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 September 30, 1998
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 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 X No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of November 11, 1998:
Common Stock $.01 par value 23,486,969
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
a) Financial Statements of Registrant
Index
-----
Consolidated Balance Sheets as of September 30,1998 (Unaudited)
and December 31, 1997
Consolidated Statements of Income (Unaudited) for the 3 months ended
September 30, 1998 and 1997
Consolidated Statements of Income (Unaudited) for the 9 months ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows (Unaudited) for the 9 months ended
September 30, 1998 and 1997
Notes to Consolidated Financial Statements (Unaudited)
The consolidated financial statements of the Registrant included herein
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Although certain information normally
included in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted, the Registrant believes
that the disclosures are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Annual Report on Form 10-K of the Registrant for its fiscal year ended December
31, 1997.
The consolidated financial statements included herein reflect all
adjustments, consisting only of normal recurring items, which, in the opinion of
management, are necessary to present a fair statement of the results for the
interim periods presented.
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.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
September December
30, 1998 31, 1998
--------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents........................... $ 10,765 $ 21,803
Held-to-maturity investments - current portion...... 4,794 4,242
Accrued membership income........................... 3,048 2,399
Commission advances - current portion............... 20,281 15,705
-------- --------
Total current assets.............................. 38,888 44,149
Held-to-maturity investments.......................... 15,932 650
Available for sale investments........................ 7,048 -
Investments pledged................................... 2,922 2,772
Commission advances, net.............................. 52,022 38,038
Property and equipment, net........................... 3,954 3,594
Other................................................. 3,463 2,709
-------- --------
Total assets...................................... $124,229 $ 91,912
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.................................. $ 3,459 $ 2,649
Accounts payable and accrued expenses................ 3,168 2,281
-------- -------
Total current liabilities......................... 6,627 4,930
Deferred income taxes................................ 26,740 16,471
-------- --------
Total liabilities................................. 33,367 21,401
-------- --------
Stockholders' equity:
Preferred stock, $1 par value; authorized 400
shares; issued and outstanding as follows:
$3.00 Cumulative Convertible Preferred Stock, 3
shares authorized, issued and outstanding at
September 30, 1998 and December 31, 1997;
liquidation value of $55 at September 30, 1998
and December 31, 1997............................. 3 3
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, 23
shares authorized, issued and outstanding at
September 30, 1998 and December 31, 1997;
liquidation value of $304 at September 30, 1998
and December 31, 1997........................... 23 23
Common stock, $.01 par value; 100,000 shares
authorized; 23,268 and 23,151 issued at
September 30, 1998 and December 31, 1997.......... 233 232
Capital in excess of par value...................... 49,203 47,303
Retained earnings................................... 45,105 25,127
Less:Treasury stock at cost; 797 and 747 shares at
September 30, 1998 and December 31, 1997........ (3,705) (2,177)
-------- --------
Total stockholders' equity........................ 90,862 70,511
-------- --------
Total liabilities and stockholders' equity........ $124,229 $ 91,912
======== ========
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
September 30,
-------------------
1998 1997
-------- --------
Revenues:
Membership premiums.................................... $ 28,105 $ 20,149
Associate services..................................... 4,093 3,142
Interest income........................................ 783 407
Other.................................................. 690 501
-------- --------
33,671 24,199
-------- --------
Costs and expenses:
Membership benefits.................................... 9,297 6,476
Commissions............................................ 6,422 4,418
General and administrative............................. 2,901 2,232
Associate services and direct marketing................ 3,306 3,041
Depreciation........................................... 210 183
Premium taxes.......................................... 277 182
-------- --------
22,413 16,532
-------- --------
Income before income taxes............................... 11,258 7,667
Provision for income taxes............................... 3,834 2,684
-------- --------
Net income............................................... 7,424 4,983
Less dividends on preferred shares....................... 2 3
-------- --------
Net income applicable to common stockholders............. $ 7,422 $ 4,980
======== ========
Basic earnings per common share.......................... $ .33 $ .22
======== ========
Diluted earnings per common share........................ $ .32 $ .22
======== ========
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)
Nine Months Ended
September 30,
--------------------
1998 1997
--------- --------
Revenues:
Membership premiums.................................... $ 78,443 $ 54,758
Associate services..................................... 11,810 8,777
Interest income........................................ 1,821 1,152
Other.................................................. 1,929 1,436
-------- --------
94,003 66,123
-------- --------
Costs and expenses:
Membership benefits..................................... 25,893 18,110
Commissions............................................. 17,299 11,988
General and administrative.............................. 8,507 6,215
Associate services and direct marketing................. 10,518 8,141
Depreciation............................................ 624 508
Premium taxes........................................... 908 670
-------- --------
63,749 45,632
-------- --------
Income before income taxes................................ 30,254 20,491
Provision for income taxes................................ 10,269 7,172
-------- --------
Net income................................................ 19,985 13,319
Less dividends on preferred shares........................ 7 10
-------- --------
Net income applicable to common stockholders.............. $ 19,978 $ 13,309
======== ========
Basic earnings per common share........................... $ .89 $ .59
======== ========
Diluted earnings per common share......................... $ .87 $ .59
======== ========
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)
Nine Months Ended
September 30,
--------------------
1998 1997
-------- ---------
Cash flows from operating activities:
Net income............................................... $ 19,985 $ 13,319
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes.................... 10,269 7,172
Depreciation and amortization.......................... 624 508
Provision for associate stock options.................. - 100
Increase in accrued membership income.................. (649) (398)
Increase in commission advances........................ (18,560) (16,733)
(Increase) decrease in other assets.................... (754) 9
Increase in membership benefits........................ 810 695
Increase in accounts payable and accrued expenses...... 887 781
-------- --------
Net cash provided by operating activities........... 12,612 5,453
-------- --------
Cash flows from investing activities:
Additions to property and equipment.................... (984) (734)
Purchases of investments - Held-to-maturity............ (19,959) (1,851)
Purchases of investments - Available-for-sale.......... (7,048) -
Maturities of investments - Held-to-maturity........... 3,975 115
-------- --------
Net cash used in investing activities............... (24,016) (2,470)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock..................... 1,901 3,155
Purchase of treasury stock............................. (1,528) -
Dividends paid on preferred stock...................... (7) (10)
-------- --------
Net cash provided by financing activities........... 366 3,145
-------- --------
Net (decrease) increase in cash ......................... (11,038) 6,128
Cash and cash equivalents at beginning of period......... 21,803 14,831
-------- --------
Cash and cash equivalents at end of period............... $ 10,765 $ 20,959
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ - $ 6
======== ========
Cash paid for income taxes............................. $ - $ -
======== ========
The accompanying notes are an integral part of thesefinancial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated balance sheets as of September 30, 1998, and the
related statements of income and of cash flows for the three-month and
nine-month periods ended September 30, 1998 and 1997 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 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 1997 Annual Report on Form 10-K.
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.
New Accounting Standards
Statement of Financial Accounting Standards 130, "Reporting
Comprehensive Income," ("SFAS 130") was issued in June 1997. This Statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130, effective for fiscal years beginning after December 15,
1997, requires reclassification of financial statements for earlier periods
provided for comparative purposes. Adoption of this Statement effective January
1, 1998 did not affect the Company's financial statement presentation. Although
the Company has acquired available-for-sale investments during this quarter, any
amounts that would be disclosed pursuant to SFAS 130 are immaterial at September
30, 1998. The Company will make all necessary reporting and display changes in
its financial statements, if any, should the applicable amounts become material.
Statement of Financial Accounting Standards 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131") was issued in
June 1997. This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131, effective for fiscal years
beginning after December 15, 1997, requires comparative information for previous
years to be restated to comply with SFAS 131's reporting requirements. SFAS 131
is not effective for interim financial statements in the initial year of its
application. Due to the subsequent events described below, the Company may be
required to provide additional operating segment disclosures in future periods
should they become material.
Statement of Financial Accounting Standards 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," ("SFAS 132") was
issued in February 1998. This Statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans but standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when earlier Financial Accounting Standards Board Statements were
issued. This Statement is effective for fiscal years beginning after December
15, 1997. Since the Company does not maintain any defined benefit pension or
postretirement plans, this Statement did not affect the Company's financial
statement presentation.
Statement of Financial Accounting Standards 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") was issued in June
1998. This Statement 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. This Statement applies to all entities
and is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. The Company believes that it holds no derivative instruments at
September 30, 1998.
Subsequent Event
On October 2, 1998, the Company acquired TPN, Inc. d.b.a. The Peoples
Network ("TPN") in a tax-free reorganization in which TPN was merged directly
into the Company. Since its inception in 1994, TPN marketed personal development
products and services together with PRIMESTAR(R) satellite subscription
television service to its members through a network marketing sales force. Prior
to the merger, TPN had a sales force of approximately 30,000 it considered
active. TPN delivered and the Company will continue to deliver its personal
development products and services to its sales force and its subscribers via its
own full time channel known as the "SUCCESS CHANNEL" on the PRIMESTAR(R) digital
satellite network. The Company also intends to recruit as many of TPN's former
sales associates as possible to market the Company's legal service plans. The
Company issued 999,992 shares of common stock to the holders of TPN common stock
and warrants.
The merger will be accounted for under the pooling of interests method
and, accordingly, historical financial data in future reports will be restated
to include TPN data. The following unaudited pro forma data summarizes the
combined results of operations of the Company and TPN as though the merger had
occurred at the beginning of fiscal 1997.
Unaudited Pro Forma Financial Information
-----------------------------------------------------------------------------
(Amounts in 000's, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------
1998 1997 1998 1997
-------- --------- --------- ---------
Revenues $ 39,744 $ 36,496 $ 117,440 $ 95,689
Net income 7,064 6,077 18,295 13,652
Earnings per share:
Basic $ .30 $ .26 $ .78 $ .59
Diluted $ .30 $ .26 $ .76 $ .58
Additionally, on October 6, 1998, the Company announced its agreement
to acquire Universal Fidelity Life Insurance Company from Conseco. Universal
Fidelity, based in Duncan, Oklahoma, was a subsidiary of Pioneer Financial
Services, Inc., when Pioneer was acquired by Conseco in 1997. The terms of the
acquisition transaction contemplate that Universal Fidelity's health insurance
policies will be reinsured by a subsidiary of Conseco. Universal will retain the
existing life business with 1997 annual premium of approximately $1 million.
Pre-Paid's purchase price is expected to be approximately $7 million in cash,
which is approximately 1.2 times the estimated capital and surplus of Universal
after a planned extraordinary dividend. The transaction is not expected to have
a material effect on Pre-Paid's operating results for the year ending December
31, 1998. This transaction is subject to certain conditions, including insurance
department approval
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
All statements in this report concerning the Company other than purely
historical information, including, but not limited to, statements relating to
the Company's future plans and objectives, expected operating results and
assumptions relating to future performance constitute "Forward-Looking
Statements" within the meaning of Section 21E of the Securities Exchange Act of
1934 and are based on the Company's historical operating trends and financial
condition as of September 30, 1998 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 relating to the marketing of its memberships, membership
persistency, regulation and competition risks and the risk relating to the
continued active participation of its principal executive officer, Harland C.
Stonecipher. 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.
Results of Operations
First Nine Months of 1998 Compared to First Nine Months of 1997
The Company reported net income applicable to common shares of $20.0
million, or $.87 per diluted common share, for the nine months ended September
30, 1998, up 50% from net income applicable to common shares of $13.3 million,
or $.59 per diluted common share, for the same period of 1997. The increase in
the net income applicable to common shares for the 1998 period is primarily the
result of increases in every revenue category for 1998 as compared to 1997.
Membership premiums totaled $78.4 million during the nine months ended
September 30, 1998 compared to $54.8 million for the same period of 1997, an
increase of 43%. Membership premiums 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 persistency,
or renewal rate, of existing memberships. New membership sales increased 31%
during the nine months ended September 30, 1998 to 273,048 from 208,087 during
the comparable period of 1997. At September 30, 1998, there were 546,358 active
memberships in force compared to 392,791 at September 30, 1997. Additionally,
the average annual premium per membership has increased from $224 for all
memberships in force at September 30, 1997 to $227 for all memberships in force
at September 30, 1998, a 1% increase, as a result of a higher portion of active
memberships containing the additional pre-trial hours benefit at an additional
cost to the member together with increased sales of the Small Business Legal
Defense plan.
Associate services revenue increased 35% from $8.8 million for the
first nine months of 1997 to $11.8 million during the same period of 1998
primarily as a result of Fast Start which resulted in the Company receiving
training fees of approximately $6.1 million during the first nine months of 1998
compared to $4.0 million for the comparable period of 1997. The 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.
Fast Start requires a training fee of $184 per new associate 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 $6.1 million in training fees was
comprised of $184 from each of approximately 33,200 new sales associates who
elected to participate in Fast Start during the first nine months of 1998. New
associates enrolled during the first nine months of 1998 were 46,530 compared to
43,861 for the same period of 1997, an increase of 6%. The Company believes the
reduced rate of growth in the number of associates recruited is primarily
attributable to the increased costs associated with the Fast Start program.
However, while the number of new associates increased only 6% during 1998, the
number of new memberships sold, at least partially as a result of the Fast Start
program, increased 31%. 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 for the nine month period ended September 30, 1998
increased 58% to $1.8 million from $1.2 million for the comparable period of
1997. Interest income increased as a result of increases in the average
investments outstanding. At September 30, 1998 the Company reported $41.5
million in cash and investments compared to $27.7 million at September 30, 1997.
Primarily as a result of the increase in membership premiums, total
revenues increased to $94.0 million for the nine month period September 30, 1998
from $66.1 million during the comparable period of 1997, an increase of 42%.
Membership benefits totaled $25.9 million for the nine month period
ended September 30, 1998 compared to $18.1 million for same period of 1997, and
represented 33% of membership premiums for both 1998 and 1997 periods. This loss
ratio (membership benefits as a percentage of membership premiums) should remain
near 35% as the portion of active memberships which provide for a capitated
benefit continues to increase.
Commission expense was $17.3 million for the nine months ended
September 30, 1998 compared to $12.0 million for the same period of 1997, and
represented 22% of membership premiums for both 1998 and 1997 periods.
Commission expense, as a percentage of membership premiums, should remain at or
near these levels in future periods based on the Company's current commission
structure.
General and administrative expenses during the 1998 and 1997 nine-month
periods were $8.5 million and $6.2 million, respectively, and represented 11% of
membership premiums for such periods. This trend of gradual increases in the
total dollar amount of these expenses but consistent when expressed as a
percentage of membership premiums should continue and such percentages should
remain at or near these levels in future periods.
Associate services and direct marketing expenses increased to $10.5
million for the first nine months of 1998 from $8.1 million for the same period
of 1997 primarily as a result of approximately $4.8 million in Fast Start
training bonuses paid, additional costs of supplies due to increased purchases
by associates and higher staffing requirements. These expenses also include the
costs of providing associate services and marketing costs other than commissions
that are directly associated with new membership sales.
Due to property and equipment additions during 1998 and 1997,
depreciation increased from $508,000 during the first nine months of 1997 to
$624,000 for the first nine months of 1998. Premium taxes increased to $908,000
for the first nine months of 1998 from $670,000 for the same period of 1997.
The Company's expense ratio, which represents commissions, general and
administrative expenses and premium taxes as a percentage of membership
premiums, was 34% for both periods of 1998 and 1997 resulting in a combined loss
and expense ratio of 67% for the first nine months of 1998 compared to 68% for
the same period of 1997. 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 $10.3 million
(34% of pretax income) for the first nine months of 1998 compared to $7.2
million (35% of pretax income) for the same period of 1997. The Company has
established a valuation allowance for the portion of its deferred tax asset that
the Company believes more likely than not will not be realized. Historically,
the Company has concluded that it is unlikely it will generate sufficient
taxable income to realize the benefits from its pre-1996 NOLs and certain other
carryforwards before they expire, primarily as a result of future tax deductions
attributable to expected levels of commissions to be paid on new membership
sales. Operating results for the nine months ended September 30, 1998 indicate
that there is an increasing possibility that the Company may have taxable income
for fiscal 1998. There are a large number of variables that will affect the
determination of taxable income, and the Company does not have the ability to
definitely predict whether or not it will have taxable income for fiscal 1998
until later in the current year. Should the Company have taxable income for
1998, the Company's tax expense for 1998 would be reduced to reflect any actual
or anticipated future utilization of deferred tax benefits through reduction in
the current valuation allowance.
Dividends paid on outstanding preferred stock decreased to $7,000 for
the first nine months of 1998 from $10,000 for the same period of 1997, and such
reduction is attributable to the conversion of shares of $3.00 Cumulative
Convertible Preferred Stock into common stock.
Third Quarter of 1998 Compared to the Third Quarter of 1997
The results of operations in the third quarter of 1998, compared to the
third quarter of 1997, reflect increases in revenues and expenses primarily as a
result to the same factors discussed in the comparison of the first nine months
of 1998 to the first nine months of 1997.
Total revenues increased 39% or approximately $9.5 million to $33.7
million in the third quarter of 1998 compared to $24.2 million in the third
quarter of 1997, primarily as a result of increases in membership premiums. The
membership premium increase of 39% primarily resulted from an increase in the
number of average active memberships during the third quarter of 1998 compared
to the similar period in 1997.
Membership benefits totaled $9.3 million in the 1998 third quarter
compared to $6.5 million in the 1997 third quarter and resulted in a loss ratio
of 33% and 32%, respectively. The Company's expense ratio was 34% for the third
quarter of 1998 and 1997, respectively. This resulted in a combined loss and
expense ratio of 67% and 66%, respectively. The combined ratio does not measure
total profitability because it does not take into account all revenues and
expenses.
The above factors resulted in a 1998 third quarter net income
applicable to common shares of $7.4 million, or $.32 per diluted share, compared
to $5.0 million, or $.22 per diluted share, for the third quarter of 1997.
Liquidity and Capital Resources
General
Consolidated net cash provided by operating activities was $12.6
million for the first nine months of 1998 compared to of $5.5 million for the
1997 period. The increase of $7.1 million in cash provided by operating
activities during the first nine months of 1998 compared to the same period of
1997 resulted primarily from an increase in net income of $6.7 million and an
increase in deferred income taxes of $3.1 million, reduced by increases in other
assets of $763,000 and increases in commission advances of $1.8 million related
to the increase in new membership enrollments.
The Company had a consolidated working capital surplus of $32.3 million
at September 30, 1998, a decrease of $6.9 million compared to a consolidated
working capital of $39.2 million at December 31, 1997 and a decrease of $1.0
million, compared to September 30, 1997 working capital of $33.3 million. The
$6.9 million decrease in working capital during the first nine months of 1998
was primarily the result of decreases in cash and cash equivalents and
investments of $10.4 million, due to management's decision to move a portion of
these current assets into longer term investments with higher yields. This
movement of current investments to long term investments was partially offset by
increases in the current portion of commission advances of $4.6 million less the
$1.7 million increase in membership benefits and accounts payable and accrued
expenses. The Company's investments consist of investment grade (rated Baa or
higher) preferred stocks, bonds primarily issued by 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 nine months ended September 30, 1998, the Company
advanced commissions of $34.9 million on new membership sales compared to $27.6
million for the same period of 1997. Since approximately 93% 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 no additional commissions are paid on the membership
until all previous commission advances have been fully recovered. Commission
advances were subsequently reduced by commission earnings of $16.3 million and
$10.6 million for the nine-month periods ended September 30, 1998 and 1997,
respectively. The Company has recorded an allowance of $3.7 million to provide
for estimated uncollectible balances.
The Company has no outstanding material financial commitments and
believes that it has significant ability to finance expected future growth in
membership sales based on its existing amount of unpledged cash and investments
at September 30, 1998 of $38.5 million.
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 which
regulate memberships 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 is required to
maintain its stockholders' equity at levels sufficient to satisfy various state
regulatory requirements, the most restrictive of which is currently $3 million.
Although the Company does not expect additional capital requirements of either
PPLCI or PPLSIF, such requirements would be funded by the Company in the form of
capital contributions or surplus debentures.
Year 2000 Issues
The Company has conducted a comprehensive review of its systems,
including both information technology (e.g. computer databases) and
non-information technology systems (e.g. building utilities) that use date data,
to identify the systems that could be affected by the "Year 2000" issue and has
developed a plan to resolve the issue. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's affected programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
Testing and conversion of system applications commenced during 1993 and
is expected to be completed during the remainder of 1998. Testing of the
Company's information technology systems (as modified for Year 2000 issues) with
system dates set beyond January 1, 2000 will occur in February 1999 to further
ensure Year 2000 compliance. Costs incurred in prior periods have been
immaterial and expensed as incurred and the remaining total cost of the
Company's remediation efforts is expected to be approximately $100,000,
substantially all of which will be incurred during the last quarter of 1998 and
the first quarter of 1999. Year 2000 costs will continue to be funded out of
cash flow from operations. A significant portion of the Company's Year 2000
remediation plan has been and will continue to be accomplished by the Company's
internal programming staff and while such efforts will continue to result in
concentration on Year 2000 programming, these costs are not likely to be
incremental costs to the Corporation, but rather will represent the redeployment
of existing information technology resources. Although concentration on Year
2000 compliance has delayed other programming projects, such delays have not had
and are not expected to have a material adverse impact on the Company's
financial condition and results of operations.
The Company is also exposed to the risk that one or more of its vendors
or service providers could experience Year 2000 problems that impact the ability
of such vendor or service provider to provide goods and services. Though this is
not considered as significant a risk with respect to the suppliers of goods, due
to the availability of alternative suppliers, the disruption of certain
services, such as utilities, could, depending upon the extent of the disruption,
have a material adverse impact on the Company's operations. Further, the Company
must rely on other entities such as the Federal Reserve and its member banks
whose Year 2000 readiness efforts it does not control. The Company relies on
such entities for the timely processing of its monthly Automated Clearing House
transactions and credit card transactions. Should these entities fail in their
efforts to become Year 2000 compliant, the Company would immediately convert to
monthly invoices until such time as all necessary entities become Year 2000
compliant. Although such actions would be inconvenient and more costly to
process, it is not expected to materially affect the Company's long term
business outlook. The Company has initiated a comprehensive program to assess
the Year 2000 compliance of its key vendors and service providers in order to
determine the extent to which the Company is vulnerable to such third parties
that fail to remedy their own Year 2000 issues. In this regard, the Company has
initiated formal communications with its significant vendors and financial
institutions to assess their Year 2000 readiness. No material costs related to
Year 2000 compliance efforts by the Company regarding such third parties have
been incurred to date. To date these efforts have not revealed any vendor or
service provider Year 2000 issue that the Company believes would have a material
adverse impact on the Company's operations. However, the Company has no means of
ensuring that its vendors or service providers will be Year 2000 ready, and the
inability of vendors or service providers to complete their Year 2000 resolution
process in a timely fashion could have an adverse impact on the Company's
financial position or results of operations
The Company presently believes based on its knowledge and
representations of third parties that, with modifications to existing software
and conversion to new software, the Year 2000 issue will not pose significant
operational problems for the Company's computer systems as so modified and
converted. However, if such modifications and conversions are not completed in a
timely fashion, the Year 2000 issue may have a material adverse impact on the
operations of the Company.
Subsequent Event
On October 2, 1998, the Company acquired TPN, Inc. d.b.a. The Peoples
Network ("TPN") in a tax-free reorganization in which TPN was merged directly
into the Company. Since its inception in 1994, TPN marketed personal development
products and services together with PRIMESTAR(R) satellite subscription
television service to its members through a network marketing sales force. Prior
to the merger, TPN had a sales force of approximately 30,000 it considered
active. TPN delivered and the Company will continue to deliver its personal
development products and services to its sales force and its subscribers via its
own full time channel known as the "SUCCESS CHANNEL" on the PRIMESTAR(R) digital
satellite network. The Company also intends to recruit as many of TPN's former
sales associates as possible to market the Company's legal service plans. The
Company issued 999,992 shares of common stock to the holders of TPN common stock
and warrants. The merger will be accounted for under the pooling of interests
method and, accordingly, historical financial data in future reports will be
restated to include TPN data. See Notes to Consolidated Financial Statements in
Item 1 for information relating to the pro forma effect of such acquisition on
the first nine months of 1998 and 1997.
Additionally, on October 6, 1998, the Company announced its agreement
to acquire Universal Fidelity Life Insurance Company ("UFL") from Conseco.
Universal Fidelity, based in Duncan, Oklahoma, was a subsidiary of Pioneer
Financial Services, Inc., when Pioneer was acquired by Conseco in 1997. The
terms of the acquisition transaction contemplate that Universal Fidelity's
health insurance policies will be reinsured by a subsidiary of Conseco.
Universal will retain the existing life business with 1997 annual premium of
approximately $1 million. Pre-Paid's purchase price is expected to be
approximately $7 million in cash, which is approximately 1.2 times the estimated
capital and surplus of Universal after a planned extraordinary dividend. The
transaction is not expected to have a material effect on Pre-Paid's operating
results for the year ending December 31, 1998. This transaction is subject to
certain conditions, including insurance department approval
The acquisition of TPN effective October 2, 1998, will have the effect
of increasing both the Company's revenues and expenses in future periods. Any
net income derived from this acquisition during the fourth quarter of 1998 is
not expected to be material. TPN suffered pre-tax losses from operations of $1.7
million and negative cash flows from operations of $5.2 million during the first
nine months of 1998 and had a net working capital deficiency of approximately
$5.5 million at September 30, 1998. The Company expects to reduce losses from
operations at TPN during the fourth quarter due to the elimination of duplicate
capabilities and improve profitability during the first quarter of 1999. The
expected cash requirements for operations will be funded out of consolidated
cash flow from operations and such requirements are not expected to materially
affect the Company's liquidity or ability to continue to finance expected future
growth in membership sales. TPN had total assets of $9.0 million and total
liabilities of $11.7 million on September 30, 1998.
The planned acquisition of UFL is still subject to Oklahoma Insurance
Department approval as well as the approval under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. Should the acquisition receive all necessary
approvals, the financial impact to the Company's balance sheet would be to
increase assets by $17 million, liabilities by $11 million and stockholders'
equity by $6 million. These amounts are subject to certain pre-closing
adjustments including a mark-to-market adjustment pertaining to the acquired
investments. The impact to the Company's results of operations and cash flows by
UFL is expected to be positive in future periods but remain immaterial relative
to revenues, expenses and net income.
<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-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 September 30, 1998.
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: November 12, 1998 /s/ HARLAND C. STONECIPHER
----------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1998 /s/ RANDY HARP
----------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
Date: November 12, 1998 /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
September 30,
------------------
1998 1997
------- --------
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a)............ $ 7,422 $ 4,980
======= =======
Shares:
- -------
Weighted average shares outstanding, (net of 747 shares of
treasury stock)
disregarding exercise of options or conversion of
preferred stock........................................... 22,497 22,256
======= =======
Earnings per common share (a)............................... $ .33 $ .22
======= =======
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a)............ $ 7,422 $ 4,980
Add: Dividends on preferred stock (b)....................... 2 -
------- -------
Net income applicable to common stockholders, as adjusted .. $ 7,424 $ 4,980
======= =======
Shares:
Weighted average shares outstanding, (net of 747 shares of
treasury stock)
disregarding exercise of options or conversion of
preferred stock........................................... 22,497 22,256
Assumed dilutive conversion of preferred stock.............. 88 108
Assumed exercise of options and warrants based on the
treasury
stock method using average market price................... 303 306
------- -------
Weighted average number of shares, as adjusted.............. 22,888 22,670
======= =======
Earnings per share - assuming dilution (a).................. $ .32 $ .22
======= =======
(a) These amounts agree with the related amounts in the statements of income.
(b) Assumed conversion of $3 Cumulative Convertible Preferred Stock is
included in the 1998 periods since it is dilutive but not assumed in 1997
periods since such assumed conversion would be antidilutve.
<PAGE>
EXHIBIT 11.1
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
Nine Months Ended
September 30,
-----------------
1998 1997
-------- -------
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)............ $ 19,978 $ 13,309
======== ========
Shares:
Weighted average shares outstanding, (net of 747 shares of
treasury stock)
disregarding exercise of options or conversion of
preferred stock........................................... 22,447 22,043
======== ========
Earnings per common share (a)............................... $ .89 $ .60
======== ========
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)............ $ 19,978 $ 13,309
Add: Dividends on preferred stock (b)....................... 7 -
-------- --------
Net income applicable to common stockholders, as adjusted .. $ 19,985 $ 13,309
======== ========
Shares:
Weighted average shares outstanding, (net of 747 shares of
treasury stock)
disregarding exercise of options or conversion of
preferred stock........................................... 22,447 22,043
Assumed dilutive conversion of preferred stock.............. 88 112
Assumed exercise of options and warrants based on the
treasury
stock method using average market price................... 392 355
------- -------
Weighted average number of shares, as adjusted.............. 22,927 22,510
======= =======
Earnings per share - assuming dilution (a).................. $ .87 $ .59
======= =======
(a) These amounts agree with the related amounts in the statements of income.
(b) Assumed conversion of $3 Cumulative Convertible Preferred Stock is
included in the 1998 periods since it is dilutive but not assumed in 1997
periods since such assumed conversion would be antidilutve.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the September 30, 1998 financial statements contained in Form 10-Q
and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000311657
<NAME> Pre-Paid Legal Services
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 10,765
<SECURITIES> 4,794
<RECEIVABLES> 3,048
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,888
<PP&E> 3,954
<DEPRECIATION> 0
<TOTAL-ASSETS> 124,229
<CURRENT-LIABILITIES> 6,627
<BONDS> 0
0
26
<COMMON> 233
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 124,229
<SALES> 78,443
<TOTAL-REVENUES> 94,003
<CGS> 0
<TOTAL-COSTS> 63,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 30,254
<INCOME-TAX> 10,269
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,978
<EPS-PRIMARY> .89
<EPS-DILUTED> .87
</TABLE>
