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, 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 November 7, 2000:
Common Stock $.01 par value 22,601,490
<PAGE>
CONTENTS
Page
Number
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
Consolidated Balance Sheets
as of September 30, 2000 (Unaudited) and
December 31, 1999
Consolidated Statements of Income
(Unaudited) for the nine months ended
September 30, 2000 and 1999
Consolidated Statements of Comprehensive Income
(Unaudited) for the nine months ended
September 30, 2000 and 1999
Consolidated Statements of Income
(Unaudited) for the three months ended
September 30, 2000 and 1999
Consolidated Statements of Comprehensive Income
(Unaudited) for the three months ended
September 30, 2000 and 1999
Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended
September 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
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, 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
September 30, December 31,
------------- ------------
2000 1999
------------- ------------
(Unaudited)
<CAPTION>
<S> <C> <C>
Current assets:
Cash and cash equivalents.....................................................$ 20,159 $ 10,191
Available-for-sale investments, at fair value................................. 1,967 2,252
Accrued Membership income..................................................... 6,097 4,883
Inventories................................................................... 1,558 1,442
Amount due from coinsurer..................................................... 13,613 12,483
Membership commission advances, current portion............................... 42,969 32,885
---------- ----------
Total current assets...................................................... 86,363 64,136
Available-for-sale investments, at fair value................................... 19,253 19,628
Investments pledged............................................................. 6,047 5,288
Membership commission advances, net............................................. 113,233 87,828
Property and equipment, production costs, net................................... 10,400 8,634
Other........................................................................... 9,437 8,261
---------- ----------
Total assets..............................................................$ 244,733 $ 193,775
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits...........................................................$ 6,523 $ 5,252
Deferred product sales revenue and membership fees............................ 3,007 356
Accident and health reserves.................................................. 13,613 12,483
Life insurance reserves....................................................... 965 967
Deferred income taxes - current portion....................................... 14,897 10,664
Current portion of capital lease obligation................................... 274 348
Accounts payable and accrued expenses......................................... 7,323 10,768
---------- ----------
Total current liabilities................................................. 46,602 40,838
Deferred income taxes........................................................... 39,254 30,535
Life insurance reserves......................................................... 7,619 7,733
Capital lease obligation, net of current portion................................ 32 205
---------- ----------
Total liabilities......................................................... 93,507 79,311
---------- ----------
Stockholders' equity:
Preferred stock, $1 par value; 400 shares authorized; 0 and 3 issued and
outstanding at September 30, 2000 and December 31, 1999, respectively;
liquidation value of $0 and $53 at September 30, 2000 and December 31, 2000,
respectively.................................................................. - 3
Special preferred stock, $1 par value; authorized 500 shares, issued and
outstanding in one series designated as follows:
$1 Non-Cumulative Special Preferred Stock, 0 and 18 shares authorized, issued
and outstanding at September 30, 2000 and December 31, 1999, respectively;
liquidation value of $0 and $235 at September 30, 2000 and December 31, 1997,
repectively................................................................... - 18
Common stock, $.01 par value; 100,000 shares authorized; 24,565 and 24,507
issued at September 30, 2000 and December 31, 1999, respectively.............. 246 245
Capital in excess of par value................................................. 60,994 59,822
Retained earnings.............................................................. 126,878 88,471
Accumulated other comprehensive income (loss):
Unrealized losses on investments............................................... (426) (958)
Unrealized loss from currency translation...................................... (90) -
Treasury stock at cost; 2,059 and 1,960 shares held at September 30, 2000 and
December 31, 1999............................................................. (36,376) (33,137)
---------- ----------
Total stockholders' equity................................................... 151,226 114,464
---------- ----------
Total liabilities and stockholders' equity................................$ 244,733 $ 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)
Nine months ended
September 30,
------------------------
2000 1999
--------- ---------
<CAPTION>
<S> <C> <C>
Revenues:
Membership premiums................................................ $ 153,181 $ 112,071
Associate services................................................. 23,475 16,201
Product sales...................................................... 864 4,426
Other.............................................................. 8,698 8,869
--------- ---------
186,218 141,567
--------- ---------
Costs and expenses:
Membership benefits................................................ 50,976 37,388
Commissions........................................................ 38,040 26,200
Associate services and direct marketing............................ 17,002 10,637
Product costs...................................................... 621 2,899
General and administrative......................................... 17,168 13,938
Other.............................................................. 5,508 6,622
--------- ---------
129,315 97,684
--------- ---------
Income before income taxes........................................... 56,903 43,883
Provision for income taxes........................................... 18,492 15,359
--------- ---------
Net income........................................................... 38,411 28,524
Less dividends on preferred shares................................... 4 7
--------- ---------
Net income applicable to common stockholders......................... $ 38,407 $ 28,517
========= =========
Basic earnings per common share...................................... $ 1.70 $ 1.23
========= =========
Diluted earnings per common share.................................... $ 1.69 $ 1.21
========= =========
Basic number of common shares........................................ 22,531 23,246
========= =========
Diluted number of common shares...................................... 22,719 23,587
========= =========
</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)
Nine months ended
September 30,
------------------------
2000 1999
--------- ---------
<CAPTION>
<S> <C> <C>
Net income.......................................................... $ 38,411 $ 28,524
--------- ---------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on investments................... 532 (1,222)
Unrealized loss from currency translation.......................... (90) -
--------- ---------
Other comprehensive income (loss)................................... 442 (1,222)
--------- ---------
Comprehensive income................................................ $ 38,853 $ 27,302
========= =========
</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
September 30,
------------------------
2000 1999
--------- ---------
<CAPTION>
<S> <C> <C>
Revenues:
Membership premiums................................................ $ 54,581 $ 39,748
Associate services................................................. 10,104 5,832
Product sales...................................................... 53 1,256
Other.............................................................. 2,460 2,189
--------- ---------
67,198 49,025
--------- ---------
Costs and expenses:
Membership benefits................................................ 18,562 13,764
Commissions........................................................ 13,475 9,819
Associate services and direct marketing............................ 7,119 3,676
Product costs...................................................... 31 790
General and administrative......................................... 6,014 4,428
Other.............................................................. 1,390 1,362
--------- ---------
46,591 33,839
--------- ---------
Income before income taxes........................................... 20,607 15,186
Provision for income taxes........................................... 6,247 5,316
--------- ---------
Net income........................................................... 14,360 9,870
Less dividends on preferred shares................................... - 2
--------- ---------
Net income applicable to common stockholders......................... $ 14,360 $ 9,868
========= =========
Basic earnings per common share...................................... $ .64 $ .43
========= =========
Diluted earnings per common share.................................... $ .63 $ .42
========= =========
Basic number of common shares........................................ 22,497 22,927
========= =========
Diluted number of common shares...................................... 22,661 23,313
========= =========
</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
September 30,
------------------------
2000 1999
--------- ---------
<CAPTION>
<S> <C> <C>
Net income.......................................................... $ 14,360 $ 9,870
--------- ---------
Other comprehensive income (loss), net of tax:
Unrealized holding losses on investments........................... (141) (218)
Unrealized loss from currency translation.......................... (104) -
--------- ---------
Other comprehensive income (loss)................................... (245) (218)
--------- ---------
Comprehensive income................................................ $ 14,115 $ 9,652
========= =========
</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)
Nine months ended
September 30,
----------------------
2000 1999
--------- ---------
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 38,411 $ 28,524
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes................................ 13,993 13,536
Depreciation and amortization...................................... 2,009 2,372
Increase in accrued Membership income.............................. (1,214) (412)
(Increase) decrease in inventories................................. (116) 750
Increase in amount due from coinsurer.............................. (1,130) (480)
Increase in Membership commission advances......................... (35,489) (26,610)
Increase in other assets........................................... (1,176) (354)
Increase in Membership benefits.................................... 1,271 1,008
Increase (decrease) in deferred product sales revenue and
Membership fees.................................................. 2,651 (2,198)
Increase in accident and health reserves........................... 1,130 480
Decrease in life insurance reserves................................ (116) (194)
Decrease in accounts payable, accrued expenses and other........... (3,659) (3,568)
--------- ---------
Net cash provided by operating activities...................... 16,565 12,854
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, production costs, net......... (3,775) (1,367)
Purchases of investments - Available-for-sale...................... (7,068) (8,060)
Maturities of investments - Available-for-sale..................... 6,460 16,985
--------- ---------
Net cash (used in) provided by investing activities............ (4,383) 7,558
--------- ---------
Cash flows from financing activities:
Proceeds from sales of common stock................................ 1,366 3,176
Purchase of treasury stock......................................... (3,239) (19,830)
Dividends paid on preferred stock.................................. (4) (7)
Decrease in capital lease obligations.............................. (247) (514)
--------- ---------
Net cash used in financing activities.......................... (2,124) (17,175)
--------- ---------
Effect of exchange rate changes on cash.............................. (90) -
--------- ---------
Net increase in cash ................................................ 9,968 3,237
Cash and cash equivalents at beginning of period..................... 10,191 8,604
--------- ---------
Cash and cash equivalents at end of period........................... $ 20,159 $ 11,841
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest............................................. $ 9 $ 20
========= =========
Cash paid for income taxes......................................... $ 5,857 $ 1,928
========= =========
</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 September 30, 2000, and the
related consolidated statements of income, comprehensive income and cash flows
for the nine-month and three-month periods ended September 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 accounting
principles generally accepted in the United States of America 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. In June 2000, the FASB issued SFAS No. 138, which amends certain
provisions of SFAS 133 to clarify four areas causing difficulties in
implementation. The amendment included expanding the normal purchase and sale
exemption for supply contracts, permitting the offsetting of certain
intercompany foreign currency derivatives and thus reducing the number of third
party derivatives, permitting hedge accounting for foreign-currency denominated
assets and liabilities, and redefining interest rate risk to reduce sources of
ineffectiveness. Management believes implementation of SFAS 133, as amended by
SFAS 138, will not have a material impact on the Company's consolidated results
of operations, financial position or cash flows.
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 believes the implementation of SAB 101 will
not have any significant effect on the Company's financial statements.
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, Inc. ("TPN"), a
corporation acquired by merger into the Company during 1998. The lawsuit was
settled on August 18, 2000. The settlement amount paid in the third quarter was
$575,000.
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 September 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. During October 2000, the Company
purchased 98,300 shares of the Company's stock for consideration of $3.1
million.
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 these shares
were outstanding. 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.
During the second quarter of 2000, all shares of preferred stock were
converted into shares of common stock or repurchased by the Company.
5. SEGMENT INFORMATION
The Company during the nine months ended September 30, 2000 and 1999,
derived approximately 99% and 97%, 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 1% and
3% each of the respective consolidated totals for the nine months ended
September 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 nine months ended September 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 for the nine months ended
September 30, 2000 and 1999 and the identifiable assets at September 30, 2000
and December 31, 1999.
Nine months ended
September 30,
------------------------
2000 1999
---------- ----------
Revenues:
Legal service plans and directly related activities:
Legal service plan membership fees................. $ 153,181 $ 112,071
Associate Services................................ 23,475 16,201
Product sales..................................... 864 4,426
Other............................................. 6,224 4,442
---------- ----------
Total......................................... 183,744 137,140
---------- ----------
Life insurance segment (UFL):
Revenues.......................................... 2,474 4,427
---------- ----------
Total Revenues............................... $ 186,218 $ 141,567
========== ==========
Net Income:
Legal service plans and directly related activities $ 37,812 $ 27,700
Life insurance segment (UFL)....................... 599 824
---------- ----------
Net Income..................................... $ 38,411 $ 28,524
========== ==========
<PAGE>
September 30, December 31,
2000 1999
------------- -------------
Assets:
Legal service plans and directly related
activities................................... $ 214,017 $ 163,755
Life insurance segment (UFL).................. 30,716 30,020
------------- -------------
Total Assets............................... $ 244,733 $ 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
$38.4 million, or $1.69 per diluted common share, for the nine months ended
September 30, 2000, up 35% from net income applicable to common stockholders of
$28.5 million, or $1.21 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 $153.2 million during the nine months ended
September 30, 2000 compared to $112.1 million for the same period of 1999, an
increase of 37%. 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 34%
during the nine months ended September 30, 2000 to 504,408 from 376,424 during
the comparable period of 1999. At September 30, 2000, there were 1,018,181
active Memberships in force compared to 759,341 at September 30, 1999.
Additionally, the average annual premium per Membership has increased from $236
for all Memberships in force at September 30, 1999 to $243 for all Memberships
in force at September 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 80% from $4.4 million for the first nine months
of 1999 to $864,000 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 45% from $16.2 million for the
first nine months of 1999 to $23.5 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
$12.7 million during the first nine months of 2000 compared to $8.4 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 $12.7 million in training fees
was comprised of $184 from each of approximately 69,251 new sales associates who
elected to participate in Fast Start during the first nine months of 2000. New
associates enrolled during the first nine months of 2000 were 74,273 compared to
68,035 for the same period of 1999, an increase of 9%. 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 nine months ended September 30, 2000 and 1999
decreased by 2% to $8.7 million from $8.9 million. Included in other revenue for
the nine month periods ended September 30, 2000 and September 30, 1999 was $1.8
million and $2.8 million, respectively, in life insurance premiums and life
reinsurance ceded related to Universal Fidelity Life Insurance Company ("UFL").
Included in other revenue for the 1999 period was a realized gain on the sale of
investments of $700,000 also related to UFL. Interest income, also included in
other revenue, for the nine months ended September 30, 2000 increased 22% to
$3.3 million from $2.7 million for the comparable period of 1999. Interest
income increased primarily due to the increase in 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 $186.2 million for the nine months ended
September 30, 2000 from $141.6 million during the comparable period of 1999, an
increase of 32%.
Membership benefits totaled $51.0 million for the nine months ended
September 30, 2000 compared to $37.4 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 $38.0 million for the nine months ended
September 30, 2000 compared to $26.2 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 $17.0
million for the first nine months of 2000 from $10.6 million for the same period
of 1999. Fast Start bonuses paid were approximately $5.6 million during the 2000
period compared to $4.3 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 79%, during the nine months ended
September 30, 2000 to $621,000 from $2.9 million for the comparable period of
1999 in conjunction with the 80% decline in product sales. Product costs as a
percentage of product sales were 72% for the nine months ended September 30,
2000 as compared to 65% 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 nine months ended
September 30, 2000 and 1999 were $17.2 million and $13.9 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 nine months of 2000 and 1999 were $2.3 million and $3.2
million, respectively. Depreciation and amortization decreased from $2.4 million
during the first nine months of 1999 to $2.0 million for the first nine months
of 2000. This decrease was primarily due to increased amortization of production
costs by $425,000 during the first quarter of 1999. Premium taxes increased to
$1.2 million for the first nine months of 2000 from $1.1 million for the same
period of 1999 as a result of increased premiums.
The Company has recorded a provision for income taxes of $18.5 million
(32% of pretax income) for the first nine months of 2000 compared to $15.4
million (35% of pretax income) for the same period of 1999.
Dividends paid on outstanding preferred stock for the nine-month
periods ended September 30, 2000 and 1999 were $4,000 and $7,000, respectively.
During the second quarter of 2000, all shares of preferred stock had been
converted into shares of common stock or repurchased by the Company.
Third Quarter of 2000 compared to the Third Quarter of 1999
-----------------------------------------------------------
The results of operations in the third quarter of 2000, compared to the
third quarter of 1999, reflect increases in revenues and expenses primarily as a
result of the same factors discussed in the comparison of the first nine months
of 2000 to the first nine months of 1999.
Total revenues increased 37% or approximately $18.2 million to $67.2
million in the third quarter of 2000 compared to $49.0 million in the third
quarter of 1999, primarily as a result of increases in membership premiums. The
membership premium increase of 37% primarily resulted from an increase in the
number of average active memberships during the third quarter of 2000 compared
to the similar period in 1999.
Membership benefits totaled $18.6 million in the 2000 third quarter
compared to $13.8 million in the 1999 third quarter and resulted in a loss ratio
of 34% and 35%, respectively.
The above factors resulted in a 2000 third quarter net income
applicable to common shareholders of $14.4 million, or $.63 per share, diluted,
compared to $9.9 million, or $.42 per share, diluted, for the third quarter of
1999.
Liquidity and Capital Resources
-------------------------------
General
Consolidated net cash provided by operating activities was $16.6
million for the first nine months of 2000 compared to cash provided of $12.9
million for the 1999 period. The increase of $3.7 million in cash provided by
operating activities during the first nine months of 2000 compared to the same
period of 1999 resulted primarily from the increase in net income of $9.9
million and an increase in deferred product sales revenue and memberships fees
of $4.8 million reduced by an increase in Membership commission advances of $8.9
million.
Consolidated net cash used in investing activities was $4.4 million for
the first nine months of 2000 compared to net cash provided by investing
activities of $7.6 million for the comparable period of 1999. This $12.0 million
change in net investment activity was comprised of net investment used during
the first nine months of 2000 of $608,000 compared to net investment proceeds of
$8.9 million for the comparable period of 1999 and a $2.4 million increase in
net additions to property and equipment and production costs during the first
nine months of 2000.
Net cash used in financing activities during the first nine months of
2000 was $2.1 million compared to $17.2 million for the comparable period of
1999. This $15.1 million change was due primarily to the $19.8 million used in
the first nine months of 1999 to purchase treasury stock compared to the $3.2
million used in the first nine 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 $39.8 million
at September 30, 2000, an increase of $16.5 million compared to a consolidated
working capital of $23.3 million at December 31, 1999. The $16.5 million
increase in working capital during the first nine months of 2000 was primarily
the result of increases in the current portion of Membership commission advances
of $10.1 million and decreases in accounts payable and accrued expenses of $3.4
million, increases in cash and cash equivalents of $9.9 million, and increase in
accrued membership income of $1.2 million offset by increases of $2.7 million in
deferred product sales revenue and membership fees and $4.2 million in current
deferred income taxes.
At September 30, 2000 the Company reported $47.4 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 nine months ended September 30, 2000, the Company
advanced commissions of $73.0 million on new Membership sales compared to $52.3
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 $37.5 million and $24.4 million
for the nine-month periods ended September 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 cash and unpledged investments
at September 30, 2000 of $41.4 million. Due to the continued growth, the Company
is in the design phase of a new home office facility, which is projected to cost
in excess of $25.0 million and be completed in the first quarter of 2003. The
Company is currently reviewing the many financing options available.
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 September 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 September 30, 2000 (1)........ $23,094 100 bp increase $ 22,315
200 bp increase 21,389
50 bp decrease 23,791
100 bp decrease 24,116
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 $4.2 million and $3.3
million at September 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 September 30, 20000 would reduce
the estimated fair value of the Company's fixed-maturity investments by
approximately $1.7 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits: The following exhibits are filed as part of this Form 10-Q:
No. Description
---- -----------
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (EDGAR Version Only)
(b) Filed Form 8-K on September 23, 2000 to update under Item 5 description of
securities and to file amended and restated articles of incorporation.
<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: November 8, 2000 /s/ Randy Harp
------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: November 8, 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)
