UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 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 November 5, 1999:
Common Stock $.01 par value 22,547,152
<PAGE>
CONTENTS
Number
Part I. Financial Statements
- -----------------------------
Item 1. Financial Statements of Registrant:
Consolidated Balance Sheets as of September 30, 1999 (Unaudited) and
December 31, 1998
Consolidated Statements of Income (Unaudited) for the nine months ended
September 30, 1999 and 1998
Consolidated Statements of Comprehensive Income (Unaudited) for the nine months
ended September 30, 1999 and 1998
Consolidated Statements of Income (Unaudited) for the three months ended
September 30, 1999 and 1998
Consolidated Statements of Comprehensive Income (Unaudited) for the three months
ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended
September 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 September 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)
September 30, December 31,
---------------------------
1999 1998
------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents......................... $ 11,841 $ 8,604
Available-for-sale investments, at fair value..... 2,038 2,368
Accrued Membership income......................... 4,007 3,595
Inventories....................................... 1,838 2,588
Prepaid product commissions....................... 610 1,384
Amount due from coinsurer......................... 12,978 12,498
Membership commission advances, current portion... 29,146 21,224
-------- --------
Total current assets............................ 62,458 52,261
Available-for-sale investments, at fair value....... 23,842 36,207
Investments pledged................................. 4,799 2,922
Membership commission advances, net................. 80,123 60,661
Property and equipment, net......................... 7,601 7,678
Production costs, net............................... 445 1,373
Other............................................... 7,155 6,801
-------- --------
Total assets................................... $186,423 $167,903
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits............................... $ 4,816 $ 3,808
Deferred product sales revenue.................... 1,734 3,932
Accident and health reserves...................... 12,978 12,498
Life insurance reserves........................... 944 970
Current portion of capital lease obligation....... 257 487
Accounts payable and accrued expenses............. 5,818 9,386
-------- --------
Total current liabilities....................... 26,547 31,081
Deferred income taxes............................... 40,013 27,148
Life insurance reserves............................. 7,543 7,711
-------- --------
Capital lease obligation, net of current portion.... 375 659
-------- --------
Total liabilities............................... 74,478 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
September 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
September 30, 1999 and December 31, 1998;
liquidation value of $240....................... 18 18
Common stock, $.01 par value; 100,000 shares
authorized; 24,495 and 24,321 issued at
September 30, 1999 and December 31, 1998........ 245 243
Capital in excess of par value.................... 58,415 55,241
Retained earnings................................. 78,045 49,528
Accumulated other comprehensive income:
Unrealized losses on investments................. (1,246) (24)
Less: Treasury stock at cost; 1,547 and 797 shares
held at September 30, 1999 and December 31, 1998,
respectively ..................................... (23,535) (3,705)
-------- --------
Total stockholders' equity....................... 111,945 101,304
-------- --------
Total liabilities and stockholders' equity...... $186,423 $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)
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
Revenues:
Membership premiums.................................... $112,071 $ 78,443
Product sales.......................................... 4,426 23,437
Associate services..................................... 16,201 11,810
Interest income........................................ 2,665 1,881
Other.................................................. 6,204 1,929
-------- --------
141,567 117,500
-------- --------
Costs and expenses:
Membership benefits.................................... 37,388 25,893
Product costs.......................................... 2,899 14,321
Commissions............................................ 26,200 17,299
General and administrative............................. 13,938 17,971
Associate services and direct marketing................ 10,637 10,518
Depreciation and amortization.......................... 2,372 2,025
Premium taxes.......................................... 1,090 908
Other.................................................. 3,160 -
-------- --------
97,684 88,935
-------- --------
Income before income taxes............................... 43,883 28,565
Provision for income taxes............................... 15,359 10,269
-------- --------
Net income............................................... 28,524 18,296
Less dividends on preferred shares....................... 7 7
-------- --------
Net income applicable to common stockholders............. $ 28,517 $ 18,289
======== ========
Basic earnings per common share.......................... $ 1.23 $ .78
======== ========
Diluted earnings per common share........................ $ 1.21 $ .77
======== ========
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)
Nine Months Ended
September 30,
------------------
1999 1998
-------- --------
Net income........................................ $ 28,524 $ 18,296
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during period................................... (1,222) -
-------- --------
Other comprehensive income (loss)................. (1,222) -
-------- --------
Comprehensive income.............................. $ 27,302 $ 18,296
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
--------------------
1999 1998
--------- --------
Revenues:
Membership premiums.................................... $ 39,748 $ 28,105
Product sales.......................................... 1,256 6,102
Associate services..................................... 5,832 4,093
Interest income........................................ 897 819
Other.................................................. 1,292 690
-------- --------
49,025 39,809
-------- --------
Costs and expenses:
Membership benefits.................................... 13,764 9,297
Product costs.......................................... 790 3,711
Commissions............................................ 9,819 6,422
General and administrative............................. 4,428 5,074
Associate services and direct marketing................ 3,676 3,306
Depreciation and amortization.......................... 688 823
Premium taxes.......................................... 389 277
Other.................................................. 285 -
-------- --------
33,839 28,910
-------- --------
Income before income taxes............................... 15,186 10,899
Provision for income taxes............................... 5,316 4,288
-------- --------
Net income............................................... 9,870 6,611
Less dividends on preferred shares....................... 2 2
-------- --------
Net income applicable to common stockholders............. $ 9,868 $ 6,609
======== ========
Basic earnings per common share.......................... $ .43 $ .28
======== ========
Diluted earnings per common share........................ $ .42 $ .28
======== ========
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
September 30,
-------------------
1999 1998
-------- --------
Net income........................................ $ 9,870 $ 6,611
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during period................................... (218) -
-------- --------
Other comprehensive income (loss)................ (218) -
-------- --------
Comprehensive income............................. $ 9,652 $ 6,611
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Nine Months Ended
September 30,
-------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income............................................... $ 28,524 $ 18,296
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes.................... 13,536 10,269
Depreciation and amortization.......................... 2,372 2,025
Increase in accrued Membership income.................. (412) (649)
Increase in Membership commission advances............. (27,384) (18,560)
Increase in other assets............................... (354) (601)
Decrease (increase) in inventories..................... 750 (742)
Decrease increase in prepaid product commissions....... 774 676
Increase in amount due from coinsurer.................. (480) -
Increase in accident and health reserves............... 480 -
Decrease in life insurance reserves.................... (194) -
Decrease in deferred product revenue................... (2,198) (588)
Increase in Membership benefits........................ 1,008 810
Decrease in accounts payable and accrued expenses...... (3,568) (2,146)
-------- --------
Net cash provided by operating activities........... 12,854 8,790
-------- --------
Cash flows from investing activities:
Additions to property and equipment and production (1,367) (2,930)
costs, net.............................................
Purchases of investments - Available-for-sale.......... (2,605) (26,857)
Maturities of investments - Available-for-sale......... 16,255 3,950
Purchases of investments - Investment pledged.......... (5,455) (150)
Maturities of investments - Investments pledged........ 730 -
-------- --------
Net cash provided by (used in) investing activities. 7,558 (25,987)
-------- --------
Cash flows from financing activities:
Proceeds from sales of common stock.................... 3,176 1,900
Purchases of treasury stock............................ (19,830) (1,528)
Dividends paid on preferred stock...................... (7) (7)
(Decrease) increase in capital lease obligations....... (514) 483
-------- --------
Net cash (used in) provided by financing activities. (17,175) 848
-------- --------
Net increase (decrease) in cash ......................... 3,237 (16,349)
Cash and cash equivalents at beginning of period......... 8,604 27,722
-------- --------
Cash and cash equivalents at end of period............... $ 11,841 $ 11,373
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 20 $ 11
======== ========
Cash paid for income taxes............................. $ 1,928 $ -
======== ========
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 September 30, 1999, and the related
statements of income and comprehensive income for the three-month and nine-month
periods ended September 30, 1999 and 1998 and the statements of cash flows for
the nine-month periods ended September 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 September 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.
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 position,
results of operations or cash flows.
3. STOCK REPURCHASES
The Company announced on April 6, 1999, a stock repurchase program
authorizing management to reacquire up to 500,000 shares of the Company's common
stock. The Board of Directors has increased such authorization from 500,000
shares to 1,250,000 shares during three subsequent board meetings. At November
5, 1999, the Company had repurchased 1,162,800 shares under these
authorizations for a total consideration of $29.4 million, an average price of
$25.31 per share.
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 nine-month periods ending
September 30, 1999, but would be anti-dilutive, and therefore was 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 in the
applicable periods. 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 be 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
$28.5 million, or $1.21 per diluted common share, for the nine months ended
September 30, 1999, up 56% from net income applicable to common stockholders of
$18.3 million, or $.77 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 an 81% decline in product sales.
Membership premiums totaled $112.1 million during the nine months ended
September 30, 1999 compared to $78.4 million for the same period of 1998, an
increase of 43%. Membership premiums and their impact on total revenues in any
period are determined directly by the number of active Memberships in force
during any such period. The active Memberships in force are determined by both
the number of new Memberships sold in any period together with the persistency,
or renewal rate, of existing Memberships. New Membership sales increased 38%
during the nine months ended September 30, 1999 to 376,424 from 273,048 during
the comparable period of 1998. At September 30, 1999, there were 759,341 active
Memberships in force compared to 546,358 at September 30,1998. Additionally, the
average annual premium per Membership has increased from $227 for all
Memberships in force at September 30,1998 to $236 for all Memberships in force
at September 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 per month
for those businesses with employees of 50 or less and $125 per month for those
businesses with 51 to 99 employees.
As a result of a larger portion of new members joining in the latter
part of the 1999 3rd quarter compared to the 1999 2nd quarter together with
lower Canadian premiums per membership (when expressed in equivalent U.S.
dollars) which also began in the 1999 3rd quarter, the sequential new Membership
growth of 9.6% during the 1999 3rd quarter from the 1999 2nd quarter exceeded
the sequential 3.1% Membership premium growth for the same period. The Company
believes that over time, Membership premiums generally will grow as fast or
faster than new members as the overall average premium continues to increase.
Product sales declined 81% from $23.4 million for the first nine months
of 1998 to $4.4 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 37% from $11.8 million for the
first nine months of 1998 to $16.2 million during the same period of 1999
primarily as a result of the Company's combination classroom and field training
program, titled Fast Start to Success ("Fast Start"). Fast Start is aimed at
increasing the level of new Membership sales per associate. This program
resulted in the Company receiving training fees of approximately $8.4 million
during the first nine months of 1999 compared to $6.1 million for the comparable
period of 1998. 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 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 $8.4 million in training fees was comprised of $184
from each of approximately 45,668 new sales associates who elected to
participate in Fast Start during the first nine months of 1999. New associates
enrolled during the first nine months of 1999 were 68,035 compared to 46,530 for
the same period of 1998, an increase of 46%. Future revenues from associate
services will depend primarily on the number of new associates enrolled and the
number who choose to participate in the Company's training program, but the
Company expects that such revenues will continue to be largely offset by the
direct and indirect cost to the Company of training bonuses paid, providing
associate services and other direct marketing expenses.
Interest income for the nine months ended September 30, 1999 increased
42% to $2.7 million from $1.9 million for the comparable period of 1998.
Interest income increased primarily as a result of increased commission advances
that, under certain circumstances, incur an interest charge at prime rate. At
September 30, 1999 the Company reported $42.5 million in cash and investments
compared to $41.5 million at September 30,1998.
Other income for the nine months ended September 30, 1999 increased 226%
to $6.2 million from $1.9 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 $2.8 million in life insurance premiums and life reinsurance
ceded related to Universal Fidelity Life Insurance Company ("UFL"). The Company
acquired 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 nine months ended September 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 $141.6 million for the nine months ended September
30, 1999 from $117.5 million during the comparable period of 1998, an increase
of 21%.
Membership benefits totaled $37.4 million for the nine months ended
September 30, 1999 compared to $25.9 million for same period of 1998, and
represented 33% of Membership premiums for both the 1999 and 1998 periods. This
loss ratio (Membership benefits as a percentage of Membership premiums) should
remain near 33%-35% as the portion of active Memberships that provide for a
capitated benefit continues to increase.
Product costs declined approximately $11.4 million, or 80%, during the
nine months ended September 30, 1999 to $2.9 million from $14.3 million for the
comparable period of 1998 in conjunction with the 81% decline in product sales.
Product costs as a percentage of product sales were 66% for the nine months
ended September 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 $26.2 million for the nine months ended September
30, 1999 compared to $17.3 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 nine months of 1999 primarily as a result
of an increase of $550,000 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 nine months ended
September 30, 1999 and 1998 were $13.9 million and $18.0 million, respectively,
and represented 10% and 15% 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 increased minimally, to
$10.6 million for the first nine months of 1999 from $10.5 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 $4.3 million during the
1999 period compared to $4.8 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.
Depreciation and amortization increased from $2.0 million during the
first nine months of 1998 to $2.4 million for the first nine months of 1999.
This increase was primarily due to increased amortization of production costs by
$425,000. Premium taxes increased to $1.1 million for the first nine months of
1999 from $908,000 for the same period of 1998 as a result of increased
premiums.
Other expenses represent the operating expenses of UFL. The amount
reported for the first nine months of 1999 was $3.2 million. The results of
operations of UFL for the first nine months of 1999 were $824,000 in net income.
UFL had revenues of approximately $4.4 million consisting of $2.8 million of
life insurance premiums and life reinsurance ceded, $900,000 of interest income
and $700,000 gain on the sale of investments, offset by expenses of $1.4 million
in life insurance claims and $1.8 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 nine months ended September 30, 1999 compared
to 36% for the nine months ended September 30,1998. The product cost ratio,
which represents product costs as a percentage of product sales, was 66% for the
nine months ended September 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 $15.4 million
(35% of pretax income) for the first nine months of 1999 compared to $10.3
million (36% of pretax income) for the same period of 1998.
Dividends paid on outstanding preferred stock were $7,000 for each of
the nine-month periods ended September 30, 1999 and 1998.
Third Quarter of 1999 Compared to the Third Quarter of 1998
The results of operations in the third quarter of 1999, compared to the
third quarter of 1998, reflect increases in revenues and expenses primarily as a
result to the same factors discussed in the comparison of the first nine months
of 1999 to the first nine months of 1998.
Total revenues increased 23%, or approximately $9.2 million, to $49.0
million in the third quarter of 1999 compared to $39.8 million in the third
quarter of 1998, primarily as a result of increases in Membership premiums. The
Membership premium increase of 41% primarily resulted from an increase in the
number of average active Memberships during the third quarter of 1999 compared
to the similar period in 1998.
Membership benefits totaled $13.8 million in the 1999 third quarter
compared to $9.3 million in the 1998 third quarter and resulted in a loss ratio
of 35% and 33%, respectively. The increase in the loss ratio for the third
quarter of 1999 was due primarily to the replacement of one of the Company's
provider law firms. Pending the resolution of litigation with this provider
firm, the Company paid to an escrow account the per capita payment for 60 days
while also paying the replacement provider law firm. The Company's expense ratio
for the third quarter of 1999 and 1998, was 36% and 34%, respectively. This
resulted in a combined loss and expense ratio of 71% and 67%, 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 third quarter net income applicable
to common stockholders of $9.9 million, or $.42 per share, diluted, compared to
$6.6 million, or $.28 per share, for the third quarter of 1998, and an increase
of 50%.
Liquidity and Capital Resources
General
Consolidated net cash provided by operating activities was $12.9 million
for the first nine months of 1999 compared to cash provided of $8.8 million for
the 1998 period. The increase of $4.1 million in cash provided by operating
activities during the first nine months of 1999 compared to the same period of
1998 resulted primarily from an increase in net income of $10.2 million, an
increase in deferred income taxes of $3.2 million and a decrease in inventories
of $1.5 million, reduced by increases in Membership commission advances of $8.8
million related to the increase in new Membership enrollments, the decrease in
deferred product revenue of $1.6 million and the decrease in accounts payable
and accrued expenses of $1.5 million.
Consolidated net cash provided by investing activities was $7.6 million
for the first nine months of 1999 compared to net cash used in investing
activities of $26.0 million for the comparable period of 1998. This $33.6
million increase in cash provided by investing activities resulted primarily
from the $32.0 million change in net investment activity comprised of net
investment proceeds during the first nine months of 1999 of $8.9 million
compared to net investment purchases of $23.1 million for the comparable period
of 1998.
Net cash used in financing activities during the first nine months of
1999 was $17.2 million compared to net cash provided by financing activities of
$848,000 for the comparable period of 1998. This $18.0 million change was
comprised of $1.3 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 nine
months of 1999.
The Company had a consolidated working capital surplus of $35.9 million
at September 30, 1999, an increase of $14.7 million compared to a consolidated
working capital of $21.2 million at December 31, 1998 and an increase of $3.6
million, compared to the September 30, 1998 working capital of $32.3 million.
The $14.7 million increase in working capital during the first nine months of
1999 was primarily the result of decreases in accounts payable and accrued
expenses of $3.6 million, decrease in deferred product revenue of $2.2 million
and increases in the current portion of Membership commission advances of $7.9
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 nine months ended September 30, 1999, the Company
advanced commissions of $52.3 million on new Membership sales compared to $34.9
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 reduced by earned commissions of $24.4 million and $16.3 million
for the nine-month periods ended September 30, 1999 and 1998, respectively. The
Company assesses collectibility quarterly and has recorded an allowance of $4.5
million to provide for estimated uncollectible balances, which includes an
increase in the allowance of $550,000 during the nine months ended September 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 September 30, 1999 of $37.7 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 or
provinces 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, if needed, would be funded by the Company
in the form of capital contributions or surplus debentures. The Company does not
expect such restrictions to have a material adverse impact on its ability to
fund daily operations.
On October 26, 1999, PPLCI declared an ordinary dividend to the Company
in the amount of $8.0 million, which was subsequently paid on November 4, 1999.
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 and September 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 $25,000, substantially all of which will
be incurred during the last quarter of 1999. Year 2000 costs will continue to be
funded out of cash flow from operations. A significant portion of the Company's
Year 2000 remediation plan has been and will continue to be accomplished by the
Company's internal programming staff and while such efforts will continue to
result in concentration on Year 2000 programming, these costs are not likely to
be incremental costs to the Corporation, but rather will represent the
redeployment of existing information technology resources. Although
concentration on Year 2000 compliance has delayed other programming projects,
such delays have not had and are not expected to have a material adverse impact
on the Company's financial condition and results of operations.
The Company is also exposed to the risk that one or more of its vendors
or service providers could experience Year 2000 problems that impact the ability
of such vendor or service provider to provide goods and services. Though this is
not considered as significant a risk with respect to the suppliers of goods, due
to the availability of alternative suppliers, the disruption of certain
services, such as utilities, could, depending upon the extent of the disruption,
have a material adverse impact on the Company's operations. Further, the Company
must rely on other entities such as the Federal Reserve and its member banks
whose Year 2000 readiness efforts it does not control. The Company relies on
such entities for the timely processing of its monthly Automated Clearing House
transactions and credit card transactions. Should these entities fail in their
efforts to become Year 2000 compliant, the Company would immediately convert to
monthly invoices until such time as all necessary entities become Year 2000
compliant. Although such actions would be inconvenient and more costly to
process, it is not expected to materially affect the Company's long term
business outlook. The Company has initiated a comprehensive program to assess
the Year 2000 compliance of its key vendors and service providers in order to
determine the extent to which the Company is vulnerable to such third parties
that fail to remedy their own Year 2000 issues. In this regard, the Company has
initiated formal communications with its significant vendors and financial
institutions to assess their Year 2000 readiness. No material costs related to
Year 2000 compliance efforts by the Company regarding such third parties have
been incurred to date. To date these efforts have not revealed any vendor or
service provider Year 2000 issue that the Company believes would have a material
adverse impact on the Company's operations. However, the Company has no means of
ensuring that its vendors or service providers will be Year 2000 ready, and the
inability of vendors or service providers to complete their Year 2000 resolution
process in a timely fashion could have an adverse impact on the Company's
financial position or results of operations
The Company presently believes based on its knowledge and
representations of third parties that the Year 2000 issue will not pose
significant operational problems for 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 September 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
September 30, 1999 (bp=basis points) interest
rate
-------------------- -------------------- ------------
<S> <C> <C> <C>
(Dollars in thousands)
Fixed-maturity investments (1).......... $ 27,579 100 bp increase $ 26,035
200 bp increase 24,854
50 bp decrease 27,841
100 bp decrease 28,414
</TABLE>
- --------------------
(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 September 30, 1999 would
reduce the estimated fair value of the Company's fixed-maturity investments
by approximately $3.0 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 September 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: November 12, 1999 /s/ HARLAND C. STONECIPHER
----------------------------------
Harland C. Stonecipher
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date: November 12, 1999 /s/ RANDY HARP
----------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
Date: November 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)
Nine Months Ended
September 30,
--------------------
1999 1998
-------- ---------
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)... $ 28,517 $ 18,289
======== ========
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.................................. 23,246 23,447
======== ========
Basic earnings per common share (a)................ $ 1.23 $ .78
======== ========
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)... $ 28,517 $ 18,289
Add: Dividends on preferred stock (b).............. 7 7
-------- --------
Net income applicable to common stockholders, as
adjusted ........................................ $ 28,524 $ 18,296
======== ========
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.................................. 23,246 23,447
Assumed dilutive conversion of preferred stock (b). 70 88
Assumed exercise of options and warrants based on
the treasury stock method using average market
price............................................ 271 392
-------- --------
Weighted average number of shares, as adjusted..... 23,587 23,927
======== ========
Diluted earnings per share (a)..................... $ 1.21 $ .77
======== ========
(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
September 30,
-------------------
1999 1998
--------- --------
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)... $ 9,868 $ 6,609
======== ========
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.................................. 22,927 23,497
======== ========
Basic earnings per common share (a)................ $ .43 $ .28
======== ========
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)... $ 9,868 $ 6,609
Add: Dividends on preferred stock (b).............. 2 3
-------- --------
Net income applicable to common stockholders, as
adjusted ........................................ $ 9,870 $ 6,611
======== ========
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.................................. 22,927 23,497
Assumed dilutive conversion of preferred stock (b). 70 88
Assumed exercise of options and warrants based on
the treasury
stock method using average market price.......... 316 303
-------- --------
Weighted average number of shares, as adjusted..... 23,313 23,888
======== ========
Diluted earnings per share (a)..................... $ .42 $ .28
======== ========
(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 information extracted from the
September 30, 1999 financial statements contained in Form 10-Q and
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 11,841
<SECURITIES> 0
<RECEIVABLES> 4,007
<ALLOWANCES> 0
<INVENTORY> 1,838
<CURRENT-ASSETS> 29,146
<PP&E> 7,601
<DEPRECIATION> 0
<TOTAL-ASSETS> 186,423
<CURRENT-LIABILITIES> 26,547
<BONDS> 0
0
21
<COMMON> 245
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 111,679
<SALES> 112,071
<TOTAL-REVENUES> 141,567
<CGS> 0
<TOTAL-COSTS> 97,684
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 43,883
<INCOME-TAX> 15,359
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,524
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.21
</TABLE>
