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 June 30, 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
--------------------------------------------------------------
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 July 23, 1999:
Common Stock $.01 par value 22,927,426
<PAGE>
CONTENTS
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
Consolidated Balance Sheets as of June 30, 1999 (Unaudited) and
December 31, 1998
Consolidated Statements of Income (Unaudited) for the 6 months ended
June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income (Unaudited) for the 6 months
ended June 30, 1999 and 1998
Consolidated Statements of Income (Unaudited) for the 3 months ended
June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income (Unaudited) for the 3 months
ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) for the 6 months ended
June 30, 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 6. Exhibits and Reports on Form 8-K
<PAGE>
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 June 30, 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 per share amounts)
ASSETS
<TABLE>
<CAPTION>
June 30 December 31,
-------- ------------
1999 1998
-------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................... $ 9,670 $ 8,604
Available-for-sale investments, at fair value ....................... 1,868 2,368
Accrued Membership income ........................................... 3,935 3,595
Inventories ......................................................... 2,060 2,588
Prepaid product commissions ......................................... 1,004 1,384
Amount due from coinsurer ........................................... 11,887 12,498
Membership commission advances - current portion .................... 26,855 21,224
-------- --------
Total current assets ............................................. 57,279 52,261
Available-for-sale investments, at fair value ......................... 21,586 36,207
Investments pledged ................................................... 4,822 2,922
Membership commission advances, net ................................... 73,230 60,661
Property and equipment, net ........................................... 7,257 7,678
Production costs, net ................................................. 617 1,373
Other ................................................................. 7,526 6,801
-------- --------
Total assets ..................................................... $172,317 $167,903
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits................................................... $ 4,514 $ 3,808
Deferred product sales revenue........................................ 2,852 3,932
Accident and health reserves.......................................... 11,887 12,498
Life insurance reserves............................................... 927 970
Current portion of capital lease obligation........................... 464 487
Accounts payable and accrued expenses................................. 6,736 9,386
------- -------
Total current liabilities........................................... 27,380 31,081
Deferred income taxes................................................... 35,328 27,148
Life insurance reserves................................................. 7,692 7,711
Capital lease obligation, net of current portion........................ 513 659
------- -------
Total liabilities................................................... 70,913 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 June 30, 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 June 30, 1999 and December 31, 1998;
liquidation value of $240............................................... 18 18
Common stock, $.01 par value; 100,000 shares authorized; 24,456 and
24,321 issued at June 30, 1999 and December 31, 1998.................... 245 243
Capital in excess of par value........................................ 57,524 55,241
Retained earnings..................................................... 68,177 49,528
Accumulated other comprehensive income:
Unrealized gains (losses) on investments............................. (1,028) (24)
Less: Treasury stock at cost; 1,547 and 797 shares held at
June 30, 1999 and December 31, 1998, respectively ..................... (23,535) (3,705)
-------- --------
Total stockholders' equity........................................... 101,404 101,304
-------- --------
Total liabilities and stockholders' equity.......................... $172,317 $167,903
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Six Months Ended
June 30,
-------------------
1999 1998
-------- --------
Revenues:
Membership premiums.................................... $ 72,324 $ 50,338
Product sales.......................................... 3,169 17,335
Associate services..................................... 10,370 7,717
Interest income........................................ 1,768 1,062
Other.................................................. 4,911 1,239
-------- --------
92,542 77,691
-------- --------
Costs and expenses:
Membership benefits.................................... 23,624 16,596
Product costs.......................................... 2,109 10,610
Commissions............................................ 16,381 10,877
General and administrative............................. 9,510 12,897
Associate services and direct marketing................ 6,961 7,212
Depreciation and amortization.......................... 1,684 1,202
Premium taxes.......................................... 701 631
Other.................................................. 2,875 -
-------- --------
63,845 60,025
-------- --------
Income before income taxes............................... 28,697 17,666
Provision for income taxes............................... 10,043 5,981
-------- --------
Net income............................................... 18,654 11,685
Less dividends on preferred shares....................... 5 5
-------- --------
Net income applicable to common stockholders............. $ 18,649 $ 11,680
======== ========
Basic earnings per common share.......................... $ .80 $ .50
======== ========
Diluted earnings per common share........................ $ .79 $ .49
======== ========
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)
Six Months Ended
June 30,
------------------
1999 1998
------- -------
Net income........................................ $18,654 $11,685
------- -------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during period................................ (1,004) -
------- -------
Other comprehensive income (loss)................. (1,004) -
------- -------
Comprehensive income.............................. $17,650 $11,685
======= =======
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
June 30,
-------------------
1999 1998
-------- --------
Revenues:
Membership premiums.................................... $ 38,557 $ 26,385
Product sales.......................................... 1,115 8,262
Associate services..................................... 4,960 3,986
Interest income........................................ 832 554
Other.................................................. 2,495 627
-------- --------
47,959 39,814
-------- --------
Costs and expenses:
Membership benefits.................................... 12,595 8,617
Product costs.......................................... 848 4,458
Commissions............................................ 8,546 5,780
General and administrative............................. 5,422 6,707
Associate services and direct marketing................ 3,470 3,536
Depreciation and amortization.......................... 413 679
Premium taxes.......................................... 362 266
Other.................................................. 1,031 -
-------- --------
32,687 30,043
-------- --------
Income before income taxes............................... 15,272 9,771
Provision for income taxes............................... 5,400 3,352
-------- --------
Net income............................................... 9,872 6,419
Less dividends on preferred shares....................... 3 3
-------- --------
Net income applicable to common stockholders............. $ 9,869 $ 6,416
======== ========
Basic earnings per common share.......................... $ .43 $ .27
======== ========
Diluted earnings per common share........................ $ .42 $ .27
======== ========
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
June 30,
-------------------
1999 1998
-------- --------
Net income........................................ $ 9,872 $ 6,419
------- -------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during period................................. (967) -
------- -------
Other comprehensive income (loss)................. (967) -
------- -------
Comprehensive income.............................. $ 8,905 $ 6,419
======= =======
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)
Six Months Ended
June 30,
-------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income............................................... $ 18,654 $ 11,685
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes.................... 8,838 5,981
Depreciation and amortization.......................... 1,684 1,202
Increase in accrued membership income.................. (340) (375)
Increase in Membership commission advances............. (18,200) (12,295)
Increase in other assets............................... (725) (400)
Decrease (increase) in inventories..................... 528 (1,123)
Decrease (increase) in prepaid product commissions..... 380 (80)
Decrease in amount due from coinsurer.................. (611) -
Decrease in accident and health reserves............... 611 -
Decrease in life insurance reserves.................... (62) -
Decrease in deferred product revenue................... (1,080) (386)
Increase in Membership benefits........................ 706 530
Decrease in accounts payable and accrued expenses...... (2,650) (1,564)
-------- --------
Net cash provided by operating activities........... 7,733 3,292
-------- --------
Cash flows from investing activities:
Additions to property and equipment and production (507) (2,080)
costs, net.............................................
Purchases of investments - Available-for-sale.......... (5,100) (13,059)
Maturities of investments - Available-for-sale......... 16,660 1,725
-------- --------
Net cash provided by (used in) investing activities. 11,053 (13,414)
-------- --------
Cash flows from financing activities:
Proceeds from sales of common stock.................... 2,284 675
Purchases of treasury stock............................ (19,830) -
Dividends paid on preferred stock...................... (5) (5)
(Decrease) increase in capital lease obligations....... (169) 117
-------- --------
Net cash (used in) provided by financing activities. (17,720) 787
Net increase (decrease) in cash ......................... 1,066 (9,452)
Cash and cash equivalents at beginning of period......... 8,604 27,722
-------- --------
Cash and cash equivalents at end of period............... $ 9,670 $ 18,270
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 8 $ 7
======== ========
Cash paid for taxes.................................... $ 105 $ -
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1999, and the related
statements of income and comprehensive income for the three-month and six-month
periods ended June 30, 1999 and 1998 and the statements of cash flows for the
six-month periods ended June 30, 1999 and 1998 are unaudited; in the opinion of
management, all adjustments (consisting of normal recurring 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 periods have
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, 2000. The Company believes that it holds no material derivative instruments
at June 30, 1999.
2. CONTINGENCIES
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 intends 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.
3. STOCK REPURCHASES
The Company announced on April 6, 1999, a stock repurchase program
authorizing management to reacquire up to 500,000 shares. The Board of Directors
at its April 23, 1999 meeting increased such authorization from 500,000 shares
to 750,000 shares. At June 30, 1999, the Company had completed the repurchase of
750,000 shares for total consideration of $19.8 million, or an average price of
$26.44 per share and has subsequently increased the authorization to 1,000,000
shares.
4. EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income
applicable to common stockholders by the weighted average number of shares of
Common Stock outstanding during the respective periods.
Diluted earnings per common share are computed by dividing net income
applicable to common stockholders by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. The
$3.00 Cumulative Convertible Preferred stock is considered to be a dilutive
common stock equivalent for the three-month and six-month periods ending June
30, 1999, but would be anti-dilutive and therefore not considered in the 1998
periods. The Special Preferred stock is considered to be a dilutive common stock
equivalent for all periods and the number of shares issuable on conversion of
the $3.00 Cumulative Convertible Preferred stock and the Special Preferred stock
is added to the weighted average number of common shares. The weighted average
number of common shares is also increased by the number of shares issuable on
the exercise of options less the number of common shares assumed to have been
purchased with the proceeds from the exercise of the options pursuant to the
treasury stock method; those purchases are assumed to have been made at the
average price of the common stock during the respective period.
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 stockholders of
$18.6 million, or $.79 per diluted common share, for the six months ended June
30, 1999, up 59% from net income applicable to common stockholders of $11.7
million, or $.49 per diluted common share, for the same period of 1998. The
increase in the net income applicable to common stockholders for the 1999 period
is primarily the result of increased Membership premiums for 1999 as compared to
1998 which more than offset the 82% decline in product sales.
Membership premiums totaled $72.3 million during the six months ended
June 30, 1999 compared to $50.3 million for the same period of 1998, an increase
of 44%. 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 36% during the six
months ended June 30, 1999 to 241,699 from 177,429 during the comparable period
of 1998. At June 30, 1999, there were 700,659 active Memberships in force
compared to 507,365 at June 30,1998. Additionally, the average annual premium
per Membership has increased from $226 for all Memberships in force at June
30,1998 to $235 for all Memberships in force at June 30, 1999, a 4% 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. The Business
Owner's Legal Solution Plan sells for $75.00 per month for those businesses with
employees of 50 or less and $125.00 per month for those businesses with 51 to 99
employees.
Product sales declined 82% from $17.3 million for the first six months
of 1998 to $3.2 million during the same period of 1999 primarily due to the
concentration on Membership sales as opposed to the sale of goods and services
subsequent to the acquisition of TPN. 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 focused on the
sale of new Memberships and the recruitment of new sales associates.
Associate services revenue increased 35% from $7.7 million for the first
six months of 1998 to $10.4 million during the same period of 1999 primarily as
a result of Fast Start which resulted in the Company receiving training fees of
approximately $6.1 million during the first six months of 1999 compared to $3.9
million for the comparable period of 1998. The Company's 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 prior to April 1, 1999, 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. Beginning July 26, 1999, the new associate may also
qualify for Fast Start by writing 5 new memberships within the 60-day timeframe.
The $6.1 million in training fees was comprised of $184 from each of
approximately 33,268 new sales associates who elected to participate in Fast
Start during the first six months of 1999. New associates enrolled during the
first six months of 1999 were 45,542 compared to 30,710 for the same period of
1998, an increase of 48%. 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 six months ended June 30, 1999 increased 64% to
$1.8 million from $1.1 million for the comparable period of 1998. Interest
income increased as a result of increased average investments outstanding for
the quarter and as a result of increased commission advances which incur an
interest charge. At June 30, 1999 the Company reported $37.9 million in cash and
investments compared to $37.3 million at June 30,1998.
Other income for the six months ended June 30, 1999 increased 308% to
$4.9 million from $1.2 million for the comparable period of 1998. Included in
other income for the 1999 period was a realized gain on the sale of investments
of $700,000 and $2.5 million in life insurance premiums and life reinsurance
ceded. The Company acquired Universal Fidelity Life Insurance Company ("UFL")
during the fourth quarter of 1998 in a transaction that was accounted for as a
purchase. UFL also sells accident and health insurance. The Company has
coinsured 100% of UFL's accident and health policy liabilities pursuant to a
coinsurance agreement. During the six months ended June 30, 1999, accident and
health premiums earned and ceded were $8.6 million.
As a result of the increases in all categories except for product sales,
total revenues increased to $92.5 million for the six months ended June 30, 1999
from $77.7 million during the comparable period of 1998, an increase of 19%.
Membership benefits totaled $23.6 million for the six months ended June
30, 1999 compared to $16.6 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 that provide for a capitated benefit
continues to increase.
Product costs declined approximately $8.5 million, or 80%, during the
six months ended June 30, 1999 to $2.1 million from $10.6 million for the
comparable period of 1998 in conjunction with the 82% decline in product sales.
Product costs as a percentage of product sales were 67% for the six months ended
June 30, 1999 as compared to 61% 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 and the recruitment of sales associates rather than
the sale of goods and services.
Commission expense was $16.4 million for the six months ended June 30,
1999 compared to $10.9 million for the same period of 1998, and represented 23%
and 22% of Membership premiums for 1999 and 1998, respectively. Commission
expense increased to 23% for the first six months 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 six months ended June 30,
1999 and 1998 were $9.5 million and $12.9 million, respectively, and represented
10% and 17% of total revenues for such years. Management expects further gradual
decreases in general and administrative expenses when expressed as a percentage
of total revenues as a result of certain economies of scale and the integration
of TPN and UFL operations.
Associate services and direct marketing expenses decreased to $7.0
million for the first six months of 1999 from $7.2 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 $3.3 million during the
1999 period compared to $3.1 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 $1.2 million during the first six months of 1998 to $1.7 million
for the first six months of 1999. This increase was also due in part to
increased amortization of production costs by $425,000. Premium taxes increased
to $701,000 for the first six months of 1999 from $631,000 for the same period
of 1998.
Other expenses represent the operating expenses of UFL. The amount
reported for the first six months of 1999 was $2.9 million. The results of
operations of UFL for the first six months of 1999 were $491,000 in net income.
UFL had revenues of approximately $3.9 million consisting of $2.5 million of
life insurance premiums and life reinsurance ceded, $700,000 of interest income
and $700,000 gain on the sale of investments offset by expenses of $1.7 million
in life insurance claims and $1.2 million 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 35% for the six months ended June 30, 1999 compared to
36% for the six months ended June 30,1998. The product cost ratio, which
represents product costs as a percentage of product sales, was 67% for the six
months ended June 30, 1999 compared to 61% 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 $10.0 million
(35% of pretax income) for the first six months of 1999 compared to $6.0 million
(34% of pretax income) for the same period of 1998.
Dividends paid on outstanding preferred stock were at $5,000 for each of
the six months ended June 30, 1999 and 1998.
Second Quarter of 1999 Compared to the Second Quarter of 1998
- -------------------------------------------------------------
The results of operations in the second quarter of 1999, compared to the
second quarter of 1998, reflect increases in revenues and expenses primarily as
a result to the same factors discussed in the comparison of the first six months
of 1999 to the first six months of 1998.
Total revenues increased 21% or approximately $8.2 million to $48.0
million in the second quarter of 1999 compared to $39.8 million in the second
quarter of 1998, primarily as a result of increases in membership premiums. The
membership premium increase of 46% primarily resulted from an increase in the
number of average active memberships during the second quarter of 1999 compared
to the similar period in 1998.
Membership benefits totaled $12.6 in the 1999 second quarter compared to
$8.6 million in the 1998 second quarter and resulted in a loss ratio of 33% for
both periods. The Company's expense ratio for the second quarter of 1999 and
1998, was 36% and 38%, respectively. This resulted in a combined loss and
expense ratio of 69% and 71%, respectively. The combined ratio does not measure
total profitability because it does not taken into account all revenues and
expenses.
The above factors resulted in a 1999 second quarter net income
applicable to common stockholders of $9.9 million, or $.42 per share, diluted,
compared to $6.4 million, or $.27 per shares, for the second quarter of 1998.
Liquidity and Capital Resources
- -------------------------------
General
Consolidated net cash provided by operating activities was $7.7 million
for the first six months of 1999 compared to cash provided of $3.3 million for
the 1998 period. The increase of $4.4 million in cash provided by operating
activities during the first six months of 1999 compared to the same period of
1998 resulted primarily from an increase in net income of $7.0 million, an
increase in deferred income taxes of $2.8 million and a decrease in inventories
of $1.7 million, reduced by increases in Membership commission advances of $5.9
million related to the increase in new Membership enrollments, and the decrease
in accounts payable and accrued expenses of $1.1 million.
Consolidated net cash provided by investing activities was $11.1 million
for the first half of 1999 compared to net cash used in investing activities of
$13.4 million for the comparable period of 1998. This $24.5 million increase in
cash provided by investing activities resulted primarily from the $22.9 million
change in net investment activity comprised of net investment proceeds during
the first six months of 1999 of $11.6 million compared to net investment
purchases of $11.3 million for the comparable period of 1998.
Net cash used in financing activities during the first six months of
1999 was $17.7 million compared to net cash provided by financing activities of
$787,000 for the comparable period of 1998. This $18.5 million change was
comprised of $1.6 million in additional proceeds during the 1999 period over the
1998 period from the exercise of common stock options but more than offset by
the $19.8 million use of cash to purchase treasury stock during the first six
months of 1999.
The Company had a consolidated working capital surplus of $29.9 million
at June 30, 1999, an increase of $8.7 million compared to a consolidated working
capital of $21.2 million at December 31, 1998 and equal to the June 30,1998
working capital of $29.9 million. The $8.7 million increase in working capital
during the first six months of 1999 was primarily the result of decreases in
accounts payable and accrued expenses of $2.7 million and increases in the
current portion of Membership commission advances of $5.6 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 six months ended June 30, 1999, the Company
advanced commissions of $33.8 million on new Membership sales compared to $22.4
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 $15.2 million and
$10.1 million for the six-month periods ended June 30, 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 six months ended
June 30, 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 June 30, 1999 of $33.1 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 are
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 $50,000, 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 June 30, 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:
<TABLE>
<CAPTION>
Estimated
fair value
Hypothetical after
change in hypothetical
Fair value at interest rate change in
June 30, 1999 (bp=basis interest
points) rate
(Dollars in thousands)
<S> <C> <C> <C>
Fixed-maturity investments (1)................... $23,905 100 bp increase $ 22,817
200 bp increase 21,770
50 bp decrease 24,425
100 bp decrease 24,891
</TABLE>
- --------------------
(1) Excluding short-term investments with a fair value of $3.2 million.
The table above illustrates, for example, that an instantaneous 200
basis point increase in market interest rates at June 30, 1999 would reduce
the estimated fair value of the Company's fixed-maturity investments by
approximately $2.1 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.
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 (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 June 30, 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: August 12, 1999 /s/ HARLAND C. STONECIPHER
----------------------------------
Harland C. Stonecipher
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date: August 12, 1999 /s/ RANDY HARP
----------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
Date: August 12, 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)
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a)............ $ 18,649 $ 11,680
======== ========
Shares:
Weighted average shares outstanding, (net of 1,024 and 747
shares of treasury stock, respectively) disregarding
exercise of options or conversion of preferred stock...... 23,407 23,422
======== ========
Basic earnings per common share (a)......................... $ .80 $ .50
======== ========
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)............ $ 18,649 $ 11,680
Add: Dividends on preferred stock (b)....................... 5 5
Net income applicable to common stockholders, as adjusted .. -------- --------
$ 18,654 $ 11,685
======== ========
Shares:
Weighted average shares outstanding, (net of 1,024 and 747
shares of treasury stock, respectively) disregarding
exercise of options or conversion of preferred stock...... 23,407 23,422
Assumed dilutive conversion of preferred stock (b).......... 70 80
Assumed exercise of options and warrants based on the
treasury stock method using average market price.......... 274 432
------- -------
Weighted average number of shares, as adjusted.............. 23,751 23,934
======= =======
Diluted earnings per share (a).............................. $ .79 $ .49
======= =======
(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 1998
periods since such assumed conversion would be antidilutve.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
Three Months Ended
June 30,
-------------------
1999 1998
--------- --------
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)............ $ 9,869 $ 6,416
======== ========
Shares:
Weighted average shares outstanding, (net of 1,249 and 747
shares of treasury stock, respectively) disregarding
exercise of options or conversion of preferred stock...... 23,207 23,431
======== ========
Basic earnings per common share (a)......................... $ .43 $ .27
======== ========
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)............ $ 9,869 $ 6,416
Add: Dividends on preferred stock (b)....................... 3 3
-------- --------
Net income applicable to common stockholders, as adjusted .. $ 9,872 $ 6,419
======== ========
Shares:
Weighted average shares outstanding, (net of 1,249 and 747
shares of treasury stock, respectively) disregarding
exercise of options or conversion of preferred stock...... 23,207 23,431
Assumed dilutive conversion of preferred stock (b).......... 70 80
Assumed exercise of options and warrants based on the
treasury
stock method using average market price................... 224 414
------- -------
Weighted average number of shares, as adjusted.............. 23,501 23,925
======= =======
Diluted earnings per share (a).............................. $ .42 $ .27
======= =======
(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 1998
periods since such assumed conversion would be antidilutve.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial inforamtion extracted from the
June 30, 1999 financial statements cpontained in Form 10-Q and is
qualifies 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 9,670
<SECURITIES> 28,276
<RECEIVABLES> 3,935
<ALLOWANCES> 0
<INVENTORY> 2,060
<CURRENT-ASSETS> 57,279
<PP&E> 7,257
<DEPRECIATION> 0
<TOTAL-ASSETS> 172,317
<CURRENT-LIABILITIES> 27,380
<BONDS> 0
0
21
<COMMON> 245
<OTHER-SE> 101,138
<TOTAL-LIABILITY-AND-EQUITY> 172,317
<SALES> 72,324
<TOTAL-REVENUES> 92,542
<CGS> 0
<TOTAL-COSTS> 63,845
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28,697
<INCOME-TAX> 10,043
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,649
<EPS-BASIC> .80
<EPS-DILUTED> .79
</TABLE>
