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, 2003
( )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.)
One Pre-Paid Way
Ada, Oklahoma 74820
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (580) 436-1234
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered under Section 12 (g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |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 ( ).
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes |X| No [ ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked prices of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter. As of June 30, 2003 -$291,000,000
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 29,
2004 there were 16,791,225 shares of Common Stock, par value $.01 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Company's definitive proxy statement for its 2004 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, 2003
TABLE OF CONTENTS
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
General
Industry Overview
Description of Memberships
Specialty Legal Service Plans
Provider Law Firms
Identity Theft Shield Provider
Marketing
Operations
Quality Control
Competition
Regulation
Employees
Foreign Operations
Availability of Information
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price of and Dividends on the Common Stock
Recent Sales of Unregistered Securities
Equity Compensation Plans
Issuer Purchases of Equity Securities
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview of the Company's Financial Model
Measures of Member retention
Results of Operations:
Comparison of 2003 to 2002
Comparison of 2002 to 2001
Liquidity and Capital Resources
Forward-Looking Statements
Risk Factors
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
PART III. (Information required by Part III is incorporated by reference
from the Company's definitive proxy statement for its 2004 annual
meeting of shareholders.)
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
SIGNATURES
PRE-PAID LEGAL SERVICES, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
General
Pre-Paid Legal Services, Inc. (the "Company") was one of the first
companies in the United States organized solely to design, underwrite and market
legal expense plans. The Company's predecessor commenced business in 1972 and
began offering legal expense reimbursement services as a "motor service club"
under Oklahoma law. In 1976, the Company was formed and acquired its predecessor
in a stock exchange. The Company began offering Memberships independent of the
motor service club product by adding a legal consultation and advice service,
and in 1979 the Company implemented a legal expense benefit that provided for
partial payment of legal fees in connection with the defense of certain civil
and criminal actions. The Company's legal expense plans (referred to as
"Memberships") currently provide for a variety of legal services in a manner
similar to medical plans. In most states and provinces, standard plan benefits
include preventive legal services, motor vehicle legal defense services, trial
defense services, IRS audit services and a 25% discount off legal services not
specifically covered by the Membership for an average monthly Membership fee of
approximately $22. Additionally, in approximately 40 states, the Legal Shield
rider can be added to the standard plan for only $1 per month and provides
members with 24-hour access to a toll-free number for attorney assistance if the
member is arrested or detained. Also, during the third quarter of 2003, the
Company began offering its Identity Theft Shield ("IDT") to new and existing
members at $9.95 per month if added to a legal service Membership or it may be
purchased separately for $12.95 per month. The identity theft related benefits
include a credit report and related instructional guide, a credit score and
related instructional guide, credit report monitoring with daily online and
monthly offline notification of any changes in credit information, up to $25,000
in credit restoration expense reimbursement and comprehensive identity theft
restoration services.
Legal plan benefits are generally provided through a network of independent
provider law firms, typically one firm per state or province and IDT plan
benefits are provided by Kroll Background America, Inc., a subsidiary of Kroll
Inc. ("Kroll"). Members have direct, toll-free access to Kroll or their provider
law firm rather than having to call for a referral. At December 31, 2003, the
Company had 1,418,997 Memberships in force with members in all 50 states, the
District of Columbia and the Canadian provinces of Ontario, British Columbia,
Alberta and Manitoba. Approximately 90% of such Memberships were in 29 states.
Industry Overview
Legal service plans, while used in Europe for more than one hundred years
and representing more than a $4 billion European industry, were first developed
in the United States in the late 1960s. Since that time, there has been
substantial growth in the number of Americans entitled to receive various forms
of legal services through legal service plans. According to the latest estimates
developed by the National Resource Center for Consumers of Legal Services
("NRC") for 2002, there were 164 million Americans without any type of legal
service plan. The NRC estimates that 122 million Americans were entitled to
service through at least one legal service plan in 2002 although more than half
are "free" plans that generally provide limited benefits on an automatic
enrollment without any direct cost to the individual. The 122 million Americans
compares to 4 million in 1981, 58 million in 1990 and 115 million in 2000. The
legal service plan industry continues to evolve and market acceptance of legal
service plans, as indicated by the continuing growth in the number of
individuals covered by plans, is increasing.
Legal service plans are offered through various organizations and marketing
methods and contain a wide variety of benefits. Free plans include those
sponsored by labor unions, elder hotlines, the American Association of Retired
Persons and the National Education Association according to NRC estimates, and
accounted for approximately 56% of covered persons in 2002. The NRC estimates
that an additional 27% are covered by employee assistance plans that are also
automatic enrollment plans without direct cost to participants designed to
provide limited telephonic access to attorneys for members of employee groups.
Free plans and employee assistance plans therefore comprise approximately 83% of
covered persons in 2002. Employer paid plans pursuant to which more
comprehensive benefits are offered by the employer as a fringe benefit and the
Armed Forces are each estimated by the NRC to account for approximately 5% of
covered persons in 2002.
According to the NRC, the remaining covered persons in 2002 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 8% of the market in 2002 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 7% were
estimated by the NRC to be covered by plans having full coverage. The Company
believes these plans include benefits comparable to those provided by the
Company's Memberships. Accordingly, the Company believes that significant
opportunities exist for successful marketing of the Company's Memberships to
employee groups and other individual consumers.
According to the latest estimates of the census bureaus of the United
States and Canada, currently the two geographic areas in which the Company
operates, the number of households in the combined area exceeds 127 million.
Since the Company has always disclosed its members in terms of Memberships and
individuals covered by the Membership include the individual who purchases the
Membership together with his or her spouse and never married children living at
home up to age 21 or up to age 23 if the children are full time college
students, the Company believes that its market share should be viewed as a
percentage of households. Historically, the Company's primary market focus has
been the "middle" eighty percent of such households rather than the upper and
lower ten percent segments based on the Company's belief that the upper ten
percent may already have a relationship with an attorney or law firm and the
lower ten percent may not be able to afford the cost of a legal service plan. As
a percentage of this defined "middle" market of approximately 100 million
households, the Company currently has an approximate 1.4% share of the estimated
market based on its existing 1.4 million active Memberships and, over the last
30 years, an additional 4% of households have previously purchased, but no
longer own, Memberships. The Company routinely remarkets to previous members and
reinstated approximately 66,000, 57,000 and 54,000 Memberships during 2003, 2002
and 2001, respectively.
Description of Memberships
The Memberships sold by the Company generally allow members to access legal
services through a network of independent law firms ("provider law firms") under
contract with the Company. Provider law firms are paid a monthly fixed fee on a
capitated basis to render services to plan members residing within the state or
province in which the provider law firm attorneys are licensed to practice.
Because the fixed fee payments by the Company to provider law firms do not vary
based on the type and amount of benefits utilized by the member, this capitated
arrangement provides significant advantages to the Company in managing claims
risk. At December 31, 2003, Memberships subject to the capitated provider law
firm arrangement comprised approximately 99% of the Company's active
Memberships. The remaining Memberships, approximately 1%, were primarily sold
prior to 1987 and allow members to locate their own lawyer ("open panel") to
provide legal services available under the Membership with the member's lawyer
being reimbursed for services rendered based on usual, reasonable and customary
fees, or are in states where there is no provider law firm in place and the
Company's referral attorney network is utilized.
Family Legal Plan
The Family Legal Plan currently marketed in most jurisdictions by the
Company consists of five basic benefit groups that provide coverage for a broad
range of preventive and litigation-related legal expenses. The Family Legal Plan
accounted for more than 93% of the Company's Membership fees in 2003 and
approximately 95% of the outstanding Memberships at December 31, 2003. In
addition to the Family Legal Plan, the Company markets other specialized legal
services products specifically related to employment in certain professions
described below.
In 12 states, certain of the Company's plans are available in the Spanish
language. For the Spanish language plans, the provider law firms have both
bilingual staff and lawyers and the Company has bilingual staff for both
customer service and marketing service functions. The Company will continue to
evaluate making its plans available in additional languages in markets where
demand for such a product is expected to be sufficient to justify this
additional cost.
In exchange for a fixed monthly, semi-annual or annual payment, members are
entitled to specified legal services. Those individuals covered by the
Membership include the individual who purchases the Membership along with his or
her spouse and never married children living at home up to age 21 or up to age
23 if the children are full time college students. Also included are children up
to age 18 for whom the member is legal guardian and any dependent child,
regardless of age, who is mentally or physically disabled. Each Membership,
other than the Business Owners' Legal Solutions Plan, is guaranteed renewable,
except in the case of fraud or nonpayment of Membership fees. Historically, the
Company has not raised rates to existing members. If new benefits become
available, existing members may choose the newer, more comprehensive plan at a
higher rate or keep their existing Memberships. Memberships are automatically
renewed at the end of each Membership period unless the member cancels prior to
the renewal date or fails to make payment on a timely basis.
The basic legal service plan Membership is sold as a package consisting of
five separate benefit groups. Memberships range in cost from $14.95 to $26.00
per month depending in part on the schedule of benefits, which may vary from
state or province in compliance with regulatory requirements. Benefits for
domestic matters, bankruptcy and drug and alcohol related matters are limited in
most Memberships.
Preventive Legal Services. These benefits generally offer unlimited
toll-free access to a member's provider law firm for advice and consultation on
any legal matter. These benefits also include letters and phone calls on the
member's behalf, review of personal contracts and documents, each up to 10 pages
in length, last will and testament preparation for the member and annual will
reviews at no additional cost. Additional wills for spouse and other covered
members may be prepared at a cost of $20.
Automobile Legal Protection. These benefits offer legal assistance for
matters resulting from the operation of a licensed motor vehicle. Members have
assistance available to them at no additional cost for: (a) defense in the court
of original jurisdiction of moving traffic violations deemed meritorious, (b)
defense in the court of original jurisdiction of any charge of manslaughter,
involuntary manslaughter, vehicular homicide or negligent homicide as the result
of a licensed motor vehicle accident, (c) up to 2.5 hours of assistance per
incident for collection of minor property damages (up to $2,000) sustained by
the member's licensed motor vehicle in an accident, (d) up to 2.5 hours of
assistance per incident for collection of personal injury damages (up to $2,000)
sustained by the member or covered family member while driving, riding or being
struck as a pedestrian by a motor vehicle, and (e) up to 2.5 hours of assistance
per incident in connection with an action, including an appeal, for the
maintenance or reinstatement of a member's driver's license which has been
canceled, suspended, or revoked. No coverage under this benefit of the basic
legal service plan is offered to members for pre-existing conditions, drug or
alcohol related matters, or for commercial vehicles over two axles or operation
without a valid license.
Trial Defense. These benefits offer assistance to the member and the
member's spouse through an increasing schedule of benefits based on Membership
year. Up to 60 hours are available for the defense of civil or job-related
criminal charges by the provider law firm in the first Membership year. The
criminal action must be within the scope and responsibility of employment
activities of the member or spouse. Up to 2.5 hours of assistance are available
prior to trial, and the balance is available for actual trial services. The
schedule of benefits under this benefit area increases by 60 hours each
Membership year to: 120 hours in the second Membership year, 3 hours of which
are available for pre-trial services; 180 hours in the third Membership year,
3.5 hours of which are available for pre-trial services; 240 hours in the fourth
Membership year, 4 hours of which are available for pre-trial services, to the
maximum limit of 300 hours in the fifth Membership year, 4.5 hours of which are
available for pre-trial services. This benefit excludes domestic matters,
bankruptcy, deliberate criminal acts, alcohol or drug-related matters, business
matters, and pre-existing conditions.
In addition to the pre-trial benefits of the basic legal plan described
above, there are additional pre-trial hours available as an option, or add-on,
to the basic plan. These optional benefits cost $9.00 per month and add 15 hours
of pre-trial services during the first year of the Membership increasing 5
additional hours each Membership year to the maximum limit of 35 hours in the
fifth Membership year and increases total pre-trial and trial defense hours
available pursuant to the expanded Membership to 75 hours during the first
Membership year to 335 hours in the fifth Membership year. These pre-trial hours
are in addition to those hours already provided by the basic plan so that the
member, in the first year of the Membership, has a combined total of 17.5
pre-trial hours available escalating to a combined total of 39.5 pre-trial hours
in the fifth Membership year. There were approximately 598,000 subscribers of
this benefit at December 31, 2003 compared to 614,000 at December 31, 2002.
IRS Audit Protection Services. This benefit offers up to 50 hours of legal
assistance per year in the event the member, spouse or dependent children
receive written notification of an Internal Revenue Service ("IRS") audit or are
summoned in writing to appear before the IRS concerning a tax return. The 50
hours of assistance are available in the following circumstances: (a) up to 1
hour for initial consultation, (b) up to 2.5 hours for representation in
connection with the audit if settlement with the IRS is not reached within 30
days, and (c) the remaining 46.5 hours of actual trial time if settlement is not
achieved prior to litigation. Coverage is limited to audit notification received
regarding the tax return for years during which the Membership is effective.
Representation for charges of fraud or income tax evasion, business and
corporate tax returns and certain other matters are excluded from this benefit.
With pre-trial benefits limited to 2.5 hours to 4.5 hours based on the
Membership year for trial defense (without the pre-trial option described) and
3.5 hours for the IRS audit benefit, these benefits do not ensure complete
pre-trial coverage. In order to receive additional pre-trial IRS audit or trial
defense benefits, a matter must actually proceed to trial. The costs of
pre-trial preparation that exceed the benefits under the Membership are the
responsibility of the member. Provider law firms under the closed panel
Membership have agreed to provide to members any additional pre-trial services
beyond those stipulated in the Membership at a 25% discount from the provider
law firm's customary and usual hourly rate. Retainer fees for these additional
services may be required.
Preferred Member Discount. Provider law firms have agreed to provide to
members any legal services beyond those stipulated in the Membership at a fee
discounted 25% from the provider law firm's customary and usual hourly rate.
This "customary and usual hourly rate" is a fixed single hourly rate for each
provider firm that is generally an average of the firm's various hourly rates
for its attorneys which typically vary based on experience and expertise.
Legal Shield Benefit
In approximately 40 states, the Legal Shield plan can be added to the
standard or expanded Family Legal Plan for $1 per month and provides members
with 24-hour access to a toll-free number for provider law firm assistance if
the member is arrested or detained. The Legal Shield member, if detained, can
present their Legal Shield card to the officer that has detained them to make it
clear that they have access to legal representation and that they are requesting
to contact a lawyer immediately. The benefits of the Legal Shield plan are
subject to conditions imposed by the detaining authority, which may not allow
for the provider law firm to communicate with the member on an immediate basis.
There were approximately 881,000 Legal Shield subscribers at December 31, 2003
compared to approximately 613,000 at December 31, 2002.
Identity Theft Shield Benefit
During the third quarter of 2003, the Company and Kroll Background America
Inc., a subsidiary of Kroll Inc., announced a joint marketing agreement that
allows the Company's independent sales associates to market Kroll's identity
theft benefits. By adding the new Identity Theft Shield to their existing family
Membership, members have toll free access to the identity theft specialists at
Kroll. This benefit can be added to a legal service Membership for $9.95 per
month or purchased separately for $12.95 per month. The identity theft related
benefits include a credit report and related instructional guide, a credit score
and related instructional guide, credit report monitoring with daily online and
monthly offline notification of any changes in credit information, up to $25,000
in credit restoration expense reimbursement and comprehensive identity theft
restoration services. There were approximately 91,000 subscribers at December
31, 2003 comprised of 87,000 subscribers at $9.95 per month and 4,000
subscribers at $12.95 per month.
Canadian Family Plan
The Family Legal Plan is currently marketed in the Canadian provinces of
Ontario, British Columbia, Alberta and Manitoba. The Company began operations in
Ontario and British Columbia during 1999, Alberta in February 2001 and Manitoba
in August 2001. Benefits of the Canadian plan include expanded preventive
benefits including assistance with Canadian Government agencies, warranty
assistance and small claims court assistance as well as the preferred member
discount. Canadian Membership fees collected during 2003 were approximately $4.2
million in U.S. dollars compared to $3.7 million collected in 2002 and $4.3
million collected in 2001. The Company plans to expand operations in other
provinces and territories of Canada.
Specialty Legal Service Plans
In addition to the Family Legal Plan described above, the Company also
offers other specialty or niche legal service plans. These specialty plans
usually contain many of the Family Legal Plan benefits adjusted as necessary to
meet specific industry or prospective member requirements. In addition to those
specialty plans described below, the Company will continue to evaluate and
develop other such plans as the need and market allow.
Business Owners' Legal Solutions Plan
The Business Owners' Legal Solutions plan was developed during 1995 and
provides business oriented legal service benefits for small businesses with 99
or fewer employees. This plan was developed and test marketed in selected
geographical areas and more widely marketed beginning in 1996 at a monthly rate
of $69.00. This plan provides small businesses with legal consultation and
correspondence benefits, contract and document reviews, debt collection
assistance and reduced rates for any non-covered areas. During 1997, the
coverage offered pursuant to this plan was expanded to include trial defense
benefits and Membership in GoSmallBiz.com, an unrelated Internet based service
provider. Through GoSmallBiz.com, members may receive unlimited business
consultations from business consultants and have access to timely small business
articles, educational software, Internet tools and more. This expanded plan is
currently marketed at a monthly rate ranging from $69 to $150 ($175 in Canada)
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 42 states and provinces and represented approximately 3.7%,
4.0% and 3.8% of the Company's Membership fees during 2003, 2002 and 2001,
respectively.
Law Officers Legal Plan
The Law Officers Legal Plan, developed in 1991 and marketed to law
enforcement officers, provides 24-hour job-related emergency toll-free access to
a provider law firm and provides legal services associated with administrative
hearings. This plan was designed to meet the legal needs of persons in the law
enforcement profession and is currently marketed at the monthly rate of $16.00
or at a group rate of $14.95. The Company has members covered under the Law
Officers Legal Plan in 27 states. The Law Officers Legal Plan offers the basic
family legal plan benefits described above without the motor vehicle related
benefits. These motor vehicle benefits are available in the Law Officers Legal
Plan only for defense of criminal charges resulting from the operation of a
licensed motor vehicle. Additionally, at no charge to the member, a 24-hour
emergency hotline is available to access the services of the provider law firm
in situations of job-related urgency. The Law Officers Legal Plan also offers
representation at no additional charge for up to ten hours (five hours per
occurrence) for two administrative hearings or inquiries per year and one
pre-termination hearing per Membership year before a review board or arbitrator.
Preparation and/or counsel for post-termination hearings are also available to
members as a schedule of benefits, which increases with each Membership year.
The schedule of benefits is similar to that offered under the Family Legal Plan
Trial Defense, including the availability of the optional pre-trial hours
described above for an additional $9.00 per month. During the years ended
December 31, 2003, 2002 and 2001, the Law Officers Legal Plan accounted for
approximately .9%, 1.4% and 1.5%, respectively, of the Company's Membership
fees.
Commercial Driver Legal Plan
The Commercial Driver Legal Plan, developed in 1986, is designed
specifically for the professional truck driver and offers a variety of
driving-related benefits, including coverage for moving and non-moving
violations. This plan provides coverage by a provider law firm for persons who
drive a commercial vehicle. This legal service plan is currently offered in 45
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, 2003, 2002 and 2001, this plan accounted for approximately
..9%, 1.3% and .9%, respectively, of Membership fees. The Plan underwritten by
the Road America Motor Club is available at the monthly rate of $35.95 or at a
group rate of $32.95. Plans underwritten by the Company are available at the
monthly rate of $32.95 or at a group rate of $29.95. Benefits include the motor
vehicle related benefits described above, defense of Department of
Transportation violations and the 25% discounted rate for services beyond plan
scope, such as defense of non-moving violations. The Road America Motor Club
underwritten plan includes bail and arrest bonds and services for family
vehicles.
Home-Based Business Rider
The Home-Based Business plan was designed to provide small business owners
access to commonly needed legal services. It can be added to the Expanded Family
Legal Plan in approved states. To qualify, the business and residence address
must be the same with three or fewer employees and be a for-profit business that
is not publicly traded. Benefits under this plan include unlimited business
telephone consultation, review of three business contracts per month, three
business and debt collection letters per month and discounted trial defense
rates. This plan also includes Membership in GoSmallBiz.com. This plan is
available in 35 states and represented approximately 1.6%, 1.7% and 1.5% of the
Company's Membership fees during 2003, 2002 and 2001, respectively.
Comprehensive Group Legal Services Plan
The Company introduced in late 1999 the Comprehensive Group plan, designed
for the large group employee benefit market. This plan provides all the benefits
of the Family Legal Plan as well as mortgage document preparation, assistance
with uncontested legal situations such as adoptions, name changes, separations
and divorces. Additional benefits include the preparation of health care power
of attorney and living wills or directives to physicians. Although the Company
has experienced increased sales of this plan during the last three years (8,795
Memberships, 7,051 Memberships and 3,462 Memberships during 2003, 2002 and 2001,
respectively) and believes this plan improves its competitive position in the
large group market, the Company continues to emphasize group marketing to
employee groups of less than 50 rather than larger groups where there is more
competition, price negotiation and typically a longer sales cycle.
Other than additional benefits such as the Legal Shield benefit described
above, the basic structure and design of the Membership benefits has not
significantly changed over the last several years. The consistency in plan
design and delivery provides the Company consistent, accurate data about plan
utilization which enables the Company to manage its benefit costs through the
capitated payment structure to provider firms.
Provider Law Firms
The Company's Memberships generally allow members to access legal services
through a network of independent provider law firms under contract with the
Company generally referred to as "provider law firms." Provider law firms are
paid a fixed fee on a per capita basis to render services to plan members
residing within the state or province as provided by the contract. Because the
fixed fee payments by the Company to provider law firms in connection with the
Memberships do not vary based on the type and amount of benefits utilized by the
member, this arrangement provides significant advantages to the Company in
managing its cost of benefits. Pursuant to these provider law firm arrangements
and due to the volume of revenue directed to these firms, the Company has the
ability to more effectively monitor the customer service aspects of the legal
services provided and the financial leverage to help ensure a customer friendly
emphasis by the provider law firms. Generally, due to the volume of revenue that
may be directed to particular provider law firms, the Company has access to
larger, more diversified law firms. The Company, through its members, is
typically the largest client base of its provider law firms.
Provider law firms are selected to serve members based on a number of
factors, including recommendations from provider law firms and other lawyers in
the area in which the candidate provider law firm is located and in neighboring
states, investigation by the Company of bar association standing and client
references, evaluation of the education, experience and areas of practice of
lawyers within the firm, on-site evaluations by Company management, and
interviews with lawyers in the firm who would be responsible for providing
services. Most importantly, these candidate law firms are evaluated on the
firm's customer service philosophy.
The majority of provider law firms are connected to the Company via
high-speed digital links to the Company's management information systems,
thereby providing real-time monitoring capability. This online connection offers
the provider law firm access to specially designed software developed by the
Company for administration of legal services by the firm. These systems provide
statistical reports of each law firm's activity and performance and allow
approximately 97% of members served by provider law firms to be monitored on a
near real-time basis. The few provider law firms that are not online with the
Company typically have a small Membership base and must provide various weekly
reports to the Company to assist in monitoring the firm's service level. The
combination of the online statistical reporting and weekly service reports for
smaller provider law firms allows quality control monitoring of over 15 separate
service delivery benchmarks. In addition, the Company regularly conducts
extensive random surveys of members who have used the legal services of a
provider law firm. The Company surveys members in each state every 60 days,
compiles the results of such surveys and provides the provider law firms with
copies of each survey and the overall summary of the results. If a member
indicates on a survey the service did not meet their expectation, the member is
contacted as soon as possible to resolve the issue.
Each month, provider law firms are presented with a comprehensive report of
ratings related to the Company's online monitoring, member complaints, member
survey evaluations, telephone reports and other information developed in
connection with member service monitoring. If a problem is detected, immediate
remedial actions are recommended by the Company to the provider law firms to
eliminate service deficiencies. In the event the deficiencies of a provider law
firm are not eliminated through discussions and additional training with the
Company, such deficiencies may result in the termination of the provider law
firm. The Company is in constant communication with its provider law firms and
meets with them frequently for additional training, to encourage increased
communications with the Company and to share suggestions relating to the timely
and effective delivery of services to the Company's members.
Each attorney member of the provider law firm rendering services must have
at least two years of experience as a lawyer, unless the Company waives this
requirement due to special circumstances such as instances when the lawyer
demonstrates significant legal experience acquired in an academic, judicial or
similar capacity other than as a lawyer. The Company provides customer service
training to the provider law firms and their support staff through on-site
training that allows the Company to observe the individual lawyers of provider
law firms as they directly assist the members.
Agreements with provider law firms: (a) generally permit termination of the
agreement by either party upon 60 days prior written notice, (b) permit the
Company to terminate the Agreement for cause immediately upon written notice,
(c) require the firm to maintain a minimum amount of malpractice insurance on
each of its attorneys, in an amount not less than $100,000, (d) preclude the
Company from interference with the lawyer-client relationship, (e) provide for
periodic review of services provided, (f) provide for protection of the
Company's proprietary information and (g) require the firm to indemnify the
Company against liabilities resulting from legal services rendered by the firm.
The Company is precluded from contracting with other law firms to provide the
same service in the same geographic area, except in situations where the
designated law firm has a conflict of interest, the Company enrolls a group of
500 or more members, or when the agreement is terminated by either party.
Provider law firms are precluded from contracting with other prepaid legal
service companies without Company approval. Provider law firms receive a fixed
monthly payment for each member who are residents in the service area and are
responsible for providing the Membership benefits without additional
remuneration. If a provider law firm delivers legal services to an open panel
member, the law firm is reimbursed for services rendered according to the open
panel Membership. As of December 31, 2003, provider law firms averaged
approximately 59 employees each and on average are evenly split between support
staff and lawyers.
The Company has had occasional disputes with provider law firms, some of
which have resulted in litigation. The toll-free telephone lines utilized and
paid for by the provider law firms are owned by the Company so that in the event
of a termination, the members' calls can be rerouted very quickly. Nonetheless,
the Company believes that its relations with provider law firms are generally
very good. At the end of 2003, the Company had provider law firms representing
46 states and four provinces compared to 45 states and three provinces at the
end of 2002 and 2001. During the last three calendar years, the Company's
relationships with a total of four provider law firms were terminated by the
Company or the provider law firm. As of December 31, 2003, 26 provider law firms
have been under contract with the Company for more than eight years with the
average tenure of all provider law firms being approximately 7 1/2 years.
The Company has an extensive database of referral lawyers who have provided
services to its members for use by members when a designated provider law firm
is not available. Lawyers with whom members have experienced verified service
problems, or are otherwise inappropriate for the referral system, are removed
from the Company's list of referral lawyers.
Identity Theft Shield Benefits Provider
Kroll is one of the world's leading independent risk consulting companies.
Kroll provides a broad range of investigative, intelligence, financial,
security, and technology services to help clients reduce risks, solve problems,
and capitalize on opportunities. Headquartered in New York with more than 60
offices on six continents, Kroll has a multidisciplinary corps of more than
2,200 employees and serves a global clientele of law firms, financial
institutions, corporations, nonprofit institutions, government agencies, and
individuals. Over the last three years, Kroll has developed a unique solution
for victims of identity theft. This new service is now available to Pre-Paid
Legal members through the Identity Theft Shield benefit. Similar to the provider
law firms, Kroll is paid a fixed fee on a monthly per capita basis to render
services to IDT members
Marketing
Multi-Level Marketing
The Company markets Memberships through a multi-level marketing program
that encourages individuals to sell Memberships and allows individuals to
recruit and develop their own sales organizations. Commissions are paid only
when a Membership is sold or an associate subscribes to the Company's eService
package (described below). No commissions are paid based solely on recruitment.
When a Membership is sold, commissions are paid to the associate making the
sale, and to other associates (on average, 13 others at December 31, 2003
compared to 17 others at December 31, 2002) who are in the line of associates
who directly or indirectly recruited the selling associate. The Company provides
training materials, organizes area-training meetings and designates personnel at
the home office specially trained to answer questions and inquiries from
associates. The Company offers various communication avenues to its sales
associates to keep such associates informed of any changes in the marketing of
its Memberships. The primary communication vehicles utilized by the Company to
keep its sales associates informed include extensive use of e-mail, an
interactive voice-mail service, The Connection monthly magazine, the weekly
Communication Show that may be heard via the Company's Internet webcasts, an
interactive voice response system, a monthly DVD (digital video disc) program
and the Company's website, prepaidlegal.com.
Multi-level marketing is primarily used for marketing based on personal
sales since it encourages individual or group face-to-face meetings with
prospective members 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 75% of
the Company's Memberships in force at December 31, 2003 compared to 73% at
December 31, 2002 and 2001. Although other means of payment are available,
approximately 73% of fees on Memberships purchased by individuals or families
are paid on a monthly basis by means of automatic bank draft or credit card.
The Company's marketing efforts towards employee groups, principally on a
payroll deduction payment basis, are designed to permit its sales associates to
reach more potential members with each sales presentation and strive to
capitalize on, among other things, what the Company perceives to be a growing
interest among employers in the value of providing legal service plans to their
employees. Memberships sold through employee groups constituted approximately
25% of total Memberships in force at December 31, 2003 compared to 27% at
December 31, 2002 and 2001. Adverse publicity about the Company is responsible,
to some extent, for the decline in group memberships on a percentage basis. The
majority of employee group Memberships are sold to school systems, governmental
entities and businesses. The Company emphasizes group marketing to employee
groups of less than 50 rather than larger groups where there is more
competition, price negotiation and typically a longer sales cycle. No group
accounted for more than 1% of the Company's consolidated revenues from
Memberships during 2003, 2002 or 2001. Substantially all group Memberships are
paid on a monthly basis. The Company is active in legislative lobbying efforts
to enhance the ability of the Company to market to public employee groups and to
encourage Congress to reenact legislation to permit legal service plans to
qualify for pre-tax payments under tax qualified employee cafeteria plans.
Sales associates are generally engaged as independent contractors and are
provided with training materials and are given the opportunity to participate in
Company training programs. Sales associates are required to complete a specified
training program prior to marketing the Company's Memberships to employee
groups. All advertising and solicitation materials used by sales associates must
be approved by the Company prior to use. At December 31, 2003, the Company had
329,600 "vested" sales associates compared to 341,116 and 286,488 "vested" sales
associates at December 31, 2002 and 2001, respectively. A sales associate is
considered to be "vested" if he or she has personally sold at least three new
Memberships per quarter or if he or she retains a personal Membership. A vested
associate is entitled to continue to receive commissions on prior sales after
all previous commission advances have been recovered. However, a substantial
number of vested associates do not continue to market the Membership, as they
are not required to do so in order to continue to be vested. During 2003, the
Company had 84,207 sales associates who personally sold at least one Membership,
of which 45,920 (55%) made first time sales. During 2002 and 2001 the Company
had 103,112 and 81,613 sales associates producing at least one Membership sale,
respectively, of which 65,383 (63%) and 46,687 (57%), respectively, made first
time sales. During 2003, the Company had 10,685 sales associates who personally
sold more than ten Memberships compared to 12,738 and 13,749 in 2002 and 2001,
respectively. A substantial number of the Company's sales associates market the
Company's Memberships on a part-time basis only. The decline in total vested
sales associates, those making at least one membership sale in 2003, those
making first time sales in 2003 and those that sold more than ten Memberships
during 2003 are all attributable to the decline in new sales associates added
during 2003. For the year 2003, new sales associates enrolled decreased 30% to
108,557 from the 155,663 enrolled in 2002.
The Company derives revenues from its multi-level marketing sales force,
principally from a one-time enrollment fee of $65 from each new sales associate
for which the Company provides initial marketing supplies and enrollment
services to the associate. In January 1997, the Company implemented a new
combination classroom and field training program, titled Fast Start to Success
("Fast Start"), aimed at increasing the level of new Membership sales per
associate. During most of 2003, the Fast Start program provided a direct
economic incentive to existing associates to help train new recruits in the form
of a qualification, or training, bonus. Associates successfully completed the
program by writing three new Memberships and recruiting a new sales associate or
by personally selling five new Memberships within 60 days of the associate's
start date. Associates in states that require the associate to become licensed
had 60 days from the issue date on their license to complete the same
requirements. Beginning January 1, 2004, new Fast Start associates must qualify
within the first 45 days of their start date. The program typically requires a
fee ranging from $34 to $184 per new associate, depending on special promotions
the Company implements from time to time, that is earned by the Company upon
completion of the training program. Amounts collected from sales associates are
intended primarily to offset the Company's costs incurred in recruiting and
training and providing materials to sales associates and are not intended to
generate profits from such activities. Other revenues from sales associates
represent the sale of marketing supplies and promotional materials and includes
fees related to the Company's eService program for associates. The eService
program provides subscribers Internet based back office support such as reports,
on-line documents, tools, a personal e-mail account and multiple personalized
web sites with "flash" movie presentations.
The Company's compensation plan for the multi-level marketing force is
under continuous review by the Company to assure that the various financial
incentives in the plan encourage the Company's desired goals. The Company offers
various incentive programs from time to time and frequently adjusts the program
to maintain appropriate incentives and to improve Membership production and
retention.
The Company holds its International Convention once a year, typically in
the spring, and a Leadership Summit, typically in the fall, and routinely hosts
more than 10,000 of its sales associates at these events. These events are
intended to provide additional training, corporate updates, new announcements,
motivation and associate recognition. Additionally, the Company offers the
Player's Club incentive program providing additional incentives to its
associates as a reward for consistent, quality business. Associates can earn the
right to attend an annual incentive trip by meeting monthly qualification
requirements for the entire calendar year and maintaining certain personal
retention rates for the Memberships sold during the calendar year. Associates
can also earn the right to receive additional monthly bonuses by meeting the
monthly qualification requirements for twelve consecutive months and maintaining
certain personal retention rates for the Memberships sold during that twelve
month period.
Regional Vice Presidents
The Company has a group of employees that serve as Regional Vice Presidents
("RVPs") responsible for associate activity in a given geographic region and
with the ability to appoint independent contractors as Area Coordinators within
the RVP's region. The RVPs have weekly reporting requirements as well as
quarterly sales and recruiting goals. The RVP and Area Coordinator program
provides a basis to effectively monitor current sales activity, further educate
and motivate the sales force and otherwise enhance the relationships between the
associates and the Company. New products and initiatives will continue to be
channeled through the RVPs and Area Coordinators. At December 31, 2003, the
Company had 80 RVPs in place.
Pre-Paid Legal Benefits Association
The PPL Benefits Association (PPLBA) was founded in 1999 with the intent of
providing sales associates the opportunity to have access, at their own expense,
to health insurance and life insurance benefits. Membership in the Association
allows a sales associate to become eligible to enroll in numerous benefit
programs, as well as take advantage of attractive affinity agreements.
Membership in this association is open to sales associates that reach a certain
level within the Company's marketing programs who also maintain an active
personal legal services Membership. The PPLBA is a separate association not
owned or controlled by the Company and is governed by a 9 member Board of
Directors, including four officer positions. None of the officers or directors
of the PPLBA serve in any such capacity with the Company. The PPLBA employs a
Director of Associate Benefits paid by the Association. Affinity programs
available to members of the PPLBA include credit cards, long-distance, wireless
services, safety trip plan, mortgage and real estate assistance and a travel
club. As determined by its Board of Directors, some of the revenue generated by
the PPLBA through commissions from vendors of the benefits and affinity programs
or contributed to the Association by the Company may be used to make open-market
purchases of the Company's stock for use in stock bonus awards to Association
members based on criteria established from time to time by the Board of
Directors of the PPLBA. Since inception and through December 31, 2003,
approximately 31,000 shares were purchased by the PPLBA for awards to its
members. In 2002, the PPLBA offered cash in lieu of stock awards and
approximately 21,000 shares purchased by the Association were sold to the
Company on January 2, 2003 at the stock's closing price to fund the awards. For
the 2003 stock bonus award program the PPLBA awarded approximately 10,000 shares
of stock to Association members.
Cooperative Marketing
The Company has in the past, and may in the future, develop marketing
strategies 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 a cooperative marketing agreement with Atlanta-based
Primerica Financial Services ("PFS"), a subsidiary of Citigroup, Inc. PFS is one
of the largest financial services marketing organizations in North America with
more than 100,000 personal financial analysts across the U.S. and Canada. The
PFS cooperative marketing agreement resulted in approximately 15,000 Memberships
during each of 2003 and 2002.
The Company has had limited success with cooperative marketing arrangements
in the past and is unable to predict with certainty what success it will
achieve, if any, under its existing or future cooperative marketing
arrangements.
Operations
The Company's corporate operations involve Membership application
processing, member-related customer service, various associate-related services
including commission payments, receipt of Membership fees, related general
ledger accounting, and managing and monitoring the provider law firm
relationships.
The Company utilizes a management information system to control operations
costs and monitor benefit utilization. Among other functions, the system
evaluates benefit claims, monitors member use of benefits and monitors
marketing/sales data and financial reporting records. Dominant company concerns
in the architecture of private networks and web systems include security,
scalability, capacity to accommodate peak traffic and business continuity in the
event of a disaster. The Company believes its management information system has
substantial capacity to accommodate increases in business data before
substantial upgrades will be required. The Company believes this excess capacity
will enable it to experience a significant increase in the number of members
serviced with less than a commensurate increase of administrative costs.
The Company has built a strong Internet presence to strengthen the services
provided to both members and associates. The Company's Internet site, at
www.prepaidlegal.com, welcomes the multifaceted needs of our members, sales
force, investors and prospects. It has also reduced costs associated with
communicating critical information to the associate sales force.
The Company's operations also include departments specifically responsible
for marketing support and regulatory and licensing compliance. The Company has
an internal production staff that is responsible for the development of new
audio and video sales materials.
Quality Control
In addition to the Company's quality control efforts for provider law firms
described above, the Company also closely monitors the performance of its home
office personnel, especially those who have telephone contact with members or
sales associates. The Company records home office employee telephone calls with
its members and sales associates to assure that Company policies are being
followed and to gather data about recurring problems that may be avoided through
modifications in policies. The Company also uses such recorded calls for
training and recognition purposes.
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 the latest
(2002) estimates by NRC, an estimated 35% 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 or union-based automatic enrollment
plans. The remaining 65% of such market are served primarily by the Company and
five other principal competitors: Hyatt Legal Plans (a MetLife company), ARAG
Group (formerly Midwest Legal Services), LawPhone/ACS, National Legal Plan and
Legal Services Plan of America (a GE Financial Assurance Partnership Marketing
Group company, formerly the Signature Group). For employment-based plans other
than employer paid, union-based automatic enrollment plans and employee
assistance plans and for individual enrollment plans, the Company represents
approximately 51% of the market share garnered by this group according to the
NRC.
If a greater number of companies seek to enter the prepaid legal services
market, the Company will experience increased competition in the marketing of
its Memberships. However, the Company believes its competitive position is
enhanced by its actuarial database, its existing network of provider attorney
law firms and its ability to tailor products to suit various types of
distribution channels or target markets. The Company believes that no other
competitor has the ability to monitor the customer service aspect of the
delivery of legal services to the same extent the Company does. Serious
competition is most likely from companies with significant financial resources
and advanced marketing techniques.
Regulation
The Company is regulated by or required to file with or obtain approval of
State Insurance Departments, Secretaries of State, State Bar Associations and
State Attorney General offices depending on individual state opinions of
regulatory responsibility for legal expense plans. The Company is also required
to file with similar government agencies in Canada. While some states or
provinces regulate legal expense plans as insurance or specialized legal expense
products, others regulate them as services.
As of December 31, 2003, the Company or one of its subsidiaries was
marketing new Memberships in 38 states or provinces that require no special
licensing. The Company's subsidiaries serve as operating companies in 16 states
that regulate Memberships as insurance or specialized legal expense products.
The most significant of these wholly owned subsidiaries are Pre-Paid Legal
Casualty, Inc. ("PPLCI") and Pre-Paid Legal Services, Inc. of Florida
("PPLSIF"). Of the Company's total Memberships in force as of December 31, 2003,
38% were written in jurisdictions that subject the Company or one of its
subsidiaries to insurance or specialized legal expense plan regulation.
The Company began selling Memberships in the Canadian provinces of Ontario
and British Columbia during 1999, Alberta during February 2001 and Manitoba
during August 2001. The Memberships currently marketed by the Company in such
provinces do not constitute an insurance product and therefore are exempt from
insurance regulation.
In states with no special licensing or regulatory requirements, the Company
commences operations only when advised by the appropriate regulatory authority
that proposed operations do not constitute conduct of the business of insurance.
There is no assurance that Memberships will be exempt from insurance regulation
even in states or provinces with no specific regulations. In these situations,
the Company or one of its subsidiaries would be required to qualify as an
insurance company in order to conduct business.
PPLCI serves as the operating company in most states where Memberships are
determined to be an insurance product. PPLCI is organized as a casualty
insurance company under Oklahoma law and as such is subject to regulation and
oversight by various state insurance agencies where it conducts business. These
agencies regulate the Company's forms, rates, trade practices, allowable
investments and licensing of agents and sales associates. These agencies also
prescribe various reports, require regular evaluations by regulatory
authorities, and set forth-minimum capital and reserve requirements. The
Company's insurance subsidiaries are routinely evaluated and examined by
representatives from the various regulatory authorities in the normal course of
business. Such examinations have not and are not expected to adversely impact
the Company's operations or financial condition in any material way. The Company
believes that all of its subsidiaries meet any required capital and reserve
requirements. Dividends paid by PPLCI are restricted under Oklahoma law to
available surplus funds derived from realized net profits.
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 and the Company or any other subsidiary must be at arms-length with
consideration for the adequacy of PPLCI's surplus, and must have prior approval
of the Oklahoma Insurance Commissioner. Payment of any extraordinary dividend by
PPLCI to the Company requires approval of the Oklahoma Insurance Commissioner.
During 2001, PPLCI declared a $5 million dividend payable to the Company which
was paid in 2002. During 2002, PPLCI declared a $6 million dividend which was
paid in December of 2002. While PPLCI had approximately $3.5 million in surplus
funds available for payment of an ordinary dividend in December 2002, no such
dividend was declared or paid during 2003. At December 31, 2003 PPLCI had
approximately $750,000 available for payment of an ordinary dividend. 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 operates 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. At December 31, 2003, PPLSIF did not have
funds available for payment of substantial dividends without the prior approval
of the insurance commissioner.
As the legal plan industry matures, additional legislation may be enacted
that would affect the Company and its subsidiaries. The Company cannot predict
with any accuracy if such legislation would be adopted or its ultimate effect on
operations, but expects to continue to work closely with regulatory authorities
to minimize any undesirable impact.
The Company's operations are further impacted by the American Bar
Association Model Rules of Professional Conduct ("Model Rules") and the American
Bar Association Code of Professional Responsibility ("ABA Code") as adopted by
various states. Arrangements for payments to a lawyer by an entity providing
legal services to its members are permissible under both the Model Rules and the
ABA Code, so long as the arrangement prohibits the entity from regulating or
influencing the lawyer's professional judgment. The ABA Code prohibits lawyer
participation in closed panel legal service programs in certain circumstances.
The Company's agreements with provider law firms comply with both the Model
Rules and the ABA Code. The Company relies on the lawyers serving as the
designated provider law firms for the closed panel benefits to determine whether
their participation would violate any ethical guidelines applicable to them. The
Company and its subsidiaries comply with filing requirements of state bar
associations or other applicable regulatory authorities.
The Company also is required to comply with state, provincial and federal
laws governing the Company's multi-level marketing approach. These laws
generally relate to unfair or deceptive trade practices, lotteries, business
opportunities and securities. The Company has experienced no material problems
with marketing compliance. In jurisdictions that require associates to be
licensed, the Company receives all applications for licenses from the associates
and forwards them to the appropriate regulatory authority. The Company maintains
records of all associates licensed, including effective and expiration dates of
licenses and all states in which an associate is licensed. The Company does not
accept new Membership sale applications from any unlicensed associate in such
jurisdictions.
Employees
At December 31, 2003, the Company and its subsidiaries employed 742
individuals on a full-time basis, exclusive of independent agents and sales
associates who are not employees. None of the Company's employees are
represented by a union. Management considers its employee relations to be good.
Foreign Operations
The Company began operations in the Canadian provinces of Ontario and
British Columbia during 1999, Alberta in February 2001 and Manitoba in August
2001 and derived aggregate revenues, including Membership fees and revenues from
associate services, from Canada of $4.5 million in U.S. dollars during 2003
compared to $4.0 million and $4.4 million in 2002 and 2001, respectively. Due to
the relative stability of the United States and Canadian foreign relations and
currency exchange rates, the Company believes that any risk of foreign
operations or currency valuations is minimal and would not have a material
effect on the Company's financial condition, liquidity or results of operations.
Availability of Information
The Company files periodic reports and proxy statements with the Securities
and Exchange Commission. The public may read and copy any materials the Company
files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information about the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company
files its reports with the SEC electronically. The SEC maintains an Internet
site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The address
of this site is http://www.sec.gov.
The Company's Internet address is www.prepaidlegal.com. The Company makes
available on its website free of charge copies of its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) of the Exchange
Act as soon as reasonably possible after the Company electronically files such
material with, or furnishes it to, the SEC.
ITEM 2. DESCRIPTION OF PROPERTY
The executive and administrative offices of the Company and its
subsidiaries are located at One Pre-Paid Way, Ada, Oklahoma. The newly completed
office complex, containing approximately 170,000 square feet of office space, is
owned by the Company and constructed on approximately 87 acres contributed to
the Company by the City of Ada in 2001 as part of an economic development
incentive package. Costs incurred through December 31, 2003 of approximately
$30.7 million, including $706,000 in capitalized interest costs, have been paid
from existing resources and proceeds from a $20 million line of credit for the
new office construction. The Company has entered into construction contracts in
the amount of $28.9 million with the general contractor pertaining to the new
office complex. Total remaining costs of completion pursuant to these contracts
from January 1, 2004 are estimated at approximately $3.1 million.
Continued growth over the past 11 years required the Company to lease and
purchase several ancillary sites to accommodate its expanding workforce. In
December over 600 employees departed their various worksites and moved to the
newly constructed headquarters. The new headquarters contains two long bars of
open office area designed to serve as podiums, which stretch east from the
northern and southern edges of the tower. Two and three stories high
respectively, the podiums house the call centers and Information Technology
departments. Only 60 feet across, they are designed to ensure that employees are
never more that thirty feet from a source of daylight. Shared corporate services
- -- including a 650-seat auditorium, dining hall, exercise facility, and a
connecting corridor containing a company history gallery -- are located at the
east end of the bars, creating a central courtyard. The courtyard features a
reflecting pool and a 12-foot bronze sculpture of the Company's logo, the Lady
of Justice, a universal symbol of justice. The building's main entrance welcomes
its frequent visitors, celebrates the history of the Company, and is designed to
convey the tradition of civic judicial buildings. The building is designed to
expand over time without negatively impacting the site layout or the building
concept and the Company emphasized the use of modular furnishings to provide
enhanced flexibility. The Company placed importance on the goal of providing
each employee with an excellent work environment.
Additionally, the Company fully utilizes another distribution facility
located about two miles from its new offices and containing approximately 17,000
square feet of office and warehouse and shipping space. The Company's previous
headquarters of approximately 40,000 square feet and two other buildings
containing approximately 18,600 combined square feet located adjacent to the
distribution facility are now used as disaster recovery, or business continuity,
sites.
In addition to the property described above that is owned by the Company,
the Company opened an additional Customer Care facility in Antlers, Oklahoma
during March 2000, in building space provided by the City of Antlers at no cost
to the Company. In conjunction with a rural economic development program
coordinated by the City of Antlers, a new facility was built at no cost to the
Company that can accommodate approximately 100 customer service representatives.
The Company leased the facilities from the City of Antlers upon completion of
the construction in November 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company and various of its executive officers have been named as
defendants in a putative securities class action originally filed in the United
States District Court for the Western District of Oklahoma in early 2001 seeking
unspecified damages on the basis of allegations that the Company issued false
and misleading financial information, primarily related to the method the
Company used to account for commission advance receivables from sales
associates. On March 5, 2002, the Court granted the Company's motion to dismiss
the complaint, with prejudice, and entered a judgment in favor of the
defendants. Plaintiffs thereafter filed a motion requesting reconsideration of
the dismissal which was denied. The plaintiffs have appealed the judgment and
the order denying their motion to reconsider the judgment to the Tenth Circuit
Court of Appeals. In August 2002 the lead institutional plaintiff withdrew from
the case, leaving two individual plaintiffs as lead plaintiffs on behalf of the
putative class. As of December 31, 2003, the briefing in the appeal had been
completed. On January 14, 2004 oral argument was held in the appeal. The Company
is unable to predict when a decision will be made on this appeal, and the
ultimate outcome of the case is not determinable.
Beginning in the second quarter of 2001 multiple lawsuits were filed
against the Company, certain officers, employees, sales associates and other
defendants in various Alabama and Mississippi state courts by current or former
members seeking actual and punitive damages for alleged breach of contract,
fraud and various other claims in connection with the sale of Memberships.
During 2003, there were at one time as many as 30 separate lawsuits involving
approximately 285 plaintiffs in Alabama. As of December 31, 2003, as a result of
dismissals or settlements for nominal amounts, the Company was aware of
approximately 25 separate lawsuits involving approximately 98 plaintiffs that
have been filed in multiple counties in Alabama. As of February 27, 2004, there
were approximately 80 named plaintiffs in approximately 25 cases pending in
Alabama. In February 2004, the claims of several additional plaintiffs in one of
the cases were dismissed on summary judgment in the Company's favor. As of
December 31, 2003, the Company was aware of 18 separate lawsuits involving
approximately 432 plaintiffs in multiple counties in Mississippi. Certain of the
Mississippi lawsuits also name the Company's provider attorney in Mississippi as
a defendant. Proceedings in several of the eleven cases which name the Company's
provider attorney as a defendant have been stayed pending the Mississippi
Supreme Court's ruling on the Pre-Paid defendants' appeal of a trial court's
granting of a partial summary judgment that the action is not required to be
submitted to arbitration. At least three complaints have been filed by the law
firm representing plaintiffs in eleven of the cases on behalf of certain of the
Mississippi plaintiffs and others with the Attorney General of Mississippi in
March 2002, December 2002 and August 2003. The Company has responded to the
Attorney General's requests for information with respect to these complaints,
and as of December 31, 2003, the Company was not aware of any further actions
being taken by the Attorney General. In Mississippi, the Company has filed
lawsuits in the United States District Court for the Southern and Northern
Districts of Mississippi in which the Company seeks to compel arbitration of the
various Mississippi claims under the Federal Arbitration Act and the terms of
the Company's Membership agreements, and has appealed the state court rulings in
favor of certain of the plaintiffs on the arbitration issue to the Mississippi
Supreme Court. One of the federal courts has ordered arbitration of a case
involving 8 plaintiffs. These cases are all in various stages of litigation,
including trial settings beginning in Alabama in April 2004, and in Mississippi
in May 2004, and seek varying amounts of actual and punitive damages. While the
amount of Membership fees paid by the plaintiffs in the Mississippi cases is
$500,000 or less, certain of the cases seek damages of $90 million. Additional
suits of a similar nature have been threatened. The ultimate outcome of any
particular case is not determinable.
On April 19, 2002, counsel in certain of the above-referenced Alabama suits
also filed a similar suit against the Company and certain of its officers in the
District Court of Creek County, Oklahoma on behalf of Jeff and Jana Weller
individually and doing business as Hi-Tech Auto making similar allegations
relating to the Company's Memberships and seeking unspecified damages on behalf
of a "nationwide" class. The Pre-Paid defendants' preliminary motions in this
case were denied, and on June 17, 2003, the Oklahoma Court of Civil Appeals
reversed the trial court's denial of the Pre-Paid defendants' motion to compel
arbitration, finding that the trial court erred when it denied Pre-Paid's motion
to compel arbitration pursuant to the terms of the valid Membership contracts,
and remanded the case to the trial court for further proceedings consistent with
that opinion. There have been no material developments in this case since the
June 17, 2003 Court of Appeals decision. The ultimate outcome of this case is
not determinable.
On June 29, 2001, an action was filed against the Company in the District
Court of Canadian County, Oklahoma. In 2002, the petition was amended to add
five additional named plaintiffs and to add and drop certain claims. This action
was originally a putative class action brought by Gina Kotwitz, later adding,
George Kotwitz, Rick Coker, Richard Starke, Jeff Turnipseed and Aaron Bouren, on
behalf of all sales associates of the Company. The amended petition seeks
injunctive and declaratory relief, with such other damages as the court deems
appropriate, for alleged violations of the Oklahoma Uniform Consumer Credit Code
in connection with the Company's commission advances, and seeks injunctive and
declaratory relief regarding the enforcement of certain contract provisions with
sales associates, including a request stated in June 2003 for the imposition of
a constructive trust as to earned commissions applied to the reduction of debit
balances and disgorgement of all earned renewal commissions applied to the
reduction of debit balances. On September 23, 2003 the court entered an order
dismissing the class action allegations upon the motion of the plaintiffs. The
order provides that the action will proceed only on an individual basis, and
that the hearing on plaintiffs' motion for class certification previously set
for February 2004 was cancelled. The Company has filed a motion for summary
judgment, which was pending as of December 31, 2003. The ultimate outcome of
this case is not determinable.
On March 1, 2002, an action was filed in the United States District Court
for the Western District of Oklahoma by Caroline Sandler, Robert Schweikert, Sal
Corrente, Richard Jarvis and Vincent Jefferson against the Company and certain
executive officers. This action is a putative class action seeking unspecified
damages filed on behalf of all sales associates of the Company and alleges that
the marketing plan offered by the Company constitutes a security under the
Securities Act of 1933 and seeks remedies for failure to register the marketing
plan as a security and for violations of the anti-fraud provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934 in connection
with representations alleged to have been made in connection with the marketing
plan. The complaint also alleges violations of the Oklahoma Securities Act, the
Oklahoma Business Opportunities Sales Act, breach of contract, breach of duty of
good faith and fair dealing and unjust enrichment and violation of the Oklahoma
Consumer Protection Act and negligent supervision. This case is subject to the
Private Litigation Securities Reform Act. Pursuant to the Act, the Court has
approved the named plaintiffs and counsel and an amended complaint was filed in
August 2002. The Pre-Paid defendants filed motions to dismiss the complaint and
to strike the class action allegations on September 19, 2002, and discovery in
the action was stayed pending a ruling on the motion to dismiss. On July 24,
2003, the Court granted in part and denied in part the Pre-Paid defendants'
motion to dismiss. The claims asserted under the Securities Exchange Act of 1934
and the Oklahoma Securities Act were dismissed without prejudice. The motion was
denied as to the remaining claims. On July 23, 2003, the Court denied the motion
to strike class action allegations at that time. The case is in the process of
completion of class certification briefing currently scheduled to be concluded
May 5, 2004, after which time the Court will make a determination as to whether
the case may proceed as a class action. The ultimate outcome of this case is not
determinable.
In December 2002, the West Virginia Supreme Court reversed a summary
judgment which had been granted by the Circuit Court of Monangalia County, West
Virginia in favor of the Company in connection with the claims of a former
member, Georgia Poling and her daughters against the Company and a referral
lawyer with respect to a 1995 referral. That action was originally filed in
March 2000, and alleges breach of contract and fraud against the Company in
connection with the referral. Plaintiffs seek actual and punitive damages in
unspecified amounts. The case is set for trial in April 2004. The ultimate
outcome of this case is not determinable.
On January 30, 2003, the Company announced that it had received a subpoena
from the office of the United States Attorney for the Southern District of New
York requesting information relating to trading activities in the Company's
stock in advance of the January 2003 announcement of recruiting and Membership
production results for the fourth quarter of 2002. The Company also received
notice from the Securities and Exchange Commission that it is conducting an
informal inquiry into the same subject and requesting that the Company
voluntarily provide certain information. The Company has and will continue to
respond to any such requests, the last of which occurred in July 2003. As of
February 27, 2004, the Company was not aware of any further inquiries in either
of these matters. The ultimate outcome of these matters is not determinable.
The Company is a defendant in various other legal proceedings that are
routine and incidental to its business. The Company will vigorously defend its
interests in all proceedings in which it is named as a defendant. The Company
also receives periodic complaints or requests for information from various state
and federal agencies relating to its business or the activities of its marketing
force. The Company promptly responds to any such matters and provides any
information requested.
While the ultimate outcome of these proceedings is not determinable, the
Company does not currently anticipate that these contingencies will result in
any material adverse effect to its financial condition or results of operation,
unless an unexpected result occurs in one of the cases. The costs of the defense
of these various matters are reflected as a part of general and administrative
expense in the consolidated statements of income. The Company has established an
accrued liability it believes will be sufficient to cover estimated damages in
connection with various cases (exclusive of ongoing defense costs which are
expensed as incurred), which at December 31, 2003 was $3.3 million. The Company
believes it has meritorious defenses in all pending cases and will vigorously
defend against the plaintiffs' claims. However, it is possible that an adverse
outcome in certain cases or increased litigation costs could have an adverse
effect upon the Company's financial condition, operating results or cash flows
in particular quarterly or annual periods.
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 29, 2004, there were 5,772 holders of record (including
brokerage firms and other nominees) of the Company's common stock, which is
listed on the New York Stock Exchange under the symbol "PPD." The following
table sets forth, for the periods indicated, the range of high and low sales
prices for the common stock, as reported by the New York Stock Exchange.
High Low
------- -------
2004:
1st Quarter (through February 29)............................................ $ 26.33 $ 21.57
2003:
4th Quarter ................................................................. $ 28.30 $ 23.24
3rd Quarter.................................................................. 25.21 20.60
2nd Quarter.................................................................. 27.40 17.22
1st Quarter.................................................................. 26.80 15.80
2002:
4th Quarter.................................................................. $ 30.49 $ 17.04
3rd Quarter.................................................................. 24.29 16.68
2nd Quarter.................................................................. 30.45 18.50
1st Quarter.................................................................. 31.75 18.76
The Company has never declared a cash dividend on its common stock.
However, due to recent changes in the Federal tax laws providing for certain
preferential treatment of dividends in certain instances, the Company may
reconsider its dividend policy.
It is anticipated that earnings generated from the operations of the
Company will be used to finance the Company's growth, to continue to purchase
shares of its stock, to retire existing debt and possibly to pay a cash
dividend. The Company has lines of credit as described in "Management's
Discussion and Analysis - Liquidity and Capital Resources," which prohibit
payment of cash dividends in excess of $1.8 million per quarter on its 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, capital requirements and approval from its lender
for any dividends in excess of $1.8 million per quarter. 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 is restricted
under the Oklahoma Insurance Code to available surplus funds derived from
realized net profits and requires the approval of the Oklahoma Insurance
Commissioner for any dividend representing more than 10% of such accumulated
available surplus or an amount representing more than the previous years' net
profits. During 2002 and 2001, PPLCI declared a $6 million and a $5 million
dividend payable to the Company. Both the 2001 and 2002 dividends were paid
during 2002. PPLSIF is similarly restricted pursuant to the insurance laws of
Florida. At December 31, 2003, PPLSIF did not have funds available for payment
of substantial dividends without the prior approval of the insurance
commissioner. While PPLCI had approximately $3.5 million in surplus funds
available for payment of an ordinary dividend in December 2002, no such dividend
was declared or paid during 2003. At December 31, 2003 PPLCI had approximately
$750,000 available for payment of an ordinary dividend. At December 31, 2003 the
amount of restricted net assets of consolidated subsidiaries was $16.7 million.
Recent Sales of Unregistered Securities
None.
Equity Compensation Plans
The following table provides information with respect to the Company's
equity compensation plans as of December 31, 2003, (other than its tax qualified
Employee Stock Ownership Plan designed to provide retirement benefits).
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
- --------------------------------------- ----------------------- --------------------- -------------------------
Equity compensation plans approved by
security holders (1)................. 1,020,252 $24.75 1,162,250
Equity compensation plans not approved
by security holders (2).............. 255,247 21.31 -
- --------------------------------------- ----------------------- --------------------- -------------------------
Total.................................. 1,275,499 $24.06 1,162,250
- --------------------------------------- ----------------------- --------------------- -------------------------
(1) These stock options have been issued pursuant to the Company's Stock Option
Plan which has been approved by security holders.
(2) These stock options have been issued to the Company's Regional Vice
Presidents ("RVPs") (described above) in order to encourage stock ownership
by its RVPs and to increase the proprietary interest of such persons in its
growth and financial success. These options have been granted periodically
to RVPs since 1996. Options are granted at fair market value at the date of
the grant and are generally immediately exercisable for a period of three
years or within 90 days of termination, whichever occurs first. There were
106,002, 244,679 and 131,288 total options granted to RVPs in the years
ended December 31, 2003, 2002 and 2001, respectively. The Company has
decided to discontinue the RVP stock option grants immediately after the
2003 fourth quarter stock options are awarded in the first quarter of 2004.
Issuer Purchases of Equity Securities
The following table provides information about the Company's purchases of stock
in the open market during the fourth quarter of 2003.
Total Number of Maximum Number
Total Number of Shares that May Yet
Shares Purchased as of Shares that May
Total Number of Average Price Paid Part of Publicly Yet Be Purchased
Period Shares Purchased per Share Announced Plans or Under the Plans or
Programs Programs (1)
- ----------------------- --------------------- --------------------- --------------------- ---------------------
October 2003........... 65,000 $ 27.44 65,000 848,900
November 2003.......... 95,400 26.85 95,400 753,500
December 2003.......... 378,000 25.97 378,000 375,500
--------------------- --------------------- ---------------------
Total.................. 538,400 $ 22.70 538,400
--------------------- --------------------- ---------------------
1) The Company announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of the Company's
common stock. The Board of Directors has subsequently from time to time
increased such authorization from 500,000 shares to 8,000,000 shares. The
most recent authorization was for 1,000,000 additional shares May 23, 3003
and there has been no time limit set for completion of the repurchase
program.
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. 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 and Management's Discussion and Analysis
of Financial Condition and Results of Operation included elsewhere herein.
Year Ended December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Income Statement Data: (In thousands, except ratio, per share and Membership amounts)
Revenues:
Membership fees...................................... $ 330,322 $ 308,401 $ 263,514 $ 211,763 $ 153,918
Associate services................................... 25,704 37,418 36,485 30,372 22,816
Product sales (2).................................... - - 60 1,016 5,888
Other................................................ 5,287 4,804 3,602 3,232 3,809
---------- ---------- ---------- ---------- ----------
Total revenues..................................... 361,313 350,623 303,661 246,383 186,431
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Membership benefits.................................. 111,165 103,761 87,429 69,513 51,089
Commissions.......................................... 115,386 119,371 111,060 96,614 74,333
Associate services and direct marketing.............. 28,929 32,566 29,879 23,251 15,815
General and administrative expenses.................. 36,711 33,256 28,243 21,524 19,280
Product costs (2).................................... - - 33 675 4,174
Other, net........................................... 8,546 6,685 5,884 4,403 3,226
---------- ---------- ---------- ---------- ----------
Total costs and expenses........................... 300,737 295,639 262,528 215,980 167,917
---------- ---------- ---------- ---------- ----------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle.... 60,576 54,984 41,133 30,403 18,514
Provision for income taxes............................. 20,669 18,970 13,519 9,550 6,480
---------- ---------- ---------- ---------- ----------
Income from continuing operations before cumulative
effect 39,907 36,014 27,614 20,853 12,034
of change in accounting principle....................
Income (loss) from operations of discontinued UFL segment
(net of applicable income tax benefit (expense) of
$0, $387 and ($444) for years 2001, 2000 and 1999,
respectectively)........................................ - - (504) 649 826
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in accounting
principle............................................ 39,907 36,014 27,110 21,502 12,860
Cumulative effect of adoption of SAB 101 (net of
applicable income tax benefit of $546)............... - - - (1,013) -
---------- ---------- ---------- ---------- ----------
Net income............................................... 39,907 36,014 27,110 20,489 12,860
Less dividends on preferred shares..................... - - - 4 10
---------- ---------- ---------- ---------- ----------
Net income applicable to common stockholders............. $ 39,907 $ 36,014 $ 27,110 $ 20,485 $ 12,850
---------- ---------- ---------- ---------- ----------
Basic earnings per common share from continuing
operations before cumulative effect of accounting change $ 2.28 $ 1.83 $ 1.28 $ .93 $ .52
Basic earnings per common share from discontinued
operations........................................... - - (.02) .03 .04
---------- ---------- ---------- ---------- ----------
Basic earnings per common share before cumulative effect
of change in accounting principle.................... 2.28 1.83 1.26 .96 .56
Cumulative effect of adoption of SAB 101................. - - - (.05) -
---------- ---------- ---------- ---------- ----------
Basic earnings per common share.......................... $ 2.28 $ 1.83 $ 1.26 $ .91 $ .56
---------- ---------- ---------- ---------- ----------
Selected Financial Data, continued
Year Ended December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(In thousands, except ratio, per share and Membership amounts)
Diluted earnings per common share from continuing
operations before cumulative effect of accounting change $ 2.27 $ 1.82 $ 1.28 $ .92 $ .51
Diluted earnings per common share from discontinued
operations........................................... - - (.02) .03 .04
---------- ---------- ---------- ---------- ----------
Diluted earnings per common share before cumulative
effect of accounting change.......................... 2.27 1.82 1.26 .95 .55
Cumulative effect of adoption of SAB 101................. - - - (.05) -
---------- ---------- ---------- ---------- ----------
Diluted earnings per common share........................ $ 2.27 $ 1.82 $ 1.26 $ .90 $ .55
---------- ---------- ---------- ---------- ----------
Pro forma amounts assuming adoption of SAB 101 is retroactively applied:
Net income.................................................................................. $ 21,502 $ 12,786
Basic earnings per common share.......................................................... $ .96 $ .55
Diluted earnings per common share........................................................ $ .95 $ .55
Weighted average number of common shares
outstanding - basic.................................. 17,530 19,674 21,504 22,504 23,099
Weighted average number of common shares
outstanding - diluted................................ 17,599 19,764 21,544 22,679 23,374
Membership Benefits Cost and Statistical Data:
Membership benefits ratio (1).......................... 33.7% 33.6% 33.2% 32.8% 33.2%
Commissions ratio (1).................................. 34.9% 38.7% 42.1% 45.6% 48.3%
General & administrative expense ratio (1)............. 11.1% 10.8% 10.7% 10.2% 12.5%
Product cost ratio (1) (2)............................. - - 55.0% 66.4% 70.9%
Commission cost per new Membership sold................ $ 172 $ 154 $ 152 $ 144 $ 141
New Memberships sold................................... 671,857 773,767 728,295 670,118 525,352
Period end Memberships in force........................ 1,418,997 1,382,306 1,242,908 1,064,805 827,979
Cash Flow Data:
Net cash provided by operating activities................ $ 51,693 $ 52,073 $ 37,801 $ 23,201 $ 17,031
Net cash (used in) provided by investing activities...... (36,901) (11,074) (6,963) (7,965) 12,070
Net cash (used in) financing activities................. (14,191) (34,431) (27,414) (13,714) (26,687)
Balance Sheet Data:
Total assets........................................... $ 131,012 $ 96,836 $ 85,720 $ 77,766 $ 58,156
Total liabilities...................................... 101,438 61,864 43,496 35,999 25,518
Stockholders' equity .................................. 29,574 34,972 42,224 41,767 32,638
(1) The Membership benefits ratio, the commissions ratio and the general and
administrative expense ratio represent those costs as a percentage of
Membership fees. The product cost ratio represents product costs as a
percentage of product sales for those years in which the Company sold
products. These ratios do not measure total profitability because they do
not take into account all revenues and expenses.
(2) During the fourth quarter of 1998, the Company completed the acquisition of
TPN. 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. Product sales declined and were
eventually eliminated following the TPN acquisition due to the
concentration on Membership sales as opposed to the sale of goods and
services.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview of the Company's Financial Model
The Company is in one line of business - the marketing of legal expense and
other complimentary plans primarily through a multi-level marketing force to
individuals. The Company's principal revenues are derived from membership fees,
and to a much lesser extent, revenues from marketing associates. The Company's
principal expenses are commissions, Membership benefits, associates services and
direct marketing costs and general and administrative expense. The following
table reflects the changes in these categories of revenues and expenses in the
last 3 years (dollar amounts in 000's):
% % %
Change Change Change
% of from % of from % of from
Total Prior Total Prior Total Prior
2003 Revenue Year 2002 Revenue Year 2001 Revenue Year
----------- ------- ------ ---------- ------- ------ ----------- ------- --------
Revenues:
Membership fees........ $ 330,322 91.4 7.1 $ 308,401 88.0 17.0 $ 263,514 86.8 24.4
Associate services..... 25,704 7.1 (31.3) 37,418 10.6 2.6 36,485 12.0 20.1
Other.................. 5,287 1.5 10.1 4,804 1.4 31.2 3,662 1.2 (13.8)
----------- ------- ------ ---------- ------- ------ ----------- ------- --------
361,313 100.0 3.0 350,623 100.0 15.5 303,661 100.0 23.2
----------- ------- ------ ---------- ------- ------ ----------- ------- --------
Costs and expenses:
Commissions............ 115,386 31.9 (3.3) 119,371 34.0 7.5 111,060 36.6 15.0
Membership benefits.... 111,165 30.8 7.1 103,761 29.6 18.7 87,429 28.8 25.8
Associate services and
direct marketing..... 28,929 8.0 (11.2) 32,566 9.3 9.0 29,879 9.8 28.5
General and administrative 36,711 10.2 10.4 33,256 9.5 17.7 28,243 9.3 31.2
Other, net............. 8,546 2.4 27.8 6,685 1.9 13.0 5,917 1.9 16.5
----------- ------- ------ ---------- ------- ------ ----------- ------- --------
300,737 83.2 1.7 295,639 84.3 12.6 262,528 86.4 21.6
----------- ------- ------ ---------- ------- ------ ----------- ------- --------
Provision for income taxes 20,669 5.7 9.0 18,970 5.4 40.3 13,519 4.4 41.6
Loss from operations of
discontinued UFL segment - - - - - (504) - -
----------- ------- ------ ---------- ------- ------ ----------- ------- --------
Net income.................. $ 39,907 11.0 10.8 $ 36,014 10.3 32.8 $ 27,110 8.9 32.3
----------- ------- ------ ---------- ------- ------ ----------- ------- --------
The number of active Memberships in force and the average monthly fee will
directly determine Membership fees and their impact on total revenues during any
period. The two most important variables impacting the number of active
Memberships during a period are the number of new Memberships written during the
period combined with the retention characteristics of both new and existing
Memberships. See "Measures of Member Retention" below for a discussion of the
Company's Membership retention. Associate services revenues are a function of
the number of new sales associates enrolled and the price of entry during the
period, the number of associates subscribing to the Company's eService offering
and the amount of sales tools purchased by the sales force.
Membership benefits expense is primarily determined by the number of active
Memberships and the per capita contractual rate that exists between the Company
and its benefits providers and during the last five years has been and is
expected to continue to be a relatively fixed percentage of Membership revenues
of approximately 33%-34%. Commissions paid to associates are primarily dependent
on the number and price of new Memberships sold during a period and any special
incentives that may be in place during the period. The Company expenses advance
commissions ratably over the first month of the related Membership. The level of
commission expense in relation to Membership revenues varies depending on the
level of new Memberships written and is expected to be higher when the Company
experiences increases in new Membership sales. During the last five years this
percentage has ranged from approximately 35% to 48% of Membership revenues.
Associate services and direct marketing expenses are directly impacted by the
number of new associates enrolled during a period due to the cost of materials
provided to such new associates, the number of associates subscribing to the
Company's eService offering, the amount of sales tools purchased by the sales
force as well as the number of those associates who successfully meet the Fast
Start to Success training and incentive award program qualifications. Generally,
these costs are more than offset by associate services revenue, although this
did not occur in 2003 due to the lower entry fees charged during most of the
year. General and administrative expenses are expected to trend up in terms of
dollars, but remain relatively constant as a percent of revenues. During the
past five years, general and administrative expenses have ranged from 8.7% to
10.2% of total revenues.
The primary benchmarks monitored by the Company throughout the various
periods include the number of active Memberships and their related retention
characteristics, the number of new Memberships written, the number of new
associates enrolled and the percentage of new associates that successfully meet
the Fast Start to Success qualification requirements.
The Company experienced decreases in both the number of new Memberships
written and the number of new associates enrolled during 2003 compared to the
prior year, the first year such a decrease has occurred in more than ten years.
During the 2002 fourth quarter, the Company eliminated the commission advances
to certain associates that had below average retention and due to below average
retention rates of Internet submitted Memberships, the Company placed
restrictions on those associates who are able to submit new memberships via the
Internet. These actions naturally reduced the number of new memberships written
and new associates enrolled during the 2002 fourth quarter and during 2003 but
demonstrate the Company's commitment to improve Membership retention. The
Company also attributes such decline, in part, to negative publicity (see Risk
Factors). Such adverse publicity may affect the Company's ability to write new
Memberships (especially in large employee groups), recruit new associates and
may have a detrimental effect on the persistency of the Company's Memberships.
However depending on the average monthly Membership fee and the entry price for
new associates, the Company may experience declines in both areas in terms of
numbers but may experience increases in both Membership fees and associate
services revenue and vice versa
Although the Company has grown its active Membership base and related
Membership fees in each of the past 11 years, the rate of growth has slowed to
an unacceptable rate. The Company believes however, that its current product
design, pricing parameters and business model are generally appropriate and it
has no immediate plans to change these fundamental sectors. The Company's focus
during 2004 will be on improved training of its associates, enhancing the
quality and quantity of sales tools provided to new and existing associates,
providing incentives for associates to write consistent, quality business and
continued emphasis on improving the basic retention characteristics of its
Memberships.
During the first part of 2004, the Company has updated its Fast Start to
Success training program materials and hosted more than 600 Fast Start trainers
at its new corporate headquarters in order to "train the trainers" on the
updated training materials. Also, beginning in 2004, the Company has increased
the amount of sales tools that are included in the new associate kit and
provided a supplemental package of sale tools if the new associate qualifies
pursuant to the Fast Start rules. The Company has also increased the number of
"points" needed to qualify for its Player's Club incentive award program to
encourage more productivity from both its new and existing associates.
Critical Accounting Policies
The Company's financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. These estimates and assumptions are affected by
management's application of accounting policies. If these estimates or
assumptions are incorrect, there could be a material change in the Company's
financial condition or operating results. Many of these "critical accounting
policies" are common in the insurance and financial services industries; others
are specific to the Company's business and operations. The Company's critical
accounting policies include estimates relating to revenue recognition related to
Membership and associate fees, deferral of Membership and associate related
costs, expense recognition related to commissions to associates, accrual of
incentive awards payable and accounting for legal contingencies.
Revenue recognition - Membership and Associate Fees
The Company's principal revenues are derived from Membership fees, most of
which are collected on a monthly basis. Memberships are generally guaranteed
renewable and non-cancelable except for fraud, non-payment of Membership fees or
upon written request. Membership fees are recognized in income ratably over the
related service period in accordance with Membership terms, which generally
require the holder of the Membership to remit fees on an annual, semi-annual or
monthly basis. Approxi