UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 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
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PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 East Main Street
Ada, Oklahoma 74821-0145
(Address of principal executive offices) (Zip Code)
(580) 436-1234
(Registrants' telephone number, including area code)
--------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of April 26, 2000:
Common Stock $.01 par value 22,560,143
<PAGE>
CONTENTS
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
Consolidated Balance Sheets
as of March 31, 2000 (Unaudited) and
December 31, 1999
Consolidated Statements of Income
(Unaudited) for the three months ended
March 31, 2000 and 1999
Consolidated Statements of Comprehensive Income
(Unaudited) for the three months ended
March 31, 2000 and 1999
Consolidated Statements of Cash Flows
(Unaudited) for the three months ended
March 31, 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 March 31, 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.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS OF REGISTRANT
- -------------------------------------------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except per share amounts)
ASSETS
March 31, December 31,
-------------------------
2000 1999
--------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents.......................... $ 13,433 $ 10,191
Available-for-sale investments, at fair value...... 2,521 2,252
Accrued Membership income.......................... 5,330 4,883
Inventories........................................ 1,480 1,442
Amount due from coinsurer.......................... 12,540 12,483
Membership commission advances, current portion.... 35,994 32,885
--------- ---------
Total current assets........................... 71,298 64,136
Available-for-sale investments, at fair value........ 19,834 19,628
Investments pledged.................................. 5,319 5,288
Membership commission advances, net.................. 95,577 87,828
Property and equipment, production costs, net........ 9,496 8,634
Other............................................... 8,214 8,261
--------- ---------
Total assets.................................. $ 209,738 $ 193,775
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits............................... $ 5,636 $ 5,252
Deferred product sales revenue and membership fees. 1,838 356
Accident and health reserves....................... 12,540 12,483
Life insurance reserves............................ 947 967
Deferred income taxes - current portion............ 11,679 10,664
Current portion of capital lease obligation........ 334 348
Accounts payable and accrued expenses.............. 9,772 10,768
--------- ---------
Total current liabilities...................... 42,746 40,838
Deferred income taxes................................ 33,377 30,535
Life insurance reserves.............................. 7,749 7,733
Capital lease obligation, net of current portion..... 137 205
--------- ---------
Total liabilities.............................. 84,009 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 March 31, 2000
and December 31, 1999; liquidation value of $55.... 3 3
Special preferred stock, $1 par value; authorized
500 shares, issued and outstanding in one series
designated as follows: $1.00 Non-Cumulative Special
Preferred Stock, 18 shares authorized, issued and
outstanding at March 31, 2000 and December 31, 1999;
liquidation value of $240.......................... 18 18
Common stock, $.01 par value; 100,000 shares authorized;
24,511 and 24,507 issued at March 31, 2000 and
December 31, 1999, respectively.................... 245 245
Capital in excess of par value................... 59,677 59,822
Retained earnings............... ................ 99,861 88,471
Accumulated other comprehensive income (loss):
Unrealized losses on investments................. (934) (958)
Unrealized loss from currency translation........ (4) -
Treasury stock at cost; 1,960 shares held at
March 31, 2000 and December 31, 1999............ (33,137) (33,137)
--------- ---------
Total stockholders' equity....................... 125,729 114,464
--------- ---------
Total liabilities and stockholders' equity.....$ 209,738 $ 193,775
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three months ended
March 31,
-----------------------
2000 1999
-------- --------
Revenues:
Membership premiums................................. $ 46,976 $ 33,767
Associate services.................................. 6,233 5,410
Product sales....................................... 669 2,054
Other............................................... 3,392 3,352
-------- --------
57,270 44,583
-------- --------
Costs and expenses:
Membership benefits................................. 15,541 11,029
Commissions......................................... 11,743 7,835
Associate services and direct marketing............. 4,279 3,491
Product costs....................................... 545 1,261
General and administrative.......................... 5,418 4,088
Other............................................... 2,218 3,454
-------- --------
39,744 31,158
-------- --------
Income before income taxes............................ 17,526 13,425
Provision for income taxes............................ 6,134 4,643
-------- --------
Net income............................................ 11,392 8,782
Less dividends on preferred shares.................... 2 2
-------- --------
Net income applicable to common stockholders.......... $ 11,390 $ 8,780
======== ========
Basic earnings per common share....................... $ .51 $ .37
======== ========
Diluted earnings per common share..................... $ .50 $ .37
======== ========
Basic number of common shares......................... 22,549 23,610
======== ========
Diluted number of common shares....................... 22,783 23,994
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three months ended
March 31,
---------------------
2000 1999
-------- --------
Net income............................................. $ 11,392 $ 8,782
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains(losses) on investments:
Unrealized holding gains (losses) arising during period. 24 (37)
Unrealized loss from currency translation............... (4) -
-------- --------
Other comprehensive income (loss)....................... 20 (37)
-------- --------
Comprehensive income.................................... $ 11,412 $ 8,745
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Three months ended
March 31,
------------------
2000 1999
-------- -------
Cash flows from operating activities:
Net income............................................... $ 11,392 $ 8,782
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes..................... 3,844 4,643
Depreciation and amortization........................... 603 1,271
(Increase) decrease in accrued Membership income........ (447) 205
(Increase) decrease in inventories...................... (38) 245
Increase in amount due from coinsurer................... (57) (810)
Increase in Membership commission advances.............. (10,858) (7,221)
Decrease (increase) in other assets..................... 47 (1,709)
Increase in Membership benefits......................... 384 338
Increase (decrease) in deferred product sales revenue
and membership fees.................................... 1,482 (300)
Increase in accident and health reserves................ 57 810
Decrease in life insurance reserves..................... (4) (98)
Decrease in accounts payable, accrued expenses and
other.................................................. (1,210) (4,133)
-------- --------
Net cash provided by operating activities........... 5,195 2,023
-------- --------
Cash flows from investing activities:
Additions to property and equipment, production costs,
net.................................................... (1,465) (382)
Purchases of investments - Available-for-sale.......... (599) (420)
Maturities of investments - Available-for-sale......... 130 -
-------- --------
Net cash used in investing activities.............. (1,934) (802)
-------- --------
Cash flows from financing activities:
Proceeds from sales of common stock..................... 69 2,182
Dividends paid on preferred stock...................... (2) (2)
Decrease in capital lease obligations.................. (82) (82)
-------- --------
Net cash (used in) provided by financing activities (15) 2,098
Effect of exchange rate changes on cash.................. (4) -
-------- --------
Net increase in cash .................................... 3,242 3,319
Cash and cash equivalents at beginning of period......... 10,191 8,604
--------- --------
Cash and cash equivalents at end of period............... $ 13,433 $ 11,923
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 3 $ 4
========= ========
Cash paid for income taxes............................. $ 1,131 $ -
========= ========
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 March 31, 2000, and the related
consolidated statements of income, comprehensive income and cash flows for the
three-month periods ended March 31, 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 March 31, 2000.
2. CONTINGENCIES
During February 1999, a suit was filed against the Company by a
building owner seeking to recover unspecified damages and attorneys' fees for an
alleged breach of a lease agreement between the owner and TPN. Management
intends to vigorously contest this suit and believes that any loss resulting
from the suit would not have a material impact on the Company's financial
position, results of operations or cash flows.
The Company is a named defendant in certain other lawsuits arising in
the ordinary course of the Company's business. While the outcome of these
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on the Company's financial position,
results of operations or cash flows.
3. STOCK REPURCHASES
The Company announced on April 6, 1999, a stock repurchase program
authorizing management to reacquire up to 500,000 shares of the Company's common
stock. The Board of Directors subsequently increased such authorization from
500,000 shares to 1,500,000. At March 31, 2000, the Company had repurchased
1,162,800 shares under these authorizations for a total consideration of $29.4
million, an average price of $25.31 per share.
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.
<PAGE>
5. SEGMENT INFORMATION
The Company derived approximately 98% of its revenues and net income
from the sale of legal service plans and directly related activities during the
three months ended March 31, 2000 and 1999. Revenues and net income from the
Company's other operating segment (life insurance, through UFL) were
approximately 2% each of the respective consolidated totals for the three months
ended March 31, 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 three months ended March 31, 2000 and 1999.
Three months ended
March 31,
-----------------------
2000 1999
---------- ---------
Revenues:
Legal service plans and directly related activities:
Legal service plan membership fees................. $ 46,976 $ 33,737
Associate Services................................. 6,233 5,410
Product sales...................................... 669 2,054
Other.............................................. 1,998 1,347
---------- ----------
Total........................................... 42,578 55,876
---------- ----------
Life insurance segment (UFL):
Revenues........................................... 1,394 2,005
---------- ----------
Total........................................... 1,394 2,005
---------- ----------
Total.......................................... $ 57,270 $ 44,583
========== ==========
Net Income:
Legal service plans and directly related activities. $ 11,249 $ 8,622
Life insurance segment (UFL)....................... 143 160
---------- ----------
Net Income...................................... $ 11,392 $ 8,782
========== ==========
Assets:
Legal service plans and directly related activities. $ 180,261 $ 150,970
Life insurance segment (UFL)....................... 29,477 42,805
---------- ----------
Total assets................................... $ 209,738 $ 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
$11.4 million, or $.50 per diluted common share, for the three months ended
March 31, 2000, up 30% from net income applicable to common stockholders of $8.8
million, or $.37 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 $47.0 million during the three months ended
March 31, 2000 compared to $33.8 million for the same period of 1999, an
increase of 39%. 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 37%
during the three months ended March 31, 2000 to 163,341 from 118,814 during the
comparable period of 1999. At March 31, 2000, there were 890,264 active
Memberships in force compared to 648,475 at March 31, 1999. Additionally, the
average annual premium per Membership has increased from $231 for all
Memberships in force at March 31, 1999 to $237 for all Memberships in force at
March 31, 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 67% from $2.1 million for the first three months
of 1999 to $669,000 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 15% from $5.4 million for the
first three months of 1999 to $6.2 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
$3.5 million during the first three months of 2000 compared to $2.9 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 $3.5 million in training fees
was comprised of $184 from each of approximately 19,240 new sales associates who
elected to participate in Fast Start during the first three months of 2000. New
associates enrolled during the first three months of 2000 were 21,238 compared
to 20,442 for the same period of 1999, an increase of 4%. 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 three months ended March 31, 2000 and 1999 was
unchanged at $3.4 million. Included in other revenue for the three month periods
ended March 31, 2000 and March 31, 1999 was $1.2 million and $1.6 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 three months ended March 31, 2000 decreased
1% to $922,000 from $936,000 for the comparable period of 1999. Interest income
decreased primarily due to the decreased cash and investment balances at March
31, 2000 compared to March 31, 1999. This decrease was offset by 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 all categories except for product sales
total revenues increased to $57.3 million for the three months ended March 31,
2000 from $44.6 million during the comparable period of 1999, an increase of
28%.
Membership benefits totaled $15.5 million for the three months ended
March 31, 2000 compared to $11.0 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 $11.7 million for the three months ended March
31, 2000 compared to $7.8 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 23%-25% in
future periods based on the Company's current commission structure.
Associate services and direct marketing expenses increased to $4.3
million for the first three months of 2000 from $3.5 million for the same period
of 1999. Fast Start bonuses paid were approximately $1.8 million during the 2000
period compared to $2.0 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 57%, during the three months ended
March 31, 2000 to $545,000 from $1.3 million for the comparable period of 1999
in conjunction with the 67% decline in product sales. Product costs as a
percentage of product sales were 81% for the three months ended March 31, 2000
as compared to 61% 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 three months ended March
31, 2000 and 1999 were $5.4 million and $4.1 million, respectively, and
represented 9% 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 three months of 2000 and 1999 were $1.2 million and $1.8
million, respectively. Depreciation and amortization decreased from $1.3 million
during the first three months of 1999 to $603,000 for the first three 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 $442,000 for the first three months of 2000 from $339,000 for the
same period of 1999 as a result of increased premiums.
The Company has recorded a provision for income taxes of $6.1 million
(35% of pretax income) for the first three months of 2000 compared to $4.6
million (35% of pretax income) for the same period of 1999.
Dividends paid on outstanding preferred stock were $2,000 for each of
the three-month periods ended March 31, 2000 and 1999.
Liquidity and Capital Resources
- -------------------------------
General
Consolidated net cash provided by operating activities was $5.2 million
for the first three months of 2000 compared to cash provided of $2.0 million for
the 1999 period. The increase of $3.2 million in cash provided by operating
activities during the first three months of 2000 compared to the same period of
1999 resulted primarily from the increase in net income of $2.6 million.
Consolidated net cash used in investing activities was $1,955,000 for
the first three months of 2000 compared to net cash used in investing activities
of $802,000 for the comparable period of 1999. This $1.2 million increase in
cash used in investing activities resulted primarily from the $1.2 million
change in net additions to property and equipment and production costs during
the first three months of 1999 of $1.5 million compared to $382,000 for the
comparable period of 1999.
Net cash used in financing activities during the first three months of
2000 was $15,000 compared to net cash provided by financing activities of $2.1
for the comparable period of 1999. This $2.1 million change was comprised of
$2.1 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 $28.6 million
at March 31, 2000, an increase of $5.3 million compared to a consolidated
working capital of $23.3 million at December 31, 1999. The $5.3 million increase
in working capital during the first three months of 2000 was primarily the
result of a $3.3 million increase in cash and cash equivalents, decreases in
accounts payable and accrued expenses of $1.0 million and increases in the
current portion of Membership commission advances of $3.2 million offset by
increases of $1.5 million in deferred product sales revenue and membership fees
and $1.0 million in deferred income taxes.
At March 31, 2000 the Company reported $41.4 million in cash and
investments (after utilizing more than $29.4 million to repurchase approximately
1.2 million shares of its common stock during 1999) compared to $53.8 million at
March 31, 1999. The Company's investments consist of common stocks, investment
grade (rated Baa or higher) preferred stocks and investment grade bonds
primarily issued by corporations, the United States Treasury, federal agencies,
federally sponsored agencies and enterprises as well as mortgage-backed
securities and state and municipal tax-exempt bonds
The Company generally advances significant commissions at the time a
Membership is sold. During the three months ended March 31, 2000, the Company
advanced commissions of $22.7 million on new Membership sales compared to $14.8
million for the same period of 1999. Since approximately 93% of Membership
premiums are collected on a monthly basis, a significant cash flow deficit is
created at the time a Membership is sold. This deficit is reduced as monthly
premiums are remitted and no additional commissions are paid on the Membership
until all previous commission advances have been fully recovered. Commission
advances were reduced by earned commission of $11.8 million and $7.1 million for
the three-month periods ended March 31, 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 March 31, 2000 of $35.8 million.
Parent Company Funding and Dividends
Although the Company is the operating entity in many jurisdictions, the
Company's subsidiaries serve as operating companies in various states which
regulate Memberships as insurance or specialized legal expense products. The
most significant of these wholly owned subsidiaries are PPLCI, UFL and PPLSIF.
The ability of PPLCI, UFL and PPLSIF to provide funds to the Company is subject
to a number of restrictions under various insurance laws in the jurisdictions in
which PPLCI, UFL and PPLSIF conduct business, including limitations on the
amount of dividends and management fees that may be paid and requirements to
maintain specified levels of capital and reserves. In addition PPLCI and UFL are
required to maintain its stockholders' equity at levels sufficient to satisfy
various state regulatory requirements, the most restrictive of which is
currently $3 million for PPLCI. Additional capital requirements of PPLCI, UFL or
PPLSIF, if needed, would be funded by the Company in the form of capital
contributions or surplus debentures.
LawInfo.com
- -----------
The Company and LawInfo.com have entered into a strategic
relationship to provide legal service benefits to consumers searching for legal
solutions on the Internet. The relationship combines legal content and education
with access to qualified and experienced attorneys as an affordable value. The
Internet has evolved as the first stop for millions of consumers searching for
legal solutions. The Company has developed an application to provide solutions
to legal events at the consumer's time of need, and Lawlnfo.com is the first of
several strategic relationships the Company anticipates building.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's consolidated balance sheets include a certain amount of
assets and liabilities whose fair values are subject to market risk. Due to the
Company's significant investment in fixed-maturity investments, interest rate
risk represents the largest market risk factor affecting the Company's
consolidated financial position. Increases and decreases in prevailing interest
rates generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, liquidity of the instrument and
other general market conditions.
As of March 31, 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 change hypothetical
in interest rate change in
Fair Value at (bp=basis points) interest rate
------------------ --------------------- -------------
(Dollars in thousands)
<CAPTION>
<S> <C> <C> <C>
Fixed-maturity investments at March 31, 2000 (1)............ $24,513 100 bp increase $ 23,404
200 bp increase 22,473
50 bp decrease 24,907
100 bp decrease 25,424
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 $3.2 million and $3.3
million at March 31, 2000 and December 31, 1999, respectively.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 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.
<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) Reports on Form 8-K: There were no reports on Form 8-K filed by the Company
during the quarter ended March 31, 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: May 4, 2000 /s/ Harland C. Stonecipher
--------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 4, 2000 /s/ Randy Harp
--------------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
Date: May 4, 2000 /s/ Kathleen S. Pinson
---------------------------------------
Kathleen S. Pinson
Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
No. Description
---- -----------------------------------------------------
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (EDGAR Version Only)
EXHIBIT 11.1
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
Three Months Ended
March 31,
-------------------
2000 1999
-------- -------
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)......... $ 11,390 $ 8,780
======== ========
Shares:
Weighted average shares outstanding (net of 1,960 and
797 shares of treasury stock, respectively),
disregarding exercise of options or conversion of
preferred stock......................................... 22,549 23,610
======== ========
Basic earnings per common share (a)...................... $ .51 $ .37
======== ========
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)......... $ 11,390 $ 8,780
Add: Dividends on preferred stock ....................... 2 2
-------- --------
Net income applicable to common stockholders, as adjusted $ 11,392 $ 8,782
======== ========
Shares:
Weighted average shares outstanding (net of 1,960 and
797 shares of treasury stock, respectively),
disregarding exercise of options or conversion of
preferred stock.......................................... 22,549 23,610
Assumed dilutive conversion of preferred stock ........... 70 70
Assumed exercise of options and warrants based on the
treasury stock method using average market price......... 164 314
-------- -------
Weighted average number of shares, as adjusted............ 22,783 23,994
-------- -------
Diluted earnings per common share (a)..................... $ .50 $ .37
======== =========
(a) These amounts agree with the related amounts in the consolidated statements
of income.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 2000 financial statements contained in Form 10-Q and is
qualified in its entirety by reference to such financial statements and
the related footnotes.
</LEGEND>
<CIK> 0000311657
<NAME> Pre-Paid Legal Services, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<EXCHANGE-RATE> 1
<CASH> 13,433
<SECURITIES> 27,674
<RECEIVABLES> 5,330
<ALLOWANCES> 0
<INVENTORY> 1,480
<CURRENT-ASSETS> 71,298
<PP&E> 9,496
<DEPRECIATION> 0
<TOTAL-ASSETS> 209,738
<CURRENT-LIABILITIES> 42,746
<BONDS> 0
0
21
<COMMON> 245
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 209,738
<SALES> 0
<TOTAL-REVENUES> 57,270
<CGS> 0
<TOTAL-COSTS> 39,744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,526
<INCOME-TAX> 6,134
<INCOME-CONTINUING> 11,392
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,390
<EPS-BASIC> .51
<EPS-DILUTED> .50
</TABLE>
