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, 2001
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 No X
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of August 10, 2001:
Common Stock $.01 par value 21,350,908
TABLE OF CONTENTS
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
Consolidated Balance Sheets
(Unaudited) as of June 30, 2001 and December 31, 2000
Consolidated Statements of Income
(Unaudited) for the six months ended June 30, 2001 and 2000
Consolidated Statements of Comprehensive Income
(Unaudited) for the six months ended June 30, 2001 and 2000
Consolidated Statements of Income
(Unaudited) for the three months ended June 30, 2001 and 2000
Consolidated Statements of Comprehensive Income
(Unaudited) for the three months ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows
(Unaudited) for the six months ended June 30, 2001 and 2000
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 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
ITEM 1. FINANCIAL STATEMENTS OF REGISTRANT
----------------------------------
On August 1, 2001, the Company and its independent auditor, Deloitte &
Touche, LLP, mutually agreed to terminate their auditor-client relationship. The
Company is currently in the process of selecting new independent auditors. As a
result, the financial information included in this Form 10-Q has not been
subjected to a timely quarterly review as required by Rule 10-01(d) of
Regulation S-X.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
(Unaudited)
June 30, December 31,
ASSETS 2001 2000
Current assets: (Restated)
--------------- ---------------
Cash and cash equivalents................................................... $ 10,184 $ 11,570
Available-for-sale investments, at fair value............................... 1,282 2,448
Membership income receivable................................................ 6,189 6,780
Inventories................................................................. 988 1,542
Amount due from coinsurer................................................... 14,449 12,242
Deferred income taxes....................................................... 2,374 2,007
Deferred member and associate service costs................................. 5,370 5,029
--------------- ---------------
Total current assets.................................................... 40,836 41,618
Available-for-sale investments, at fair value................................. 17,697 21,207
Investments pledged........................................................... 6,139 6,105
Property and equipment, net................................................... 13,321 11,200
Deferred member and associate service costs................................... 4,063 3,465
Other assets.................................................................. 11,083 9,562
--------------- ---------------
Total assets............................................................ $ 93,139 $ 93,157
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits......................................................... $ 7,585 $ 6,831
Deferred Membership revenue and fees and associate fees..................... 10,407 9,449
Accident and health reserves................................................ 14,449 12,242
Life insurance reserves..................................................... 968 976
Capital lease obligation.................................................... 82 223
Accounts payable and accrued expenses....................................... 5,696 7,096
--------------- ---------------
Total current liabilities............................................... 39,187 36,817
Deferred Membership revenue and fees and associate fees....................... 4,063 3,083
Deferred income taxes......................................................... 572 376
Life insurance reserves....................................................... 7,744 7,656
--------------- ---------------
Total liabilities....................................................... 51,566 47,932
--------------- ---------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 24,747 issued...... 247 247
Capital in excess of par value.............................................. 65,117 64,958
Retained earnings........................................................... 42,258 30,588
Accumulated other comprehensive income (loss):
Unrealized gain (losses) on investments................................... 224 (96)
Unrealized gain (loss) from foreign currency translation.................. 7 (12)
Treasury stock, at cost; 3,397 and 2,480 shares held at June 30, 2001
and December 31, 2000, respectively....................................... (66,280) (50,460)
--------------- ---------------
Total stockholders' equity................................................ 41,573 45,225
--------------- ---------------
Total liabilities and stockholders' equity.............................. $ 93,139 $ 93,157
--------------- ---------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Six months ended
June 30,
----------------------------------
2001 2000
--------------- ---------------
(Restated)
Revenues:
Membership fees............................................................. $ 126,500 $ 98,600
Associate services.......................................................... 19,123 13,371
Other....................................................................... 2,190 4,162
-------------- ---------------
147,813 116,133
-------------- ---------------
Costs and expenses:
Membership benefits......................................................... 42,395 32,414
Commission payments to associates........................................... 55,688 48,322
Associate services and direct marketing..................................... 16,279 9,883
General and administrative.................................................. 13,445 11,688
Life insurance benefits..................................................... 710 487
Other, net.................................................................. 1,714 1,720
-------------- ---------------
130,231 104,514
-------------- ---------------
Income before income taxes.................................................... 17,582 11,619
Provision for income taxes.................................................... 5,912 3,805
-------------- ---------------
Net income.................................................................... 11,670 7,814
Less dividends on preferred shares............................................ - 4
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Net income applicable to common stockholders.................................. $ 11,670 $ 7,810
-------------- ---------------
Basic earnings per common share............................................... $ .54 $ .35
-------------- ---------------
Diluted earnings per common share............................................. $ .54 $ .34
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Six months ended
June 30,
----------------------------------
2001 2000
--------------- ---------------
(Restated)
Net income.................................................................... $ 11,670 $ 7,814
Other comprehensive income, net of tax:
Foreign currency translation adjustment..................................... 19 14
Unrealized gains on investments:
Unrealized holding gains arising during period,........................... 320 673
Less: reclassification adjustment for gains included
in net income........................................................... - -
-------------- ---------------
Other comprehensive income, net of income taxes
of $183 and $370............................................................ 339 687
-------------- ---------------
Comprehensive income.......................................................... $ 12,009 $ 8,501
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Six months ended
June 30,
----------------------------------
2001 2000
--------------- ---------------
(Restated)
Revenues:
Membership fees............................................................. $ 67,005 $ 51,624
Associate services.......................................................... 8,986 7,138
Other....................................................................... 1,004 1,438
--------------- ---------------
76,995 60,200
--------------- ---------------
Costs and expenses:
Membership benefits......................................................... 21,997 16,873
Commission payments to associates........................................... 31,129 26,779
Associate services and direct marketing..................................... 8,170 5,604
General and administrative.................................................. 7,066 5,764
Life insurance benefits..................................................... 432 235
Other, net.................................................................. 1,028 613
--------------- ---------------
69,822 55,868
--------------- ---------------
Income before income taxes.................................................... 7,173 4,332
Provision for income taxes.................................................... 2,422 1,255
--------------- ---------------
Net income.................................................................... 4,751 3,077
Less dividends on preferred shares............................................ - 2
--------------- ---------------
Net income applicable to common stockholders.................................. $ 4,751 $ 3,075
--------------- ---------------
Basic earnings per common share............................................... $ .22 $ .14
--------------- ---------------
Diluted earnings per common share............................................. $ .22 $ .14
--------------- ---------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Six months ended
June 30,
----------------------------------
2001 2000
--------------- ---------------
(Restated)
Net income.................................................................... $ 4,751 $ 3,077
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment..................................... 111 18
Unrealized gains on investments:
Unrealized holding gains (losses) arising during period,.................. (84) 649
Less: reclassification adjustment for gains included
in net income........................................................... - -
--------------- ---------------
Other comprehensive income, net of income taxes
of $15 and $359............................................................. 27 667
--------------- ---------------
Comprehensive income.......................................................... $ 4,778 $ 3,744
--------------- ---------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's, except per share amounts)
(Unaudited)
Six months ended
June 30,
----------------------------------
2001 2000
--------------- ---------------
(Restated)
Cash flows from operating activities:
Net income.................................................................... $ 11,670 $ 7,814
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes......................................... (343) 550
Depreciation and amortization............................................... 1,945 1,256
Compensation expense relating to contribution of stock to ESOP.............. 162 130
Decrease (increase) in Membership income receivable......................... 591 (314)
Decrease (increase) in inventories.......................................... 554 (213)
Increase in amount due from coinsurer....................................... (2,207) (417)
Increase in deferred member and associate service costs..................... (939) (7,692)
Increase in other assets.................................................... (1,521) (1,508)
Increase in accrued Membership benefits..................................... 754 734
Increase in deferred revenue and fees...................................... 1,938 9,855
Increase in accident and health reserves.................................... 2,207 417
Increase (decrease) in life insurance reserves.............................. 80 (61)
Decrease in accounts payable and accrued expenses........................... (1,398) (4,554)
--------------- ---------------
Net cash provided by operating activities................................. 13,493 5,997
--------------- ---------------
Cash flows from investing activities:
Additions to property and equipment......................................... (4,066) (2,534)
Purchases of investments - available for sale............................... (3,637) (3,406)
Maturities and sales of investments - available for sale.................... 8,771 1,490
--------------- ---------------
Net cash provided by (used in) investing activities................... 1,068 (4,450)
--------------- ---------------
Cash flows from financing activities:
Proceeds from sale of common stock.......................................... 14 543
Decrease in capital lease obligations....................................... (141) (163)
Purchases of treasury stock................................................. (15,820) (3,239)
Redemption of preferred stock............................................... - (167)
Dividends paid on preferred stock........................................... - (4)
--------------- ---------------
Net cash used in financing activities................................. (15,947) (3,030)
--------------- ---------------
Net decrease in cash and cash equivalents..................................... (1,386) (1,483)
Cash and cash equivalents at beginning of period.............................. 11,570 10,191
--------------- ---------------
Cash and cash equivalents at end of period.................................... $ 10,184 $ 8,708
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid for interest...................................................... $ 1 $ 3
--------------- ---------------
Income taxes paid........................................................... $ 8,400 $ 5,057
--------------- ---------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. The accompanying
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2000 Annual Report on Form 10-K. The Company expects
to amend its 2000 Annual Report on Form 10-K in the near future to reflect the
change in accounting for commission advance receivables described below.
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited financial
statements as of June 30, 2001, and for the three and six months ended June 30,
2000 and 2001, reflect adjustments (which were normal and recurring) which, in
the opinion of management, are necessary for a fair statement of the financial
position and results of operations of the interim periods presented. Results for
the three and six months ended June 30, 2001, are not necessarily indicative of
results expected for the full year.
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.
Change in Accounting for Commission Advance Receivables
-------------------------------------------------------
As previously reported, in January, 2001 and May, 2001, the staff of the
Division of Corporation Finance of the Securities and Exchange Commission
("SEC") reviewed the Company's 1999 and 2000 Forms 10-K, respectively. On May
11, 2001, the Company received a letter from the staff of the Division of
Corporation Finance advising that, after reviewing the Company's Forms 10-K, it
was the position of the Division that the Company's accounting for commission
advance receivables was not in accordance with GAAP. The Company subsequently
appealed this decision to the Chief Accountant of the SEC. On July 25, 2001, the
Company announced that the Chief Accountant concurred with the prior staff
opinion of the Division of Corporation Finance. The Company subsequently
announced that it would not pursue any further appeals and that it would amend
its previously filed SEC reports to restate the Company's financial statements
to reflect the SEC's position that the Company's advance commission payments
should be expensed when paid. As previously discussed, the change in accounting
treatment reduced total assets from $247 million at December 31, 2000 to $93
million, reduced total liabilities from $100 million to $48 million (due to the
elimination of deferred taxes related to the receivables) and therefor reduced
stockholders' equity from $147 million to $45 million. The elimination of the
receivables reduced 2000 net income from $43.6 million, or $1.92 per diluted
share, to $20.5 million, or $.90 per diluted share. A summary of the effects of
the restatement on previously reported results of operations follows:
Six Months Ended Three Months Ended
June 30, 2000 June 30, 2000
-------------------- ---------------------
(Amount in 000's, except per share amounts)
Net income applicable to common shares:
As previously reported................................. $ 24,047 $ 12,657
As restated............................................ 7,810 3,075
Basic earnings per common share:
As previously reported................................. $ 1.07 $ .56
As restated............................................ .35 .14
Diluted earnings per common share:
As previously reported................................. $ 1.06 $ .56
As restated............................................ .34 .14
2. CONTINGENCIES
Subsequent to December 31, 2000, the Company and various other executive
officers were named in multiple putative securities class action complaints
filed in both the United States District Courts for the Eastern and Western
Districts of Oklahoma seeking damages on the basis of allegations that the
Company issued false and misleading financial information, primarily related to
the method the Company uses to account for commission advance receivables from
sales associates. These complaints have been transferred to the Western District
of Oklahoma and have been consolidated into a single proceeding. An amended and
consolidated complaint was filed on June 14, 2001, and the Company filed a
motion to dismiss the complaint on July 24, 2001. Under the Private Securities
Litigation Reform Act of 1995, discovery is stayed during the pendency of a
motion to dismiss. Costs of defense of these cases through the motion to dismiss
stage are not expected to be material. While the outcome of these cases is
uncertain, the Company believes these actions are without merit and will
vigorously defend these actions. However, an unfavorable decision in this
litigation could have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
In January, 2001 and May, 2001, the staff of the Division of Corporation
Finance of the Securities and Exchange Commission ("SEC") reviewed the Company's
1999 and 2000 Forms 10-K, respectively. On May 11, 2001, the Company received a
letter from the staff of the Division of Corporation Finance advising that,
after reviewing the Company's Forms 10-K, it was the position of the Division
that the Company's accounting for commission advance receivables was not in
accordance with GAAP. The Company subsequently appealed this decision to the
Chief Accountant of the SEC. On July 25, 2001, the Company announced that the
Chief Accountant concurred with the prior staff opinion of the Division of
Corporation Finance. The Company subsequently announced that it would not pursue
any further appeals and that it would amend its previously filed SEC reports to
restate the Company's financial statements to reflect the SEC's position that
the Company's advance commission payments should be expensed when paid. See
"Part I - Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations" for information with respect to the effect of the
restatement on the Company's financial statements.
Also, in January 2001, the Company received inquiries from the Division of
Enforcement of the SEC requesting information relating primarily to the
Company's accounting policies for commission advance receivables from sales
associates. The Division of Enforcement's inquiries were informal and did not
constitute a formal investigation or proceeding. The Company is unable to
determine the ultimate outcome of this inquiry, including whether the Division
of Enforcement will continue the inquiry subsequent to the Company's decision to
restate its financial statements.
On June 7, 2001 and August 3, 2001, shareholder derivative actions were
filed by alleged company shareholders, Bruce A. Hansen and Donna L. Hansen, and
Roger Strykowski, respectively, against all of the directors of the Company
seeking unspecified actual and punitive damages on behalf of the Company based
on allegations of breach of fiduciary duty, corporate waste and mismanagement by
the defendant directors. The complaints, which have not been served as of August
13, 2001, allege that the defendant directors caused the Company to violate
generally accepted accounting principles and federal securities laws by
improperly capitalizing commission expenses, caused the Company to pay increased
salaries and bonuses based upon financial performance which was improperly
inflated and caused the Company to expend significant dollars in connection with
the defense of its accounting policy and in connection with repurchase of its
own shares on the open market at artificially inflated prices. The Company
believes that these derivative actions are related to the securities class
actions described above and may be intended to circumvent the restrictions on
the securities class actions imposed by the Private Securities Litigation Reform
Act of 1995. While the outcome of these cases is uncertain, based on the
information currently available to the Company, it appears that the complaints
should be dismissed because the plaintiffs failed to make or excuse the
requisite demand that the Company pursue the claims of alleged misconduct. In
any event, the Company believes these cases will not result in any material
adverse effect to the Company's financial condition or results of operations.
In the second quarter of 2001 and through July 31, 2001, multiple lawsuits
were filed against the Company, certain sales associates and other unnamed
defendants in Alabama state courts by current or former members seeking
unspecified actual and punitive damages for alleged breach of contract and fraud
in connection with the sale of memberships. As of July 31, 2001, the Company was
aware of 17 separate lawsuits involving approximately 110 plaintiffs that have
been filed in multiple counties in Alabama and it is possible that additional
cases will be filed. These cases make allegations similar to allegations made in
cases previously filed against the Company in Alabama state courts by multiple
plaintiffs which was previously settled for a payment of $1.5 million to settle
claims by 97 separate claimants. Based on the Company's preliminary
investigation of the new cases, the facts involved are in many respects
significantly different from the facts involved in the case the company
previously settled. These cases are all in the preliminary stages and the
ultimate outcome is not determinable. The Company believes these cases are
without merit and will vigorously defend them. The Company does not currently
believe that they will result in any material adverse effect to the Company's
financial condition or results of operations.
On June 29, 2001, an action was filed in the District Court of Canadian
County, Oklahoma by Gina Cotwitz against the Company. This action is a putative
class action on behalf of all sales associates of the Company and alleges
violations of the Oklahoma Consumer Protection Act, the Oklahoma Uniform
Consumer Credit Code and breach of contract in connection with certain of the
Company's practices relating to advancing commissions to sales associates. The
Company has filed an answer denying the plaintiff's claims and raising
affirmative defenses and intends to vigorously defend this case. The case is in
the preliminary stages and the ultimate outcome is not determinable, However,
the Company does not currently believe this case will result in any material
adverse effect to the Company's financial condition or results of operations.
The Company is a defendant in various other legal proceedings which are
routine and incidental to its business. The Company will vigorously defend its
interests in these proceedings. While the ultimate outcome of these proceedings
is not determinable, the Company does not believe the outcome of these matters
will have a material adverse effect on the Company's financial condition or
results of operations.
3. STOCK REPURCHASES
The Company announced on April 6, 1999, a stock repurchase program
authorizing management to reacquire up to 500,000 shares of the Company's common
stock. The Board of Directors has increased such authorization from 500,000
shares to 3 million shares during subsequent board meetings. At June 30, 2001,
the Company had repurchased 2.6 million shares under these authorizations for a
total consideration of $62.6 million, an average price of $24.07 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. The Company is currently considering borrowing funds in order to
accelerate additional repurchases.
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 the fiscal year 2000. 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.
5. SEGMENT INFORMATION
The Company derived approximately 99% of its revenues and 99% and 95%,
respectively of its net income from the sale of legal service plans and directly
related activities during the six months ended June 30, 2001 and 2000. Revenues
and net income from the Company's other operating segment (life insurance,
through UFL) were approximately 1% and 5% of the respective consolidated totals
for the six months ended June 30, 2001 and 2000. 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 and
net income for the six months ended June 30, 2001 and 2000 and identifiable
assets as of June 30, 2001 and December 31, 2000.
Six months ended
June 30,
---------------------------------
2001 2000
--------------- --------------
Revenues:
Legal service plans and directly related activities:
Legal service plan Membership fees.................... $ 126,500 $ 98,600
Associate services.................................... 19,123 13,371
Other................................................. 1,637 2,476
--------------- ---------------
Total............................................. $ 147,260 $ 114,447
--------------- ---------------
Life insurance segment (UFL):
Life premiums and other income........................ 553 1,686
--------------- ---------------
Total............................................. $ 553 $ 1,686
--------------- ---------------
Total.......................................... $ 147,813 $ 116,133
--------------- ---------------
Interest Income:
Legal service plans and directly related activities... $ 2,179 $ 1,596
Life insurance segment (UFL).......................... 445 448
--------------- ---------------
Interest income.................................. $ 2,624 $ 2,044
--------------- ---------------
Net Income: (Restated)
Legal service plans and directly related activities... $ 11,575 $ 7,442
Life insurance segment (UFL).......................... 95 372
--------------- ---------------
Net Income........................................ $ 11,670 $ 7,814
--------------- ---------------
June 30, December 31,
2001 2000
--------------- ---------------
Assets: (Restated)
Legal service plans and directly related activities... $ 65,500 $ 68,341
Life insurance segment (UFL).......................... 27,639 24,816
--------------- ---------------
Total assets...................................... $ 93,139 $ 93,157
--------------- ---------------
6. RECENT ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued new
pronouncements: Statement 141, "Business Combinations"; Statement 142, "Goodwill
and Other Intangible Assets"; and Statement 143, "Accounting for Asset
Retirement Obligations." Statement 141, which requires the purchase method of
accounting for all business combinations, applies to all business combinations
initiated after June 30, 2001 and to all business combinations accounted for by
the purchase method that are completed after June 30, 2001. Statement 141 will
not apply to the Company unless it enters into a future business combination.
Statement 142 requires that goodwill as well as other intangible assets be
tested annually for impairment. In addition, the Statement eliminates the
current requirement to amortize goodwill or intangible assets with indeterminate
lives, and is effective for fiscal years beginning after December 15, 2001. The
Company is currently assessing the impact of Statement 142 on its financial
condition and results of operations. Statement 143 requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred and a corresponding increase in the carrying amount of
the related long-lived asset. Statement 143 is effective for fiscal years
beginning after June 15, 2002. The Company does not expect Statement 143 to
impact its reported results.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
As previously reported, in January, 2001 and May, 2001, the staff of the
Division of Corporation Finance of the Securities and Exchange Commission
("SEC") reviewed the Company's 1999 and 2000 Forms 10-K, respectively. On May
11, 2001, the Company received a letter from the staff of the Division of
Corporation Finance advising that, after reviewing the Company's Forms 10-K, it
was the position of the Division that the Company's accounting for commission
advance receivables was not in accordance with GAAP. The Company subsequently
appealed this decision to the Chief Accountant of the SEC. On July 25, 2001, the
Company announced that the Chief Accountant concurred with the prior staff
opinion of the Division of Corporation Finance. The Company subsequently
announced that it would not pursue any further appeals and that it would amend
its previously filed SEC reports to restate the Company's financial statements
to reflect the SEC's position that the Company's advance commission payments
should be expensed when paid. As previously discussed, the change in accounting
treatment reduced total assets from $247 million at December 31, 2000 to $93
million, reduced total liabilities from $100 million to $48 million (due to the
elimination of deferred taxes related to the receivables) and therefor reduced
stockholders' equity from $147 million to $45 million. The elimination of the
receivables reduced 2000 net income from $43.6 million, or $1.92 per diluted
share, to $20.5 million, or $.90 per diluted share. The Company expects to amend
its 2000 Annual Report on Form 10-K in the near future to reflect the change in
accounting for commission advance receivables and restate all periods included
in the 2000 Form 10-K. The financial statements and the explanation thereof
contained in this Form 10-Q reflect the change in the accounting treatment for
advance payments made to associates.
Results of Operations
---------------------
The Company reported net income applicable to common shares of $11.7
million, or $.54 per diluted common share, for the six months ended June 30,
2001, up 49% from net income applicable to common stockholders of $7.8 million,
or $.34 per diluted common share, for the comparable period of the prior year.
The increase in the net income applicable to common shares for the 2001 period
is primarily the result of increases in Membership fees for 2001 as compared to
2000.
Membership fees totaled $126.5 million during 2001 compared to $98.6
million for 2000, an increase of 28%. Membership fees 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 renewal rate of existing Memberships. New Membership sales increased
12% during the six months ended June 30, 2001 to 371,832 from 332,655 during the
comparable period of 2000. At June 30, 2001, there were 1,179,705 active
Memberships in force compared to 965,849 at June 30, 2000, an increase of 22%.
Additionally, the average annual fee per Membership has increased from $241 for
all Memberships in force at June 30, 2000 to $249 for all Memberships in force
at June 30, 2001, a 3% increase. This increase is a result of a higher portion
of active Memberships containing the Legal Shield benefit and the additional
pre-trial hours benefit at an additional cost and increased sales of the
Business Owners' Legal Solutions plan.
Associate services revenue increased 43% from $13.4 million for the first
six months of 2000 to $19.1 million during the same period of 2001 primarily as
a result of more new associates recruited and of the Fast Start program which
generated training fees of approximately $10.7 million during the first six
months of 2001 compared to $7.9 million for the comparable period of 2000. The
field training program, titled Fast Start to Success ("Fast Start") is aimed at
increasing the level of new Membership sales per associate. Fast Start requires
a training fee of $184 per new associate and upon successful completion of the
program provided for the payment of certain training bonuses through June 30,
2001. The $10.7 million and $7.9 million for the six month periods ending June
30, 2001 and 2000, respectively, in training fees was comprised of $184 from
each of approximately 58,363 new sales associates who elected to participate in
Fast Start during the first six months of 2001 compared to 43,019 that
participated during the comparable quarter of 2000. New associates enrolled
during the first six months of 2001 were 61,191 compared to 46,592 for the same
period of 2000, an increase of 31%. Effective April 2001, the Company modified
its compensation plan to consolidate the lower four levels of its compensation
structure into two levels. At the same time, the Company implemented a two-year
advance at the lowest commission level for associates who participate in the
training program. Associates who do not participate in the training program
receive only earned commissions until they meet the advancement qualification
requiring them to produce 50 new memberships in their organization in order to
advance to the next compensation level and qualify for up to 3 years commission
advance.
Other income decreased from $4.2 million for the first six months of 2000
to $2.2 million during the same period of 2001, primarily due to a reduction in
product sales and UFL's claims processing revenue.
Primarily as a result of the increase in Membership fees and associate
services, total revenues increased to $147.8 million for the six months ended
June 30, 2001 from $116.1 million during the comparable period of 2000, an
increase of 27%.
Membership benefits totaled $42.4 million for the six months ended June 30,
2001 compared to $32.4 million for the comparable period of 2000, an increase of
31%, and represented 33.5% and 32.9% of Membership fees for 2001 and 2000,
respectively. This Membership benefit ratio (Membership benefits as a percentage
of Membership fees) should remain near 35% as substantially all active
Memberships provide for a capitated benefit.
Commission payments to associates increased 15% to $55.7 million for the
six months ended June 30, 2001 compared to $48.3 million for the comparable
period of 2000, and represented 44% and 49% of Membership fees for such periods.
These amounts were reduced by $1.2 million and $.9 million, respectively,
representing Membership lapse fees. These fees are determined by applying the
prime interest rate to the advance commission payment balance pertaining to
lapsed Memberships. The Company realizes and recognizes this fee only when the
amount of the calculated fee is collected by withholding from cash commissions
payments due the associate, because the Company's ability to recover fees in
excess of current payments is primarily dependant on the associate selling new
Memberships which qualify for advance commission payments. Commission payments
to associates per new membership sold were $150 per membership for the six
months ended June 30, 2001 compared to $145 for the comparable period of 2000.
Associate services and direct marketing expenses increased to $16.3 million
for the six months ended June 30, 2001 from $9.9 million for the comparable
period of 2000. Fast Start bonuses incurred were approximately $6.2 million
during the first six months of 2001 compared to $3.5 million in the same period
of 2000. Additional costs due to increased enrollment of new associates and
purchases of marketing and promotional supplies by associates also contributed
to the increase. These expenses also include marketing costs, other than
commissions, that are directly associated with new Membership sales.
General and administrative expenses during the six months ended June 30,
2001 and 2000 were $13.4 million and $11.7 million, respectively, and
represented 10.6% and 11.9% of Membership fees for such years. Management
expects further gradual decreases in general and administrative expenses when
expressed as a percentage of Membership fees as a result of certain economies of
scale.
Other expenses, which includes depreciation and amortization, premium taxes
and product cost reduced by interest income, remained constant at $1.7 million
for both six month periods of 2001 and 2000. Depreciation and amortization
increased to $1.9 million for the first six months of 2001 from $1.3 million for
the comparable period of 2000. Premium taxes increased from $900,000 for the six
months ended 2000 to $1.0 million for the same period of 2001. Product costs
declined by approximately $519,000 from the first six months of 2000. Interest
income declined by approximately $154,000 from the first six months of 2000 to
$1,248,000 due to lower investment balances and lower interest rates.
The Company has recorded a provision for income taxes of $5.9 million
(33.6% of pretax income) for the first six months of 2001 compared to $3.8
million (32.7% of pretax income) for the same period of 2000.
The Company did not pay dividends during the first six months of 2001 due
to the fact that during the second quarter of 2000, all shares of preferred
stock were converted into shares of common stock or repurchased by the Company.
Dividends paid on outstanding preferred stock were $4,000 for the six-month
period ended June 30, 2000.
Second Quarter of 2001 compared to the Second Quarter of 2000
-------------------------------------------------------------
The results of operations in the second quarter of 2001, compared to the
second quarter of 2000, reflect increases in revenues and expenses primarily as
a result of the same factors discussed in the comparison of the first six months
of 2001 to the first six months of 2000.
Total revenues increased 28% or approximately $16.8 million to $77.0
million in the second quarter of 2001 compared to $60.2 million in the second
quarter of 2000, primarily as a result of increases in membership premiums. The
membership premium increase of 30% primarily resulted from an increase in the
number of average active memberships during the second quarter of 2001 compared
to the similar period in 2000.
Membership benefits totaled $22.0 million in the 2001 second quarter
compared to $16.9 million in the 2000 second quarter and resulted in a loss
ratio of 33% for both periods.
Commission payments to associates increased 16% to $31.1 million for the
three months ended June 30, 2001 compared to $26.8 million for the comparable
period of 2000, and represented 46% and 52% of Membership fees for such periods.
These amounts were reduced by $640,000 and $481,000, respectively, representing
Membership lapse fees. Commission payments to associates per new membership sold
were $165 per membership for the three months ended June 30, 2001 compared to
$158 for the comparable period of 2000.
The above factors resulted in a 2001 second quarter net income applicable
to common shareholders of $4.8 million, or $.22 per share, diluted, compared to
$3.1 million, or $.14 per share, for the second quarter of 2000.
Liquidity and Capital Resources
-------------------------------
General
Consolidated cash flows from operating activities before working capital
changes increased 38% for the six months ended June 30, 2001 to $13.4 million
versus $9.8 million for the six months ended June 30, 2000, principally due to
higher membership revenues. Consolidated net cash provided by operating
activities was $13.5 million for the first six months of 2001 compared to cash
provided of $6.0 million for the 2000 period. The increase of $7.5 million in
cash provided by operating activities during the first six months of 2001
compared to the same period of 2000 resulted primarily from the increase in net
income of $3.9 million, the $6.8 million change in the increase in deferred
member and associate service costs and the change in the net increase in
accounts payable and accrued expenses of $3.2 million partially offset by the
$7.9 million change in the increase in deferred revenue and fees.
Consolidated net cash provided by investing activities was $1.1 million for
the first six months of 2001 compared to net cash used in investing activities
of $4.5 million for the comparable period of 2000. This $5.8 million increase in
cash provided by investing activities resulted primarily from the $7.3 million
change in the maturities and sales of investments offset by a $200,000 increase
in the purchases of investments and the $1.5 million increase in net additions
to property and equipment.
Net cash used in financing activities during the first six months of 2001
was $15.8 million compared to $2.9 million for the comparable period of 2000.
This $13.0 million change was primarily due to the $12.6 million increase in
treasury stock purchases during the first six months of 2001 as compared to the
comparable period of 2000.
The Company had a consolidated working capital surplus of $1.6 million at
June 30, 2001, a decrease of $3.2 million compared to a consolidated working
capital surplus of $4.8 million at December 31, 2000. The $3.2 million decrease
in working capital during the first six months of 2001 was primarily due to the
$1.4 million decrease in cash and cash equivalents, a $1.2 million decrease in
available-for-sale investments, a $1.0 million increase in deferred Membership
revenue and fees and associate fees and an $800,000 increase in accrued
Membership benefits partially offset by a $1.4 million decrease in accounts
payable and accrued expenses.
At June 30, 2001 the Company reported $35.3 million in cash and investments
(after utilizing more than $15.8 million to repurchase approximately 917,000
shares of its common stock during the six months ending June 30, 2001) compared
to $41.3 million at December 31, 2000. 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 and immediately expenses for financial
reporting purposes significant commission payments to associates at the time a
Membership is sold. During the six months ended June 30, 2001, the Company made
advance commission payments to associates of $55.7 million on new Membership
sales compared to $49.0 million for the same period of 2000. 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. However, the Company
recovers the advance commission payment through commissions earned on future
premium receipts since no earned commissions are paid until all advances made to
an associate are recovered as permitted by the Company's contracts with its
sales associates. Advance commission payments to associates were reduced by
earned commissions payable of $28.8 million and $24.3 million for the six-month
periods ended June 30, 2001 and 2000, respectively. Although the advance
payments are immediately expensed and therefore not recorded as an asset, the
Company assesses collectibility of its advance payments quarterly based on
estimates of the future commissions to be earned on active memberships.
Commission payments to associates for the six months ended June 30, 2001
were as follows:
(in thousands)
--------------
Unearned advance commission payments at December 31, 2000..............$167,193
Advance commission payments, net....................................... 55,147
Earnings applied to advance commission payments........................ (28,234)
Advance commission payment write-offs.................................. (929)
---------
Balance at June 30, 2001 before estimated unrecoverable payments....... 193,177
Estimated unrecoverable advance commission payments.................... (12,770)
---------
Unearned advance commission payments at June 30, 2001..................$180,407
---------
Unearned advance commission payments outstanding at June 30, 2001 of $193.2
million included $24.7 million attributable to "D status" associates and $168.5
million from sales associates that have met certain minimum vesting
requirements. An associate is considered to be "vested" if he or she has sold at
least three new Memberships per quarter or if he or she retains a personal
Membership.
The Company has not historically demanded repayment of advances to
associates from sources other than future earned commissions, even when
management has reason to believe that future earned commissions to which the
associate may be entitled would be insufficient to recover the advance. This
policy is based on management's judgement that pursuit of collection would have
the potential to disrupt the Company's relationship with its sales associates
and potentially adversely affect shareholder value. A substantial amount of
advances, estimated at $12.8 million at June 30, 2001, are not expected to be
recovered from future earned commissions.
The Company believes that it has significant ability to finance expected
future growth in Membership sales based on its existing amount of cash and cash
equivalents and unpledged investments at June 30, 2001 of $29.2 million, the
cash flow generated from operations and the recovery of the advance commission
payments. The Company expects to maintain cash and investment balances on an
on-going basis of approximately $30 to $40 million in order to meet expected
working capital needs and regulatory capital requirements. Cash balances in
excess of this amount would be used for discretionary purposes such as stock
repurchases. The Company continues to consider borrowing funds in order to
continue or increase the rate of stock repurchases, including financing its new
corporate headquarters in order to allow cash flow from operations to continue
to be used to repurchase stock.
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.
FORWARD - LOOKING STATEMENTS
----------------------------
All statements in this report concerning Pre-Paid Legal Services, Inc. (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 statements regarding accounting issues raised by the
staff of the Division of Corporation Finance of the Securities and Exchange
Commission (See Note 2 (Contingencies) to the Consolidated Financial
Statements), and the assumptions on which such forward-looking statements are
based, constitute "Forward-Looking Statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such statements are based on the Company's historical operating trends and
financial condition as of June 30, 2001 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 (among others) those listed in the Company's Annual Report
on Form 10-K and in Note 2 to the Consolidated Financial Statements included
herein. Please refer to page 30 of the Company's 2000 Annual Report on Form 10-K
and page 10 herein for a more complete description of the factors that could
cause actual results to differ materially from those described in the
forward-looking statements. 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. The Company assumes no
obligation to update the Forward-Looking Statements to reflect events or
circumstances occurring after the date of the statement.
Risk Factors
As noted above there are a number of risk factors that could affect our
financial condition or results of operations. The status of pending SEC
inquiries with respect to certain of our accounting practices has been updated
as described in Note 2 (Contingencies) and Item 1 Legal Proceedings. Please
refer to page 30 and 31 of the Company's 2000 Annual Report on Form 10-K for a
description of other risk factors.
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, 2001, 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:
Estimated
fair value
after
Hypothetical hypothetical
change in interest change in
rate interest
Fair Value (bp=basis points) rate
------------- ------------------ ---------------
(Dollars in thousands)
Fixed-maturity investments at June 30, 2001 (1)............. $21,220 100 bp increase $ 20,248
200 bp increase 19,147
50 bp decrease 21,558
100 bp decrease 21,895
Fixed-maturity investments at December 31, 2000 (1)......... $25,480 100 bp increase $ 24,635
200 bp increase 23,773
50 bp decrease 25,882
100 bp decrease 26,261
--------------------
(1) Excluding short-term investments with a fair value of $3.9 million at June
30, 2001 and December 31, 2000.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at June 30, 2001 would reduce the
estimated fair value of the Company's fixed-maturity investments by
approximately $2.1 million at that date. At December 31, 2000, 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 $1.7 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Note 2 of the Notes to Consolidated Financial Statements included in
Part I, Item 1 of this report for information with respect to legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
The 2001 Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held on May 25, 2001. The following matters were submitted to a
vote of the Company's shareholders at the Annual Meeting.
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
---------- ---------------
Shirley A. Stonecipher 18,965,811 395,638
Peter K. Grunebaum 19,045,917 315,532
Randy Harp 18,720,980 640,469
The Board of Directors of the Company consists of ten members and is
divided into three classes as nearly equal in size as possible, with the term of
office of one class expiring each year. The new terms of service of Ms.
Stonecipher and Messrs. Grunebaum and Harp will expire in 2004. The terms of the
other seven 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: Harland C. Stonecipher - 2002; Wilburn L. Smith - 2002;
Martin H. Belsky - 2002; Kathleen S. Pinson - 2003; David A. Savula - 2003; John
W. Hail - 2003; and John A. Addison - 2003.
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
(b) Reports on Form 8-K: The Company filed Form 8-K dated August 3, 2001
providing under Item 4 - Changes in Registrant's Certifying Accountant
describing the Company's mutual agreement with its independent auditor,
Deloitte & Touche LLP, to cease their client-auditor relationship.
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 15, 2001 /s/ Randy Harp
---------------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: August 15, 2001 /s/ Steve Williamson
---------------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Accounting Officer)
EXHIBIT INDEX
No. Description
---- ------------------------------------------------------
11.1 Statement Regarding Computation of Per Share Earnings
EXHIBIT 11.1
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
Six months ended
June 30,
----------------------------------
2001 2000
--------------- ---------------
(Restated)
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)................................ $ 11,670 $ 7,810
--------------- ---------------
Shares:
Weighted average shares outstanding (net of 3,043 and 1,984 weighted average
shares of treasury stock, respectively), disregarding exercise of
options or conversion of preferred stock...................................... 21,704 22,533
--------------- ---------------
Basic earnings per common share (a)............................................. $ .54 $ .35
--------------- ---------------
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)................................ $ 11,670 $ 7,810
Add: Dividends on preferred stock .............................................. - 4
--------------- ---------------
Net income applicable to common stockholders, as adjusted ...................... $ 11,670 $ 7,814
--------------- ---------------
Shares:
Weighted average shares outstanding (net of 3,043 and 1,984 weighted average
shares of treasury stock, respectively), disregarding exercise of options or
conversion of preferred stock................................................. 21,704 22,533
Assumed dilutive conversion of preferred stock ................................. - 69
Assumed exercise of options and warrants based on the treasury
method using average market price............................................ 30 133
--------------- ---------------
Weighted average number of shares, as adjusted.................................. 21,734 22,735
--------------- ---------------
Diluted earnings per common share (a)........................................... $ .54 $ .34
--------------- ---------------
(a) These amounts agree with the related amounts in the consolidated statements
of income.
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
Three months ended
June 30,
----------------------------------
2001 2000
--------------- ---------------
(Restated)
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)................................ $ 4,751 $ 3,075
--------------- ---------------
Shares:
Weighted average shares outstanding (net of 3,344 and 2,008 weighted average
shares of treasury stock, respectively), disregarding exercise of
options or conversion of preferred stock...................................... 21,403 22,516
--------------- ---------------
Basic earnings per common share (a)............................................. $ .22 $ .14
--------------- ---------------
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Net income applicable to common stockholders (a)................................ $ 4,751 $ 3,075
Add: Dividends on preferred stock .............................................. - 2
--------------- ---------------
Net income applicable to common stockholders, as adjusted ...................... $ 4,751 $ 3,077
--------------- ---------------
Shares:
Weighted average shares outstanding (net of 3,344 and 2,008 weighted average
shares of treasury stock, respectively), disregarding exercise of options or
conversion of preferred stock................................................. 21,403 22,516
Assumed dilutive conversion of preferred stock ................................. - 69
Assumed exercise of options and warrants based on the treasury
method using average market price............................................ 26 149
--------------- ---------------
Weighted average number of shares, as adjusted.................................. 21,429 22,734
--------------- ---------------
Diluted earnings per common share (a)........................................... $ .22 $ .14
--------------- ---------------
(a) These amounts agree with the related amounts in the consolidated statements
of income.