================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
FORM 10-K/A
--------------------------------------------------------------------------------
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2008
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-9293
PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Pre-Paid Way
Ada, Oklahoma 74820
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (580) 436-1234
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered under Section 12 (g) of the Exchange Act: None
Indicate by check mark if registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes [ ] No |X|
Indicate by check mark if registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No |X|
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|.
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer [ ] Accelerated filer |X| Non-accelerated file [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act) Yes [ ] No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked prices of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. As of June 30, 2008: $576,352,000
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: As of February 19, 2009 there
were 11,194,317 shares of Common Stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of our definitive proxy statement for our 2009 annual meeting of
shareholders are incorporated into Part III of this Form 10-K by reference.
================================================================================
EXPLANATORY NOTE
----------------
This amendment is being filed soley for purposes of filing the financial
statements of the Pre-Paid Legal Services, Inc. Employee Stock Ownership and
Thrift Plan, as required by form 11-K for the fiscal year of the plan ended
December 31, 2008 pursuant to Rule 15d-21.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
----------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Consolidated Financial Statements
and Consolidated Financial Statement Schedule set forth o page 40 of
this report.
(2) Exhibits: For a list of the documents filed a exhibits to this report,
see the Exhibit Index following the signatures to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
DATE: JUNE 29, 2009 By: /s/ Steve Williamson
----------------------------------
Steve Williamson
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company, as amended (Incorporated by
reference to Exhibit 3.1 of the Company's Report on Form 8-K dated June 27, 2005)
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.1 of the
Company's Report on Form 10-Q for the period ended June 30, 2003)
*10.1 Employment Agreement effective January 1, 1993 between the Company and Harland C. Stonecipher (In-
corporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1992)
*10.2 Agreements between Shirley Stonecipher, New York Life Insurance Company and the Company regarding
life insurance policy covering Harland C. Stonecipher (Incorporated by reference to Exhibit 10.21 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1985)
*10.3 Amendment dated January 1, 1993 to Split Dollar Agreement between Shirley Stonecipher and the
Company regarding life insurance policy covering Harland C. Stonecipher (Incorporated by reference
to Exhibit 10.3 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1992)
*10.4 Form of New Business Generation Agreement Between the Company and Harland C. Stonecipher (Incorpor-
ated by reference to Exhibit 10.22 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1986)
*10.5 Amendment to New Business Generation Agreement between the Company and Harland C. Stonecipher
effective January, 1990 (Incorporated by reference to Exhibit 10.12 of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1992)
*10.6 Amendment No. 2 to New Business Generation Agreement between the Company and Harland C. Stonecipher
effective January, 1990 (Incorporated by reference to Exhibit 10.13 of the Company's Annual Report
on Form 10-K for the year ended December 31, 2002)
*10.7 Stock Option Plan, as amended effective May 2003 (Incorporated by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2004)
10.8 Loan agreement dated June 11, 2002 between Bank of Oklahoma, N.A. and the Company (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the six-months ended
June 30, 2002)
10.9 Form of Mortgage dated July 23, 2002 between Bank of Oklahoma, N.A. and the Company (Incorporated
by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the six months
ended June 30, 2002)
*10.10 Deferred compensation plan effective November 6, 2002 (Incorporated by reference to Exhibit 10.14
of the Company's Annual Report on Form 10-K for the year ended December 31, 2002)
*10.11 Amended Deferred Compensation Plan effective January 1, 2005 (Incorporated by reference to
Exhibit 10.16 of the Company's Report on Form 10-K for the year ended December 31, 2004)
10.12 Credit Agreement dated June 23, 2006 among Pre-Paid Legal Services, Inc, the lenders signatory
thereto and Wells Fargo Foothill, Inc. as Arranger and Administrative Agent and Bank of Oklahoma,
N.A. (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed
June 27, 2006)
10.13 Security Agreement dated June 23, 2006 between Pre-Paid Legal Services, Inc and certain of its
subsidiaries and Wells Fargo Foothill, Inc., as Agent (Incorporated by reference to Exhibit 10.2 of
the Company's Current Report on Form 8-K filed June 26, 2006)
10.14 Guaranty Agreement dated June 23, 2006 between certain subsidiaries of Pre-Paid Legal Services,
Inc. and Wells Fargo Foothill, Inc., as Agent (Incorporated by reference to Exhibit 10.3 of the
Company's Current Report on Form 8-K filed June 27, 2006)
10.15 Mortgage, Assignment of Rents and Leases and Security Agreement by Pre-Paid Legal Services, Inc. in
favor of Wells Fargo Foothill, Inc as Agent (Incorporated by reference to Exhibit 10.4 of the
Company's Current Report on Form 8-K filed June 26, 2006)
10.16 First Amendment to Loan Agreement dated June 23, 2006 between Pre-Paid Legal Services, Inc. and
Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.5 of the Company's of the Company's
Current Report on Form 8-K filed June 26, 2006)
10.17 First Amendment to Credit Agreement dated September 10, 2007 between Pre-Paid Legal Services, Inc.
and the lenders named therein and Wells Fargo Foothill, Inc. as administrative agent (Incorporated
by reference to Exhibit 10.1 of the Company's of the Company's Current Report on Form 8-K filed
September 10, 2007)
10.18 Term Loan Agreement dated September 28, 2007 between Pre-Paid Legal Services, Inc. and Wells Fargo
Equipment Finance, LLC (Incorporated by reference to Exhibit 10.1 of the Company's of the Company's
Current Report on Form 8-K filed October 2, 2007)
10.19 Form of Aircraft Mortgage and Security Agreement between Pre-Paid Legal Services, Inc. and Wells
Fargo Equipment Finance, LLC (Incorporated by reference to Exhibit 10.2 of the Company's of the
Company's Current Report on Form 8-K filed October 2, 2007)
10.20 Second Amendment to Credit Agreement dated February 22, 2008 between Pre-Paid Legal Services, Inc.
and the lenders named therein and Wells Fargo Foothill, Inc. as administrative agent (Incorporated
by reference to Exhibit 10.20 of our Annual Report on Form 10-K for the year ended December 31,
2007)
10.21 Third Amendment to Credit Agreement dated June 5, 2008 between Pre-Paid Legal Services, Inc. and
the lenders named therein and Wells Fargo Foothill, Inc. as administrative agent (Incorporated by
reference to Exhibit 10.21 of the Company's Quarterly Report on Form 10-Q for the six-months ended
June 30, 2008)
10.22 Second Amendment to Loan Agreement dated June 6, 2008 between Pre-Paid Legal Services, Inc. and
Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.22 of the Company's Quarterly
Report on Form 10-Q for the six-months ended June 30, 2008)
21.1 List of Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
23.2** Consent of Grant Thornton LLP relating to report concerning plan financial information included as
part of Exhibit 99.1
31.1 Certification of Harland C. Stonecipher, Chairman, Chief Executive Officer and President, Pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.1(a)** Certification of Harland C. Stonecipher, Chairman, Chief Executive Officer and President, Pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
31.2(a)** Certification of Steve Williamson, Chief Financial Officer, Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
32.1 Certification of Harland C. Stonecipher, Chairman, Chief Executive Officer and President, Pursuant
to 18 U.S.C. Section 1350
32.1(a)** Certification of Harland C. Stonecipher, Chairman, Chief Executive Officer and President, Pursuant
to 18 U.S.C. Section 1350
32.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350
32.2(a)** Certification of Steve Williamson, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350
--------------------
* Constitutes a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
** Filed herewith. All other Exhibits have been previously filed.
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated June 25, 2009, with respect to the financial
statements and supplemental schedule of the Pre-Paid Legal Services, Inc.
Employee Stock Ownership and Thrift Plan for the year ended December 31, 2008,
included in this Amendment No. 1 on Form 10-K/A of Pre-Paid Legal Services, Inc.
for the year ended December 31, 2008. We hereby consent to the incorporation by
reference of said report in the Registration Statement of Pre-Paid Legal
Services, Inc. on Form S-8 (File No. 33-82144, effective July 28, 1994).
/s/GRANT THORNTON LLP
Oklahoma City, Oklahoma
June 25, 2009
EXHIBIT 31.1(a)
CERTIFICATION
I, Harland C. Stonecipher, certify that:
1. I have reviewed this annual report on Form 10-K of Pre-Paid Legal Services,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information;
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: June 29, 2009 /s/ Harland C. Stonecipher
--------------------------
Harland C. Stonecipher
Chief Executive Officer
EXHIBIT 31.2(a)
CERTIFICATION
I, Steve Williamson, certify that:
1. I have reviewed this annual report on Form 10-K of Pre-Paid Legal Services,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information;
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: June 29, 2009 /s/ Steve Williamson
--------------------
Steve Williamson
Chief Financial Officer
Exhibit 32.1(a)
CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Annual
Report on Form 10-K for the year ended December 31, 2008 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: June 29, 2009 /s/ Harland C. Stonecipher
--------------------------
Harland C. Stonecipher
Chairman, Chief Executive Officer
and President
Exhibit 32.2(a)
---------------
CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Annual
Report on Form 10-K for the year ended December 31, 2008 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: June 29, 2009 /s/ Steve Williamson
--------------------
Steve Williamson
Chief Financial Officer
Exhibit 99.1
Financial statements and report of registered public accounting firm
Pre-Paid Legal Services, Inc. Employee Stock Ownership and Thrift Plan
December 31, 2008 and 2007
Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
NOTES TO FINANCIAL STATEMENTS
SUPPLEMENTAL SCHEDULE
SCHEDULE H, LINE 4i--SCHEDULE OF ASSETS (HELD AT END OF YEAR)
Report of Independent Registered Public Accounting Firm
Trustee and Participants
Pre-Paid Legal Services, Inc. Employee Stock Ownership and Thrift Plan
We have audited the accompanying statements of net assets available for benefits
of Pre-Paid Legal Services, Inc. Employee Stock Ownership and Thrift Plan as of
December 31, 2008 and 2007, and the related statements of changes in net assets
available for benefits for the years then ended. These financial statements are
the responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Plan is not required to have,
nor were we engaged to perform an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Plan's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of Pre-Paid Legal
Services, Inc. Employee Stock Ownership and Thrift Plan as of December 31, 2008
and 2007, and the changes in net assets available for benefits for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of assets (held
at end of year) as of December 31, 2008 is presented for the purpose of
additional analysis and is not a required part of the basic financial statements
but is supplemental information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The supplemental schedule is the responsibility of the
Plan's management. The supplemental schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
June 25, 2009
Pre-Paid Legal Services, Inc. Employee Stock Ownership
and Thrift Plan
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31,
2008 2007
---------------- ----------------
ASSETS
Investments, at fair value
Pre-Paid Legal Services, Inc. common stock $ 7,113,478 $ 10,117,316
Mutual funds 3,147,630 4,322,935
Collective trust fund 648,249 593,477
Money market funds 4,316 4,129
Participant notes 186,232 199,560
Receivables
Employer contributions 492,266 480,202
Other receivables 12,246 6,327
Cash and cash equivalents 3,710 6,749
---------------- ----------------
Total assets 11,608,127 15,730,695
LIABILITIES
Accounts payable 7,475 20,854
---------------- ----------------
NET ASSETS AVAILABLE FOR BENEFITS AT FAIR VALUE 11,600,652 15,709,841
Adjustment from fair value to contract value for interest in collective trust
relating to fully benefit-responsive investment contracts 62,943 15,305
---------------- ----------------
NET ASSETS AVAILABLE FOR BENEFITS $11,663,595 $15,725,146
---------------- ----------------
The accompanying notes are an integral part of these statements.
Pre-Paid Legal Services, Inc. Employee Stock Ownership
and Thrift Plan
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
Year ended December 31,
2008 2007
---------------- ----------------
Additions to net assets attributed to
Contributions
Employer contributions $ 492,430 $ 482,135
Participant contributions 715,317 689,629
------------- ------------
Total contributions 1,207,747 1,171,764
Investment income (loss)
Interest and dividend income 191,024 303,397
Net (depreciation) appreciation in fair value of investments (4,990,490) 3,237,827
---------------- ----------------
Net investments (4,799,466) 3,541,224
---------------- ----------------
Total additions, net of investment income (loss) (3,591,719) 4,712,988
Deductions from net assets attributed to
Benefits paid to participants 468,802 1,225,033
Administrative fees 1,030 1,860
---------------- ----------------
Total deductions 469,832 1,226,893
---------------- ----------------
NET (DECREASE) INCREASE IN NET ASSETS (4,061,551) 3,486,095
Net assets available for benefits at beginning of year 15,725,146 12,239,051
---------------- ----------------
Net assets available for benefits at end of year $11,663,595 $15,725,146
---------------- ----------------
The accompanying notes are an integral part of these statements.
Pre-Paid Legal Services, Inc. Employee Stock Ownership
and Thrift Plan
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
NOTE A - DESCRIPTION OF PLAN
The Pre-Paid Legal Services, Inc. Employee Stock Ownership and Thrift Plan
(the "Plan") was established on January 1, 1988 for the benefit of the
employees of Pre-Paid Legal Services, Inc. and its subsidiaries (the
"Company"). The Plan is administered by a committee (the "Committee") of
three employees appointed by the Company. The Charles Schwab Trust Company
("Schwab") has entered into a Trust Agreement whereby Schwab acts as Plan
Trustee.
The following brief description of the provisions of the Plan is provided
for general information purposes only. Participants should refer to the
Plan agreement for more complete information.
Under the terms of the Plan, the Trustee may acquire, hold and dispose of
all cash and investments, including common and preferred stock of the
Company in accordance with the Committee's written investment policy.
Participants may direct the investment of 100% of their Elective Deferral
accounts to any one or more of the investment funds designated by the
Committee as permissible under the written investment policy.
Each participant or beneficiary shall have the sole right to vote shares of
Company common stock allocated to such participant's account. The right to
vote such shares shall be exercised by directing the Committee as to the
manner in which the shares shall be voted.
The Plan is a defined contribution plan covering certain employees of the
Company and employees of affiliated companies which are included in the
Company's consolidated tax return. The Plan year-end is December 31. All
employees at least 21 years of age are eligible to enroll in the Plan on
the first day of the month following the date the employee completes one
year of service (1,000 hours) within 12 consecutive months of his/her
employment date.
The Company may make discretionary contributions to the Plan for each Plan
year. The contributions may vary from year to year and are determined by
written action of the Board of Directors of the Company. The Company's
contribution may be paid to the Trustee either in cash, Company common
stock or in other property.
The discretionary matching company contribution is an amount determined, in
the sole discretion of the Company and added to amounts forfeited by other
participants, to match the following percentages of participants' deferred
compensation contributions (up to a maximum of 6%) for the Plan year. The
discretionary matching company contribution is allocated at the end of each
Plan year to each participant's Company Contribution Account based on the
following percentages:
Years of service
on first day of Matching
Plan year percentages
---------------- -----------
0-3 50%
4-5 75%
6 or more 100%
A participant may elect to defer a portion of his compensation in the form
of a contribution to his deferred compensation account under the Plan.
Participants contribute to the Plan on a pre-tax basis only. Subject to the
limitations contained in the Plan, a participant may elect to defer any
portion of his compensation. However, a participant may never defer more
than the lesser of the Internal Revenue Service limitation ($15,500 for
both 2008 and 2007) in any Plan year or 80% of compensation.
Separate accounts are maintained for each participant in the Plan. When an
election is made by the participant to defer part of his compensation, an
Employee Deferred Compensation Account is established. Each participant
will also have a Company Contribution Account consisting of discretionary
matching contributions made by the Company and a proportionate share of
forfeitures.
All amounts in the participant's accounts are placed in a trust fund and
invested by the Trustee. The Trustee must invest the trust fund solely in
the interest of and for the exclusive purpose of providing benefits to the
participants and their beneficiaries while minimizing the expenses of
administering the Plan. The Plan allows participants to direct the Trustee
as to the investment of their contributions including the portion, if any,
to be invested in Company common stock. The Plan allows participants who
have completed at least three years of service with the Company to direct
the investment of their employer contributions.
A participant will be entitled to the full amount credited to his Company
Contribution Account at the normal retirement date or upon permanent
disability or death. If a participant terminates employment for any reason
after he has completed at least one year of service, he will be entitled to
receive a portion or all of his account, depending on his years of service.
The percentage of the Company Contribution Account to which a participant
is entitled and the percentage forfeited if a participant leaves the
Company for reasons other than retirement, permanent disability or death
prior to becoming fully vested is computed according to the following
formula:
Vested Forfeited
Years of service percentage percentage
------------------ ---------- ----------
Less than 1 0% 100%
1 but less than 2 20% 80%
2 but less than 3 40% 60%
3 but less than 4 60% 40%
4 but less than 5 80% 20%
5 or more 100% 0%
A participant will always be fully vested in his Employee Deferred
Compensation Account, regardless of his years of service.
Upon termination of a participant's employment with the Company, the
nonvested portion of the Company contribution is forfeited. Forfeitures of
approximately $12,000 and $5,000 were used to reduce future Company
contributions during 2008 and 2007, respectively. At December 31, 2008 and
2007, forfeited nonvested accounts totaled approximately $4,000 and $5,000,
respectively.
The Company may amend the Plan at any time to conform to the Internal
Revenue Code, Treasury Regulations and Rulings thereunder. The Company has
the right to terminate the Plan at any time upon prior written notice to
the Trustee and may direct the Trustee to liquidate the shares of
participants in the trust fund. Upon termination or permanent suspension of
contributions, the accounts of all participants affected thereby shall
become nonforfeitable and shall be distributed.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
The following is a summary of the Plan's significant accounting policies.
1. Basis of Accounting
-------------------
The Plan's financial statements are prepared on the accrual basis of
accounting in conformity with accounting principles generally accepted in
the United States of America.
2. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist of the Plan's linked cash and money fund
accounts at a national brokerage firm which may not be federally insured.
The Plan has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risks on cash and cash equivalents.
Money fund amounts have a unit value of $1 and balances are immediately
accessible by the Plan.
3. Investments
-----------
Investments are presented at fair value (see Note F). The cost of Company
common stock sold is determined on the basis of average cost. Actual cost
is used as a basis for sales of all other investments. Investment
transactions are recorded on a trade-date basis. Dividends are recorded on
the ex-dividend date.
The Plan presents in the statements of changes in net assets available for
benefits, the net appreciation (depreciation) in the fair value of its
investments, which consists of the realized gains or losses and the
unrealized appreciation (depreciation) on those investments.
As described in Financial Accounting Standards Board Staff Position, FSP
AAG INV-1 and SOP 94-4-1, Reporting on Fully Benefit-Responsive Investment
Contracts Held by Certain Investments Companies Subject to the AICPA
Investment Company Guide and Defined-Contribution Health and Welfare and
Pension Plans (the "FSP"), investment contracts held by a
defined-contribution plan are required to be reported at fair value.
However, contract value is the relevant measure attribute for that portion
of the net assets available for benefits of a defined-contribution plan
attributable to a fully-benefit responsive investment contracts because
contract value is the amount participants would receive if they were to
initiate permitted transactions under the terms of the Plan. The Plan
invests in investment contracts through a collective trust. As required by
the FSP, the Statement of Net Assets Available for Benefits presents the
fair value of the investment in the collective trust as well as the
adjustment of the investment in the collective trust from fair value to
contract value relating to the investment contracts. The Statement of
Changes in Net Assets Available for Benefits is prepared on a contract
value basis.
4. Participant Notes
-----------------
Participant notes are approved by the Committee and cannot be made for an
amount less than $1,040 or exceed the lesser of $50,000 reduced by the
excess of the highest outstanding balance of loans during the one-year
period ending on the day before the loan is made or one-half of the
participant's vested balance. The notes are secured by the participants'
vested interest in the Plan, bear interest and are repayable based upon
rates and terms set forth in the Loan Policy. Participant notes are valued
at cost which approximates fair value.
5. Noncash Contributions
---------------------
Contributions of Company common stock are recorded at fair value as
determined by the market price of Company common stock on the New York
Stock Exchange for the day when the company match is contributed.
6. Expenses
--------
The Company elected to pay substantially all of the Plan's administration
expenses in 2008 and 2007 although it is not obligated to do so. Any
expenses not paid by the Company are to be paid by the Plan.
7. Estimates
---------
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 net assets available for benefits and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of changes in net assets available for benefits during the
reporting period. Actual results could differ from those estimates.
Investment securities, in general, are exposed to various risks, such as
interest rate, credit and overall market volatility. Due to the level of
risk associated with certain investment securities, it is reasonably
possible that changes in the values of investment securities will occur in
the near term and that such changes could materially affect the amounts
reported in the statements of net assets available for benefits.
8. Adoption of New Accounting Guidance
-----------------------------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. The Plan adopted SFAS 157 on January 1, 2008, as
required for the financial assets and financial liabilities. However, the
FASB deferred the effective date of SFAS 157 for one year as it relates to
fair value measurement requirements for nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at fair value
on a recurring basis. The adoption of SFAS 157 for the financial assets and
financial liabilities did not have a material impact on the Plan's
financial statements. The adoption of SFAS 157 for our nonfinancial assets
and nonfinancial liabilities will have no impact on the Plan's financial
statements. See Note F below.
NOTE C - INVESTMENTS
The following presents investments that represent 5% or more of the Plan's
net assets as of December 31:
2008 2007
------------- -----------
Common stock - Pre-Paid Legal Services, Inc. (190,761 and 182,788,
shares respectively) $7,113,478 $10,117,316
Washington Mutual Investors Fund/R4 (39,492 and 32,704 units, respectively) 842,760 1,097,785
SEI Stable Asset (602,305 and 608,782 units, respectively) 711,192 N/A
Bond Fund of America (59,942 units) 634,211 N/A
Growth Fund of America/R4 (29,192 units) 593,171 902,634
Euro Pacific Growth Fund/R4 (16,736 units) N/A 839,592
The following table presents the net appreciation (depreciation) (including
gains and losses on investments bought and sold, as well as held during the
year) by type of investment for the years ended December 31:
2008 2007
------------- -----------
Corporate common stock - Pre-Paid Legal Services, Inc. $(3,370,195) $3,265,791
Mutual funds (1,620,295) (27,964)
------------- -----------
$(4,990,490) $3,237,827
------------- -----------
NOTE D - TAX STATUS
A favorable determination letter dated November 16, 2005 was received from
the Internal Revenue Service indicating that the Plan, as amended through
November 1, 2004, qualifies under section 401(a) of the Internal Revenue
Code and is exempt from federal income taxes under section 501(a) of the
Code. The Plan has been further amended since receiving the determination
letter. However, the Company and the Committee believe that the Plan is
currently designed and operated in compliance with the applicable
requirements of the Internal Revenue Code. Therefore, the Company and the
Committee believe that the Plan continues to be qualified and no provision
for income taxes has been included in the Plan's financial statements.
NOTE E - DISTRIBUTIONS
Former participants may request distribution of their accounts in the form
of Company common stock or cash. Former participants who have elected to
diversify all or a portion of their Plan accounts into mutual fund
investments will receive a distribution of mutual fund shares or cash.
Distributions made in 2008 consisted of cash of $468,802. Distributions
made in 2007 consisted of cash of $1,225,033.
Former participants who terminated employment during 2008 and had not yet
received distribution of their account at December 31, 2008 will receive
distribution in 2009. The balance due former participants at December 31,
2008 included cash of $3,685.
NOTE F - FAIR VALUE MEASUREMENT
On January 1, 2008, the Plan adopted SFAS No. 157, "Fair Value
Measurements," for the financial assets and liabilities. SFAS 157
established the following fair value hierarchy that prioritizes the inputs
used to measure fair value:
Level 1: Quoted prices are available in active markets for identical assets
or liabilities as of the reporting date. Active markets are those in which
transactions for the asset or liability occur in sufficient frequency and
volume to provide pricing information on an ongoing basis.
Level 2: Pricing inputs are other than quoted prices in active markets
included in Level 1, which are either directly or indirectly observable as
of the reporting date. Level 2 includes those financial instruments that
are valued using models or other valuation methodologies. Substantially all
of the assumptions are observable in the marketplace throughout the full
term of the instrument, can be derived from observable data or are
supported by observable levels at which transactions are executed in the
marketplace.
Level 3: Pricing inputs include significant inputs that are generally less
observable from objective sources. These inputs may be used with internally
developed methodologies that result in management's best estimate of fair
value. At each balance sheet date, we perform an analysis of all
instruments subject to SFAS No. 157 and include in Level 3 all of those
whose fair value is based on significant unobservable inputs.
Following is a description of the valuation methodologies used for assets
measured at fair value:
Mutual funds - Valued at the net asset value ("NAV") of shares held by the
Plan at year-end.
Common stock - Valued at the closing price reported on the active market on
which the security is traded.
Collective trust fund - Valued based on the fair value of the collective
trust's underlying investmetns.
Participant notes - Valued at amortized cost, which approximates fair
value.
The methods described above may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair
values. Furthermore, while the Plan believes its valuation methods are
appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different estimate of fair
value at the reporting date.
The following table sets forth by level, within the fair value hierarchy,
the Plan's assets at fair value as of December 31, 2008:
Level 1 Level 2 Level 3 Total
------------- ------------ ------------- -------------
Common stock $ 7,113,478 $ - $ - $ 7,113,478
Mutual funds 3,147,630 - - 3,147,630
Collective trust funds - 711,192 - 711,192
Money market funds - 4,316 - 4,316
Participant notes - - 186,232 186,232
------------- ------------ ------------- -------------
Total assets $10,261,108 $ 715,508 $ 186,232 $11,162,848
------------- ------------ ------------- -------------
The table below sets forth a summary of changes in the fair value of the
Plan's Level 3 assets for the year ended December 31, 2008:
Participant notes
Balance, beginning of year $199,560
Realized gains (losses) -
Unrealized gains (losses) -
Purchases, sales, issuances and settlements (net) (13,328)
---------
Balance, end of year $186,232
---------
NOTE G - RELATED PARTY TRANSACTIONS
A significant portion of the Plan's assets is invested in common stock of
the Company. In addition, the Plan invests in a collective fund and various
mutual funds that are issued or managed by the Trustee or an affiliate
thereof.
NOTE H - RECONCILIATION TO FORM 5500
The following is a reconciliation of net assets available for benefits per
the financial statements to Form 5500 for the year ended December 31:
2008 2007
------------ ------------
Net assets available for benefits per financial statements $11,663,595 $15,725,146
Adjustment from fair value to contract value for interest in collective
trust relating to fully benefit-responsive investment contracts (62,943) (15,305)
------------ ------------
Net assets available for benefits per Form 5500 $11,600,652 $15,709,841
------------ -----------
The Plan's investment in the collective trust is reported at fair value on
the Form 5500.
SUPPLEMENTAL SCHEDULE
Pre-Paid Legal Services, Inc. Employee Stock Ownership
and Thrift Plan
SCHEDULE H, LINE 4i--SCHEDULE OF ASSETS (HELD AT END OF YEAR)
December 31, 2008
--- ------------------------------------------ -------------------------------------------------------- -------- -----------------
(a) (b) (c) (d) (e)
Identity of issuer, borrower, Description of investment including maturity date, rate
lessor or similar party of interest, collateral, par or maturity value Cost Current Value
----------------------- ---------------------------------------------- ---- -------------
*Pre-Paid Legal Services, Inc. Common Common Stock, 190,761 shares/units ** $ 7,113,478
Stock
SEI Stable Asset Common Collective Trust Fund, 602,305.315 shares/units ** 711,192
American Balanced Fund/R4 Mutual Funds, 11,478.754 shares/units ** 157,948
Bond Fund of America/R4 Mutual Funds, 59,941.502 shares/units ** 634,211
Euro Pacific Growth Fund/R4 Mutual Funds, 19,153.175 shares/units ** 527,862
Growth Fund of America/R4 Mutual Funds, 29,191.505 shares/units ** 593,171
Vanguard Small Cap Growth Index Fund Mutual Funds, 10,808.687 shares/units ** 128,623
Vanguard Small Cap Value Index/Inv Mutual Funds, 25,764.536 shares/units ** 263,055
Washington Mutual Investors Fund/R4 Mutual Funds, 39,492.017 shares/units ** 842,760
*Participant Loans Participant loans, maturity dates various thru July 2016;
interest rates vary between 6.00% and 10.25% 186,232
Money Market Funds 4,316
-----------
Total Investments $11,162,848
-----------
*Party-in-interest
**Cost not required for participant-directed investments