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, 1999
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
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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 April 30, 1999:
Common Stock $.01 par value 23,423,576
<PAGE>
CONTENTS
Page
Number
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and
December 31, 1998 Consolidated Statements of Income (Unaudited) for the
3 months ended March 31, 1999 and 1998
Consolidated Statements of Comprehensive Income (Unaudited) for the 3 months
ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) for the 3 months ended
March 31, 1999 and 1998
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders (Voting Results)
Item 6. Exhibits and Reports on Form 8-K
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, 1999 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.
ITEM 1. FINANCIAL STATEMENTS OF REGISTRANT
- -------------------------------------------
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, 1998.
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
March 31, December 31,
-----------------------
1999 1998
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents............................... $ 11,923 $ 8,604
Available-for-sale investments, at fair value........... 2,068 2,368
Accrued Membership income............................... 3,390 3,595
Inventories............................................. 2,343 2,588
Prepaid product commissions............................. 1,278 1,384
Amount due from coinsurer............................... 13,308 12,498
Membership commission advances - current portion........ 24,017 21,224
-------- --------
Total current assets.................................. 58,327 52,261
Available-for-sale investments, at fair value............. 35,056 36,207
Investments pledged....................................... 4,722 2,922
Membership commission advances, net....................... 65,195 60,661
Property and equipment, net............................... 7,373 7,678
Production costs, net..................................... 789 1,373
Other..................................................... 8,510 6,801
-------- --------
Total assets.......................................... $179,972 $167,903
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits..................................... $ 4,146 $ 3,808
Deferred product sales revenue.......................... 3,632 3,932
Accident and health reserves............................ 13,308 12,498
Life insurance reserves................................. 957 970
Current portion of capital lease obligation............. 473 487
Accounts payable and accrued expenses................... 5,253 9,386
-------- --------
Total current liabilities............................. 27,769 31,081
Deferred income taxes..................................... 31,757 27,148
Life insurance reserves................................... 7,626 7,711
Capital lease obligation, net of current portion.......... 591 659
-------- --------
Total liabilities..................................... 67,743 66,599
-------- --------
Stockholders' equity:
Preferred stock, $1 par value; authorized 400 shares;
3 issued and outstanding as follows:
$3.00 Cumulative Convertible Preferred Stock, 3 shares
authorized, issued and outstanding at March 31, 1999
and December 31, 1998; liquidation value of $55........ 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,
18 shares authorized, issued and outstanding at
March 31, 1999 and December 31, 1998; liquidation
value of $240......................................... 18 18
Common stock, $.01 par value; 100,000 shares authorized;
24,452 and 24,321 issued at March 31, 1999 and
December 31, 1998..................................... 245 243
Capital in excess of par value.......................... 57,421 55,241
Retained earnings....................................... 58,308 49,528
Accumulated other comprehensive income:
Unrealized gains (losses) on investments............... (61) (24)
Less: Treasury stock at cost; 797 shares held............. (3,705) (3,705)
-------- --------
Total stockholders' equity............................. 112,229 101,304
-------- --------
Total liabilities and stockholders' equity............ $179,972 $167,903
======== ========
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,
---------------------
1999 1998
--------- ---------
Revenues:
Membership premiums.......................... $ 33,767 $ 23,953
Product sales................................ 2,054 9,073
Associate services........................... 5,410 3,731
Interest income.............................. 936 508
Other........................................ 2,416 612
-------- --------
44,583 37,877
-------- --------
Costs and expenses:
Membership benefits.......................... 11,029 7,979
Product costs................................ 1,261 6,152
Commissions................................... 7,835 5,097
General and administrative.................... 4,088 6,190
Associate services and direct marketing....... 3,491 3,676
Depreciation.................................. 1,271 523
Premium taxes................................ 339 365
Other......................................... 1,844 -
-------- --------
31,158 29,982
-------- --------
Income before income taxes..................... 13,425 7,895
Provision for income taxes..................... 4,643 2,629
-------- --------
Net Income..................................... 8,782 5,266
Less dividends on preferred shares............. 2 2
-------- --------
Net income applicable to common stockholders... $ 8,780 $ 5,264
======== ========
Basic earnings per common share................ $ .37 $ .22
======== ========
Diluted earnings per common share.............. $ .37 $ .22
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
------- -------
Net income................................ $ 8,782 $ 5,266
------- -------
Other comprehensive income (loss):
Unrealized gains (losses) on
investments:
Unrealized holding gains (losses)
arising during period.................. (37) -
------- -------
Other comprehensive income................ (37) -
------- -------
Comprehensive income....................... $ 8,721 $ 5,266
======= =======
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,
--------------------
1999 1998
-------- ---------
Cash flows from operating activities:
Net income....................................... $ 8,782 $5,266
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes............ 4,643 2,629
Depreciation and amortization.................. 1,271 826
Decrease (increase) in accrued membership
income......................................... 205 (215)
Increase in Membership commission advances..... (7,327) (5,954)
Increase in other assets....................... (1,709) (336)
Decrease (increase) in inventories............. 245 (1,165)
Decrease (increase) in prepaid product
commissions.................................. 106 (22)
Increase in amount due from coinsurer.......... (810) -
Increase in accident and health reserves....... 810 -
Decrease in life insurance reserves............ (98) -
Decrease in deferred product revenue........... (300) (88)
Increase in Membership benefits................ 338 281
Decrease in accounts payable and accrued
expenses...................................... (4,133) (1,279)
------- -------
Net cash provided by (used in) operating
activities.................................. 2,023 (57)
------- -------
Cash flows from investing activities:
Additions to property and equipment and
production costs, net.......................... (382) (1,705)
Purchases of investments - Available-for-sale.. (420) (4,350)
Maturities of investments - Available-for-sale. - 400
------- -------
Net cash used in investing activities........ (812) (5,655)
------- -------
Cash flows from financing activities:
Proceeds from sale of common stock............. 2,182 306
Dividends paid on preferred stock.............. (2) (2)
(Decrease) increase in capital lease
obligations.................................... (82) 268
------- -------
Net cash provided by financing activities.... 2,098 572
------- -------
Net increase (decrease) in cash ................. 3,319 (5,140)
Cash and cash equivalents at beginning of period. 8,604 27,722
------- -------
Cash and cash equivalents at end of period....... $11,923 $22,582
======= =======
Supplemental disclosure of cash flow
information:
Cash paid for interest......................... $ 4 $ 7
======= =======
The accompanying notes are an integral part of these financial statements.
financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated balance sheets as of March 31, 1999, and the related
statements of income, comprehensive income and cash flows for the three-month
periods ended March 31, 1999 and 1998 are unaudited; in the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. As a result of the 1998 fourth quarter
acquisition of TPN, Inc. ("TPN") that was accounted for as a pooling of
interests, the 1998 first quarter has been restated to include the operating
results of TPN.
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 financial statements and notes
included in the Company's 1998 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.
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 March
31, 1999.
During February 1999, a suit was filed against the Company by a
building owner seeking to recover unspecified damages and attorneys' fees for an
alleged breach of a lease agreement between the owner and TPN. Management has
indicated its plans to vigorously contest this suit and believes that any loss
resulting from the suit would not have a material impact on the Company's
financial position, results of operations or cash flows in future years.
The Company is a named defendant in certain other lawsuits arising in
the ordinary course of the Company's business. While the outcome of these
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on the Company's financial condition,
liquidity or results of operations.
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 $8.8
million, or $.37 per diluted common share, for the three months ended March 31,
1999, up 67 % from net income applicable to common shares of $5.3 million, or
$.22 per diluted common share, for the same period of 1998. The increase in the
net income applicable to common shares for the 1999 period is primarily the
result of increased Membership premiums for 1999 as compared to 1998 which more
than offset the 77% decline in product sales.
Membership premiums totaled $33.8 million during the three months ended
March 31, 1999 compared to $24.0 million for the same period of 1998, an
increase of 41%. 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 39%
during the three months ended March 31, 1999 to 118,814 from 85,223 during the
comparable period of 1998. At March 31, 1999, there were 648,475 active
Memberships in force compared to 463,796 at March 31, 1998. Additionally, the
average annual premium per Membership has increased from $224 for all
Memberships in force at March 31, 1998 to $231 for all Memberships in force at
March 31, 1999, a 3% 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 Business Owner's Legal
Solution Plan.
Product sales declined 77% from $9.1 million for the first three months
of 1998 to $2.1 million during the same period of 1999 primarily due to the
acquisition of TPN and the subsequent concentration on Membership sales as
opposed to the sale of goods and services. The trend of declining product sales
is expected to continue as the array of goods and services previously available
for sale through TPN is significantly narrowed and sales efforts are more
closely focused on the sale of new Memberships and the recruitment of new sales
associates.
Associate services revenue increased 45% from $3.7 million for the
first three months of 1998 to $5.4 million during the same period of 1999
primarily as a result of Fast Start which resulted in the Company receiving
training fees of approximately $3.0 million during the first three months of
1999 compared to $1.8 million for the comparable period of 1998. 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. Effective April 1, 1999, in order to be
deemed successful for Fast Start purposes, in addition to attending a Fast Start
Training, the new associate must write three new Memberships and recruit three
new sales associates within 60 days of the associate's effective date. The $3.0
million in training fees was comprised of $184 from each of approximately 16,448
new sales associates who elected to participate in Fast Start during the first
three months of 1999. New associates enrolled during the first three months of
1999 were 20,442 compared to 14,741 for the same period of 1998, an increase of
39%. 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, 1999 increased 84%
to $936,000 from $508,000 for the comparable period of 1998. Interest income
increased as a result of increases in the average investments outstanding. At
March 31, 1999 the Company reported $53.8 million in cash and investments
compared to $34.2 million at March 31, 1998.
Other income for the three months ended March 31, 1999 increased 294%
to $2.4 million from $612,000 for the comparable period of 1998. Included in
other income for the 1999 period was $1.6 million in life insurance premiums and
life reinsurance ceded. The Company acquired Universal Fidelity Life Insurance
Company ("UFL") during the fourth quarter of 1998. The Company has coinsured
100% of its accident and health policy liabilities pursuant to a coinsurance
agreement. During the three months ended March 31, 1999, accident and health
premiums earned and ceded were $8.3 million and claims incurred.
As a result of the increases in all categories except for product
sales, total revenues increased to $44.6 million for the three months ended
March 31, 1999 from $37.9 million during the comparable period of 1998, an
increase of 18%.
Membership benefits totaled $11.0 million for the three months ended
March 31, 1999 compared to $8.0 million for same period of 1998, and represented
33% of Membership premiums for both 1999 and 1998 periods. This loss ratio
(Membership benefits as a percentage of Membership premiums) should remain near
33% as the portion of active Memberships, which provide for a capitated benefit
continues to increase.
Product costs declined approximately $5.0 million, or 80%, during the
three months ended March 31, 1999 to $1.3 million from $6.2 million for the
comparable period of 1998 in conjunction with the 77% decline in product sales.
Product costs as a percentage of product sales were 61% for the three months
ended March 31, 1999 as compared to 68% for the same period of 1998. Product
costs are expected to decline proportionately as product sales decline as more
emphasis is placed on Membership sales rather than the sale of goods and
services.
Commission expense was $7.8 million for the three months ended March
31, 1999 compared to $5.1 million for the same period of 1998, and represented
23% and 21% of Membership premiums for 1999 and 1998, respectively. Commission
expense increased to 23% for the first quarter of 1999 primarily as a result of
an increase of $400,000 in the allowance for uncollectible commission advances.
Commission expense, as a percentage of Membership premiums, should remain near,
23%-25% in future periods based on the Company's current commission structure.
General and administrative expenses during the three months ended March
31, 1999 and 1998 were $4.1 million and $6.2 million, respectively, and
represented 9% and 16% of total revenues for such years. A trend of gradual
decreases of general and administrative expenses when expressed as a percentage
of total revenues should continue as a result of certain economies of scale
pertaining to the Company's operating leverage.
Associate services and direct marketing expenses decreased to $3.5
million for the first three months of 1999 from $3.7 million for the same period
of 1998 primarily as a result of the introduction of sales materials for which
the Company incurs no cost but receives a royalty for the sale of such
materials. Fast Start bonuses paid were approximately $2.0 million during the
1999 period compared to $1.5 million in the same period of 1998. 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 continuing property and equipment additions depreciation
increased from $523,000 during the first three months of 1998 to $1.3 million
for the first three months of 1999. This increase was also due in part to an
adjustment to the amortization of production costs incurred in prior years of
$425,000. Premium taxes decreased to $339,000 for the first three months of 1999
from $365,000 for the same period of 1998.
The Company has an additional expense category, other, which represents
of the operating expenses of UFL. The amount reported for the first three months
of 1999 was $1.8 million. The results of operations of UFL for the first three
months of 1999 were $160,000 in net income. UFL had revenues of approximately
$2.0 million consisting of $1.6 million of life insurance premiums and life
reinsurance ceded and $400,000 of interest income offset by expenses of $1.1
million in life insurance claims and $740,000 in general operating expenses.
The Company's expense ratio, which represents commissions, general and
administrative expenses and premium taxes as a percentage of Membership premiums
and product sales, was 34% for the three months ended March 31, 1999 compared to
35% for the three months ended March 31, 1998. The product cost ratio, which
represents product costs as a percentage of product sales, was 61% for the three
months ended March 31, 1999 compared to 68% for the same period of 1998. The
loss ratio, product cost ratio and the expense ratio do not measure total
profitability because they do not take into account all revenues and expenses.
The Company has recorded a provision for income taxes of $4.6 million
(35% of pretax income) for the first three months of 1999 compared to $2.6
million (33% of pretax income) for the same period of 1998.
Dividends paid on outstanding preferred stock were at $2,000 for each
of the three months ended March 31, 1999 and 1998.
Liquidity and Capital Resources
- -------------------------------
General
Consolidated net cash provided by operating activities was $2.0 million
for the first three months of 1999 compared to cash used of $57,000 for the 1998
period. The increase of $2.1 million in cash provided by operating activities
during the first three months of 1999 compared to the same period of 1998
resulted primarily from an increase in net income of $3.5 million, an increase
in deferred income taxes of $2.0 million and an decrease in inventories of $1.4
million, reduced by increases in other assets of $1.4 million, increases in
Membership commission advances of $1.4 million related to the increase in new
Membership enrollments, and the decrease in accounts payable and accrued
expenses of $4.1 million.
The Company had a consolidated working capital surplus of $30.6 million
at March 31, 1999, an increase of $9.4 million compared to a consolidated
working capital of $21.2 million at December 31, 1998 and a decrease of $6.2
million, compared to March 31, 1998 working capital of $36.8 million. The $9.3
million increase in working capital during the first three months of 1999 was
primarily the result of decreases in accounts payable and accrued expenses of
$4.1 million and increases in the current portion of Membership commission
advances of $2.8 million. The Company's investments consist of common stocks,
investment grade (rated Baa or higher) preferred stocks and investment grade
bonds primarily issued by corporations, 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 three months ended March 31, 1999, the Company
advanced commissions of $14.8 million on new Membership sales compared to $10.7
million for the same period of 1998. 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 $7.1 million and
$4.7 million for the three-month periods ended March 31, 1999 and 1998,
respectively. The Company assesses collectibility quarterly and has recorded an
allowance of $4.4 million to provide for estimated uncollectible balances which
includes an increase in the allowance of $400,000 during the three months ended
March 31, 1999.
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 March 31, 1999 of $49.0 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 PPLCI, UFL and PPLSIF.
The ability of PPLCI, UFL 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, UFL 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 and UFL
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 for PPLCI. Additional capital requirements of PPLCI, UFL or
PPLSIF will 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
was substantially completed during 1998. Testing of the Company's information
technology systems (as modified for Year 2000 issues) with system dates set
beyond January 1, 2000 occurred 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 $75,000, substantially all of which will be
incurred during the next two quarters 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's consolidated balance sheets include a certain amount of
assets and liabilities whose fair values are subject to market risk. Due to the
Company's significant investment in fixed-maturity investments, interest rate
risk represents the largest market risk factor affecting the Company's
consolidated financial position. Increases and decreases in prevailing interest
rates generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, liquidity of the instrument and
other general market conditions.
As of March 31, 1999, substantially all of the Company's investments
were in investment grade (rated Baa or higher) fixed-maturity investments,
interest-bearing money market accounts and a collateralized repurchase
agreement. The Company does not hold any investments classified as trading
account assets or derivative financial instruments.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on the Company's fixed-maturity investment
portfolio. It is assumed that the changes occur immediately and uniformly, with
no effect given to any steps that management might take to counteract that
change. The hypothetical changes in market interest rates reflect what could be
deemed best and worst case scenarios. The fair values shown in the following
table are based on contractual maturities. Significant variations in market
interest rates could produce changes in the timing of repayments due to
prepayment options available. The fair value of such instruments could be
affected and, therefore, actual results might differ from those reflected in the
following table:
Estimated fair
Hypothetical value after
change in hypothetical
Fair value at interest rate change in
March 31, 1999 (bp=basis points) interest rate
--------------- ----------------- --------------
(Dollars in thousands)
Fixed-maturity investments (1)... $34,915 100 bp increase $33,550
200 bp increase 32,218
50 bp decrease 35,549
100 bp decrease 36,085
____________________
(1) Excluding short-term investments with a fair value of $3.1 million.
The table above illustrates, for example, that an instantaneous 200
basis point increase in market interest rates at March 31, 1999 would
reduce the estimated fair value of the Company's fixed-maturity investments
by approximately $2.7 million at that date.
The Company primarily manages its exposure to interest rate risk by
purchasing investments that can be readily liquidated should the interest
rate environment begin to significantly change.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The 1999 Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held on April 23rd, 1999. The only matters submitted to a vote of
the Company's shareholders at the Annual Meeting were the election of three
directors. The results of the election for each such director were was follows:
Abstentions and
Votes For Votes Withheld
---------- ------------------
Harland C. Stonecipher 17,726,037 324,199
Wilburn Smith 17,726,715 323,521
Martin Belsky 17,731,393 318,843
The Board of Directors of the Company consists of nine members and is
divided into three classes as nearly equal in size, with the term of office of
one class expiring each year. The respective terms of service of Messrs.
Stonecipher, Smith and Belsky will expire in 2002. Other directors remaining in
office until their terms expire are Randy Harp, Kathleen S. Pinson, Peter K.
Grunebaum, Shirley Stonecipher, John Hail and David A. Savula.
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 (EDGAR Version Only)
(b) Reports on Form 8-K: There were no reports on Form 8-K filed by the Company
during the quarter ended March 31, 1999.
<PAGE>
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 11, 1999 /s/ HARLAND C. STONECIPHER
----------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 11, 1999 /s/ RANDY HARP
----------------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
Date: May 11, 1999 /s/ KATHLEEN S. PINSON
----------------------------------------
Kathleen S. Pinson
Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
No. Description
---- ------------------------------------------------------
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (EDGAR Version Only)
EXHIBIT 11.1
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a)......... $ 8,780 $ 5,264
======= =======
Shares:
- -------
Weighted average shares outstanding, (net of 747 shares of
treasury stock) disregarding exercise of options
or conversion of preferred stock....................... 23,610 23,413
======= =======
Earnings per common share (a)............................. $ .37 $ .22
======= =======
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a).......... $ 8,780 $ 5,264
Add: Dividends on preferred stock (b)..................... 2 -
------- -------
Net income applicable to common stockholders, as
adjusted................................................. $ 8,782 $ 5,264
======= =======
Shares:
- -------
Weighted average shares outstanding, (net of 747 shares
of treasury stock) disregarding exercise of options
or conversion of preferred stock....................... 23,610 23,413
Assumed dilutive conversion of preferred stock............ 70 79
Assumed exercise of options and warrants based on the
treasury stock method using average market price........ 314 322
------- -------
Weighted average number of shares, as adjusted............ 23,994 23,814
======= =======
Earnings per share - assuming dilution (a)................ $ .37 $ .22
======= =======
(a) These amounts agree with the related amounts in the consolidated
statements of income.
(b) Assumed conversion of $3 Cumulative Convertible Preferred Stock is
included in the 1999 periods since it is dilutive but not assumed in 1999
periods since such assumed conversion would be antidilutve.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 1999 financial statements contained in Form 10-Q and is
qualified in its entirety by reference to such financial statements and
the related footnotes.
</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-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> 11,923
<SECURITIES> 41,846
<RECEIVABLES> 3,390
<ALLOWANCES> 0
<INVENTORY> 2,343
<CURRENT-ASSETS> 58,327
<PP&E> 7,373
<DEPRECIATION> 0
<TOTAL-ASSETS> 179,972
<CURRENT-LIABILITIES> 27,769
<BONDS> 0
0
21
<COMMON> 245
<OTHER-SE> 11,963
<TOTAL-LIABILITY-AND-EQUITY> 179,972
<SALES> 3,376
<TOTAL-REVENUES> 44,583
<CGS> 0
<TOTAL-COSTS> 31,158
<OTHER-EXPENSES> 0
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<INCOME-TAX> 4,643
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,780
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
