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, 2000
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 31, 2000:
Common Stock $.01 par value 22,523,665
<PAGE>
CONTENTS
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
Consolidated Balance Sheets
as of June 30, 2000 (Unaudited) and
December 31, 1999
Consolidated Statements of Income
(Unaudited) for the six months ended
June 30, 2000 and 1999
Consolidated Statements of Comprehensive Income
(Unaudited) for the six months ended
June 30, 2000 and 1999
Consolidated Statements of Income
(Unaudited) for the three months ended
June 30, 2000 and 1999
Consolidated Statements of Comprehensive Income
(Unaudited) for the three months ended
June 30, 2000 and 1999
Consolidated Statements of Cash Flows
(Unaudited) for the six months ended
June 30, 2000 and 1999
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
Item 4. Submission of Matters to a Vote of Security Holders
Part II. Other Information
Item 1. Legal Proceedings
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, 2000 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 that the principal executive officer, Harland C. Stonecipher, will not
continue to be active. 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
(Begins on following page)
<PAGE>
<TABLE>
PRE-PAID LEGAL SERVICES, INC.CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except per share amounts)
ASSETS
June 30, December 31,
------------ -------------
2000 1999
------------ -------------
(Unaudited)
<CAPTION>
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 8,708 $ 10,191
Available-for-sale investments, at fair value................................ 1,694 2,252
Accrued Membership income.................................................... 5,197 4,883
Inventories.................................................................. 1,655 1,442
Amount due from coinsurer.................................................... 12,900 12,483
Membership commission advances, current portion.............................. 39,992 32,885
----------- -----------
Total current assets..................................................... 70,146 64,136
Available-for-sale investments, at fair value.................................. 21,951 19,628
Investments pledged............................................................ 6,007 5,288
Membership commission advances, net............................................ 105,398 87,828
Property and equipment, production costs, net.................................. 9,912 8,634
Other.......................................................................... 9,769 8,261
----------- -----------
Total assets............................................................. $ 223,183 $ 193,775
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.......................................................... $ 5,986 $ 5,252
Deferred product sales revenue and membership fees........................... 2,519 356
Accident and health reserves................................................. 12,900 12,483
Life insurance reserves...................................................... 972 967
Deferred income taxes - current portion...................................... 12,984 10,664
Current portion of capital lease obligation.................................. 315 348
Accounts payable and accrued expenses........................................ 6,413 10,768
----------- -----------
Total current liabilities................................................ 42,089 40,838
Deferred income taxes.......................................................... 37,101 30,535
Life insurance reserves........................................ ............... 7,667 7,733
Capital lease obligation, net of current portion............................... 75 205
----------- -----------
Total liabilities........................................................ 86,932 79,311
----------- -----------
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 December 31, 1999; liquidation value of $53............. - 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 December 31, 1999; liquidation value of $235......... - 18
Common stock, $.01 par value; 100,000 shares authorized; 24,565 and 24,507
issued at June 30, 2000 and December 31, 1999, respectively................ 246 245
Capital in excess of par value............................................... 60,134 59,822
Retained earnings............................................................ 112,518 88,471
Accumulated other comprehensive income (loss):
Unrealized losses on investments............................................ (285) (958)
Unrealized gain from currency translation................................... 14 -
Treasury stock at cost; 2,059 and 1,960 shares held at June 30, 2000 and
December 31, 1999........................................................... (36,376) (33,137)
--- ----- ----------- -----------
Total stockholders' equity................................................. 136,251 114,464
----------- -----------
Total liabilities and stockholders' equity............................... $ 223,183 $ 193,775
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Six months ended
June 30,
---------------------
2000 1999
-------- --------
<CAPTION>
<S> <C> <C>
Revenues:
Membership premiums ................................ $ 98,600 $ 72,324
Associate services ................................. 13,371 10,370
Product sales ...................................... 811 3,169
Other .............................................. 6,238 6,679
-------- --------
119,020 92,542
-------- --------
Costs and expenses:
Membership benefits ................................ 32,414 23,624
Commissions ........................................ 24,565 16,381
Associate services and direct marketing ............ 9,883 6,961
Product costs ...................................... 590 2,109
General and administrative ......................... 11,154 9,510
Other .............................................. 4,118 5,260
-------- --------
82,724 63,845
-------- --------
Income before income taxes ........................... 36,296 28,697
Provision for income taxes ........................... 12,245 10,043
-------- --------
Net income ........................................... 24,051 18,654
Less dividends on preferred shares ................... 4 5
-------- --------
Net income applicable to common stockholders ......... $ 24,047 $ 18,649
======== ========
Basic earnings per common share ...................... $ 1.07 $ .80
======== ========
Diluted earnings per common share .................... $ 1.06 $ .79
======== ========
Basic number of common shares ........................ 22,533 23,407
======== ========
Diluted number of common shares ...................... 22,735 23,751
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Six months ended
June 30,
---------------------
2000 1999
-------- ---------
<CAPTION>
<S> <C> <C>
Net income............................................ $24,051 $ 18,654
-------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during
period............................................. 673 (1,004)
Unrealized gain from currency translation........... 14 -
--------- ---------
Other comprehensive income (loss)..................... 687 (1,004)
--------- ---------
Comprehensive income.................................. $ 24,738 $ 17,650
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three months ended
June 30,
---------------------
2000 1999
-------- --------
<CAPTION>
<S> <C> <C>
Revenues:
Membership premiums ................................ $ 51,624 $ 38,557
Associate services ................................. 7,138 4,960
Product sales ...................................... 142 1,115
Other .............................................. 2,846 3,327
-------- --------
61,750 47,959
-------- --------
Costs and expenses:
Membership benefits ................................ 16,873 12,595
Commissions ........................................ 12,822 8,546
Associate services and direct marketing ............ 5,604 3,470
Product costs ...................................... 45 848
General and administrative ......................... 5,736 5,422
Other .............................................. 1,900 1,806
-------- --------
42,980 32,687
-------- --------
Income before income taxes ........................... 18,770 15,272
Provision for income taxes ........................... 6,111 5,400
-------- --------
Net income ........................................... 12,659 9,872
Less dividends on preferred shares ................... 2 3
-------- --------
Net income applicable to common stockholders ......... $ 12,657 $ 9,869
======== ========
Basic earnings per common share ...................... $ .56 $ .43
======== ========
Diluted earnings per common share .................... $ .56 $ .42
======== ========
Basic number of common shares ........................ 22,516 23,207
======== ========
Diluted number of common shares ...................... 22,734 23,501
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three months ended
June 30,
---------------------
2000 1999
-------- ---------
<CAPTION>
<S> <C> <C>
Net income............................................ $12,659 $ 9,872
-------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during
period............................................. 649 (967)
Unrealized gain from currency translation........... 18 -
--------- ---------
Other comprehensive income (loss)..................... 667 (967)
--------- ---------
Comprehensive income.................................. $ 13,326 $ 8,905
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Six months ended
June 30,
-----------------------
2000 1999
--------- ---------
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 24,051 $ 18,654
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes................................ 8,990 8,838
Depreciation and amortization...................................... 1,256 1,684
Increase in accrued Membership income.............................. (314) (340)
(Increase) decrease in inventories................................. (213) 528
Increase in amount due from coinsurer.............................. (417) (611)
Increase in Membership commission advances......................... (24,677) (17,820)
Increase in other assets........................................... (1,508) (725)
Increase in Membership benefits.................................... 734 706
Increase (decrease) in deferred product sales revenue and
Membership fees.................................................. 2,163 (1,080)
Increase in accident and health reserves........................... 417 611
Decrease in life insurance reserves................................ (61) (62)
Decrease in accounts payable, accrued expenses and other........... (4,568) (2,650)
--------- ---------
Net cash provided by operating activities...................... 5,853 7,733
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, production costs, net......... (2,534) (507)
Purchases of investments - Available-for-sale...................... (3,406) (5,100)
Maturities of investments - Available-for-sale..................... 1,490 16,660
--------- ---------
Net cash (used in) provided by investing activities............ (4,450) 11,053
--------- ---------
Cash flows from financing activities:
Proceeds from sales of common stock................................ 506 2,284
Purchase of treasury stock......................................... (3,239) (19,830)
Dividends paid on preferred stock.................................. (4) (5)
Decrease in capital lease obligations.............................. (163) (169)
--------- ---------
Net cash used in financing activities.......................... (2,900) (17,720)
--------- ---------
Effect of exchange rate changes on cash.............................. 14 -
--------- ---------
Net (decrease) increase in cash ..................................... (1,483) 1,066
Cash and cash equivalents at beginning of period..................... 10,191 8,604
--------- ---------
Cash and cash equivalents at end of period........................... $ 8,708 $ 9,670
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................. $ 7 $ 8
========= =========
Cash paid for income taxes......................................... $ 5,057 $ 105
========= =========
</TABLE>
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, 2000, and the related
consolidated statements of income, comprehensive income and cash flows for the
six-month and three-month periods ended June 30, 2000 and 1999 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.
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 1999 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 will adopt SFAS 133 on January 1, 2001 as required. The
Company believes it holds no material derivative instruments at June 30, 2000.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," ("SAB 101") was issued December 1999. This staff bulletin
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective no later than the fourth fiscal quarter of the fiscal years beginning
after December 15, 1999. Management has not determined whether implementation of
SAB 101 will have any significant effect on its financial statements.
2. CONTINGENCIES
During August 2000, the Company settled an action brought by Aetna Life
Insurance Company ("Aetna") against the Company and Primedia Workplace Learning,
Inc., and Primedia, Inc. in the District Court of Dallas County, which was filed
on February 9, 1999. Aetna alleged that the Company's predecessor in interest,
TPN, Inc., breached an agreement to lease certain premises in Dallas, Texas and
was liable to Aetna for damages for such breach. Under the terms of the
settlement, the Company will pay $575,000 to Aetna. This amount had been
previously accrued by the Company prior to June 30, 2000 and accordingly is
included as an accrued liability in the Company's financial statements.
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 subsequently increased such authorization from
500,000 shares to 1,500,000. At June 30, 2000, the Company had repurchased
1,261,700 shares under these authorizations for a total consideration of $32.7
million, an average price of $25.89 per share.
Stock repurchases will be made at prices that are considered attractive
by management and at such times that management believes will not unduly impact
the Company's liquidity. No time limit has been set for completion of the
repurchase program.
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 and the special preferred stock are
considered to be dilutive common stock equivalents for all 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.
At June 30, 2000, all shares of preferred stock had been converted into
shares of common stock or repurchased by the Company.
5. SEGMENT INFORMATION
The Company during the six months ended June 30, 2000 and 1999, derived
approximately 98% and 96%, respectively, of its revenues and approximately 98%
and 97%, respectively, of its net income from the sale of legal service plans
and directly related activities. Revenues from the Company's other operating
segment (life insurance, through UFL) were approximately 2% and 4% each of the
respective consolidated totals for the six months ended June 30, 2000 and 1999.
Net income from the Company's other operating segment (life insurance, through
UFL) were approximately 2% and 3% each of the respective consolidated totals for
the six months ended June 30, 2000 and 1999. UFL markets primarily to
individuals, age 65 and over, in New Mexico, Oklahoma and Texas. The following
table sets forth the composition of the segments and total Company revenues, net
income and identifiable assets for the six months ended June 30, 2000 and 1999.
Six months ended
------------------------
June 30,
------------------------
2000 1999
---------- ----------
Revenues:
Legal service plans and directly related activities:
Legal service plan membership fees................. $ 98,600 $ 72,324
Associate Services................................. 13,371 10,370
Product sales...................................... 811 3,169
Other.............................................. 4,104 2,710
---------- ----------
Total...................................... 116,886 88,573
Life insurance segment (UFL):
Revenues........................................... 2,134 3,969
---------- ----------
Total Revenues.............................. $ 119,020 $ 92,542
========== ==========
Net Income:
Legal service plans and directly related activities $ 23,679 $ 18,003
Life insurance segment (UFL)....................... 372 651
---------- ----------
Net Income..................................... $ 24,051 $ 18,654
========== ==========
June 30, December 31,
2000 1999
---------- ------------
Assets:
Legal service plans and directly related activities $ 192,626 $ 163,755
Life insurance segment (UFL)....................... 30,557 30,020
---------- ----------
Total Assets................................... $ 223,183 $ 193,775
========== ==========
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
$24.0 million, or $1.06 per diluted common share, for the six months ended June
30, 2000, up 29% from net income applicable to common stockholders of $18.6
million, or $.79 per diluted common share, for the same period of 1999. The
increase in the net income applicable to common stockholders for the 2000 period
is primarily the result of increased Membership premiums for 2000 as compared to
1999.
Membership premiums totaled $98.6 million during the six months ended
June 30, 2000 compared to $72.3 million for the same period of 1999, an increase
of 36%. 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 six
months ended June 30, 2000 to 332,655 from 241,699 during the comparable period
of 1999. At June 30, 2000, there were 965,849 active Memberships in force
compared to 700,659 at June 30, 1999. Additionally, the average annual premium
per Membership has increased from $235 for all Memberships in force at June 30,
1999 to $241 for all Memberships in force at June 30, 2000, a 3% increase, as a
result of a higher portion of active Memberships containing the additional
pre-trial hours benefit at an additional cost to the member together with
increased sales of the Business Owner's Legal Solution Plan. 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.
Product sales declined 74% from $3.2 million for the first six months
of 1999 to $811,000 during the same period of 2000 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 29% from $10.4 million for the
first six months of 1999 to $13.4 million during the same period of 2000
primarily as a result of Fast Start to Success. 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.
This program resulted in the Company receiving training fees of approximately
$7.9 million during the first six months of 2000 compared to $6.1 million for
the comparable period of 1999. 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 had to 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 had to 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 $7.9 million in training fees
was comprised of $184 from each of approximately 43,019 new sales associates who
elected to participate in Fast Start during the first six months of 2000. New
associates enrolled during the first six months of 2000 were 46,592 compared to
45,542 for the same period of 1999, an increase of 2%. 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.
Other revenue for the six months ended June 30, 2000 and 1999 decreased
by 7% to $6.2 million from $6.8 million. Included in other revenue for the six
month periods ended June 30, 2000 and June 30, 1999 was $1.7 million and $2.5
million, respectively, in life insurance premiums and life reinsurance ceded
related to Universal Fidelity Life Insurance Company ("UFL"). Interest income,
also included in other revenue, for the six months ended June 30, 2000 increased
11% to $2.0 million from $1.8 million for the comparable period of 1999.
Interest income increased primarily due to the increase in interest income from
the result of increased commission advances, which, under certain circumstances,
incur an interest charge at prime rate.
As a result of the increases in membership premiums and associate
services, total revenues increased to $119.0 million for the six months ended
June 30, 2000 from $92.5 million during the comparable period of 1999, an
increase of 29%.
Membership benefits totaled $32.4 million for the six months ended June
30, 2000 compared to $23.6 million for same period of 1999, and represented 33%
of Membership premiums for both the 2000 and 1999 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.
Commission expense was $24.6 million for the six months ended June 30,
2000 compared to $16.4 million for the same period of 1999, and represented 25%
and 23% of Membership premiums for 2000 and 1999, respectively. Commission
expense, as a percentage of Membership premiums, should remain near 25% in
future periods based on the Company's current commission structure.
Associate services and direct marketing expenses increased to $9.9
million for the first six months of 2000 from $7.0 million for the same period
of 1999. Fast Start bonuses paid were approximately $3.5 million during the 2000
period compared to $3.3 million in the same period of 1999. Additional costs of
supplies due to increased purchases by associates and higher staffing
requirements for associate related service departments contributed to the
increase. These expenses also include the costs of providing associate services
and marketing costs other than commissions that are directly associated with new
Membership sales.
Product costs declined approximately 72%, during the six months ended
June 30, 2000 to $590,000 from $2.1 million for the comparable period of 1999 in
conjunction with the 74% decline in product sales. Product costs as a percentage
of product sales were 73% for the six months ended June 30, 2000 as compared to
67% for the same period of 1999. 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.
General and administrative expenses during the six months ended June
30, 2000 and 1999 were $11.2 million and $9.5 million, respectively, and
represented 9% and 10% of total revenues for such years. Management expects
gradual decreases in general and administrative expenses when expressed as a
percentage of total revenues as a result of certain economies of scale.
Other expenses represent the operating expenses of UFL, depreciation
and amortization and premium taxes. The amount of UFL operating expenses
reported for the six months of 2000 and 1999 were $1.9 million and $2.9 million,
respectively. Depreciation and amortization decreased from $1.7 million during
the first six months of 1999 to $1.3 million for the first six months of 2000.
This decrease was primarily due in part to increased amortization of production
costs by $425,000 during the first quarter of 1999. Premium taxes increased to
$991,000 for the first six months of 2000 from $701,000 for the same period of
1999 as a result of increased premiums.
The Company has recorded a provision for income taxes of $12.2 million
(34% of pretax income) for the first six months of 2000 compared to $10.0
million (35% of pretax income) for the same period of 1999.
Dividends paid on outstanding preferred stock for the six-month periods
ended June 30, 2000 and 1999 were $4,000 and $5,000, respectively. At June 30,
2000, all shares of preferred stock had been converted into shares of common
stock or repurchased by the Company.
Second Quarter of 2000 compared to the Second Quarter of 1999
The results of operations in the second quarter of 2000, compared to
the second quarter of 1999, reflect increases in revenues and expenses primarily
as a result of the same factors discussed in the comparison of the first six
months of 2000 to the first six months of 1999.
Total revenues increased 29% or approximately $13.8 million to $61.8
million in the second quarter of 2000 compared to $48.0 million in the second
quarter of 1999, primarily as a result of increases in membership premiums. The
membership premium increase of 34% primarily resulted from an increase in the
number of average active memberships during the second quarter of 2000 compared
to the similar period in 1999.
Membership benefits totaled $16.9 million in the 2000 second quarter
compared to $12.6 million in the 1999 second quarter and resulted in a loss
ratio of 33% for both periods.
The above factors resulted in a 2000 second quarter net income
applicable to common shareholders of $12.7 million, or $.56 per share, diluted,
compared to $9.9 million, or $.42 per share, for the second quarter of 1999.
Liquidity and Capital Resources
General
Consolidated net cash provided by operating activities was $5.9 million
for the first six months of 2000 compared to cash provided of $7.7 million for
the 1999 period. The decrease of $1.8 million in cash provided by operating
activities during the first six months of 2000 compared to the same period of
1999 resulted primarily from the increase in Membership commission advances of
$6.9 million, a decrease in accounts payable, accrued expenses and other of $1.9
million and an increase in other assets of $800,000 reduced by an increase in
net income of $5.4 million and an increase in deferred product sales revenue and
membership fees of $3.2 million.
Consolidated net cash used in investing activities was $4.5 million for
the first half of 2000 compared to net cash provided by investing activities of
$11.0 million for the comparable quarter of 1999. This $15.5 million change in
net investment activity was comprised of net investment purchases during the
first six months of 2000 of $1.9 million compared to net investment proceeds of
$11.6 million for the comparable period of 1999 and a $2.0 million increase in
net additions to property and equipment and production costs during the first
six months of 2000 of $2.5 million compared to $500,000 for the comparable
period of 1999.
Net cash used in financing activities during the first six months of
2000 was $2.9 million compared to net cash used by financing activities of $17.7
for the comparable period of 1999. This $14.8 million change was due primarily
to the $19.8 million used in the first six months of 1999 to purchase treasury
stock compared to the $3.2 million used in the first six months of 2000. This is
offset by the $1.8 million in additional proceeds during the 1999 period over
the 2000 period from the exercise of common stock options.
The Company had a consolidated working capital surplus of $28.1 million
at June 30, 2000, an increase of $4.8 million compared to a consolidated working
capital of $23.3 million at December 31, 1999. The $4.8 million increase in
working capital during the first six months of 2000 was primarily the result of
increases in the current portion of Membership commission advances of $7.1
million and decreases in accounts payable and accrued expenses of $4.4 million
offset by decreases in cash and cash equivalents of $1.5 million, increases of
$2.2 million in deferred product sales revenue and membership fees and $2.3
million in deferred income taxes.
At June 30, 2000 the Company reported $38.4 million in cash and
investments of which $6.0 million is pledged to various state insurance
departments. 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, 2000, the Company
advanced commissions of $49.0 million on new Membership sales compared to $33.8
million for the same period of 1999. Since approximately 94% 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 $24.3 million and $15.2 million
for the six-month periods ended June 30, 2000 and 1999, respectively. The
Company assesses collectibility of its commission advances quarterly and has
recorded an allowance of $4.5 million to provide for estimated uncollectible
balances.
The Company has no outstanding material financial commitments and
believes that it has significant ability to finance expected future growth in
Membership sales based on its existing amount of unpledged cash and investments
at June 30, 2000 of $32.4 million.
Parent Company Funding and Dividends
Although the Company is the operating entity in many jurisdictions, the
Company's subsidiaries serve as operating companies in various states which
regulate Memberships as insurance or specialized legal expense products. The
most significant of these wholly owned subsidiaries are Pre-Paid Legal Casualty,
Inc. ("PPLCI"), Pre-Paid Legal Services, Inc of Florida ("PPLSIF") and UFL. 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 their 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.
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, 2000, 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>
Estimated
fair value
after
Hypothetical hypothetical
change in interest change in
rate interest
Fair Value at (bp=basis points) rate
----------------- ------------------ --------------
(Dollars in thousands)
<CAPTION>
<S> <C> <C> <C>
Fixed-maturity investments at June 30, 2000 (1)............. $28,977 100 bp increase $ 27,947
200 bp increase 27,010
50 bp decrease 29,481
100 bp decrease 29,957
Fixed-maturity investments at December 31, 1999 (1)......... $22,870 100 bp increase $ 21,528
200 bp increase 20,573
50 bp decrease 23,084
100 bp decrease 23,624
</TABLE>
--------------------
(1) Excluding short-term investments with a fair value of $3.0 million and $3.3
million at June 30, 2000 and December 31, 1999, respectively.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at June 30, 20000 would reduce the
estimated fair value of the Company's fixed-maturity investments by
approximately $2.0 million at that date. At December 31, 1999, an
instantaneous 200 basis point increase in market interest rates would have
reduced the estimated fair value of the Company's fixed-maturity
investments by approximately $2.3 million at that date. The definitive
extent of the interest rate risk is not quantifiable or predictable due to
the variability of future interest rates, but the Company does not believe
such risk is material.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
The 2000 Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held on May 12, 2000. The following matters were submitted to a
vote of the Company's shareholders at the Annual Meeting.
1. Election of Three Directors.
The results of the election for each of the Company's three directors
whose terms expired as of the Annual Meeting were as follows:
Abstentions and
Votes For Votes Withheld
---------- ---------------
Kathleen S. Pinson 19,157,485 310,373
John W. Hail 19,152,244 317,614
David A. Savula 19,152,904 314,954
The Board of Directors of the Company consists of nine members and is
divided into three classes of equal size, with the term of office of one class
expiring each year. The new terms of service of Ms. Pinson and Messrs. Hail and
Savula will expire in 2003. The terms of the other six directors of the Company
did not expire at the Annual Meeting. The names of such other directors and the
year of expiration of their respective terms are as follows: Shirley A.
Stonecipher - 2001; Peter K. Grunebaum - 2001; Randy Harp - 2001; Harland C.
Stonecipher- 2002; Wilburn L. Smith - 2002; and Martin H. Belsky - 2002.
2. Amendment of Stock Option Plan.
The results of the vote at the Annual Meeting for the proposal to amend
the Company's Stock Option Plan to increase from 1,000,000 shares to 2,000,000
shares the maximum number of shares of common stock in respect of which options
may be granted under the Stock Option Plan were as follows:
Votes For Votes Against Abstentions
17,761,505 1,583,781 122,572
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During August 2000, the Company settled an action brought by Aetna Life
Insurance Company ("Aetna") against the Company and Primedia Workplace Learning,
Inc., and Primedia, Inc. in the District Court of Dallas County, which was filed
on February 9, 1999. Aetna alleged that the Company's predecessor in interest,
TPN, Inc., breached an agreement to lease certain premises in Dallas, Texas and
was liable to Aetna for damages for such breach. Under the terms of the
settlement, the Company will pay $575,000 to Aetna. This amount had been
previously accrued by the Company prior to June 30, 2000 and accordingly is
included as an accrued liability in the Company's financial statements.
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, 2000.
<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 9, 2000 /s/ Randy Harp
Randy Harp
------------------------------------------
Chief Operating Officer
(Duly Authorized Officer)
Date: August 9, 2000 /s/ Steve Williamson
Steve Williamson
------------------------------------------
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
No. Description
---- -----------------------------------------------------
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (EDGAR Version Only)
