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, 1997
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
--------------------------------------------------------------
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)
(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 April 18, 1997:
Common Stock $.01 par value 21,953,910
<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)
ASSETS
March 31, December 31,
1997 1996
---------- ------------
(Unaudited)
Current assets:
Cash............................................... $ 17,401 $ 14,831
Held-to-maturity short-term investments............ 500 500
Accrued contract income............................ 1,851 1,710
Commission advances - current portion.............. 10,591 9,108
-------- --------
Total current assets.............................. 30,343 26,149
-------- --------
Held-to-maturity investments....................... 1,757 1,757
Investments pledged................................ 2,772 2,772
Commission advances, net........................... 24,862 21,744
Property and equipment, net........................ 2,932 2,955
Other.............................................. 2,127 2,155
-------- --------
Total assets..................................... $ 64,793 $ 57,532
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Contract benefits.................................. $ 2,084 $ 1,862
Accounts payable and accrued expenses.............. 1,381 912
-------- --------
Total current liabilities......................... 3,465 2,774
Deferred income taxes................................ 11,427 9,284
-------- --------
Total liabilities................................ 14,892 12,058
-------- --------
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 $78 at March 31, 1997
and $84 at December 31, 1996, respectively...... 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, 32
shares authorized, issued and outstanding
at March 31, 1997 and December 31, 1996;
liquidation value of $430 at
March 31, 1997 and December 31, 1996............ 32 32
Common stock, $.01 par value; 100,000 shares
authorized; 22,650 and 22,459 issued at March
31, 1997 and December 31, 1996, respectively.... 226 225
Capital in excess of par value..................... 41,487 41,039
Retained earnings.................................. 10,328 6,350
Less: Treasury stock, at cost; 747 shares.......... (2,177) (2,177)
-------- --------
Total stockholders' equity........................ 49,901 45,474
-------- --------
Total liabilities and stockholders' equity....... $ 64,793 $ 57,532
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
---------------------
1997 1996
-------- --------
Revenues:
Contract premiums.................................. $ 16,219 $ 10,304
Associate services................................. 2,700 1,251
Interest income.................................... 381 283
Other.............................................. 425 516
-------- --------
19,725 12,354
-------- --------
Costs and expenses:
Contract benefits.................................. 5,447 3,598
Commissions........................................ 3,483 2,423
General and administrative......................... 1,888 1,178
Associate services and direct marketing expenses... 2,289 991
Depreciation....................................... 161 138
Premium taxes...................................... 333 72
-------- --------
13,601 8,400
-------- --------
Income before income taxes........................... 6,124 3,954
Provision for income taxes........................... 2,143 1,384
-------- --------
Net income........................................... 3,981 2,570
Less dividends on preferred shares................... 3 4
-------- --------
Net income applicable to common shares............... $ 3,978 $ 2,566
======== ========
Earnings per common and common equivalent share...... $ .18 $ .12
======== ========
Earnings per common share - assuming full dilution... $ .18 $ .12
======== ========
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)
Three Months Ended
March 31,
-----------------------
1997 1996
----------- ---------
Cash flows from operating activities:
Net income........................................... $ 3,981 $ 2,570
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation and amortization..................... 161 138
Provision for deferred income taxes............... 2,143 1,384
Provision for associate stock options............. - 318
Increase in accrued contract income............... (141) (89)
Increase in commission advances................... (4,601) (4,314)
Decrease (increase) in other assets............... 28 (61)
Increase in contract benefits..................... 222 122
Increase (decrease) in accounts payable and
accrued expenses................................ 469 (198)
-------- --------
Net cash provided by (used in) operating
activities......................................... 2,262 (130)
-------- --------
Cash flows from investing activities:
Additions to property and equipment................ (138) (205)
Purchases of investments........................... - (506)
-------- --------
Net cash used in investing activities............ (138) (711)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common and preferred stock... 449 622
Dividends paid on preferred stock.................. (3) (4)
-------- --------
Net cash provided by financing activities........ 446 618
-------- --------
Net increase in cash and unpledged cash equivalents.. 2,570 (223)
Cash and cash equivalents at beginning of period..... 14,831 14,489
-------- --------
Cash and cash equivalents at end of period........... $ 17,401 $ 14,266
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 3 $ 1
======== ========
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, 1997, the related
statements of income and the statements of cash flows for the three-month
periods ended March 31, 1997 and 1996 are unaudited; in the opinion of
management, they include all adjustments necessary for a fair presentation of
such financial statements.
These financial statements and notes are prepared pursuant to the rules
and regulations of the Securities and Exchange Commission for interim reporting
and should be read in conjunction with the Company's financial statements and
notes included in the 1996 Annual Report on Form 10-K. Certain reclassifications
have been made to conform to current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Statement of Financial Accounting Standards 128, Earnings Per Share,
("SFAS 128") was issued in February, 1997. This statement provides new
accounting and reporting standards for earnings per share and will replace the
currently used primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share represents the potential dilution that could occur if all stock options
and other stock-based awards, as well as convertible securities, were exercised
and converted into common stock. SFAS 128, effective for year-end 1997 financial
statements, requires that prior period earnings per share be restated. The
Company does not expect adoption of this statement to have a material impact on
earnings per common share amounts.
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 $4.0
million, or $.18 per share, assuming full dilution, for the three months ended
March 31, 1997 compared to $2.6 million, or $.12 per share, for the comparable
period of 1996. As a percentage of total revenues, net income applicable to
common shares was 20.2% for the three months ended March 31, 1997, down slightly
from 20.8% for the comparable period of 1996. The decline in this margin is
attributable to increased expenses associated with the implementation of a new
program which became available in January, 1997. The new combination classroom
and field training program, titled Fast Start to Success ("Fast Start"), is
aimed at increasing the level of new membership sales per associate. The
positive impact of the program is reflected in the increase in new memberships
written and new sales associates recruited per Fast Start associate.
Revenues rose 60% to $19.7 million from $12.4 million for the prior
year's comparable period. Income before income taxes for the first three months
of 1997 increased 55% to $6.1 million, or 31% of revenues, from $4.0 million, or
32% of revenues for the comparable period of 1996.
Contract premiums totaled $16.2 million during the first three months
of 1997 compared to $10.3 million for the same period of 1996, an increase of
57%. The increase in contract premiums was primarily the result of increased new
membership sales resulting in a higher number of active memberships in force.
New membership sales during the three months of 1997 were 62,307 compared to
40,965 during the 1996 period, an increase of 52%. At March 31, 1997, there were
324,801 active memberships in force compared to 224,085 at March 31, 1996, an
increase of 45%. Contract premiums and their impact on total revenues in any
period are determined directly by the number and the average premium 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 persistency, or renewal rate, of existing memberships. The Company's
overall membership persistency rate varies based on, among other factors, the
relative age of total memberships in force. From 1981 through the year ended
December 31, 1996, the Company's annual membership persistency rates have
averaged approximately 76%.
Associate services revenue increased from $1.3 million for the first
three months of 1996 to $2.7 million during the same period of 1997 primarily as
a result of Fast Start which resulted in the Company receiving training fees of
approximately $1.1 million during the first quarter of 1997. Fast Start requires
a training fee of $184 per new associate ($25 for a limited time period for
existing associates) and upon successful completion of the program provides for
the payment of certain training bonuses. In order to be deemed successful for
Fast Start purposes, the new associate must write three new memberships and
recruit one new sales associate within 15 days of the associate's Fast Start
training. The $1.1 million in training fees was comprised of $184 from each of
approximately 4,200 new sales associates who elected to participate in Fast
Start and training fees of $25 from each of approximately 14,500 existing
associates who participated in the program. New associates enrolled during the
first three months of 1997 were 14,833 compared to 17,271 for the same period of
1996, a decrease of 14%. Future revenues from associate services will depend
primarily on the number of new associates enrolled and the number who choose to
participate in the Company's training program, but the Company expects that such
revenues will continue to be largely offset by the direct and indirect cost to
the Company of training bonuses paid, providing associate services and other
direct marketing expenses.
Interest income increased 35% to $381,000 during the three months ended
March 31, 1997 from $283,000 for the comparable period of 1996 as a result of
increases in the average investments outstanding and higher interest rates on
investments. At March 31, 1997 the Company had $22.4 million in cash and
investments compared to $18.5 million at March 31, 1996.
Contract benefits totaled $5.4 million for the first three months of
1997 compared to $3.6 million for the same period of 1996, an increase of 51%.
However, the loss ratio, which represents contract benefit costs as a percentage
of contract premiums, for the 1997 period decreased to 33.6% from 34.9% for the
comparable period of 1996 and is expected to remain near 35% as the portion of
active memberships which provide for a capitated benefit continues to increase.
Commissions were $3.5 million for the first three months of 1997
compared to $2.4 million for the same period of 1996, but decreased, as a
percentage of contract premiums, from 23.5% to 21.5% primarily as a result of
additional commission expense of $318,000 during the 1996 period related to the
issuance of stock options to sales associates. Commission expense, as a
percentage of Contract premiums, is expected to gradually increase to near 25%
of contract premiums in future years as a result of changes in the commission
structure for memberships sold after March 1, 1995.
General and administrative expenses during the 1997 and 1996 three
month periods were $1.9 million and $1.2 million, respectively, and represented
11.6% and 11.4% of contract premiums for such periods. These expenses are
expected to remain at or near these levels and gradually decrease as a
percentage of contract premiums as a result of certain economies of scale
pertaining to the Company's operations.
Associate services and direct marketing expenses increased to $2.3
million for the first three months of 1997 from $1.0 million for the same period
of 1996 as a result of approximately $598,500 in Fast Start training bonuses
paid, additional costs of supplies due to increased purchases by associates and
higher administrative staffing requirements. These expenses also include the
costs of providing associate services and marketing costs other than commissions
which are directly associated with new membership sales.
Due to property and equipment additions during 1996, depreciation
increased from $138,000 during the first three months of 1996 to $161,000 for
the first three months of 1997. Premium taxes increased $261,000 to $333,000 for
the first quarter of 1997 from $72,000 for the comparable prior year period
primarily as a result of a $200,000 accrual related to prior years tax
assessment.
The Company's expense ratio, which represents commissions, general and
administrative expenses and premium taxes as a percentage of contract premiums,
for the first nine months of 1997 was 35.2% compared to 35.6% for the comparable
period of 1996 resulting in a combined loss and expense ratio of 68.87% for the
first three months of 1997 compared to 70.5% for the same period of 1996. The
combined ratio does not measure total profitability because it does not take
into account all revenues and expenses.
The Company has recorded a provision for income taxes of $2.1 million
(35% of pretax income) for the first three months of 1997 compared to $1.4
million (35% of pretax income) for the same period of 1996. The 1997 and 1996
provision reflect the Company's expectation that it more likely than not will
not be able to realize the future tax benefit of certain of its net operating
loss carryforwards primarily as a result of tax deductions attributable to
expected levels of commissions to be paid on new Contract sales.
Dividends paid on outstanding preferred stock during the first three
months of 1997 were $3,498 compared to $3,769 during the same period of 1996.
This decrease is attributable to the conversion of shares of $3.00 Cumulative
Convertible Preferred Stock into common stock.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated net cash provided by operating activities was $2.3 million
for the first three months of 1997 compared to net cash used in operations of
$130,000 for the 1996 period. The increase of $2.4 million in cash provided by
operations during the first three months of 1997 compared to the same period of
1996 resulted primarily from increases in net income of $1.4 million, increases
in deferred income taxes of $759,000, increases in accounts payable and accrued
expenses of $667,000 and only partially reduced by an increase in commission
advances of $287,000 related to the increase in new membership enrollments.
The Company had consolidated working capital of $26.9 million at March
31, 1997, an increase of $3.5 million compared to consolidated working capital
of $23.4 million at December 31, 1996 and an increase of $7.9 million compared
to March 31, 1996 working capital of $19.0 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 1997. The borrowing base
is determined by a formula based on 80% of the net cash flow from certain of the
Company's membership contracts that have been in existence for 18 months or
more. At March 31, 1997, the borrowing base was $5.0 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, 1997. 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 advances significant commissions at the time a Contract is
sold. During the three months ended March 31, 1997 the Company advanced
commissions of $7.8 million on new membership sales compared to $6.2 million for
the same period of 1996. Since approximately 92% of Contract premiums are
collected on a monthly basis, a significant cash flow deficit is created at the
time a Contract is sold. This deficit is reduced as monthly premiums are
remitted and no additional commissions are paid on the Contract until all
previous commission advances have been fully recovered. Commission advances were
subsequently reduced by commission earnings of $3.0 million and $1.9 million for
the three month periods ended March 31, 1997 and 1996, respectively. The Company
has recorded an allowance of $3.6 million to provide for estimated uncollectible
balances which includes an increase in the allowance of $200,000 during the
three months ended March 31, 1997.
The Company believes that it has significant ability to finance
expected future growth in membership sales based on its existing amount of cash
and unpledged investments at March 31, 1997 in the amount of $19.7 million and
the unused revolving credit agreement availability of $5.0 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, if any, 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 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities:
On January 8, 1997, the Company issued to a sales associate of the Company
a total of 2,500 shares of Common Stock upon exercise of outstanding
warrants to purchase Common Stock at an exercise price of $8.25 per share.
Such warrants were issued in connection with the achievement of certain
sales levels within the Company.
Between January 13, 1997 and January 16, 1997, the Company issued to
assignees of Roger T. Staubach a total of 7,000 shares of Common Stock upon
exercise of outstanding warrants to purchase Common Stock at an exercise
price of $.50 per share. Such warrants were issued by the Company during
1993 in connection with a marketing services agreement entered into between
the Company and Mr. Staubach.
All such shares of Common Stock were issued without registration under the
Securities Act of 1933 in reliance on the exemption under Section 4(2)
thereof.
<PAGE>
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, 1997.
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: May 14, 1997 /s/ Harland C. Stonecipher
-------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1997 /s/ Randy Harp
-------------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
Date: May 14, 1997 /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)
Three Months Ended
March 31
--------------------
1997 1996
-------- --------
PRIMARY EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Income applicable to common shares (a)............... $ 3,978 $ 2,566
======== ========
Shares:
Weighted average shares outstanding, (net of 747
shares of treasury stock) disregarding exercise of
options or conversion of preferred stock........... 21,797 20,916
Assumed dilutive conversion of preferred stock....... 114 157
Assumed exercise of options and warrants based on the
treasury stock method using average market
price.............................................. 483 1,080
-------- --------
Weighted average number of shares, as adjusted....... 22,394 22,153
======== ========
Earnings per share (a)............................... $ .18 $ .12
======== ========
FULLY DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Income applicable to common shares (a)............... $ 3,978 $ 2,566
======== ========
Shares:
Weighted average shares outstanding, (net of 747
shares of treasury stock) disregarding exercise of
options or conversion of preferred stock .......... 21,797 20,916
Assumed dilutive conversion of preferred stock....... 114 157
Assumed exercise of options and warrants based on the
treasury stock method using closing market
price if higher than average market price.......... 483 1,216
-------- --------
Weighted average number of shares, as adjusted....... 22,394 22,289
======== ========
Earnings per share (a)............................... $ .18 $ .12
======== ========
(a) These amounts agree with the related amounts in the statements of income.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 1997 financial statements 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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 17,401
<SECURITIES> 0
<RECEIVABLES> 1,851
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,343
<PP&E> 2,932
<DEPRECIATION> 0
<TOTAL-ASSETS> 64,793
<CURRENT-LIABILITIES> 3,465
<BONDS> 0
0
37
<COMMON> 226
<OTHER-SE> 49,638
<TOTAL-LIABILITY-AND-EQUITY> 64,793
<SALES> 16,219
<TOTAL-REVENUES> 19,725
<CGS> 0
<TOTAL-COSTS> 13,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,124
<INCOME-TAX> 2,143
<INCOME-CONTINUING> 3,978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,978
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
