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, 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 May 4, 1998:
Common Stock $.01 par value 22,429,627
<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,
1998 1997
---------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents............................. $ 21,044 $ 21,803
Held-to-maturity investments - current portion........ 6,992 4,242
Accrued Contract income............................... 2,614 2,399
Commission advances - current portion................. 17,813 15,705
-------- --------
Total current assets................................ 48,463 44,149
Held-to-maturity investments............................ 1,500 650
Investments pledged..................................... 3,122 2,772
Commission advances, net................................ 41,884 38,038
Property and equipment, net............................. 3,746 3,594
Other................................................... 3,074 2,709
-------- --------
Total assets........................................ $101,789 $ 91,912
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Contract benefits..................................... $ 2,930 $ 2,649
Accounts payable and accrued expenses................. 2,758 2,281
-------- --------
Total current liabilities........................... 5,688 4,930
Deferred income taxes................................... 19,449 16,471
-------- --------
Total liabilities................................... 25,137 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
March 31, 1998 and December 31, 1997; liquidation
value of $55 at March 31, 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
March 31, 1998 and December 31, 1997; liquidation
value of $304 at March 31, 1998 and
December 31, 1997.................................. 23 23
Common stock, $.01 par value; 100,000 shares
authorized; 23,169 and 23,151 issued at
March 31, 1998 and December 31, 1997............... 232 232
Capital in excess of par value........................ 47,610 47,303
Retained earnings..................................... 30,961 25,127
Less: Treasury stock at cost; 747 shares.............. (2,177) (2,177)
-------- --------
Total stockholders' equity........................... 76,652 70,511
-------- --------
Total liabilities and stockholders' equity.......... $101,789 $ 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
March 31,
------------------
1998 1997
-------- --------
Revenues:
Contract premiums................................ $ 23,953 $ 16,219
Associate services .............................. 3,731 2,700
Interest income ................................. 501 381
Other ........................................... 612 425
-------- --------
28,797 19,725
-------- --------
Costs and expenses:
Contract benefits ............................... 7,979 5,447
Commissions ..................................... 5,097 3,483
General and administrative ...................... 2,661 1,888
Associate services and direct marketing ......... 3,676 2,289
Depreciation .................................... 205 161
Premium taxes ................................... 365 333
-------- --------
19,983 13,601
Income before income taxes......................... 8,814 6,124
Provision for income taxes......................... 2,978 2,143
-------- --------
Net income......................................... 5,836 3,981
Less dividends on preferred shares................. 2 3
-------- --------
Net income applicable to common stockholders....... $ 5,834 $ 3,978
======== ========
Basic earnings per common share.................... $ .26 $ .18
======== ========
Diluted earnings per common share.................. $ .26 $ .18
======== ========
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,
------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income.............................................. $ 5,836 $ 3,981
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes................... 2,978 2,143
Depreciation and amortization......................... 205 161
Increase in accrued Contract income................... (215) (141)
Increase in commission advances....................... (5,954) (4,601)
(Increase) decrease in other assets................... (365) 28
Increase in Contract benefits......................... 281 222
Increase in accounts payable and accrued expenses .... 477 469
-------- -------
Net cash provided by operating activities........... 3,243 2,262
-------- -------
Cash flows from investing activities:
Additions to property and equipment................... (357) (138)
Purchases of investments.............................. (4,350) -
Maturities of investments............................. 400 -
-------- -------
Net cash used in investing activities............... (4,307) (138)
-------- -------
Cash flows from financing activities:
Proceeds from sale of common stock.................... 307 449
Dividends paid on preferred stock..................... (2) (3)
-------- -------
Net cash provided by financing activities........... 305 446
-------- -------
Net increase (decrease) in cash and unpledged cash
equivalents ......................................... (759) 2,570
Cash and cash equivalents at beginning of period ....... 21,803 14,831
-------- -------
Cash and cash equivalents at end of period ............. $ 21,044 $ 17,401
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ - $ 3
======== ========
Cash paid for income taxes............................ $ - $ -
======== ========
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, 1998, and the related
statements of income and of cash flows for the three-month periods ended March
31, 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.
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. The Company currently does not expect adoption of
this Statement to have a material effect on financial statement presentation or
related footnote disclosures. SFAS 131 is not effective for interim financial
statements in the initial year of its application.
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 March 31, 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 Contracts, Contract
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
The Company reported net income applicable to common shares of $5.8
million, or $.26 per diluted common share, for the three months ended March 31,
1998, up 45% from net income applicable to common shares of $4.0 million, or
$.18 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.
Contract premiums totaled $24.0 million during the three months ended
March 31, 1998 compared to $16.2 million for the same period of 1997, an
increase of 48%. Contract premiums and their impact on total revenues in any
period are determined directly by the number of active Contracts in force during
any such period. The active Contracts in force are determined by both the number
of new Contracts sold in any period together with the persistency, or renewal
rate, of existing Contracts. New Contract sales increased 37% during the three
months ended March 31, 1998 to 85,223 from 62,307 during the comparable period
of 1997. At March 31, 1998, there were 463,796 active Contracts in force
compared to 324,801 at March 31, 1997. Additionally, the average annual premium
per Contract has increased from $219 for all Contracts in force at March 31,
1997 to $224 for all Contracts in force at March 31, 1998, a 2.3% increase, as a
result of a higher portion of active Contracts 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 37% from $2.7 million for the first
three months of 1997 to $3.7 million during the same period of 1998 primarily as
a result of Fast Start which resulted in the Company receiving training fees of
approximately $1.8 million during the first quarter of 1998. 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.
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 $1.8 million in training fees was
comprised of $184 from each of approximately 9,800 new sales associates who
elected to participate in Fast Start during the 1998 first quarter. New
associates enrolled during the first quarter of 1998 were 14,741 compared to
14,833 for the same period of 1997, a decrease of 1%. The Company believes the
decrease in associates recruited is primarily attributable to the increased
costs associated with the Fast Start program. However, while the number of new
associates decreased during 1998, the number of new Contracts sold, at least
partially as a result of the Fast Start program, increased significantly. 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 three months ended March 31, 1998 increased 31%
to $501,000 from $381,000 for the comparable quarter of 1997. Interest income
increased as a result of increases in the average investments outstanding. At
March 31, 1998 the Company reported $32.7 million in cash and investments
compared to $22.4 million at March 31, 1997.
Primarily as a result of the increase in Contract premiums, total
revenues increased to $28.8 million for the three months ended March 31, 1998
from $19.7 million during the comparable period of 1997, an increase of 46%.
Contract benefits totaled $8.0 million for the three months ended March
31, 1998 compared to $5.4 million for same period of 1997, and represented 33%
of Contract premiums for both 1998 and 1997. This loss ratio (Contract benefits
as a percentage of Contract premiums) should remain near 35% as the portion of
active Contracts which provide for a capitated benefit continues to increase.
Commission expense was $5.1 million for the three months ended March
31, 1998 compared to $3.5 million for the same period of 1997, and represented
21% and 22% of Contract premiums for 1998 and 1997, respectively. Commission
expense, as a percentage of Contract premiums, should remain at or near 25% of
Contract premiums in future years based on the Company's current commission
structure.
General and administrative expenses during the 1998 and 1997 three
month periods were $2.7 million and $1.9 million, respectively, and represented
11.2% and 11.7% of Contract premiums for such periods. This trend of gradual
increases in the total dollar amount of these expenses but decreases when
expressed as a percentage of Contract premiums should continue as a result of
certain economies of scale pertaining to the Company's operating leverage.
Associate services and direct marketing expenses increased to $3.7
million for the first three months of 1998 from $2.3 million for the same period
of 1997 primarily as a result of approximately $1.5 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
which are directly associated with new membership sales.
Due to property and equipment additions during 1997 and 1998,
depreciation increased from $161,000 during the first three months of 1997 to
$205,000 for the first three months of 1998. Premium taxes increased to $365,000
for the first three months of 1998 from $333,000 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 Contract premiums,
was 34% for the first three months of 1998 compared to 35% for the same period
of 1997 resulting in a combined loss and expense ratio of 67% for the first
three months of 1998 compared to 69% 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 $3.0 million
(34% of pretax income) for the first three months of 1998 compared to $2.1
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. The Company
believes it is unlikely that 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 Contract sales. However, if
the level of tax deductions for commissions is less than expected in 1998 (as a
result of new Contract sales being less than expected or for any other reason),
the Company may have taxable income. In such case, 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. The
valuation allowance decreased $107,000 during the three months ended March 31,
1998.
Dividends paid on outstanding preferred stock decreased to $2,000 for
the first three months of 1998 from $3,000 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.
Liquidity and Capital Resources
General
Consolidated net cash provided by operating activities was $3.2 million
for the first three months of 1998 compared to of $2.3 million for the 1997
period. The increase of $900,000 in cash provided by operating activities during
the first three months of 1998 compared to the same period of 1997 resulted
primarily from an increase in net income of $1.8 million, an increase in
deferred income taxes of $900,000, reduced by increases in other assets of
$400,000 and increases in commission advances of $1.4 million related to the
increase in new membership enrollments.
The Company had a consolidated working capital surplus of $42.8
million at March 31, 1998, an increase of $3.6 million compared to a
consolidated working capital of $39.2 million at December 31, 1997 and an
increase of $15.9 million compared to March 31, 1997 working capital of $26.9
million. The $3.6 million increase in working capital during the first three
months of 1998 was primarily the result of increases in the current portion of
commission advances of $2.1 million and increases in cash and investments of
$2.0 million less the $760,000 increase in Contract benefits and accounts
payable and accrued expenses.
The Company generally advances significant commissions at the time a
membership is sold. During the three months ended March 31, 1998, the Company
advanced commissions of $10.7 million on new membership sales compared to $7.8
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 $4.7 million and
$3.0 million for the three month periods ended March 31, 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
Contract sales based on its existing amount of unpledged cash and investments at
March 31, 1998 of $29.5 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 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.
<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 March 31, 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: May 5, 1998 /s/ HARLAND C. STONECIPHER
------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 5, 1998 /s/ RANDY HARP
------------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
Date: May 5, 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
<PAGE>
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,
------------------
1998 1997
------ ------
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a).......... $ 5,834 $ 3,978
Shares:
- -------
Weighted average shares outstanding, (net of 747 shares
of treasury stock) disregarding exercise of options
or conversion of preferred stock ...................... 22,413 21,797
======= =======
Earnings per common share (a) ............................ $ .26 $ .18
======= =======
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a).......... $ 5,834 $ 3,978
======= =======
Shares:
- -------
Weighted average shares outstanding, (net of 747 shares
of treasury stock) disregarding exercise of options
or conversion of preferred stock ....................... 22,413 21,797
Assumed dilutive conversion of preferred stock ........... 79 114
Assumed exercise of options and warrants based on the
treasury stock method using average market price ....... 322 483
------- -------
Weighted average number of shares, as adjusted ........... 22,814 22,394
======= =======
Earnings per share - assuming dilution (a) ............... $ .26 $ .18
======= =======
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, 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, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 21,044
<SECURITIES> 6,992
<RECEIVABLES> 2,614
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48,463
<PP&E> 3,746
<DEPRECIATION> 0
<TOTAL-ASSETS> 101,789
<CURRENT-LIABILITIES> 5,688
<BONDS> 0
0
26
<COMMON> 232
<OTHER-SE> 76,394
<TOTAL-LIABILITY-AND-EQUITY> 101,789
<SALES> 23,953
<TOTAL-REVENUES> 28,797
<CGS> 0
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<INCOME-TAX> 2,978
<INCOME-CONTINUING> 5,836
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<NET-INCOME> 5,834
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<EPS-DILUTED> .26
</TABLE>
