U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1995
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number: 1-9293
______________________________________________________________
PRE-PAID LEGAL SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 E. Main
Ada, Oklahoma
74820
(Address of principal executive offices)
(405) 436-1234
(Issuer's telephone number)
______________________________________________________________
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ____
State the number of shares outstanding of each of the issuer's classes of
common equity as of May 9, 1995:
Common Stock $.01 par value 18,111,968
Transitional Small Business Disclosure Format (Check One): Yes No X
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Current assets:
Cash ........................................................... $ 2,724 $ 2,972
Held-to-maturity short-term investments ........................ 6,854 6,540
Total cash and unpledged cash equivalents .................... 9,578 9,512
Accrued contract income ........................................ 646 563
Associates' balances ........................................... 3,451 2,533
Total current assets ....................................... 13,675 12,608
Held-to-maturity investments ..................................... 1,027 410
Investments pledged .............................................. 1,822 1,772
Property and equipment, net ...................................... 2,022 2,071
Other ............................................................ 1,425 1,293
Total assets ............................................... $ 19,971 $ 18,154
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Contract benefits .............................................. $ 1,330 $ 1,409
Accounts payable and accrued expenses .......................... 448 496
Contingency reserves on trust preparation services ............. 261 442
Total current liabilities .................................... 2,039 2,347
Deferred income taxes ............................................ 693 -
Total liabilities .......................................... 2,732 2,347
Stockholders' equity:
Preferred stock, $1 par value; authorized 400 shares; issued
and outstanding as follows: $2.40 Cumulative Convertible
Preferred Stock, authorized 391 shares; 0 and 299 shares
outstanding at March 31, 1995 and December 31, 1994;
respectively, liquidation value of $7,188 at December 31, 1994 - 299
$3.00 Cumulative Convertible Preferred Stock, authorized
5 shares; 5 shares outstanding; liquidation value of $84 ..... 5 5
Special preferred stock, $1 par value; authorized 500 shares,
issued and outstanding in one series designated as follows:
$1.00 Non-Cumulative Special Preferred Stock, 58 and 60
shares authorized, issued and outstanding at March 31, 1995
and December 31, 1994, respectively; liquidation value of
$778 and $803 at March 31, 1995 and December 31, 1994,
respectively ................................................. 58 60
Common stock, $.01 par value; 100,000 shares authorized;
18,734 and 14,216 issued at March 31, 1995 and
December 31, 1994, respectively .............................. 187 142
Capital in excess of par value ................................. 31,184 30,770
Retained earnings (deficit) .................................... (12,018) (13,292)
Less: Treasury stock at cost; 747 shares ....................... (2,177) (2,177)
Total stockholders' equity ................................... 17,239 15,807
Total liabilities and stockholders' equity ................. $ 19,971 $ 18,154
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000's, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1994
<S> <C> <C>
Revenues:
Contract premiums .............................. $6,539 $5,406
Associate services ............................. 497 176
Interest income ................................ 218 45
Other .......................................... 372 176
7,626 5,803
Costs and expenses:
Contract benefits .............................. 2,106 1,859
Commissions .................................... 1,869 1,471
General and administrative ..................... 945 966
Direct marketing expenses ...................... 174 191
Costs of associate services .................... 181 85
Interest ....................................... 3 113
Depreciation ................................... 111 114
Premium taxes .................................. 56 55
Other .......................................... 78 76
5,523 4,930
Income before income taxes ....................... 2,103 873
Provision for income taxes ....................... 715 -
Net income ....................................... 1,388 873
Less dividends on preferred shares ............... 114 4
Net income applicable to common shares ........... $1,274 $ 869
Earnings per common and common equivalent share .. $ .08 $ .07
Earnings per common share - assuming full dilution $ .07 $ .07
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 1,388 $ 873
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................. 111 114
Provision for deferred income taxes ............................ 693 -
Increase in accrued contract income ............................ (83) (15)
Increase in associates' balances ............................... (918) (262)
Increase in other assets ....................................... (132) (3)
Decrease in contract benefits .................................. (79) (464)
(Decrease) increase in accounts payable and accrued expenses and
contingency reserves ......................................... (229) 209
Net cash provided by operating activities .................. 751 452
Cash flows from investing activities:
Additions to property and equipment ............................ (62) (81)
Increase in held-to-maturity investments and investments pledged (667) (34)
Cash used in investing activities .......................... (729) (115)
Cash flows from financing activities:
Reduction in notes payable ..................................... - (492)
Payment of debentures .......................................... - (81)
Proceeds from issuance of promissory notes ..................... - 75
Proceeds from sale of common and preferred stock ............... 158 351
Dividends paid on preferred stock .............................. (114) (4)
Net cash provided by (used in) financing activities ........ 44 (151)
Net increase in cash and unpledged cash equivalents .............. 66 186
Cash and cash equivalents at beginning of period ................. 9,512 2,525
Cash and cash equivalents at end of period ....................... $ 9,578 $ 2,711
Supplemental disclosure of cash flow information:
Cash paid for interest ......................................... $ - $ 127
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated balance sheet as of March 31, 1995, the related statement
of operations for the three-month periods ended March 31, 1995 and 1994 and the
statement of cash flows for the three-month periods ended March 31, 1995 and
1994 are unaudited; in the opinion of management, all adjustments necessary for
a fair presentation of such financial statements have been included.
These financial statements and notes are presented as permitted by Form
10-QSB and should be read in conjunction with the Company's financial statements
and notes included in the annual report on Form 10-KSB.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
RESULTS OF OPERATION
FIRST THREE MONTHS OF 1995 COMPARED TO FIRST THREE MONTHS OF 1994
The Company reported net income of $1.4 million and net income applicable
to common shares of $1.3 million, or $.08 per common share, for the three months
ended March 31, 1995 compared to net income of $873,000, or $.07 per common
share, for the comparable period of 1994. The increase in the net income for the
1995 period is attributable to increases in every revenue category during the
first three months of 1995 as compared to the same period of 1994.
Revenues rose 31% to $7,626,000 from $5,803,000 for the prior year's
comparable period. Income before income taxes for the first quarter of 1995
increased 141 percent to $2,103,000 from $873,000 for the comparable period of
1994. The relatively higher percentage increase in income before income taxes
compared to revenues resulted primarily from decreases in general and
administrative expenses, interest expense and contract benefits as a percentage
of revenues.
Contract premiums totaled $6.5 million during the first quarter of 1995
compared to $5.4 million for the same period of 1994, an increase of 21%. The
increase in contract premiums was primarily the result of increased new contract
sales resulting in a higher number of active contracts in force. New contract
sales during the first three months of 1995 were 18,552 compared to 10,974
during the 1994 period, an increase of 69%. At March 31, 1995, there were
152,757 active contracts in force compared to 135,094 at March 31, 1994, an
increase of 13%.
Associate services revenue increased from $176,000 for the first quarter of
1994 to $497,000 during the same period of 1995 as a result of higher new
associate enrollments. New associates enrolled during the first three months of
1995 were 7,192 compared to 3,013 for the same period of 1994, an increase of
139%. Future revenues from associate services will depend primarily on the
number of new associates enrolled, but the Company expects that such revenues
will continue to be largely offset by the direct and indirect cost to the
Company of providing associate services.
Interest income increased as a result of increases in the average
investments outstanding and higher interest rates on investments. At March 31,
1995 the Company reported $12.4 million in cash and investments compared to $5.5
million at March 31, 1994.
Contract benefits totaled $2.1 million for the first quarter of 1995
compared to $1.9 million for the same period of 1994, an increase of 13%.
However, the loss ratio for the 1995 period decreased to 32% from 34% for the
comparable period of 1994.
Commissions were $1.9 million for the 1995 first quarter compared to $1.5
million for the same period of 1994, but remained relatively unchanged as a
percentage of contract premiums, 29% and 27%, respectively. Commission expense,
as a percentage of contract premiums, should approach 25% of contract premiums
in future years as a result of changes in the commission structure for contracts
sold after March 1, 1995.
General and administrative expenses during the 1995 and 1994 first quarters
were $945,000 and $966,000, respectively, and represented 14% and 18% of
contract premiums for such periods. The total amount of general and
administrative expenses decreased approximately $21,000 during the 1995 first
quarter from those incurred in the 1994 period and decreased as a percent of
contract premiums by 4%. This trend of small decreases is expected to give way
to gradual increases in the total dollar amount of these expenses as the Company
continues to grow. However, these expenses are expected to decrease when
expressed as a percentage of contract premiums as a result of certain economies
of scale pertaining to the Company's operations.
<PAGE>
Direct marketing costs decreased to $174,000 for the 1995 first quarter
from $191,000 for the same period of 1994 but were fairly consistent as a
percent of contract premiums (3% and 4%, respectively) and include those costs
other than commissions, which are directly associated with new contract sales.
As a result of retirement of outstanding debt and aging of property and
equipment, interest and depreciation both decreased during the first three
months of 1995 compared to the same period of 1994.
The Company has recorded a provision for income taxes of $715,000 (34% of
pretax income)for the first quarter of 1995 compared to no provision for the
same period of 1994. The 1995 provision is attributable to significant
anticipated growth and reflects the Company's expectation that it is more likely
than not that it will not be able to realize the future tax benefit of its net
operating loss carryforwards.
Dividends paid on outstanding preferred stock during the first three months
of 1995 increased to $114,000 from $4,000 during the same period of 1994. This
$110,000 increase is attributable to dividends paid on outstanding shares of
$2.40 Cumulative Convertible Preferred Stock issued during June and July, 1994
in conjunction with a public unit offering. This series of preferred stock
automatically converted to common stock pursuant to its terms on February 27,
1995, as described below.
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter of 1994 the Company completed the sale of 346,500
units consisting of a total of 346,500 shares of $2.40 Cumulative Convertible
Preferred Stock and 2,425,500 common stock purchase warrants in a public
offering. Each unit, sold at a price of $24.00 per unit, consisted of one share
of preferred stock and seven warrants. Total proceeds of the offering were $8.3
million of which the Company received approximately $6.8 million after deducting
expenses of the offering. These proceeds have been invested in short term
obligations of the U.S. Treasury and other government agencies and will be used
primarily for the payment of commission advances upon the sale of new contracts.
Each share of preferred stock had a cumulative dividend of $2.40 per year,
a liquidation preference of $24.00 per share and was convertible at any time at
the option of the holder into 14 shares of common stock. Each share of preferred
stock was also automatically convertible into common stock if the closing price
of the preferred stock exceeded $33.60 for ten consecutive trading days. The
closing price of preferred stock exceeded such price level for the 10
consecutive trading days ending February 24, 1995, and, as a result, the then
outstanding 277,700 shares of preferred stock were converted into common stock.
The remaining shares of preferred stock had been previously voluntarily
converted. The automatic conversion of the preferred stock together with earlier
voluntary conversions will result in savings of $831,600 per year in dividends.
Each warrant entitles the holder to purchase one share of common stock at
an exercise price of $2.50 per share at any time until September 8, 1999. The
warrants are redeemable at the option of the company at a price of $.25 per
warrant following the date upon which the last reported sale price of the common
stock of the company exceeds $3.75 per share (150% of the warrant exercise
price) for five consecutive trading days. The closing price of the common stock
exceeded that price level for the five consecutive trading days ended April 20,
1995. On April 24, 1995, the closing price of the common stock was $5.81 per
share.
The Company has determined to exercise its right to call the warrants for
redemption and has established 5:00 p.m. Central Daylight Time, on May 26, 1995
as the effective date and time for the redemption (the "Redemption Time"). Any
warrants not exercised prior to the Redemption Time will be redeemed and all
rights of the holders will terminate other than the right to receive cash
payment of $.25 for each redeemed Warrant.
<PAGE>
The Company anticipates that a significant portion of the warrants will be
exercised prior to the Redemption Time. If each outstanding warrant is exercised
prior to the Redemption Time, the number of outstanding shares of the Company's
common stock will increase from 18,111,968 shares to 20,537,468 shares and the
Company will receive proceeds of $6,063,750. The Company anticipates that
proceeds from the exercise of the warrants will also be invested in short term
obligations of the U.S. Treasury and other government agencies and will be used
primarily for the payment of commission advances upon the sale of new contracts.
Consolidated net cash provided by operating activities was $751,000 for the
first three months of 1995 compared to $452,000 for the 1994 period. The
increase of $299,000 in cash provided by operations during the first quarter of
1995 compared to the same period of 1994 resulted primarily from an increase in
net income of $515,000, smaller decreases in accrued contract benefits of
$385,000 and an increase in deferred income taxes of $693,000 and was only
partially reduced by the net decreases in accounts payable and accrued expenses
and contingency reserves of $438,000, net increases in other assets of $129,000
and net increases in associate balances of $656,000.
The Company had consolidated working capital of $11.6 million at March 31,
1995, an increase of $1.3 million compared to consolidated working capital of
$10.3 million at December 31, 1994 and an increase of $11.4 million compared to
March 31, 1994 working capital of $214,000. The significant increase in working
capital from March 31, 1994 to March 31, 1995 was primarily the result of
increased cash and short-term investments of $7 million together with the
complete retirement of $3.3 million in outstanding debt.
The Company has an unsecured revolving credit agreement with Bank One,
Texas under which the Company may borrow up to $5 million, as determined by the
borrowing base defined by the agreement, through July, 1996. The borrowing base
is determined by a formula based on 80% of the net cash flow from certain of the
Company's contracts that have been in existence for 18 months or more. At March
31, 1995, the borrowing base was approximately $4.3 million. Under the
agreement, the interest rate, at the option of the Company is at the bank's base
lending rate or an adjusted London interbank rate and is determined at the time
of borrowing. Interest is to be paid monthly and any outstanding principal,
unless converted to an 18 month term loan upon the occurrence of certain events,
comes due in its entirety on July 1, 1996. The agreement contains restrictions
which, among other things, require maintenance of certain financial ratios,
restrict encumbrance of assets and creation of indebtedness, and limit the
payment of dividends. To date, the Company has not borrowed under the bank
credit agreement.
The Company believes that it has significant ability to finance expected
future growth in contract sales based on its existing amount of cash and cash
equivalents at March 31, 1995 ($9.6 million) and the unused revolving credit
agreement availability of $4.3 million. The Company also expects warrant
proceeds of approximately $6.0 million to become available by May 26, 1995 if
all of the outstanding warrants exercisable at $2.50 per share of common stock
are exercised.
Although the Company is the operating entity in many jurisdictions, the
Company's subsidiaries serve as operating companies in various states which
regulate contracts 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"). 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
regulatory requirements, the most restrictive of which is currently $3 million.
Additional capital requirements of either PPLCI or PPLSIF will be funded by the
Company in the form of capital contributions or surplus debentures.
<PAGE>
PART II - OTHER INFORMATION
ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed as part of this Form 10-QSB:
No. Description
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K: There were no reports on Form 8-K filed by the
Company during the quarter ended March 31, 1995.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: May 11, 1995 /s/ Harland C. Stonecipher
Harland C. Stonecipher, Chairman
Date: May 11, 1995 /s/ Randy Harp
Randy Harp, Chief Financial Officer
(Principal Financial Officer)
Date: May 11, 1995 /s/ Kathy Pinson
Kathy Pinson, Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
No. Description
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
EXHIBIT 11.1
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1994
PRIMARY EARNINGS PER SHARE:
<S> <C> <C>
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) ...................................... $ 1,274 $ 869
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock ......... 15,059 11,255
Assumed dilutive conversion of preferred stock .............................. 206 215
Assumed exercise of options and warrants based on the modified treasury stock
method using average market price ......................................... 870 1,182
Weighted average number of shares, as adjusted .............................. 16,135 12,652
Earnings per share (a) ...................................................... $ .08 $ .07
FULLY DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) ...................................... $ 1,274 $ 869
Add: Dividends on assumed conversion of preferred stock .................. 114 -
Interest on assumed conversion of subordinated debentures,
net of tax (b) ...................................................... - 11
Net income, as adjusted ..................................................... $ 1,388 $ 880
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock or
subordinated debentures ................................................... 15,059 11,255
Assumed dilutive conversion of preferred stock .............................. 2,825 215
Assumed dilutive conversion of subordinated debentures ...................... - 529
Assumed exercise of options and warrants based on the modified treasury stock
method using closing market price if higher than average market price
1,944 1,182
Weighted average number of shares, as adjusted .............................. 19,828 13,181
Earnings per share (a) ...................................................... $ .07 $ .07
</TABLE>
(a) These amounts agree with the related amounts in the statements of
income.
(b) Adjustments to income have been shown net of tax effects calculated
at the Company's effective tax rate.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MARCH 31, 1995 FINANCIAL STATEMENTS CONTAINED IN FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000311657
<NAME> Pre-Paid Legal Services, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 2,724
<SECURITIES> 6,854
<RECEIVABLES> 4,097
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,675
<PP&E> 2,022
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,971
<CURRENT-LIABILITIES> 2,039
<BONDS> 0
<COMMON> 187
0
63
<OTHER-SE> 16,989
<TOTAL-LIABILITY-AND-EQUITY> 19,971
<SALES> 6,539
<TOTAL-REVENUES> 7,626
<CGS> 0
<TOTAL-COSTS> 5,523
<OTHER-EXPENSES> 78
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 2,103
<INCOME-TAX> 715
<INCOME-CONTINUING> 1,388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,388
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
