------------------
816,700 4.71 $ 25.08
====================== ====================== ======================
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 will continue to follow the
provisions of Accounting Principles Board Opinion No. 25 and related
interpretations for its employee compensation arrangements, and disclose 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 1998 and 1997 would have been reduced to the pro forma amounts
indicated below:
1998 1997 1996
-------- -------- --------
Net income applicable to common stockholders:
As reported................................ $ 30,200 $ 17,510 $ 10,248
Pro forma.................................. 21,671 16,387 10,020
Basic earnings per common share:
As reported................................ $ 1.29 $ .76 $ .46
Pro forma.................................. .92 .71 .45
Diluted earnings per common share:
As reported................................ $ 1.26 $ .74 $ .44
Pro forma.................................. .91 .70 .43
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 5.00% for 1998 and 1997 and 6.00% for 1996; expected
life of 3-7 years; and expected volatility ranging from 30% to 64%.
In accordance with SFAS 123, the Company recorded compensation expense
related to the issuance of stock options to non-employee marketing associates of
$100,000 and $318,000 during 1997 and 1996, respectively. The weighted average
fair value of options granted that met the minimum exercise criteria during 1997
was $1.07 per share. The fair value of each stock option grant to marketing
associates was measured on the date of the grant using the Black-Scholes option
pricing model with the following weighted average assumptions used: no dividend
yield; risk-free interest rate of 5.00% and 6.00% for 1997 and 1996,
respectively; expected life of 1 year; and expected volatility ranging from 30%
to 49%.
During 1988, the Company adopted an employee stock ownership plan.
Under the plan, employees may elect to defer a portion of their compensation by
making contributions to the plan. Up to seventy-five percent of the
contributions made by employees may be used to purchase Company common stock.
The Company, at its option, may make matching contributions to the plan, and
recorded expense during 1998, 1997 and 1996 of $58,027, $55,785 and $46,176
based on contributions of Company stock of 1,900 shares, 3,000 shares and 5,100
shares, respectively.
Note 12 - 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 is considered to be a dilutive common
stock equivalent in 1998 but would be anti-dilutive, and therefore not
considered in 1997 or 1996. The Special Preferred Stock is considered to be a
dilutive common stock equivalent for all periods and the number of shares
issuable on conversion of the $3.00 Cumulative Convertible Preferred stock and
the Special Preferred Stock is added to the weighted average number of common
shares. The weighted average number of common shares is also increased by the
number of shares issuable on the exercise of options less the number of common
shares assumed to have been purchased with the proceeds from the exercise of the
options pursuant to the treasury stock method; those purchases are assumed to
have been made at the average price of the common stock during the respective
period.
Year Ended December 31,
------------------------------------
1998 1997 1996
--------- --------- ----------
Basic Earnings Per Share:
Earnings:
Net income applicable to common stockholders....................... $ 30,200 $ 17,510 $ 10,248
========= ========= =========
Shares:
Weighted average shares outstanding................................ 23,456 23,127 22,332
========= ========= =========
Basic earnings per common share.................................... $ 1.29 $ .76 $ .46
========= ========= =========
Diluted Earnings Per Share:
Earnings:
Net income applicable to common stockholders....................... $ 30,200 $ 17,510 $ 10,248
Add: Dividends on assumed conversion of preferred stock......... 10 - -
--------- --------- ---------
Income available to common stockholders and assumed conversions.... $ 30,210 $ 17,510 $ 10,248
========= ========= =========
Shares:
Weighted average shares outstanding................................ 23,456 23,127 22,332
Assumed conversion of preferred stock.............................. 81 109 142
Assumed exercise of options........................................ 369 339 845
--------- --------- ---------
Weighted average number of shares, as adjusted..................... 23,906 23,575 23,319
========= ========= =========
Diluted earnings per common share.................................. $ 1.26 $ .74 $ .44
========= ========= =========
Note 13 - Selected Quarterly Financial Data (Unaudited)
Following is a summary of the unaudited interim results of operations
for the years ended December 31, 1998 and 1997. As a result of the 1998 fourth
quarter acquisition of TPN that was accounted for as a pooling of interests, the
1998 and 1997 periods have been restated to include the operating results of
TPN.
Selected Quarterly Data
(In thousands, except per share amounts)
Income before Net Basic earnings per Diluted earnings per
Revenues income taxes Income common share common share
---------- ---------------- ----------- ---------------------- ---------------------
1998
----
First quarter......... $37,877 $7,895 $5,266 $.22 $.22
Second quarter........ 39,814 9,771 6,419 .27 .27
Third quarter......... 39,809 10,898 6,610 .28 .28
Fourth quarter........ 42,953 12,768 11,915 .51 .50
1997
----
First quarter......... $27,506 $6,837 $4,582 $.20 $.20
Second quarter........ 31,732 7,489 5,020 .21 .21
Third quarter......... 36,442 8,761 5,905 .25 .25
Fourth quarter........ 37,724 6,817 2,016 .09 .08
The Company had taxable income for 1998 and the Company's tax expense
for 1998 was reduced in the fourth quarter to reflect management's current
estimate of the utilization of certain NOLs for which a valuation allowance had
been previously established. Due to this reduction in tax expense, fourth
quarter earnings were increased $3.5 million, or 15 cents per diluted share.
Additionally, the fourth quarter of 1997 contained an adjustment related to
TPN's deferred tax assets that resulted in additional tax expense of $1.9
million, or 8 cents per diluted share.
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, 1999.
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 in this report.
(2) Financial Statement Schedule: See Index to Consolidated
Financial Statements and Consolidated Financial Statement
Schedule set forth in 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: On October 14, 1998 the Company filed a Current Report
on Form 8-K pertaining to the acquisition of TPN, Inc. pursuant to Item 2.
Exhibits to the Form 8-K included the Agreement and Plan of Reorganization
dated as of September 23, 1998 between the Company and TPN and two press
releases, one dated September 24, 1998 and the other dated October 5, 1998,
pertaining to the acquisition.
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: March 9, 1999 By: /s/ RANDY HARP
--------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Position Date
/s/ HARLAND C. STONECIPHER Chairman of the Board March 9, 1999
- --------------------------- of Directors
Harland C. Stonecipher (Principal Executive Officer)
/s/ WILBURN L. SMITH President and Director March 9, 1999
- ---------------------------
Wilburn L. Smith
/s/ KATHLEEN S. PINSON Vice President, Controller March 9, 1999
- --------------------------- and Director,
Kathleen S. Pinson (Principal Accounting Officer)
/s/ RANDY HARP Chief Operating Officer, March 9, 1999
- --------------------------- Chief Financial
Randy Harp Officer and Director
(Principal Financial Officer)
/s/ PETER K. GRUNEBAUM Director March 9, 1999
- ---------------------------
Peter K. Grunebaum
/s/ SHIRLEY A. STONECIPHER Director March 9, 1999
- ---------------------------
Shirley A. Stonecipher
/s/ JOHN W. HAIL Director March 9, 1999
- ---------------------------
John W. Hail
/s/ DAVID A. SAVULA Director March 9, 1999
- ---------------------------
David A. Savula
/s/ MARTIN H. BELSKY Director March 9, 1999
- ---------------------------
Martin H. Belsky
SCHEDULE II
PRE-PAID LEGAL SERVICES, INC.
Consolidated Valuation And Qualifying Accounts
For the Three Years in the period ended December 31, 1998
(Amounts in 000's)
Additions
Balance at Charged to Balance at
Beginning Cost and End of
Description of Year Expenses Deductions Year
- -------------------------------------------------------- ------------ ----------- ---------- ----------
Year Ended December 31, 1998:
- -----------------------------
Allowance for unrecoverable commission advances -
(non-current)........................................ $ 3,744 $ 250 $ - $ 3,994
========= ========= ========= =========
Allowance for doubtful receivables................... $ 213 $ - $ - $ 213
========= ========= ========= =========
Inventory valuation reserve.......................... $ 160 $ - $ 160 $ -
========= ========= ========= =========
Year Ended December 31, 1997:
- -----------------------------
Allowance for unrecoverable commission advances -
(non-current)........................................ $ 3,444 $ 300 $ - $ 3,744
========= ========= ========= =========
Allowance for doubtful receivables................... $ 109 $ 104 $ - $ 213
========= ========= ========= =========
Inventory valuation reserve.......................... $ 84 $ 76 $ - $ 160
========= ========= ========= =========
Year Ended December 31, 1996:
- -----------------------------
Allowance for unrecoverable commission advances -
(non-current)........................................ $ 2,669 $ 775 $ - $ 3,444
========= ========= ========= =========
Allowance for doubtful receivables................... $ - $ 109 $ - $ 109
========= ========= ========= =========
Inventory valuation reserve.......................... $ - $ 84 $ - $ 84
========= ========= ========= =========
INDEX TO EXHIBITS
Exhibit No.
Description
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended (Incorporated by reference to Exhibit 4.1 of
the Company's Report on Form 8-K dated January 10, 1997)
3.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.1 of the Company's Report on Form 10-Q
for the period ended September 30, 1996)
*10.1 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 Stock Option Plan, as amended and restated effective December
12, 1995 (Incorporated by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995)
*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
*10.14 Stock option agreement with David A. Savula dated February 6,
1998
*10.15 Stock option agreement with David A. Savula dated July 2, 1998
*10.16 Stock option agreement with David A. Savula dated July 2, 1998
21.1 List of Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
- --------------------
* .......Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.