Product sales and product costs Product sales consist primarily of the sale of personal and home care products, jewelry, books, audiocassettes and videotapes focusing on personal achievement. Other products and services include digital satellite television subscriptions, Internet access and web sites, long distance and travel services provided by business partners. The Company has certain alliances with business partners, whereby sales associates buy products or services provided by such business partners and in return, the Company receives commissions on the sales of such goods and services. Revenues from these transactions are included in Product sales in the Statement of Income.
Income Tax Matters-Net Operating Losses At December 31, 1999, the Company has utilized its net operating loss carryforwards ("NOLs") for Federal regular tax purposes. The Company has general business and rehabilitation tax credit carryforwards of approximately $261,000 expiring primarily in 2000 to 2001, and an alternative minimum tax ("AMT") credit carryforward of $586,000 that does not expire. The Company generated taxable income for the year ended December 31, 1999 and utilized NOLs originally generated in 1996 and 1997 in their entirety. Additionally, the Company has NOLs in the amount of $4.7 million representing the remaining NOLs of TPN as of the October 1998 acquisition date. A valuation allowance has been established for these NOLs and the general business and rehabilitation tax credits as the Company does not believe it is more likely than not that the tax benefits of these carryforwards and credits will be realized prior to expiration due in part to utilization restrictions imposed by Section 382 as discussed below.
The ability of the Company to utilize NOLs and tax credit carryforwards to reduce future federal income taxes of the Company is subject to various limitations under the Internal Revenue Code of 1986, as amended (the "Code"). One such limitation is contained in Section 382 of the Code which imposes an annual limitation on the amount of a corporation's taxable income that can be offset by those carryforwards in the event of a substantial change in ownership as defined in Section 382 ("Ownership Change"). In general, an Ownership Change occurs if during a specified three-year period there are capital stock transactions that result in an aggregate change of more than 50% in the beneficial ownership of the stock of the Company. However, the Company does not have control over all possible variables which can affect the Ownership Change calculation and, accordingly, it is possible that an Ownership Change could occur in the future. The effect of any such Ownership Change on the Company's financial condition or results of operations cannot be determined because it is dependent upon unknown future facts and circumstances at the time of any such change, including, among others, the amount of any Company's NOLs, the fair market value of the Company's stock and the Company's other tax attributes. The acquisition of TPN by the Company constituted an Ownership Change of TPN. As a result, the ability of the Company to utilize TPN's $4.7 million in NOLs is limited to approximately $978,000 per year. Although the Company did not utilize any of the TPN NOL during 1998, it did fully utilize the available amount during 1999. However, due to anticipated continuing growth and the expected availability of other tax benefits, the Company does not believe it is more likely than not that the tax benefits of the TPN NOL carryforward will be realized. The TPN NOL expires in years 2015 through 2018.
The Company announced on April 6, 1999, a new stock repurchase program authorizing management to reacquire up to 500,000 shares of the Company's common stock. The Board of Directors has increased such authorization from 500,000 shares to 1,250,000 shares during three subsequent board meetings. At December 31, 1999 the Company had repurchased 1,162,800 shares under these authorizations for a total consideration of $29.4 million, at an average price of $25.31 per share. The Board, at its February 16, 2000 meeting, authorized an additional 250,000 shares to be repurchased. Stock repurchases will be made at prices that are considered attractive by management and at such times that management believes will not unduly impact the Company's liquidity. No time limit has been set for completion of the repurchase program.
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA - --------------------------------------------------- ---------------------------------------------- PRE-PAID LEGAL SERVICES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE ----------------------------------------------
We have audited the accompanying consolidated balance sheets of Pre-Paid Legal Services, Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed at Item 8 herein. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. The consolidated financial statements give retroactive effect to the October 2, 1998 merger of the Company and TPN, Inc. d.b.a. The People's Network ("TPN"), which has been accounted for as a pooling of interests as described in Note 2 to the consolidated financial statements. We did not audit the statements of income, changes in stockholders' equity, and cash flows of TPN for the year ended December 31, 1997, which statements reflect total revenues constituting 31% of the related consolidated financial statement total for the year ended December 31, 1997. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for TPN for 1997, is based solely on the report of such other auditors.
Investments The Company classifies its investments held as available for sale and accounts for them at fair value with unrealized gains and losses, net of taxes, excluded from earnings and reported as other comprehensive income.
Membership Benefits Liability The Membership benefits liability represents claims reported but not paid and actuarially estimated claims incurred but not reported on open panel Memberships and per capita amounts due provider law firms on closed panel Memberships. The Company calculates the benefit liability costs on open panel Memberships based on completion factors that consider historical claims experience based on the dates that claims are incurred, reported to the Company and subsequently paid. Processing costs related to these claims are accrued based on an estimate of expenses to process such claims.
Deferred Revenue Through February 1999, the Company sold merchandise certificates to certain of its sales associates. These certificates could be used to purchase products from the Company and expire one year from the date of issuance. Deferred revenue represents the anticipated value of certificates to be redeemed for products based on expected redemption rates of certificates issued.