UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1996
( ) TRANSITION REPORT PURSUANT TO 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 registrant 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)
(Zip code)
(405) 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 X No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of May 3, 1996:
Common Stock $.01 par value 21,175,268
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,
1996 1995
(Unaudited)
<S> <C> <C>
Current assets:
Cash ......................................................................... $14,266 $14,489
Held-to-maturity investments - current portion ............................... 500 500
Accrued contract income ...................................................... 1,127 1,038
Commission advances - current portion ........................................ 5,363 3,923
Total current assets ..................................................... 21,256 19,950
Held-to-maturity investments ................................................... 1,000 500
Investments pledged ............................................................ 2,772 2,766
Commission advances ............................................................ 11,422 8,548
Property and equipment, net .................................................... 2,269 2,202
Other .......................................................................... 1,724 1,663
Total assets ............................................................. $40,443 $35,629
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Contract benefits ............................................................ $ 1,669 $ 1,547
Accounts payable and accrued expenses ........................................ 578 646
Contingency reserves on trust preparation services ........................... -- 130
Total current liabilities .................................................. 2,247 2,323
Deferred income taxes .......................................................... 4,950 3,566
Total liabilities ........................................................ 7,197 5,889
Stockholders' equity:
Preferred stock, $1 par value; authorized 400 shares; issued and outstanding
as follows:
$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, 44 and 45 shares authorized,
issued and outstanding at March 31, 1996 and December 31, 1995,
respectively; liquidation value of $590 and $602 at March 31, 1996 and
December 31, 1995, respectively ........................................ 44 45
Common stock, $.01 par value; 100,000 shares authorized; 21,989 and 21,513
issued at March 31, 1996 and December 31, 1995, respectively ............... 219 215
Capital in excess of par value ............................................... 38,694 37,757
Retained earnings (deficit) .................................................. (3,539) (6,105)
Less: Treasury stock, at cost; 747 shares .................................... (2,177) (2,177)
Total stockholders' equity ................................................. 33,246 29,740
Total liabilities and stockholders' equity ............................... $ 40,443 $ 35,629
</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,
1996 1995
<S> <C> <C>
Revenues:
Contract premiums .................................... $10,304 $ 6,539
Associate services ................................... 1,251 497
Interest income ...................................... 283 218
Other ................................................ 516 294
12,354 7,548
Costs and expenses:
Contract benefits .................................... 3,598 2,106
Commissions .......................................... 2,423 1,869
General and administrative ........................... 1,178 801
Associate services and direct marketing .............. 991 502
Depreciation ......................................... 138 111
Premium taxes ........................................ 72 56
8,400 5,445
Income before income taxes ............................. 3,954 2,103
Provision for income taxes ............................. 1,384 715
Net income ............................................. 2,570 1,388
Less dividends on preferred shares ..................... 4 114
Net income applicable to common shares ................. $ 2,566 $ 1,274
Earnings per common and common equivalent share ........ $ .12 $ .08
Earnings per common share - assuming full dilution ..... $ .12 $ .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,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 2,570 $ 1,388
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 138 111
Provision for deferred income taxes ........................ 1,384 693
Provision for associate stock options ...................... 318 --
Increase in accrued contract income ........................ (89) (83)
Increase in commission advances ............................ (4,314) (918)
Increase in other assets ................................... (61) (132)
Increase (decrease) in contract benefits ................... 122 (79)
Decrease in accounts payable and accrued expenses and
contingency reserves ..................................... (198) (229)
Net cash (used in) provided by operating activities .... (130) 751
Cash flows from investing activities:
Additions to property and equipment ........................ (205) (62)
Purchases of investments ................................... (506) (6,979)
Maturities of investments .................................. -- 6,312
Cash used in investing activities ...................... (711) (729)
Cash flows from financing activities:
Proceeds from sale of common and preferred stock ........... 622 158
Dividends paid on preferred stock .......................... (4) (114)
Net cash provided by financing activities .............. 618 44
Net (decrease) increase in cash and unpledged cash equivalents (223) 66
Cash and cash equivalents at beginning of period ............. 14,489 9,512
Cash and cash equivalents at end of period ................... $ 14,266 $ 9,578
Supplemental disclosure of cash flow information:
Cash paid for interest ..................................... $ 1 $ 3
</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, 1996, the related statements
of operations for the three-month periods ended March 31, 1996 and 1995 and the
statements of cash flows for the three-month periods ended March 31, 1996 and
1995 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-Q and should be read in conjunction with the Company's financial statements
and notes included in its 1995 annual report on Form 10-KSB. Certain
reclassifications have been made to conform to current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATION
FIRST THREE MONTHS OF 1996 COMPARED TO FIRST THREE MONTHS OF 1995
The Company reported net income applicable to common shares of $2.6
million, or $.12 per common share, for the three months ended March 31, 1996 up
50% on a per-share basis from net income of $1.4 million or $.08 per common
share, for the comparable period of 1995. The increase in the net income for the
1996 period is attributable to increases in every revenue category during the
first three months of 1996 as compared to the same period of 1995.
Revenues rose 64% to $12,354,000 from $7,548,000 for the prior year's
comparable period. Income before income taxes for the first quarter of 1996
increased 88% to $3,954,000 from $2,103,000 for the comparable period of 1995.
The higher percentage increase in income before income taxes compared to
revenues resulted primarily from the decrease in commissions as a percentage of
revenues and the 152% increase in associate services income.
Contract premiums totaled $10.3 million during the first quarter of 1996
compared to $6.5 million for the same period of 1995, an increase of 58%. 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 1996 were 40,965 compared to 18,552
during the 1995 period, an increase of 121%. At March 31, 1996, there were
224,085 active contracts in force compared to 152,757 at March 31, 1995, an
increase of 47%.
Associate services revenue increased from $497,000 for the first quarter of
1995 to $1,251,000 during the same period of 1996 as a result of higher new
associate enrollments. New associates enrolled during the first three months of
1996 were 17,271 compared to 7,112 for the same period of 1995, an increase of
143%. 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 and other direct marketing expenses.
Interest income increased during the first quarter of 1996 compared to the
same period of 1995 as a result of increases in the average investments
outstanding. At March 31, 1996 the Company reported $18.5 million in cash and
investments compared to $12.4 million at March 31, 1995.
Contract benefits totaled $3.6 million for the first quarter of 1996
compared to $2.1 million for the same period of 1995, an increase of 71%.
However, the loss ratio for the 1996 period increased only to 35% from 32% for
the comparable period of 1995.
Commissions were $2.4 million for the 1996 first quarter compared to $1.9
million for the same period of 1995. However, as a percentage of contract
premiums, commissions decreased to 24% from 29%. Commission expense, as a
percentage of contract premiums, should approximate 25% of contract premiums in
future periods as a result of changes in the commission structure for contracts
sold after March 1, 1995.
General and administrative expenses during the 1996 and 1995 first quarters
were $1,178,000 and $801,000, respectively, and represented 11% and 12%,
respectively, of contract premiums for such periods. The ratio of general and
administrative expenses to contract premium revenues should decline with
increases in premium revenue as a result of certain economies of scale
pertaining to the Company's operations.
Associate services and direct marketing costs increased to $991,000 for the
1996 first quarter from $502,000 for the same period of 1995 but were generally
consistent as a percent of total revenues (8% and 7%, respectively) and include
the costs of providing associate services and marketing costs other than
commissions which are directly associated with new contract sales. Due to
property and equipment additions during the latter part of 1995 and the first
quarter of 1996, depreciation increased from $111,000 during the first quarter
of 1995 to $138,000 for the first quarter of 1996.
The Company has recorded a provision for income taxes of $1.4 million (35%
of pretax income) for the first quarter of 1996 compared to $715,000 for the
same period of 1995. The 1996 and 1995 provisions reflect the Company's
expectation that it more likely than not 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 1996 decreased to $4,000 from $114,000 during the same period of 1995. This
$110,000 decrease is attributable to the conversion of the 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.
Liquidity and Capital Resources
Net cash used in operating activities was $130,000 for the first three
months of 1996 compared to net cash provided of $751,000 for the 1995 period.
The decrease of $1.2 million in cash provided by operations during the first
quarter of 1996 compared to the same period of 1995 resulted primarily from the
increase in new membership enrollments.
The Company had working capital of $19 million at March 31, 1996, an
increase of $1.4 million compared to consolidated working capital of $17.6
million at December 31, 1995 and an increase of $7.4 million compared to March
31, 1995 working capital of $11.6 million. The significant increase in working
capital from March 31, 1995 to March 31, 1996 was primarily the result of
increased cash and short-term investments of $4.7 million resulting from the
exercise of certain warrants during the second quarter of 1995 which resulted in
net cash proceeds to the Company of more than $6 million.
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, 1996, the borrowing base was approximately $4.9 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 expects to renew or replace the credit agreement
at its expiration in July 1996.
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, 1996 ($14.3 million) and the unused revolving credit
agreement availability of $4.9 million.
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.
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-Q:
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, 1996.
<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 14, 1996 /s/ Harland C. Stonecipher
Harland C. Stonecipher, Chairman
Date: May 14, 1996 /s/ Randy Harp
Randy Harp, Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 1996 /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,
1996 1995
PRIMARY EARNINGS PER SHARE:
<S> <C> <C>
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) ......................................... $ 2,566 $ 1,274
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock ............ 20,916 15,059
Assumed dilutive conversion of preferred stock ................................. 157 206
Assumed exercise of options and warrants based on the modified treasury stock
method using average market price ............................................ 1,080 870
Weighted average number of shares, as adjusted ................................. 22,153 16,135
Earnings per share (a) ......................................................... $ .12 $ .08
FULLY DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) ......................................... $ 2,566 $ 1,274
Add: Dividends on114sion of preferred stock..................................... - 114
Net income, as adjusted ........................................................ $ 2,566 $ 1,388
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock or
subordinated debentures ...................................................... 20,916 15,059
Assumed dilutive conversion of preferred stock ................................. 157 2,825
Assumed exercise of options and warrants based on the modified treasury stock
method using closing market price if higher than average market price......... 1,216 1,944
Weighted average number of shares, as adjusted ................................. 22,289 19,828
Earnings per share (a) ......................................................... $ .12 $ .07
<FN>
(a) These amounts agree with the related amounts in the statements of
operations.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the March 31, 1996 financial statemetns contained in Form 10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U. S. Dollars
<EXCHANGE-RATE> 1
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 14,266
<SECURITIES> 4,772
<RECEIVABLES> 1,127
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,256
<PP&E> 2,269
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,443
<CURRENT-LIABILITIES> 2,247
<BONDS> 0
0
49
<COMMON> 219
<OTHER-SE> 32,978
<TOTAL-LIABILITY-AND-EQUITY> 40,443
<SALES> 10,304
<TOTAL-REVENUES> 12,354
<CGS> 0
<TOTAL-COSTS> 8,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,954
<INCOME-TAX> 1,384
<INCOME-CONTINUING> 2,570
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,570
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
