UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-9293
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PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 East Main Street
Ada, Oklahoma 74821-0145
(Address of principal executive offices) (Zip Code)
(580) 436-1234
(Registrants' telephone number, including area code)
--------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
--------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of May 10, 2001:
Common Stock $.01 par value 21,343,141
CONTENTS
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
Consolidated Balance Sheets
as of March 31, 2001 (Unaudited, Restated) and
December 31, 2000
Consolidated Statements of Income
(Unaudited, Restated) for the three months ended
March 31, 2001 and 2000
Consolidated Statements of Comprehensive Income
(Unaudited, Restated) for the three months ended
March 31, 2001 and 2000
Consolidated Statements of Cash Flows
(Unaudited, Restated) for the three months ended
March 31, 2001 and 2000
Notes to Consolidated Financial Statements (Unaudited, Restated
Report Of Independent Certified Public Accountants
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
ITEM 1. FINANCIAL STATEMENTS OF REGISTRANT
-------------------------------------------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
March 31, December 31,
2001 2000
(Unaudited,
Restated)
------------ ------------
Current assets:
Cash and cash equivalents........................................................ $ 11,101 $ 10,866
Available-for-sale investments, at fair value.................................... 1,089 1,953
Membership income receivable..................................................... 4,274 4,563
Inventories...................................................................... 1,065 1,542
Net assets of discontinued operations............................................ 4,649 4,504
Deferred member and associate service costs...................................... 12,649 11,606
Deferred income taxes............................................................ 1,950 4,361
------------ ------------
Total current assets......................................................... 36,777 39,395
Available-for-sale investments, at fair value...................................... 10,840 14,412
Investments pledged................................................................ 4,186 4,306
Property and equipment, net........................................................ 12,431 10,501
Deferred member and associate service costs........................................ 3,445 2,513
Other assets....................................................................... 7,187 6,639
------------ ------------
Total assets............................................................... $ 74,866 $ 77,766
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.............................................................. $ 7,194 $ 6,831
Deferred revenue and fees........................................................ 18,218 18,130
Current portion of capital lease obligation...................................... 139 223
Accounts payable and accrued expenses............................................ 7,487 6,865
------------ ------------
Total current liabilities...................................................... 33,038 32,049
Deferred revenue and fees........................................................ 4,778 3,083
Deferred income taxes ........................................................... 108 867
------------ ------------
Total liabilities............................................................ 37,924 35,999
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 24,740 issued........... 247 247
Capital in excess of par value................................................... 64,949 64,958
Retained earnings................................................................ 34,806 27,130
Accumulated other comprehensive income (loss).................................... 204 (108)
Treasury stock, at cost; 3,254 and 2,480 shares held at
March 31, 2001 and December 31, 2000, respectively............................. (63,264) (50,460)
------------ ------------
Total stockholders' equity................................................... 36,942 41,767
------------ ------------
Total liabilities and stockholders' equity................................. $ 74,866 $ 77,766
------------ ------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited, Restated)
Three Months Ended
March 31,
-------------------------
2001 2000
----------- -----------
Revenues:
Membership fees................................................................ $ 59,287 $ 48,081
Associate services............................................................. 10,137 6,233
Product sales.................................................................. 20 669
Other.......................................................................... 881 882
----------- -----------
70,325 55,865
----------- -----------
Costs and expenses:
Membership benefits............................................................ 20,041 15,082
Commissions.................................................................... 23,626 21,477
Associate services and direct marketing........................................ 8,186 4,279
General and administrative..................................................... 6,322 5,134
Product costs.................................................................. 1 545
Other, net..................................................................... 981 616
----------- -----------
59,157 47,133
----------- -----------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle............................ 11,168 8,732
Provision for income taxes....................................................... 3,650 3,051
----------- -----------
Income from continuing operations before cumulative effect
of change in accounting principle.............................................. 7,518 5,681
Income from operations of discontinued UFL segment (net of applicable
income tax expense) of $0 and $77 for year 2001 and 2000, respectively)........ 158 143
----------- -----------
Income before cumulative effect of change in accounting principle................ 7,676 5,824
Cumulative effect of adoption of SAB 101 (net of applicable income
tax benefit of $546)........................................................... - (1,013)
----------- -----------
Net income....................................................................... 7,676 4,811
Less dividends on preferred shares............................................... - 2
----------- -----------
Net income applicable to common stockholders..................................... $ 7,676 $ 4,809
----------- -----------
Basic earnings per common share from continuing operations
before cumulative effect of accounting change.................................. $ .34 $ .25
Basic earnings per common share from discontinued operations..................... .01 .01
---------- ----------
Basic earnings per common share before cumulative effect of accounting change.... .35 .26
Cumulative effect of adoption of SAB 101......................................... - (.05)
---------- ----------
Basic earnings per common share.................................................. $ .35 $ .21
---------- ----------
Diluted earnings per common share from continuing operations
before cumulative effect of accounting change.................................. $ .34 $ .25
Diluted earnings per common share from discontinued operations................... .01 .01
---------- ----------
Diluted earnings per common share before cumulative effect of accounting change.. .35 .26
Cumulative effect of adoption of SAB 101......................................... - (.05)
---------- ----------
Diluted earnings per common share................................................ $ .35 $ .21
---------- ----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited, Restated)
Three Months Ended
March 31,
-------------------------
2001 2000
----------- -----------
Net income....................................................................... $ 7,676 $ 4,811
----------- -----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment........................................ (92) (4)
----------- -----------
Unrealized gains on investments:
Unrealized holding gains arising during period............................... 416 24
Less: reclassification adjustment for gains included in net income......... (12) -
----------- -----------
404 24
----------- -----------
Other comprehensive income, net of income taxes of $168 and $11.................. 312 20
----------- -----------
Comprehensive income............................................................. $ 7,988 $ 4,831
----------- -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited, Restated)
Three Months Ended
March 31,
-------------------------
2001 2000
-------------------------
Cash flows from operating activities:
Net income....................................................................... $ 7,676 $ 4,811
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting principle............................ - 1,013
Income from discontinued operations............................................ (158) (143)
Provision for deferred income taxes............................................ 1,434 208
Depreciation and amortization.................................................. 928 345
Decrease (increase) in Membership income receivable............................ 289 (834)
Decrease (increase) in inventories............................................. 477 (38)
Increase in deferred member and associate service costs........................ (1,975) (6,365)
(Increase) decrease in other assets............................................ (549) 196
Increase in accrued Membership benefits........................................ 363 384
Increase in deferred revenue and fees.......................................... 1,783 6,320
Increase (decrease) in accounts payable and accrued expenses................... 521 (523)
----------- -----------
Net cash provided by operating activities of continuing operations........... 10,789 5,374
----------- -----------
Cash flows from investing activities:
Additions to property and equipment............................................ (2,857) (1,465)
Purchases of investments - available for sale.................................. - (228)
Maturities and sales of investments - available for sale....................... 5,191 130
----------- -----------
Net cash provided by (used in) investing activities of continuing 2,334 (1,563)
----------- -----------
operations.....................................................................
Cash flows from financing activities:
Proceeds from sale of common stock............................................. - 69
Decrease in capital lease obligations.......................................... (84) (82)
Purchases of treasury stock.................................................... (12,804) -
Dividends paid on preferred stock.............................................. - (2)
----------- -----------
Net cash used in financing activities of continuing operations........... (12,888) (15)
----------- -----------
Net increase in cash and cash equivalents........................................ 235 3,796
Cash and cash equivalents at beginning of period................................. 10,866 9,344
----------- -----------
Cash and cash equivalents at end of period....................................... $ 11,101 $ 13,140
----------- -----------
Supplemental disclosure of cash flow information:
Net cash used in discontinued operations....................................... $ (237) $ (554)
----------- -----------
Cash paid for interest......................................................... $ 1 $ 3
----------- -----------
Income taxes paid.............................................................. $ 1,000 $ 1,131
----------- -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Except for per share amounts, dollar amounts in tables are in
thousands unless otherwise indicated)
(Unaudited, Restated)
Note 1 - Basis Of Presentation
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been omitted. The
accompanying consolidated financial statements and notes thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's 2000 Annual Report on Form 10-K, as amended and
restated.
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited financial
statements as of March 31, 2001, and for the three months ended March 31, 2001
and 2000, reflect adjustments (which were normal and recurring) which, in the
opinion of management, are necessary for a fair statement of the financial
position and results of operations of the interim periods presented. Results for
the three months ended March 31, 2001 are not necessarily indicative of results
expected for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
As previously reported, in January 2001 and May 2001, the staff of the
Division of Corporation Finance of the Securities and Exchange Commission
("SEC") reviewed the Company's 1999 and 2000 Forms 10-K, respectively. On May
11, 2001, the Company received a letter from the staff of the Division of
Corporation Finance advising that, after reviewing the Company's Forms 10-K, it
was the position of the Division that the Company's accounting for commission
advance receivables was not in accordance with generally accepted accounting
principles (GAAP). The Company subsequently appealed this decision to the Chief
Accountant of the SEC. On July 25, 2001, the Company announced that the Chief
Accountant concurred with the prior staff opinion of the Division of Corporation
Finance. The Company subsequently announced that it would not pursue any further
appeals and that it would amend its previously filed SEC reports to restate the
Company's financial statements to reflect the SEC's position that the Company's
advance commission payments should be expensed ratably over the first month of
the related membership. The accompanying financial statements have been restated
primarily due to the change in accounting treatment pertaining to the advance
commission payments and related revenue recognition changes to be consistent
with such treatment (the "restatement"), and due to the effect of the Company's
sale on December 31, 2001 of Universal Fidelity Life Insurance Co. (UFL), which
is reported as and referred to as "discontinued operations" as discussed in Note
5 to the Consolidated Financial Statements. Additionally, the Company
implemented SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," ("SAB 101") during the fourth quarter of 2000 but
effective January 1, 2000 and has deferred the non-refundable $10 Membership
fees and $47 of the associate enrollment fees and the related direct incremental
costs associated with services provided members and associates in return for
such fees. At the time of the original filing we estimated the direct
incremental costs related to the non-refundable Membership fee and associate
enrollment fee to be in excess of $10 and $47, respectively. Based upon further
review, estimated direct incremental costs of $7 for the Membership fee and $40
for the associate enrollment fee have been deferred. The implementation of SAB
101 resulted in a cumulative effect type charge of $1.0 million ("Cumulative
effect"), net of tax, in the consolidated income statement for the three months
ended March 31, 2000. The effects of the restatement, discontinued operations
and SAB 101 reduced total assets from $257 million, as previously reported at
March 31, 2001, to $75 million, reduced total liabilities from $110 million to
$38 million (primarily due to the elimination of deferred taxes related to the
receivables) and therefore reduced stockholders' equity from $147 million to $37
million. A summary of the effects of these items on previously reported results
of operations follows:
As
Previously Effect of Discontinued
reported Restatement Operations Restated
----------- ----------- ----------- -----------
Three Months Ended March 31, 2001
---------------------------------
Revenues.................................................... $ 70,818 $ (208) $ (285) $ 70,325
Costs and expenses.......................................... 50,812 8,472 (127) 59,157
----------- ----------- ----------- -----------
Income from continuing operations before income taxes....... 20,006 (8,680) (158) 11,168
Provision for income taxes.................................. 6,840 (3,190) - 3,650
----------- ----------- ----------- -----------
Income from continuing operations........................... 13,166 (5,490) (158) 7,518
Income from discontinued operations......................... - - 158 158
----------- ----------- ----------- -----------
Net income applicable to common shareholders................ $ 13,166 $ (5,490) $ - $ 7,676
----------- ----------- ----------- -----------
Basic EPS................................................... $ .60 $ (.25) $ - $ .35
----------- ----------- ----------- -----------
Diluted EPS................................................. $ .60 $ (.25) $ - $ .35
----------- ----------- ----------- -----------
As Effect of
Previously Effect of Adoption of Discontinued
reported Restatement SAB 101 Operations Restated
----------- ----------- ----------- ----------- -----------
Three Months Ended March 31, 2000
---------------------------------
Revenues........................................ $ 55,933 $ 1,105 $ - $ (1,173) $ 55,865
Costs and expenses.............................. 39,026 8,928 132 (953) 47,133
----------- ----------- ----------- ----------- -----------
Income from continuing operations before income
taxes and cumulative change in accounting
principle..................................... 16,907 (7,823) (132) (220) 8,732
Provision (benefit) for income taxes............ 5,918 (2,744) (46) (77) 3,051
----------- ----------- ----------- ----------- -----------
Income from continuing operations before
cumulative effect of change in accounting
principle..................................... 10,989 (5,079) (86) (143) 5,681
Income from discontinued operations............. - - - 143 143
Cumulative effect of change in accounting
principle..................................... (4,109) 4,109 (1,013) - (1,013)
----------- ----------- ----------- ----------- -----------
Net income...................................... 6,880 (970) (1,099) - 4,811
Dividends on preferred shares................... 2 - - - 2
----------- ----------- ----------- ----------- -----------
Net income applicable to common shareholders.... $ 6,878 $ (970) $ (1,099) $ - $ 4,809
----------- ----------- ----------- ----------- -----------
Basic EPS....................................... $ .31 $ (.04) $ (.05) $ - $ .21
----------- ----------- ----------- ----------- -----------
Diluted EPS..................................... $ .30 $ (.04) $ (.05) $ - $ .21
----------- ----------- ----------- ----------- -----------
Note 2 - Contingencies
Subsequent to December 31, 2000, the Company and various of its executive
officers were named in multiple putative securities class action complaints
filed in both the United States District Courts for the Eastern and Western
Districts of Oklahoma seeking unspecified damages on the basis of allegations
that the Company issued false and misleading financial information, primarily
related to the method the Company used to account for commission advance
receivables from sales associates. These complaints have been transferred to
Western District of Oklahoma where motions to consolidate them into a single
proceeding are pending. An amended and consolidated complaint was filed on June
14, 2001, and the Company filed a motion to dismiss the complaint on July 24,
2001. The plaintiffs filed a response to the motion to dismiss on September 4,
2001 and the Company's reply brief was filed on September 24, 2001. Under the
Private Securities Litigation Reform Act of 1995, discovery is stayed during the
pendency of a motion to dismiss. Costs of defense of these cases through the
motion to dismiss stage are not expected to be material. While the outcome of
these cases is uncertain, the Company believes these actions are without merit
and will vigorously defend these actions. However, an unfavorable decision in
this litigation could have a material adverse effect on the Company's financial
position, results of operations and cash flows.
Also, in January 2001, the Company received inquiries from the Division of
Enforcement of the SEC requesting information relating primarily to the
Company's accounting policies for commission advance receivables from sales
associates. The Company has had no further contact from the Division of
Enforcement. The Division of Enforcement's inquiries were informal and did not
constitute a formal investigation or proceeding. The Company is unable to
determine the ultimate outcome of this inquiry, including whether the Division
of Enforcement will continue the inquiry subsequent to the Company's decision to
restate its financial statements.
On June 7, 2001 and August 3, 2001, shareholder derivative actions were
filed by alleged company shareholders, Bruce A. Hansen and Donna L. Hansen, and
Roger Strykowski, respectively, against all of the directors of the Company
seeking unspecified actual and punitive damages on behalf of the Company based
on allegations of breach of fiduciary duty, corporate waste and mismanagement by
the defendant directors. The derivative actions are in the preliminary pleading
stage. The complaints allege that the defendant directors caused the Company to
violate generally accepted accounting principles and federal securities laws by
improperly capitalizing commission expenses, caused the Company to allegedly pay
increased salaries and bonuses based upon financial performance which was
allegedly improperly inflated and caused the Company to expend significant
dollars in connection with the defense of its accounting policy, including cost
incurred in connection with the defense of the securities class actions
described above, and in connection with purchase of its own shares on the open
market at allegedly artificially inflated prices. The Company believes that
these derivative actions are related to the securities class actions described
above and may be intended to circumvent the restrictions on the securities class
actions imposed by the Private Securities Litigation Reform Act of 1995. While
the outcome of these cases is uncertain, based on the information currently
available to the Company, it appears that the complaints should be dismissed
because the plaintiffs failed to make or excuse the requisite demand that the
Company pursue the claims of alleged misconduct.
In the second quarter of 2001 and through January 4, 2002, multiple
lawsuits were filed against the Company, certain sales associates and other
unnamed defendants in Alabama state courts by current or former members seeking
unspecified actual and punitive damages for alleged breach of contract and fraud
in connection with the sale of memberships. As of January 30, 2002, the Company
was aware of 20 separate lawsuits involving approximately 110 plaintiffs that
have been filed in multiple counties in Alabama and it is possible that
additional cases will be filed. These cases make allegations similar to
allegations made in cases previously filed against the Company in Alabama state
courts by multiple plaintiffs which was previously settled for a payment of $1.5
million to settle claims by 97 separate claimants. In January 2002, one of the
law firms representing individual plaintiffs filed a putative class action on
behalf of all Alabama residents purchasing memberships seeking damages and
injunctive relief based on alleged failures to provide coverage under the
memberships. Based on the Company's preliminary investigation of the new cases,
the facts involved are in many respects significantly different from the facts
involved in the case the company previously settled. These cases are all in the
preliminary stages and the ultimate outcome is not determinable.
On June 29, 2001, an action was filed in the District Court of Canadian
County, Oklahoma by Gina Cotwitz against the Company. This action is a putative
class action on behalf of all sales associates of the Company and alleges
violations of the Oklahoma Consumer Protection Act, the Oklahoma Uniform
Consumer Credit Code and breach of contract in connection with certain of the
Company's practices relating to advancing commissions to sales associates. The
Company has filed an answer denying the plaintiff's claims and raising
affirmative defenses and intends to vigorously defend this case. The case is in
the preliminary stages and the ultimate outcome is not determinable.
The Company is a defendant in various other legal proceedings that are
routine and incidental to its business. The Company will vigorously defend its
interests in these proceedings. While the ultimate outcome of these proceedings
is not determinable, the Company does not currently anticipate that these
contingencies will result in any material adverse effect to its financial
condition or results of operation.
Note 3 - Treasury Stock Purchases
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 increased such authorization from 500,000
shares to 3 million shares during subsequent board meetings. At March 31, 2001,
the Company had purchased 2.5 million shares under these authorizations for a
total consideration of $59.6 million, an average price of $24.24 per share.
Treasury stock purchases will be made at prices that are considered
attractive by management and at such times that management believes will not
unduly impact the Company's liquidity. No time limit has been set for completion
of the purchase program. The Company obtained on November 6, 2001 a $17.5
million line of credit facility that may be used for additional purchases.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income
applicable to common stockholders by the weighted average number of shares of
common stock outstanding during the respective periods.
Diluted earnings per common share are computed by dividing net income
applicable to common stockholders by the weighted average number of shares of
common stock and common stock equivalents outstanding during the respective
periods. The $3.00 Cumulative Convertible Preferred stock and the Special
Preferred stock are considered to be dilutive common stock equivalents for all
periods through the conversion/redemption date and the number of shares issuable
on conversion of the $3.00 Cumulative Convertible Preferred stock and the
Special Preferred Stock is added to the weighted average number of common
shares. At December 31, 2000 all such shares had been converted or redeemed. The
weighted average number of common shares is also increased by the number of
shares issuable on the exercise of options less the number of common shares
assumed to have been purchased with the proceeds from the exercise of the
options pursuant to the treasury stock method; those purchases are assumed to
have been made at the average price of the common stock during the respective
period.
Three Months Ended
March 31,
--------------------
2001 2000
--------- --------
Basic Earnings Per Share:
Earnings:
Income from continuing operations before cumulative effect of change in accounting principle $ 7,518 $ 5,681
Less dividends on preferred shares.......................................................... - 2
--------- ---------
Income from continuing operations before cumulative effect of change in accounting principle
applicable to common stockholders......................................................... $ 7,518 $ 5,679
--------- ---------
Shares:
Weighted average shares outstanding......................................................... 22,002 22,549
--------- ---------
Diluted Earnings Per Share:
Earnings:
Income from continuing operations before cumulative effect of change in accounting principle
available to common stockholders after assumed conversions................................ $ 7,518 $ 5,681
--------- ---------
Shares:
Weighted average shares outstanding......................................................... 22,002 22,549
Assumed conversion of preferred stock....................................................... - 70
Assumed exercise of options................................................................. 31 164
--------- ---------
Weighted average number of shares, as adjusted.............................................. 22,033 22,783
--------- ---------
Note 5 - Discontinued Operations
On December 31, 2001 the Company completed the sale of its wholly owned
subsidiary UFL. The Company received a $2.8 million dividend and $1.2 million
from the sale of 100% of UFL stock. Net assets of $4.6 million and $4.5 million
have been segregated on the March 31, 2001 and December 31, 2000 Consolidated
Balance Sheets, respectively. The sale is not expected to have a significant
impact on reported earnings or stockholders' equity for 2001. Assets and
liabilities of UFL's discontinued operations were as follows:
March 31, December 31,
2001 2000
--------------- ---------------
Cash............................................... $ 468 $ 704
Available-for-sale investments, current............ 120 495
Amount due from coinsurer.......................... 14,146 12,242
Available-for-sale investments, non-current........ 7,444 6,795
Investment pledged................................. 1,800 1,799
Property and equipment, net........................ 653 699
Goodwill, net...................................... 597 616
Other assets....................................... 2,657 2,082
--------------- ---------------
Total assets....................................... 27,885 25,432
--------------- ---------------
Accident and health reserves....................... 14,146 12,242
Life insurance reserves, current................... 985 976
Accounts payable and accrued expenses.............. 364 54
Life insurance reserves, non-current............... 7,741 7,656
--------------- ---------------
Total Liabilities.................................. 23,236 20,928
--------------- ---------------
Net assets of UFL's discontinued operations........ $ 4,649 $ 4,504
--------------- ---------------
The results of operations of the UFL segment have been segregated and
reported as discontinued operations in the Consolidated Statements of Income.
Cash flow impacts of discontinued operations have been segregated in the
Consolidated Statements of Cash Flows. Details of income from discontinued
operations, net of income tax, are as follows:
Three Months Ended
March 31,
2001 2000
--------------------------
Revenues............................................................... $ 285 $ 1,173
--------------------------
Income from discontinued operations, net of tax expense of $0 and $77
for three months ended March 31, 2001 and 2000, respectively......... $ 158 $ 143
--------------------------
Note 6 - Recent Issued Accounting Pronouncements and Accounting Change
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") was issued in June 1998. This Statement, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative and
the resulting designation. SFAS 133, as amended, applies to all entities and is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company adopted SFAS 133, as amended, on January 1, 2001 as required. The
Company did not hold any derivative instruments at January 1, 2001 and there was
no effect on the consolidated financial statements upon the adoption of SFAS
133.
In July 2001, the Financial Accounting Standards Board issued new
pronouncements: SFAS 141, "Business Combinations"; SFAS 142, "Goodwill and Other
Intangible Assets"; and SFAS 143, "Accounting for Asset Retirement Obligations."
SFAS 141, which requires the purchase method of accounting for all business
combinations, applies to all business combinations initiated after June 30, 2001
and to all business combinations accounted for by the purchase method that are
completed after June 30, 2001. SFAS 141 will not apply to the Company unless it
enters into a future business combination. SFAS 142 requires that goodwill as
well as other intangible assets be tested annually for impairment. In addition,
the Statement eliminates the current requirement to amortize goodwill or
intangible assets with indeterminate lives, and is effective for fiscal years
beginning after December 15, 2001. SFAS 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long-lived asset. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The Company does not expect SFAS 142 or143 to materially impact
its reported results.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", (SFAS 144") is effective for the Company for the fiscal year beginning
January 1, 2002, and addresses accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business." SFAS 144 retains the
fundamental provisions of SFAS No. 121 and expands the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company
estimates that the new standard will not have a material impact on its financial
statements but is still in the process of evaluating the impact on its financial
statements.
Codification of Statutory Accounting Principles
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles (the "Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting to state insurance departments, is effective January 1, 2001. However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices. The State of Oklahoma will require adoption
of the Codification for the preparation of statutory financial statements
effective January 1, 2001. The Company's adoption of the Codification increased
the statutory capital and surplus of its regulated subsidiaries as of January 1,
2001 by $798,000.
Accounting Change
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101") was issued December 1999. This Staff Bulletin
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101
was effective no later than the fourth fiscal quarter of the fiscal years,
beginning after December 15, 1999. The Company implemented SAB 101 in the fourth
quarter of 2000 but effective January 1, 2000, and has deferred the
non-refundable $10 Membership and $47 of the associate enrollment fees and the
related direct incremental costs associated with services provided members and
associates in return for such fees. These deferred revenues and related costs
will be amortized to income over the estimated life of the Membership or the
estimated average active service period of associates which at March 31, 2001
were 3.6 years and one year, respectively. The implementation of SAB 101
resulted in a cumulative effect type adjustment of $1.0 million, net of tax,
which decreased net income for the three months ended March 31, 2000. See Note
1.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Pre-Paid Legal Services, Inc.
We have reviewed the accompanying consolidated balance sheet of Pre-Paid Legal
Services, Inc. and subsidiaries as of March 31, 2001, and the related
consolidated statements of income, comprehensive income and cash flows for the
three-month periods ended March 31, 2001 and 2000. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the consolidated financial statements referred to above
have been restated primarily to change the accounting treatment for payments to
associates for membership commission advances and related revenue recognition to
be consistent with such treatment. Additionally, as discussed in Note 6 the
Company changed certain of its revenue recognition policies as a result of the
adoption of Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements."
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2000, and the related consolidated statements of income,
comprehensive income, cash flows and changes in stockholders' equity for the
year then ended (not presented herein) and in our report dated January 30, 2002,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 22, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
The Company reported net income applicable to common shares of $7.7
million, or $.35 per diluted common share, for the three months ended March 31,
2001, up 60% from net income applicable to common stockholders of $4.8 million,
or $.21 per diluted common share, for the comparable period of the prior year
after an after-tax charge of $1.0 million relating to the cumulative effect on
prior years of adopting SAB 101. See Note 6.
Membership fees totaled $59.3 million during 2001 compared to $48.1 million
for 2000, an increase of 23%. Membership fees and their impact on total revenues
in any period are determined directly by the number of active Memberships in
force during any such period. The active Memberships in force are determined by
both the number of new Memberships sold in any period together with the renewal
rate of existing Memberships. New Membership sales increased 12% during the
three months ended March 31, 2001 to 183,712 from 163,341 during the comparable
period of 2000. At March 31, 2001, there were 1,114,437 active Memberships in
force compared to 890,264 at March 31, 2000, an increase of 25%. Additionally,
the average annual fee per Membership has increased from $237 for all
Memberships in force at March 31, 2000 to $246 for all Memberships in force at
March 31, 2001, a 4% increase. This increase is a result of a higher portion of
active Memberships containing the additional pre-trial hours benefit at an
additional cost and increased sales of the Business Owners' Legal Solutions
plan.
Associate services revenue increased 63% from $6.2 million for the first
three months of 2000 to $10.1 million during the same period of 2001 primarily
as a result of more new associates recruited and of the Fast Start program which
generated training fees of approximately $6.0 million during the first three
months of 2001 compared to $3.5 million for the comparable period of 2000. The
field training program, titled Fast Start to Success ("Fast Start") is aimed at
increasing the level of new Membership sales per associate. Fast Start requires
a training fee of $184 per new associate and upon successful completion of the
program provided for the payment of certain training bonuses through March 31,
2001. The $6.0 million and $3.5 million for the three month periods ending March
31, 2001 and 2000, respectively, in training fees was comprised of $184 from
each of approximately 32,790 new sales associates who elected to participate in
Fast Start during the first three months of 2001 compared to 19,240 that
participated during the comparable quarter of 2000. New associates enrolled
during the first three months of 2001 were 34,286 compared to 21,238 for the
same period of 2000, an increase of 61%. Effective April 2001, the Company
modified its compensation plan to consolidate the lower four levels of its
compensation structure into two levels. At the same time, the Company
implemented a two-year advance at the lowest commission level for associates who
participate in the training program. Associates who do not participate in the
training program receive only earned commissions until they meet the advancement
qualification requiring them to produce 50 new memberships in their organization
in order to advance to the next compensation level and qualify for up to 3 years
commission advance.
Product sales declined 97% during the three months ended March 31, 2001 to
$20,000 from $669,000 for the comparable period of 2000 primarily due to the
concentration on Membership sales as opposed to the sale of goods and services
following the TPN acquisition. Product sales are expected to be immaterial in
2001 and future periods as the Company no longer encourages product sales.
Other income remained constant at approximately $880,000 for both
three-month periods.
Primarily as a result of the increase in Membership fees and associate
services, total revenues increased to $70.3 million for the three months ended
March 31, 2001 from $55.9 million during the comparable period of 2000, an
increase of 26%.
Membership benefits totaled $20.0 million for the three months ended March
31, 2001 compared to $15.1 million for the comparable period of 2000, and
represented 33.8% and 31.4% of Membership fees for the 2001 and 2000 periods,
respectively. This Membership benefit ratio (Membership benefits as a percentage
of Membership fees) should remain near 35% as substantially all active
Memberships provide for a capitated benefit.
Commissions to associates increased 9% to $23.6 million for the three
months ended March 31, 2001 compared to $21.5 million for the comparable period
of 2000, and represented 39.9% and 44.7% of Membership fees for such periods.
These amounts were reduced by $582,000 and $357,000, respectively, representing
Membership lapse fees. Commissions to associates are primarily dependent on the
number of new memberships sold during a period. New memberships sold during the
three months ended March 31, 2001 totaled 183,712, a 12% increase from the
163,341 sold during the comparable period of 2000. Commissions to associates per
new membership sold were $129 per membership for the three months ended March
31, 2001 compared to $133 for the comparable period of 2000.
Associate services and direct marketing expenses increased to $8.2 million
for the three months ended March 31, 2001 from $4.3 million for the comparable
period of 2000. Fast Start bonuses incurred were approximately $3.6 million
during the first three months of 2001 compared to $1.8 million in the same
period of 2000. Additional costs due to increased enrollment of new associates
and purchases of marketing and promotional supplies by associates also
contributed to the increase. These expenses also include marketing costs, other
than commissions, that are directly associated with new Membership sales.
General and administrative expenses during the three months ended March 31,
2001 and 2000 were $6.3 million and $5.1 million, respectively, and represented
10.7% of Membership fees for such years. Management expects further gradual
decreases in general and administrative expenses when expressed as a percentage
of Membership fees as a result of certain economies of scale.
Product costs declined to $1,000 for the three months ended March 31, 2001
from $545,000 for the comparable period of 2000 in conjunction with the 97%
decline in product sales. Product costs are expected to be immaterial in 2001
and future periods as the Company no longer encourages product sales.
Other expenses, net, which include depreciation and amortization and
premium taxes reduced by interest income, increased to $981,000 for the three
months ended March 31, 2001 from $616,000 for the comparable period of 2000.
Depreciation and amortization increased to $948,000 for the first three months
of 2001 from $603,000 for the comparable period of 2000. Premium taxes increased
from $356,000 for the three months ended 2000 to $580,000 for the same period of
2001. Interest income increased by approximately $201,000 for the first three
months of 2001 to $544,000 from $343,000 for the 2000 period due to an increase
in investment balances.
The Company has recorded a provision for income taxes of $3.7 million
(32.7% of pretax income) for the first three months of 2001 compared to $3.1
million (34.9% of pretax income) for the same period of 2000. The decrease in
the effective tax rate is primarily attributable to non-taxable interest income
and utilization of net operating loss carryforwards and tax credits.
The results of operations of the UFL segment have been segregated and
reported as discontinued operations in the Consolidated Statements of Income.
Income from discontinued operations, net of income tax, is $158,000, net of $0
tax expense and $143,000 net of tax expense of $77,000 for the three months
ended March 31, 2001 and 2000, respectively.
The Company did not pay dividends during the first three months of 2001 due
to the fact that during the second quarter of 2000, all shares of preferred
stock were converted into shares of common stock or purchased by the Company.
Dividends paid on outstanding preferred stock were $2,000 for the three-month
period ended March 31, 2000.
Liquidity and Capital Resources
General
Consolidated net cash provided by operating activities of continuing
operations was $10.8 million for the first three months of 2001 compared to cash
provided of $5.4 million for the 2000 period. The increase of $5.4 million in
cash provided by operating activities during the first three months of 2001
compared to the same period of 2000 resulted primarily from the increase in net
income of $2.9 million, an increase in the provision for deferred taxes of $1.2
million, a net decrease in the change in Membership income receivable of $1.1
million.
Consolidated net cash provided by investing activities of continuing
operations was $2.3 million for the first three months of 2001 compared to net
cash used in investing activities of $1.6 million for the comparable period of
2000. This $3.9 million increase in cash provided by investing activities
resulted primarily from the $5.1 million change in the maturities and sales of
investments offset by a $200,000 increase in the purchases of investments and
the $1.4 million increase in net additions to property and equipment.
Net cash used in financing activities of continuing operations during the
first three months of 2001 was $12.9 million compared to $15,000 for the
comparable period of 2000. This $12.9 million change was primarily comprised of
the $12.8 million used to acquire treasury stock during the first three months
of 2001.
The Company had a consolidated working capital surplus of $3.7 million at
March 31, 2001, a decrease of $3.6 million compared to a consolidated working
capital of $7.3 million at December 31, 2000. The $3.6 million decrease in
working capital during the first three months of 2001 was primarily the result
of a $2.4 million decrease in deferred income taxes caused by a reduction in
expenses not deductible for tax purposes and an increase in the current portion
of deferred member and associate costs.
At March 31, 2001 the Company reported $27.2 million in cash and
investments (after utilizing more than $12.8 million to purchase approximately
774,000 shares of its common stock during the three months ending March 31,
2001) compared to $31.5 million at December 31, 2000. The Company's investments
consist of common stocks, investment grade (rated Baa or higher) preferred
stocks and investment grade bonds primarily issued by corporations, the United
States Treasury, federal agencies, federally sponsored agencies and enterprises
as well as mortgage-backed securities and state and municipal tax-exempt bonds.
The Company generally advances significant commissions at the time a
Membership is sold. During the three months ended March 31, 2001, the Company
advanced commissions of $25.2 million on new Membership sales compared to $22.7
million for the same period of 2000. Since approximately 94% of Membership
premiums are collected on a monthly basis, a significant cash flow deficit is
created at the time a Membership is sold. This deficit is reduced as monthly
premiums are remitted and commissions payable on those Memberships are withheld
to recover the advance.
The Company expenses advance commissions ratably over the first month of
the related membership. As a result of this accounting policy, the Company's
commission expenses are all recognized over the first month of a Membership and
there is no commission expense recognized for the same Membership during the
remainder of the advance period. The Company tracks its advance commission
payments outstanding for internal purposes of analyzing its commission advance
program. While not recorded as an asset, unearned commission payments to
associates for the three months ended March 31, 2001 were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)............................... $ 167,193
Advance commission payments, net................................................. 25,200
Earned commissions applied....................................................... (14,487)
Advance commission payment write-offs............................................ (540)
------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 177,366
Estimated unrecoverable advance commission payments (1).......................... (11,627)
Ending unearned advance commission payments, net (1)............................. ------------
$ 165,739
------------
(1) These amounts do not represent fair value, as they do not take into
consideration timing of estimated recoveries.
The ending unearned advance commission payments, net, above includes net
unearned advance commission payments to non-vested associates of $15.4 million.
As such, at March 31, 2001 future commission payments and elated expense should
be reduced as unearned advance commission payments of $150.6 million are
recovered. Commissions are earned by the associate as Membership premiums are
earned by the Company, usually on a monthly basis. The Company reduces unearned
advance commission payments or remits payment to an associate, as appropriate,
when commissions are earned. Should a Membership lapse before the advances have
been recovered for each commission level, the Company generates an immediate
"charge-back" to the applicable sales associate to recapture up to 50% of any
unearned advance. This charge-back is deducted from any future advances that
would otherwise be payable to the associate for additional new Memberships. Any
remaining unearned advance commission payment may be recovered by withholding
future residual earned commissions due to an active associate on active
Memberships. Additionally, even though a commission advance may have been fully
recovered on a particular Membership, no additional commission earnings from any
Membership are paid to an associate until all previous advances on all
Memberships, both active and lapsed, have been recovered.
The Company has the contractual right to require associates to repay
unearned advance commission payments from sources other than earned commissions
including cash (a) from all associates either (i) upon termination of the
associate relationship, which includes but is not limited to when an associate
becomes non-vested or (ii) when it is ascertained that earned commissions are
insufficient to repay the unearned advance commission payments and (b) upon
demand, from agencies or associates who are parties to the associate agreements
signed between October 1989 and July 1992 or July 1992 to August 1998,
respectively. The sources, other than earned commissions, that may be available
to recover associate unearned advance commission payments are potentially
subject to limitation based on applicable state laws relating to creditors'
rights generally. Historically, the Company has not demanded repayments of the
unearned advance commissions from associates, including terminated associates,
because collection efforts would likely increase costs and have the potential to
disrupt the Company's relationships with its sales associates. This business
decision by the Company has a significant effect on the Company's cash flow by
electing to defer collection of advance payments of which approximately $11.6
million were not expected to be collected from future commissions at March 31,
2001. However, the Company regularly reviews the unearned advance commission
payments status of associates and will exercise its right to require associates
to repay advances when management believes that such action is appropriate.
The Company believes that it has significant ability to finance expected
future growth in Membership sales based on its existing amount of cash and cash
equivalents and unpledged investments at March 31, 2001 of $23.0 million. The
Company expects to maintain cash and investment balances, including pledged
investments, on an on-going basis of approximately $25 to $35 million in order
to meet expected working capital needs and regulatory capital requirements. Cash
balances in excess of this amount would be used for discretionary purposes such
as treasury stock purchases. The Company continues to consider incurring
indebtedness in order to continue or increase the rate of stock purchases,
including financing its new corporate headquarters in order to allow cash flow
from operations to continue to be used to purchase stock.
Subsequent Events
On November 6, 2001, the Company entered into a $17.5 million line of
credit with Bank of Oklahoma, N.A. in order to fund additional treasury stock
purchases. The line of credit provides for immediate funding of up to $17.5
million with scheduled repayments beginning February 15, 2002 and ending
November 15, 2002 with interest at the Libor rate plus 2% per annum or the prime
rate minus 1/2 percent per annum as selected by the Company. The loan is secured
by the Company's rights to receive membership fees on a portion of its
memberships. The terms of this loan have various covenants customary for similar
transactions.
Parent Company Funding and Dividends
Although the Company is the operating entity in many jurisdictions, the
Company's subsidiaries serve as operating companies in various states that
regulate Memberships as insurance or specialized legal expense products. The
most significant of these wholly owned subsidiaries are PPLCI, UFL and PPLSIF.
The ability of PPLCI and PPLSIF to provide funds to the Company is subject to a
number of restrictions under various insurance laws in the jurisdictions in
which PPLCI and PPLSIF conduct business, including limitations on the amount of
dividends and management fees that may be paid and requirements to maintain
specified levels of capital and reserves. In addition PPLCI will be required to
maintain its stockholders' equity at levels sufficient to satisfy various state
or provincial regulatory requirements, the most restrictive of which is
currently $3 million. Additional capital requirements of PPLCI or PPLSIF will be
funded by the Company in the form of capital contributions or surplus
debentures. At March 31, 2001, neither UFL nor PPLSIF had funds available for
payment of substantial dividends without the prior approval of the respective
insurance commissioners. PPLCI had approximately $5 million in surplus funds
available for payment of an ordinary dividend.
Forward-Looking Statements
All statements in this report concerning Pre-Paid Legal Services, Inc. (the
"Company") other than purely historical information, including but not limited
to, statements relating to the Company's future plans and objectives,
discussions with the staff of the SEC, expected operating results, and the
assumptions on which such forward-looking statements are based, constitute
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are based
on the Company's historical operating trends and financial condition as of March
31, 2001 and other information currently available to management. The Company
cautions that the Forward-Looking Statements are subject to all the risks and
uncertainties incident to its business, including but not limited to risks
described below. Moreover, the Company may make acquisitions or dispositions of
assets or businesses, enter into new marketing arrangements or enter into
financing transactions. None of these can be predicted with certainty and,
accordingly, are not taken into consideration in any of the Forward-Looking
Statements made herein. For all of the foregoing reasons, actual results may
vary materially from the Forward-Looking Statements. The Company assumes no
obligation to update the Forward-Looking Statements to reflect events or
circumstances occurring after the date of the statement.
Risk Factors
There are a number of risk factors that could affect our financial
condition or results of operations. See Note 2 - Contingencies and Part II -
Item 1 Legal Proceedings. Please refer to page 33 and 34 of the Company's 2000
Annual Report on Form 10-K, as amended and restated, for a description of other
risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's consolidated balance sheets include a certain amount of
assets and liabilities whose fair values are subject to market risk. Due to the
Company's significant investment in fixed-maturity investments, interest rate
risk represents the largest market risk factor affecting the Company's
consolidated financial position. Increases and decreases in prevailing interest
rates generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, liquidity of the instrument and
other general market conditions.
As of March 31, 2001, substantially all of the Company's investments were
in investment grade (rated Baa or higher) fixed-maturity investments,
interest-bearing money market accounts and a collateralized repurchase
agreement. The Company does not hold any investments classified as trading
account assets or derivative financial instruments.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on the Company's fixed-maturity investment
portfolio. It is assumed that the changes occur immediately and uniformly, with
no effect given to any steps that management might take to counteract that
change. The hypothetical changes in market interest rates reflect what could be
deemed best and worst case scenarios. The fair values shown in the following
table are based on contractual maturities. Significant variations in market
interest rates could produce changes in the timing of repayments due to
prepayment options available. The fair value of such instruments could be
affected and, therefore, actual results might differ from those reflected in the
following table (dollars in 000's):
Estimated fair value
Hypothetical change after hypothetical
in interest rate change in interest
Fair Value (bp=basis points) rate
----------- ------------------- --------------------
Fixed-maturity investments at March 31, 2001 (1)............ $ 21,435 100 bp increase $ 20,546
200 bp increase 19,721
50 bp decrease 21,754
100 bp decrease 22,238
Fixed-maturity investments at December 31, 2000 (1)......... $ 25,480 100 bp increase $ 24,635
200 bp increase 23,773
50 bp decrease 25,882
100 bp decrease 26,261
--------------------
(1) Excluding short-term investments with a fair value of $3.5 million and $3.9
million at March 31, 2001 and December 31, 2000, respectively. Includes UFL
investments with a fair value of $9.4 million and $9.1 million at March 31,
2001 and December 31, 2000, respectively.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 2001 would reduce the
estimated fair value of the Company's fixed-maturity investments by
approximately $1.7 million at that date. At December 31, 2000, an
instantaneous 200 basis point increase in market interest rates would have
reduced the estimated fair value of the Company's fixed-maturity
investments by approximately $1.7 million at that date. The definitive
extent of the interest rate risk is not quantifiable or predictable due to
the variability of future interest rates, but the Company does not believe
such risk is material.
The Company primarily manages its exposure to interest rate risk by
purchasing investments that can be readily liquidated should the interest rate
environment begin to significantly change.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 2 of the Notes to Consolidated Financial Statements included in
Part I, Item 1 of this report for information with respect to legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: none
(b) Reports on Form 8-K: The Company filed Form 8-K dated January 25, 2001
providing under Item 5 additional information pertaining to advance
commission payments.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: February 22, 2002 /s/ Randy Harp
------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: February 22, 2002 /s/ Steve Williamson
-------------------------------
Steve Williamson
Chief Financial Officer
(Principal Accounting Officer)