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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2009
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period From _____ to _____
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Commission File Number: 001-09293
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 74820-5813
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (580) 436-1234
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 whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes |X| No | |
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | Accelerated filer |X| Non-accelerated filer | |
(do not check if a smaller
reporting company)
Smaller reporting Company | |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes | | No |X|
The number of shares outstanding of the registrant's common stock (excluding
4,852,179 shares held in treasury) as of July 22, 2009 was 10,965,299.
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PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended June 30, 2009
CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
a) Consolidated Balance Sheets
as of June 30, 2009 (Unaudited) and December 31, 2008
b) Consolidated Statements of Income (Unaudited)
for the three month and six month periods ended
June 30, 2009 and 2008
c) Consolidated Statements of Comprehensive Income
(Unaudited) for the three month six month periods ended
June 30, 2009 and 2008
d) Consolidated Statements of Cash Flows (Unaudited) for
the three month and six month periods ended
June 30, 2009 and 2008
e) Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition And
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Submission of matters to a vote of security holders
Item 6. Exhibits
Signatures
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ITEM 1. FINANCIAL STATEMENTS
----------------------------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
June 30, December 31,
2009 2008
-------------- --------------
Current assets: (Unaudited)
Cash and cash equivalents............................................................ $ 29,064 $ 26,528
Available-for-sale investments, at fair value........................................ 10,201 12,812
Membership fees receivable........................................................... 5,948 6,639
Inventories.......................................................................... 1,300 1,285
Refundable income taxes.............................................................. 1,817 687
Deferred member and associate service costs.......................................... 14,756 15,737
Deferred income taxes................................................................ 5,618 5,151
Other assets......................................................................... 6,644 6,200
-------------- --------------
Total current assets............................................................. 75,348 75,039
Available-for-sale investments, at fair value.......................................... 27,688 20,637
Investments pledged.................................................................... 4,191 4,039
Property and equipment, net............................................................ 51,040 53,445
Deferred member and associate service costs............................................ 1,811 2,003
Other assets........................................................................... 9,055 7,680
-------------- --------------
Total assets................................................................... $ 169,133 $ 162,843
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits payable.......................................................... $ 11,556 $ 12,013
Deferred revenue and fees............................................................ 27,259 26,556
Current portion of capital leases payable............................................ 250 24
Current portion of notes payable..................................................... 18,241 22,408
Accounts payable and accrued expenses................................................ 15,353 16,327
-------------- --------------
Total current liabilities.......................................................... 72,659 77,328
-------------- --------------
Capital leases payable............................................................... 1,119 910
Notes payable........................................................................ 28,130 37,251
Deferred revenue and fees............................................................ 1,811 2,003
Deferred income taxes................................................................ 5,466 5,646
Other non-current liabilities........................................................ 8,555 7,898
-------------- --------------
Total liabilities................................................................ 117,740 131,036
-------------- --------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 15,823 and
16,254 issued at June 30, 2009 and December 31, 2008, respectively................. 158 163
Retained earnings.................................................................... 149,788 130,832
Accumulated other comprehensive income (loss)........................................ 475 (160)
Treasury stock, at cost; 4,852 shares held at June 30, 2009 and
December 31, 2008, respectively.................................................... (99,028) (99,028)
-------------- --------------
Total stockholders' equity....................................................... 51,393 31,807
-------------- --------------
Total liabilities and stockholders' equity..................................... $ 169,133 $ 162,843
-------------- --------------
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)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Revenues:
Membership fees............................................. $ 105,516 $ 109,456 $ 212,421 $ 218,516
Associate services.......................................... 5,908 6,303 11,190 12,346
Other....................................................... 969 1,096 1,902 2,196
---------- ---------- ---------- ----------
112,393 116,855 225,513 233,058
---------- ---------- ---------- ----------
Costs and expenses:
Membership benefits......................................... 36,013 37,850 72,218 75,112
Commissions................................................. 29,335 31,196 56,347 62,020
Associate services and direct marketing..................... 6,502 7,029 13,305 12,633
General and administrative.................................. 12,922 13,761 26,305 26,335
Other, net.................................................. 1,845 2,927 4,134 7,093
---------- ---------- ---------- ----------
86,617 92,763 172,309 183,193
---------- ---------- ---------- ----------
Income before income taxes.................................... 25,776 24,092 53,204 49,865
Provision for income taxes.................................... 9,985 9,036 20,312 18,867
---------- ---------- ---------- ----------
Net income.................................................... $ 15,791 $ 15,056 $ 32,892 $ 30,998
---------- ---------- ---------- ----------
Basic earnings per common share............................... $ 1.44 $ 1.25 $ 2.97 $ 2.54
---------- ---------- ---------- ----------
Diluted earnings per common share............................. $ 1.44 $ 1.25 $ 2.96 $ 2.54
---------- ---------- ---------- ----------
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)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Net income..................................................... $ 15,791 $ 15,056 $ 32,892 $ 30,998
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... 720 111 503 (264)
---------- ---------- ---------- ----------
Unrealized (losses) gains on investments:
Unrealized holding (losses) gains arising during period.... 19 (270) 217 (365)
Reclassification adjustment for realized losses (gains)
included in net income................................... (37) 11 (85) 52
---------- ---------- ---------- ----------
(18) (259) 132 (313)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of income taxes of
$(10) and $(166) for the three months and $71 and $(200)
for the six months ended June 30, 2009 and 2008,
respectively................................................. 702 (148) 635 (577)
---------- ---------- ---------- ----------
Comprehensive income........................................... $ 16,493 $ 14,908 $ 33,527 $ 30,421
---------- ---------- ---------- ----------
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)
(Unaudited)
Six Months Ended
June 30,
---------------------------
2009 2008
------------ -------------
Cash flows from operating activities:
Net income............................................................................. $ 32,892 $ 30,998
Adjustments to reconcile net income to net cash provided
by operating activities:
Benefit for deferred income taxes.................................................... (647) (644)
Depreciation and amortization........................................................ 4,131 4,377
Decrease in Membership income receivable............................................. 691 91
(Increase) decrease in inventories................................................... (15) 180
Increase in income tax receivable.................................................... (1,130) (2,838)
Decrease in deferred member and associate service costs.............................. 1,173 1,219
Increase in other assets............................................................. (1,819) (585)
Decrease in accrued Membership benefits.............................................. (457) (2)
Increase in deferred revenue and fees................................................ 511 741
Increase in other non-current liabilities............................................ 657 699
Decrease in income tax payable....................................................... - (5,590)
Decrease in accounts payable and accrued expenses and other.......................... (471) (988)
------------ -------------
Net cash provided by operating activities.......................................... 35,516 27,658
------------ -------------
Cash flows from investing activities:
Additions to property and equipment.................................................. (1,280) (3,190)
Purchases of investments - available for sale........................................ (27,879) (34,740)
Maturities and sales of investments - available for sale............................. 23,419 36,048
------------ -------------
Net cash used in investing activities.............................................. (5,740) (1,882)
------------ -------------
Cash flows from financing activities:
Proceeds from exercise of stock options and related tax withholding payments......... 108 102
Tax benefit on exercise of stock options............................................. 14 79
Proceeds from issuance of debt....................................................... - 10,000
Decrease in capital lease obligations................................................ (11) (10)
Repayments of debt................................................................... (13,288) (9,954)
Purchases of treasury stock.......................................................... (14,063) (27,763)
------------ -------------
Net cash used in financing activities ............................................. (27,240) (27,546)
------------ -------------
Net increase (decrease) in cash and cash equivalents................................... 2,536 (1,770)
Cash and cash equivalents at beginning of period....................................... 26,528 24,941
------------ -------------
Cash and cash equivalents at end of period............................................. $ 29,064 $ 23,171
------------ -------------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................................... $ 714 $ 2,310
------------ -------------
Cash paid for income taxes........................................................... $ 23,509 $ 27,878
------------ -------------
Non-cash activities - capital lease obligations incurred............................. $ 446 $ -
------------ -------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Except for per share amounts, dollar amounts in tables are in thousands
unless otherwise indicated)
(Unaudited)
Note 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 ("GAAP") 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 our 2008 Annual Report on Form 10-K. Terms such as "we", "our" and
"us" are sometimes used as abbreviated references to Pre-Paid Legal Services,
Inc.
In our opinion, the accompanying unaudited financial statements as of June
30, 2009, and for the three month and six month periods ended June 30, 2009 and
2008, reflect adjustments (which were normal and recurring) which, in our
opinion, are necessary for a fair statement of our financial position and
results of operations of the interim periods presented. Results for the three
month and six month periods ended June 30, 2009 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 us 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.
Note 2 - Contingencies
On March 27, 2006 we received a complaint filed by Blackburn & McCune PLLC,
a former provider attorney law firm, in the Second Circuit Court of Davidson
County, Tennessee seeking compensatory and punitive damages on the basis of
allegations of breach of contract and fraud. On May 15, 2006 the trial court
dismissed plaintiff's complaint in its entirety. Plaintiff amended the complaint
to allege fraud and breach of fiduciary duty on June 12, 2006 and filed a notice
of appeal on June 13, 2006. On August 24, 2007 the Court of Appeals reversed the
ruling of the trial court and remanded the suit to the trial court for further
proceedings. On June 24, 2009, the trial court granted our motion for summary
judgment and dismissed plaintiff's action against us in its entirety. Plaintiff
has appealed this order. The ultimate outcome of this matter is not
determinable.
On March 23, 2007 we received a Civil Investigative Demand ("CID") from the
Federal Trade Commission ("FTC") requesting information relating to our Identity
Theft Shield and ADRS Program. On April 20, 2009 we received a letter from the
FTC alleging misrepresentations in sales materials used in our Identity Theft
Shield and ADRS program such that we made false and misleading claims about the
effectiveness of ADRS for helping organizations comply with government data
security requirements. Revisions to the marketing materials originally provided
to the FTC have been made subsequent to the initial communication with the FTC.
The FTC could decide to commence administrative or federal court proceedings for
purposes of determining whether there has been a violation and might seek a
variety of remedies, including injunctive relief. We are working with the FTC to
reach a mutually acceptable resolution. The ultimate outcome of the matter is
not determinable but we will vigorously defend our interests in this matter.
We are a defendant in various other legal proceedings that are routine and
incidental to our business. We will vigorously defend our interests in all
proceedings in which we are named as a defendant. We also receive periodic
complaints or requests for information from various state and federal agencies
relating to our business or the activities of our marketing force. We promptly
respond to any such matters and provide any information requested. While the
ultimate outcome of these proceedings is not determinable, we do not currently
anticipate that these contingencies will result in any material adverse effect
to our financial condition or results of operation, unless an unexpected result
occurs in one of the cases. The costs of the defense of these various matters
are reflected as a part of general and administrative expense, or Membership
benefits if fees relate to Membership issues, in the consolidated statements of
income. We have established an accrued liability, we believe will be sufficient
to cover estimated damages in connection with various cases (exclusive of
ongoing defense costs which are expensed as incurred), which at June 30, 2009
was $50,000. We believe that we have meritorious defenses in all pending cases
and will vigorously defend against the claims. However, it is possible that an
adverse outcome in certain cases or increased litigation costs could have an
adverse effect upon our financial condition, operating results or cash flows in
particular quarterly or annual periods.
Canadian taxing authorities are challenging portions of our commission and
general and administrative deductions for tax years 1999 - 2002 and have tax
assessments which aggregate $5.7 million. The Canadian taxing authorities
contend commission deductions should be matched with the membership revenue as
received, we contend these commissions are deductible when paid. Under Canadian
tax laws, our commission payments are treated as a prepaid expense and we base
our deduction of commission on the fact that all the services (the sale of the
membership) have been performed by the sales associate at the time of sale
therefore this prepaid expense (the commission payments) is deductible when
paid. Also, the commission payment is taxable to the sales associate when paid
and each year we issue a T4 (Canadian 1099 equivalent) to sales associates for
the total commission payments made during that year. In addition, Canadian
taxing authorities challenged our allocation of general and administrative
expenses to Canadian operations. We contended the allocation of general and
administrative expenses, based on the percentage of Canadian new memberships
written and the Canadian percentage memberships in force, was reasonable. During
July 2007 we received and later accepted a settlement offer from the Canadian
taxing authorities regarding the general and administrative deductions which
would allow us to claim a deduction on the Canadian tax return for over 70% of
these items. This settlement offer allowed us to amend our U.S. federal tax
returns and deduct the remaining 30% of these items. The Canadian taxing
authorities amended Canadian tax returns to reflect the changes in our general
and administrative expense and issued credits for the associated taxes, penalty
and interest. We did not prevail on the commission issue on our appeal to the
Canadian taxing authorities and on December 19, 2008 filed our Notice of Appeal
with the Tax Court of Canada. We have paid all the assessed tax, penalty and
interest relating to the commission issue and at June 30, 2009 have $3.3 million
recorded in Other Assets, Current which represents the amount of refund we
expect to ultimately receive. We have established an accrued liability we
believe will be sufficient to cover any additional estimated penalty and
interest assessment in connection with these items, which at June 30, 2009 was
$500,000. We believe it is more-likely than not that we will prevail on our tax
position relative to these items, however, it is possible that an adverse
outcome could have an adverse effect upon our financial condition, operating
results or cash flows in particular quarterly or annual periods.
Note 3 - Treasury Stock Purchases
We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock. The
Board of Directors has increased such authorization from 500,000 shares to 15
million shares through subsequent board actions. At June 30, 2009 we had
purchased 14.2 million treasury shares under these authorizations for a total
consideration of $421.2 million, an average price of $29.70 per share. We
purchased and formally retired 13,315 shares of our common stock during the 2009
second quarter for $525,000, or an average price of $39.42 per share, reducing
our common stock by $133 and our retained earnings by $525,000. See Note 6
below. Given the current interest rate environment, the nature of other
investments available and our expected cash flows, we believe that purchasing
treasury shares enhances shareholder value and may seek alternative sources of
financing to continue or accelerate the program. Any additional treasury stock
purchases will be made at prices that we consider attractive and at such times
that we believe will not unduly impact our liquidity.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
respective period. Diluted earnings per common share are computed by dividing
net income by the weighted average number of shares of common stock and dilutive
potential common shares outstanding during the respective period. The weighted
average number of common shares is increased by the number of dilutive potential
common shares issuable on the exercise of options less the number of common
shares assumed to have been 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.
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
Basic Earnings Per Share: 2009 2008 2009 2008
--------- --------- --------- ---------
Earnings:
Net income........................................................... $ 15,791 $ 15,056 $ 32,892 $ 30,998
--------- --------- --------- ---------
Shares:
Weighted average shares outstanding.................................. 10,980 12,016 11,091 12,189
--------- --------- --------- ---------
Diluted Earnings Per Share:
Earnings:
Net income........................................................... $ 15,791 $ 15,056 $ 32,892 $ 30,998
--------- --------- --------- ---------
Shares:
-------
Weighted average shares outstanding.................................. 10,980 12,016 11,091 12,189
Assumed exercise of options.......................................... 13 19 13 20
--------- --------- --------- ---------
Weighted average number of shares, as adjusted....................... 10,993 12,035 11,104 12,209
--------- --------- --------- ---------
Shares issued pursuant to option exercises........................... - - 5 6
--------- --------- --------- ---------
Options to purchase shares of common stock are excluded from the
calculation of diluted earnings per share when their inclusion would have an
anti-dilutive effect on the calculation. No options were excluded for the three
month and six month periods ended June 30, 2009 and 2008.
Note 5 - Recently Issued Accounting Pronouncements
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.
We adopted SFAS 157 on January 1, 2008, as required for our 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 our
financial assets and financial liabilities did not have a material impact on our
consolidated financial statements. The adoption of SFAS 157 for our nonfinancial
assets and nonfinancial liabilities had no impact on our consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits an entity to
choose, at specified election dates, to measure eligible financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value. An entity reports unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting date. Upfront costs and fees related to items for which the fair value
option is elected are recognized in earnings as incurred and not deferred. SFAS
159 also established presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 was effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. At the effective date, an
entity could elect the fair value option for eligible items that existed at that
date. We did not elect the fair value option for eligible items that existed as
of January 1, 2008. As such, the adoption of SFAS 159 did not have any impact on
our consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. This statement is effective for us
beginning January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements--an amendment of Accounting Research Bulletin
No. 51 ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. This statement is effective for us beginning
January 1, 2009. The adoption of SFAS 160 had no impact on our consolidated
financial position, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles" (SFAS 162). This statement identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in accordance with GAAP. With the issuance of this statement, the
FASB concluded that the GAAP hierarchy should be directed toward the entity and
not its auditor, and reside in the accounting literature established by the FASB
as opposed to the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards No. 69, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles." This statement is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles." The implementation of
this standard did not have a significant impact on the determination or
reporting of our financial results.
In October 2008, the FASB issued FASB Staff Position FAS 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active" ("FSP 157-3"). FSP 157-3 clarified the application of FAS 157.
FSP 157-3 demonstrated how the fair value of a financial asset is determined
when the market for that financial asset is inactive. FSP 157-3 was effective
upon issuance, including prior periods for which financial statements had not
been issued. The implementation of this standard did not have an impact on our
consolidated financial position, results of operations or cash flows.
In January 2009, the FASB issued FASB Staff Position No. Emerging Issues
Task Force 99-20-1, "Amendments to the Impairment Guidance of EITF Issue No.
99-20" (FSP No. EITF 99-20-1). This FSP provided additional guidance with
respect to how entities determine whether an "other-than-temporary impairment"
(OTTI) exists for certain beneficial interests in a securitized transaction,
such as asset-backed securities and mortgage-backed securities, that (1) do not
have a high quality rating or (2) can be contractually prepaid or otherwise
settled such that the holder would not recover substantially all of its
investment. FSP No. EITF 99-20-1 amended EITF Issue No. 99-20 to more closely
align its OTTI guidance with that of SFAS No. 115, "Accounting for Certain
Investment in Debt and Equity Securities." This FSP was effective for us
prospectively beginning October 1, 2008. We considered this FSP's additional
interpretation of EITF Issue No. 99-20 when classifying respective additional
impairments as "temporary" or "other-than-temporary" beginning with the fourth
quarter of 2008. This FSP had no impact on such classifications on our
consolidated financial position, results of operations or cash flows.
In May 2009, the FASB issued statement No. 165, "Subsequent Events" (SFAS
165). SFAS 165 modifies the definition of what qualifies as a subsequent
event--those events or transactions that occur following the balance sheet date,
but before the financial statements are issued, or are available to be
issued--and requires companies to disclose the date through which it has
evaluated subsequent events and the basis for determining that date. We adopted
the provisions of SFAS 165 for second quarter 2009, in accordance with the
effective date and evaluated subsequent events through July 24, 2009..
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification(TM) ("Codification") and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS No.
168"). SFAS No. 168 establishes the Codification as the single official source
of authoritative United States accounting and reporting standards for all
non-governmental entities (other than guidance issued by the SEC). The
Codification changes the referencing and organization on financial standards and
is effective for interim and annual periods ending on or after September 15,
2009. We will apply the Codification to our disclosures beginning with our third
quarter of fiscal 2009. As Codification is not intended to change the existing
accounting guidance, its adoption will not have an impact on our financial
statements.
On April 9, 2009, the Financial Accounting Standards Board (FASB) issued
Staff Position SFAS 107-1 and Accounting Principles Board (APB) Opinion No.
28-1, "Interim Disclosures about Fair Value of Financial Instruments" (FSP 107-1
and APB 28-1). FSP 107-1 amends FASB Statement No. 107, "Disclosures about Fair
Values of Financial Instruments," to require disclosures about fair value of
financial instruments in interim financial statements as well as in annual
financial statements. APB 28-1 amends APB Opinion No. 28, "Interim Financial
Reporting," to require those disclosures in all interim financial statements.
FSP 107-1 and APB 28-1 are effective for interim periods ending after June 15,
2009 and we adopted them in second quarter 2009. See Note 8.
Note 6 - Notes Payable
During 2006, we received $80 million of senior, secured financing (the
"Senior Loan") from Wells Fargo Foothill, Inc. ("Wells Fargo") consisting of a
$75 million five year term loan facility (the "Term Facility") and a $5 million
five year revolving credit facility (the "Revolving Facility"). At June 30,
2009, we had the full Revolving Facility available to us. After payment of an
origination fee of 1%, lender costs and retirement of $15.3 million of existing
bank indebtedness, the net proceeds of the Term Facility we received were $58.8
million and used to purchase treasury stock.
The Term Facility provides for a five-year maturity and amortizes in
monthly installments of $1.25 million commencing August 1, 2006, with interest
on the outstanding balances under the Term Facility and the Revolving Facility
payable, at our option, at a rate equal to Wells Fargo base rate or at the 30
day LIBOR rate plus 150 basis points. The interest rate at June 30, 2009 was
1.81%. We are also obligated to make additional quarterly payments equal to 50%
of our "excess cash flow" (as defined in the Senior Loan agreement) if our
Leverage Ratio is greater than or equal to 1 to 1 at the end of a quarter. Our
Leverage Ratio was 0.43 to 1 at June 30, 2009. We expect to be able to repay the
facilities with cash flow from operations. We have the right to prepay the Term
Facility in whole or in part without penalty.
The Senior Loan is guaranteed by our non-regulated wholly owned
subsidiaries and is secured by all of our tangible and intangible personal
property (other than aircraft), including stock in all of our direct
subsidiaries, and a mortgage on a building we recently acquired in Duncan,
Oklahoma and remodeled to relocate and expand our existing customer service
facility in Duncan.
In addition to customary covenants for loans of a similar type, the
principal covenants for the Senior Loan are:
* a limitation on incurring any indebtedness in excess of the remaining
existing bank indebtedness outstanding and $2.3 million in permitted
capitalized leases or purchase money debt;
* a limitation on our ability to pay dividends or make stock purchases,
other than with the net proceeds of the Term Loan, unless we meet
certain cash flow tests;
* a prohibition on prepayment of other debt;
* a requirement to maintain consolidated EBITDA (Earnings before
Interest, Taxes, Depreciation and Amortization) for the twelve month
period ending December 31, 2006 and each quarter thereafter of at
least $80 million ($75 million for us and our top tier direct
subsidiaries);
* a requirement to maintain a quarterly fixed charge coverage ratio
(EBITDA (with certain adjustments) divided by the sum of interest
expense, income taxes and scheduled principal payments) of at least
1.1 to 1;
* a requirement to maintain at least 1.3 million members;
* a requirement to maintain a Leverage Ratio (funded indebtedness as of
the end of each quarter divided by EBITDA for the trailing twelve
months) of no more than 1.5 to 1;
* we must have availability (unused portion of the Revolving Facility)
plus Qualified Cash (the amount of unrestricted cash and cash
equivalents) greater than or equal to $12,500,000; and,
* an event of default occurs if Harland Stonecipher ceases to be our
Chairman and Chief Executive Officer for a period of 120 days unless
replaced with a person approved by Wells Fargo.
We were in compliance with these covenants at June 30, 2009.
Our $20 million real estate loan was fully funded in 2002 to finance our
new headquarters building in Ada, Oklahoma and has a final maturity of August
2011. This loan, with interest at the 30 day LIBOR rate plus 150 basis points
adjusted monthly, is secured by a mortgage on our headquarters. The interest
rate at June 30, 2009 was 1.81%, with monthly principal payments of $191,000
plus interest with the balance of approximately $2.3 million due at maturity.
The real estate loan's financial covenants conform to those of the Senior Loan.
During 2007, we entered into a term loan agreement with Wells Fargo
Equipment Finance, Inc. to refinance $9.6 million indebtedness related to our
aircraft. This loan, with interest at the 30 day LIBOR rate plus 89 basis points
adjusted monthly, is secured by a mortgage on the aircraft and engines. The
interest rate at June 30, 2009 was 1.20%, with monthly principal payments of
$80,000 plus interest.
During June 2008 we received additional financing from Bank of Oklahoma in
the form of an unsecured stock repurchase loan for $10 million on an unsecured
basis repayable in 12 equal monthly payments beginning June 30, 2008, together
with interest at LIBOR plus 162.5 basis points. This loan was completely repaid
pursuant to its terms.
A schedule of outstanding balances as of June 30, 2009 is as follows:
Senior loan................................ $ 31,250
Real estate loan........................... 7,238
Aircraft loan.............................. 7,883
---------
Total notes payable........................ 46,371
Less: Current portion of notes payable..... (18,241)
---------
Long term portion.......................... $ 28,130
---------
A schedule of future maturities as of June 30, 2009 is as follows:
Repayment Schedule commencing
April 2009:
--------------------------------------------
Year 1..................................... $ 18,241
Year 2..................................... 18,241
Year 3..................................... 4,872
Year 4..................................... 956
Year 5..................................... 956
Thereafter................................. 3,105
---------
Total notes payable........................ $ 46,371
---------
Note 7 - Share-based Compensation
During the six months ended June 30, 2009, the stock option activity under
our stock option plans was as follows:
Weighted
Average
Remaining
Weighted Contractual Aggregate
Average Number of Term Intrinsic
Price Shares (In Years) Value
------------ ------------ ------------ ----------
Outstanding, January 1, 2009.................... $ 19.70 42,500
Granted....................................... - -
Cancelled..................................... - -
Exercised..................................... 23.93 (4,500)
------------ -----------
Outstanding, June 30, 2009...................... $ 19.20 38,000 1.67 $ 927
------------ ------------ ------------ ----------
Options exercisable as of June 30, 2009......... $ 19.20 38,000 1.67 $ 927
------------ ------------ ------------ ----------
Other information pertaining to option activity during the six months ended
June 30, 2009 and 2008 was as follows:
June 30, 2009 June 30, 2008
-------------- --------------
Weighted average grant-date fair value of stock options granted...... Not applicable Not applicable
Total fair value of stock options vested............................. Not applicable Not applicable
Total intrinsic value of stock options exercised..................... $ 40 $ 201
Under our stock option plan, 1,346,252 shares of our Common Stock are
available for issuance. Options outstanding and exercisable were granted at a
stock option price which was not less than the fair market value of our Common
Stock on the date the option was granted and no option has a term in excess of
ten years. Additionally, options vested and became exercisable either on the
grant date or up to five years from the option grant date.
Note 8 - Fair Value Measurement
On January 1, 2008, we adopted SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and expands disclosures about fair value
measurements. The Statement applies whenever other statements require or permit
assets or liabilities to be measured at fair value. 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 1 primarily consists of financial instruments such as
exchange-traded derivatives, listed equities and U.S. government
treasury securities.
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. These models
are primarily industry-standard models that consider various
assumptions, including quoted forward prices for commodities, time
value, volatility factors, and current market and contractual prices
for the underlying instruments, as well as other relevant economic
measures. Substantially all of these 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. Instruments in this
category include obligations of state and political subdivisions,
government guaranteed bank debt, auction rate certificates and
corporate obligations.
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.
The following table presents our financial assets and liabilities that were
accounted for at fair value on a recurring basis as of June 30, 2009 by level
within the fair value hierarchy (in thousands):
Fair Value Measurements Using
-------------------------------------
June 30, 2009 Level 1 Level 2 Level 3
------------- ---------- ---------- ---------
Available for sale investments..................... $ - $ 42,080 $ -
June 30, 2008
-------------
Available for sale investments..................... $ - $ 36,663 $ -
For securities without a readily ascertainable market value (Level 2), we
utilize pricing services and broker quotes. Our pricing service's evaluations
are based on market data. Our pricing service utilizes evaluated pricing models
that vary by asset class and incorporate available trade, bid and other market
information. Because many fixed income securities do not trade on a daily basis,
our pricing service's evaluated pricing applications apply available information
as applicable through processes such as benchmark curves, benchmarking of like
securities, sector groupings, and matrix pricing, to prepare evaluations. Such
estimated fair values do not necessarily represent the values for which these
securities could have been sold at the dates of the balance sheets.
Our financial instruments consist primarily of cash, certificates of
deposit, short-term investments, debt and equity securities, Membership fees
receivable, Membership benefits payable, notes payable and accounts payable and
accrued expenses. Fair value estimates have been determined by us, using
available market information and appropriate valuation methodologies. Fair
values of inactively traded debt securities are based on quoted market prices of
identical or similar securities or based on observable inputs like interest
rates. The carrying value of cash, certificates of deposit, Membership fees
receivable, Membership benefits payable and accounts payable and accrued
expenses are considered to be representative of their respective fair value, due
to the short term nature of these instruments. The carrying value of notes
payable is considered to be representative of their respective fair values, due
to the variable interest rate feature of such notes. The fair value disclosures
relating to debt and equity securities are presented above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Form 10-K for the year ended December 31, 2008, which
describes, among other things, our basic business model, critical accounting
policies, measures of Membership retention, and basic cash flow characteristics
of our business. The following tables set forth changes in the principal
categories of revenues and expenses and Membership and recruiting activity for
the second quarter of 2009 compared to the second quarter of 2008 and the first
quarter of 2009 (Table amounts in 000's). The sum of the percentages in the
tables may not total due to rounding.
Three Months Ended June 30, 2009 Three % % Three Three
compared to Months Change Change Months Months
Three Months Ended June 30, 2008 Ended % of from from Ended % of Ended % of
and compared to June 30, Total Prior Sequential June 30, Total March Total
Three Months Ended March 31, 2009 2009 Revenue Year Period 2008 Revenue 31, 2009 Revenue
------------------------------------ ---------- ------- -------- ---------- --------- --------- --------- ---------
Revenues:
Membership fees.................... $105,516 93.9 (3.6) (1.3) $109,456 93.7 $106,905 94.5
Associate services................. 5,908 5.2 (6.3) 11.9 6,303 5.4 5,282 4.7
Other.............................. 969 0.9 (11.6) 3.9 1,096 0.9 933 0.8
---------- ------- -------- ---------- --------- --------- --------- ---------
112,393 100.0 (3.8) (0.6) 116,855 100.0 113,120 100.0
Costs and expenses:
Membership benefits................ 36,013 32.0 (4.9) (0.5) 37,850 32.4 36,205 32.0
Commissions........................ 29,335 26.1 (6.0) 8.6 31,196 26.7 27,012 23.9
Associate services and direct
marketing........................ 6,502 5.8 (7.5) (4.4) 7,029 6.0 6,803 6.0
General and administrative......... 12,922 11.5 (6.1) (3.4) 13,761 11.8 13,383 11.8
Other, net......................... 1,845 1.6 (37.0) (19.4) 2,927 2.5 2,289 2.0
---------- ------- -------- ---------- --------- --------- --------- ---------
86,617 77.0 (6.6) 1.1 92,763 79.4 85,692 75.7
Income before income taxes........... 25,776 22.9 7.0 (6.0) 24,092 20.6 27,428 24.2
Provision for income taxes........... 9,985 8.9 10.5 (3.3) 9,036 7.7 10,327 9.1
---------- ------- -------- ---------- --------- --------- --------- ---------
Net income........................... $15,791 14.0 4.9 (7.7) $15,056 12.9 $17,101 15.1
---------- ------- -------- ---------- --------- --------- --------- ---------
Three Months Ended
New Memberships: 6/30/2009 6/30/2008 3/31/2009
---------------- --------- --------- ---------
New legal service membership sales.......................................... 118,050 127,804 117,635
New "stand-alone" IDT membership sales...................................... 4,180 6,642 4,960
--------- --------- ---------
Total new membership sales......................................... 122,230 134,446 122,595
--------- --------- ---------
New "add-on" IDT membership sales........................................... 78,009 82,623 72,850
Average Annual Membership fee............................................... $328.79 $329.44 $319.86
Active Memberships:
Active legal service memberships at end of period........................... 1,419,092 1,481,051 1,438,519
Active "stand-alone" IDT memberships at end of period....................... 86,779 85,588 88,544
--------- --------- ---------
Total active memberships at end of period.......................... 1,505,871 1,566,639 1,527,063
--------- --------- ---------
Active "add-on" IDT memberships at end of period............................ 670,769 658,365 671,850
New Sales Associates:
New sales associates recruited.............................................. 25,172 26,102 23,871
Average enrollment fee paid by new sales associates......................... $120.98 $98.93 $119.17
Average Membership fee in force:
Average Annual Membership fee............................................... $301.37 $300.46 $300.81
Identity Theft Shield ("IDT") memberships sold in conjunction with new
legal plan memberships or "added-on" to existing legal plan memberships sell for
$9.95 per month and are not counted as "new" memberships but do increase the
average premium and related direct expenses (membership benefits and
commissions) of our membership base, while "stand alone" Identity Theft Shield
memberships are not attached to a legal plan membership and sell for $12.95 per
month.
Recently Issued Accounting Pronouncements
See Note 5 - Recently Issued Accounting Pronouncements in Item 1 above.
Results of Operations - Second Quarter of 2009 compared to Second Quarter
-------------------------------------------------------------------------
of 2008
-------
Net income increased 5% for the second quarter of 2009 to $15.8 million
from $15.1 million for the prior year's second quarter primarily due to a
decrease in commission expense of $1.9 million, a decrease in other, net
expenses of $1.1 million and a decrease in Membership benefits of $1.8 million,
a decrease in associate services and direct marketing expenses of $527,000 and a
decrease in general and administrative expenses of $839,000, partially reduced
by a decrease in membership fees of $3.9 million and a decrease in associate
services revenue of $395,000. Diluted earnings per share increased 15% to $1.44
per share from $1.25 per share for the prior year's comparable quarter due to
the 5% increase in net income and a 9% decrease in the weighted average number
of diluted shares outstanding.
Membership fees totaled $105.5 million during the 2009 second quarter
compared to $109.5 million for 2008, a decrease of 4%. 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 and the monthly amount of
such Memberships. 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 decreased 9% during the three months
ended June 30, 2009 to 122,230 from 134,446 during the comparable period of
2008. At June 30, 2009, there were 1,505,871 active Memberships in force
compared to 1,566,639 at June 30, 2008, a decrease of 4%. The average annual fee
per Membership has increased from $300 for all Memberships in force at June 30,
2008 to $301 for all Memberships in force at June 30, 2009, primarily as a
result of a larger number of Identity Theft Shield memberships.
Associate services revenue decreased by approximately $395,000 to $5.9
million during the second quarter of 2009 when compared to the 2008 quarter. New
associates enrolled decreased 4% to 25,172 during the 2009 period compared to
26,102 for the same period of 2008. The average enrollment fees paid by new
sales associates were $121 and $99 for the respective periods. The eService fees
decreased to $2.4 million for the second quarter of 2009 compared to $3.1
million for the 2008 quarter. Future revenues from associate services will
depend primarily on the number of new associates enrolled, the price charged for
new associates and the number who choose to participate in our eService program,
but we expect that such revenues will continue to be offset by the direct and
indirect cost to us of training, providing associate services and other direct
marketing expenses.
Other revenue declined 12% from $1.1 million for the 2008 period to
$969,000 for the 2009 period.
Total revenues decreased 4% to $112.4 million for the three months ended
June 30, 2009 from $116.9 million during the comparable period of 2008 due to a
$3.9 million decrease in Membership fees and a $395,000 decrease in associate
services revenue.
Membership benefits, which primarily represent payments to provider law
firms and Kroll Background America, Inc., a subsidiary of Kroll Inc. ("Kroll"),
totaled $36.0 million for the three months ended June 30, 2009 compared to $37.9
million for the comparable period of 2008, and represented 34% and 35%,
respectively, of Membership fees for the two periods. This Membership benefit
ratio (Membership benefits as a percentage of Membership fees) should be reduced
going forward as substantially all active Memberships provide for a capitated
cost and we have reduced the capitated cost of the Identity Theft plan benefits
effective April 1, 2007, with an additional reduction on January 1, 2010.
Commissions to associates decreased 6% to $29.3 million for the three
months ended June 30, 2009 compared to $31.2 million for the comparable period
of 2008, and represented 28% and 29% of Membership fees for the respective
periods. Commissions to associates are primarily dependent on the number of new
Memberships sold during a period and the average fee of those Memberships. New
Memberships sold during the second quarter of 2009 totaled 122,230, a 9%
decrease from the 134,446 for 2008, and the "add-on" IDT Membership sales which
are not included in these totals decreased 6% to 78,009 for the second quarter
of 2009 from 82,623 for 2008. Our average Annual Membership fee written during
the quarter of 2009 had a slight increase to $301.37 from $300.46 during the
2008 period. Our new Membership fees written during the second quarter of 2009
decreased 4% from 2008. Average commission per new Membership was unchanged at
$200 for the 2009 second quarter. The 4% decline in new Membership fees written
resulted in an approximate 6% decline in commissions. Should we add additional
commissions to our compensation plan or reduce the amount of chargebacks
collected from our associates as we have from time to time, the commission cost
per new Membership will increase accordingly.
Associate services and direct marketing expenses decreased to $6.5 million
for the three months ended June 30, 2009 from $7.0 million for the comparable
period of 2008. The decrease was primarily a result of decreased costs for
bonuses, decreased costs of conventions and decreased costs for materials and
related freight sent to new associates due to the reduction in the number of new
associates enrolled during the quarter. We offer the Player's Club incentive
program to provide additional incentives to our associates as a reward for
consistent, quality business. Associates can earn the right to receive
additional monthly bonuses by meeting monthly qualification requirements for a
12 month period and maintaining certain personal retention rates for the
Memberships sold during the 12 month period. These expenses also include the
costs of providing associate services and marketing expenses.
General and administrative expenses during the three months ended June 30,
2009 and 2008 were $12.9 million and $13.8 million, respectively, and
represented 12% and 13%, respectively, of Membership fees for both periods. The
$839,000 decrease in general and administrative expenses included decreases in
employee costs, bank service charges, advertising and other taxes which were
partially offset by increases in consulting fees associated with Payment Card
Industry compliance and legal fees.
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, were $1.8 million for the three months ended June 30, 2009 compared to
$2.9 million for the 2008 comparable period. Depreciation expense was $2.0
million for the three months ended June 30, 2009 and $2.2 million for the 2008
comparable period. Interest expense decreased to $302,000 during the 2009 period
from $807,000 during the comparable period of 2008 as a result of the reduction
in debt and lower interest rates. Premium taxes decreased from $478,000 for the
three months ended June 30, 2008 to $442,000 for the comparable period of 2009.
Interest income decreased from $507,000 for the three months ended June 30, 2008
to $492,000 for the three months ended June 30, 2009, due to a decrease in
interest rates. The litigation reserve was reduced by $450,000 for the three
months ended June 30, 2009 compared to a reduction of $37,000 for the comparable
period of 2008.
We have recorded a provision for income taxes of $10.0 million (38.7% of
pretax income) and $9.0 million (37.5% of pretax income) for the three months
ended June 30, 2009 and 2008, respectively.
Results of Operations - Second Quarter of 2009 compared to First Quarter of 2009
--------------------------------------------------------------------------------
Second quarter 2009 membership fees decreased $1.4 million to $105.5
million from $106.9 million for the first quarter of 2009. Associate services
revenues increased during the 2009 second quarter by approximately $626,000 to
$5.9 million from $5.3 million for the 2009 first quarter and associate services
and direct marketing expenses decreased by $301,000 during the same period.
Membership benefits totaled $36.0 million in the second quarter of 2009 compared
to $36.2 million for the 2009 first quarter and represented 34% of membership
fees for both periods. Commissions to associates totaled $29.3 million in the
2009 second quarter compared to $27.0 million for the 2009 first quarter and
represented 28% and 25%, respectively, of membership fees for the two periods.
General and administrative expenses decreased $461,000 during the 2009 second
quarter to $12.9 million compared to $13.4 million for the 2009 first quarter
and represented 12% and 13%, respectively, of membership fees for the two
periods. The $461,000 decrease in general and administrative expenses included
decreases in employee cost, accounting and bank service charges which were
partially offset by increases in postage, legal expenses and telecommunications
fees.
Results of Operations - First Six Months of 2009 compared to First Six Months
-----------------------------------------------------------------------------
of 2008
-------
Membership revenues decreased 3% in the first six months of 2009 to $212.4
million compared to $218.5 million for the first six months of 2008. Net income
increased 6% for the first six months of 2009 to $32.9 million from $31.0
million for the prior year's comparable period primarily due to the decrease of
$5.7 million in commissions, a $3.0 million decrease in other, net expenses and
a $2.9 million decrease in Membership benefits expense partially offset by
decreases in Membership fees of $6.1 million, decrease in associate services
revenue of $1.2 million and a $1.4 million increase in the provision for income
taxes. Diluted earnings per share increased 17% to $2.96 per share from $2.54
per share for the prior year's comparable six month period due to the 6%
increase in net income and an approximate 9% decrease in the weighted average
number of diluted shares outstanding.
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 decreased 11% during the six months ended June
30, 2009 to 244,825 from 274,645 during the comparable period of 2008. At June
30, 2009, there were 1,505,871 active Memberships in force compared to 1,566,639
at June 30, 2008, a decrease of 4%. The average annual fee per Membership has
increased from $300 for all Memberships in force at June 30, 2008 to $301 for
all Memberships in force at June 30, 2009.
Associate services revenue decreased 9% from $12.3 million for the first
six months of 2008 to $11.2 million during the comparable period of 2009 due to
a decrease in associate enrollment fees and eService fees. Total new associates
enrolled decreased 6% during the first six months of 2009 to 49,043 compared to
51,902 for the same period of 2008 and average enrollment fees paid by new sales
associates increased from $99 during the 2008 period to $120 during the 2009 six
months due to a higher average enrollment fee available during the 2009 period.
The eService fees decreased to $5.0 million during the first six months of 2009
compared to $6.2 million for the comparable period of 2008. Future revenues from
associate services will depend primarily on the number of new associates
enrolled, the price charged and the number who choose to participate in the
Company's eService program, but the Company expects that such revenues will
continue to be offset by the direct and indirect cost to the Company of training
(including training bonuses paid), providing associate services and other direct
marketing expenses.
Other revenue decreased $294,000 from $2.2 million for the six month period
ending June 30, 2008 to $1.9 million for the same period of 2009.
Primarily as a result of the decrease in Membership fees, total revenues
decreased to $225.5 million for the six months ended June 30, 2009 from $233.1
million during the comparable period of 2008, a decrease of 3%.
Membership benefits totaled $72.2 million for the six months ended June 30,
2009 compared to $75.1 million for the comparable period of 2008, and
represented 34% of Membership fees for both periods. This Membership benefit
ratio (Membership benefits as a percentage of Membership fees) should be reduced
going forward as substantially all active Memberships provide for a capitated
cost and we have reduced the capitated cost of the Identity Theft plan benefits
effective April 1, 2007 with subsequent additional reductions on January 1,
2010.
Commissions to associates decreased 9% to $56.3 million for the six months
ended June 30, 2009 compared to $62.0 million for the comparable period of 2008,
and represented 27% and 28% of Membership fees for such periods. Commissions to
associates are primarily dependent on the number of new Memberships sold during
a period and the average fee of those Memberships. New Memberships sold during
the first six months of 2009 totaled 244,825 an 11% decrease from the 274,645
for 2008, and the "add-on" IDT Membership sales which are not included in these
totals decreased 8% to 150,859 for the second quarter of 2009 from 163,886 for
2008. Our average Annual Membership fee written during the first six months of
2009 decreased less than 1% to $324.32 from $325.46 for 2008. Our new Membership
fees written during the first six months of 2009 decreased 11% from 2008. Should
we add additional commissions to our compensation plan or reduce the amount of
chargebacks collected from its associates as it has from time to time, the
commission cost per new Membership will increase accordingly.
Associate services and direct marketing expenses increased to $13.3 million
for the six months ended June 30, 2009 from $12.6 million for the comparable
period of 2008. The increase was primarily a result of increased cost for
incentive trips Fast Start bonuses partially offset by a decline in direct
marketing expenses. We offer the Player's Club incentive program to provide
additional incentives to our associates as a reward for consistent, quality
business. Associates can earn the right to receive additional monthly bonuses by
meeting monthly qualification requirements for the entire calendar year and
maintaining certain personal retention rates for the Memberships sold during the
calendar year. These expenses also include the costs of providing associate
services and marketing expenses.
General and administrative expenses during the six months ended June 30,
2009 and 2008 were unchanged at $26.3 million for both periods and represented
12% of Membership fees for both periods.
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, was $4.1 million for the six months ended June 30, 2009 compared to $7.1
million for the 2008 comparable period. Depreciation decreased to $4.1 million
for the first six months of 2009 from $4.4 million for the comparable period of
2008. Litigation accruals decreased by $1.3 million for the first six months of
2009 from $888,000 in the 2008 period including a $450,000 reduction in
previously accrued amounts for the six months ended June 30, 2009. Interest
expense decreased to $664,000 during the 2009 period from $2.1 million during
the comparable period of 2008 as a result of lower indebtedness and lower
interest rates. Premium taxes were $902,000 for the six months ended June 30,
2009 and $900,000 for the comparable period of 2008. Interest income decreased
$106,000 to $1.1 million for the six months ended June 30, 2009 from $1.2
million for the comparable period of 2008, due to lower interest rates.
We have recorded a provision for income taxes of $20.3 million (38.2% of
pretax income) and $18.9 million (37.8% of pretax income) for the first six
months ended June 30, 2009 and 2008, respectively.
Liquidity and Capital Resources
-------------------------------
General
Net cash flow provided by operating activities was $35.5 million for the
six months ended June 30, 2009 compared to $27.7 million for the same period in
2008. This $7.8 million increase was primarily the result of a $4.4 million
decrease in income tax payments, a $4.6 million decrease in cash paid to our
associates for commissions, a $2.8 million decrease in cash paid to our
providers for the delivery of benefits and a $1.6 million decrease in cash paid
for interest reduced by a $7.1 million decrease in cash receipts from our
members.
Consolidated net cash used by investing activities was $5.7 million for the
first six months of 2009 compared to net cash used of $1.9 million for the
comparable period of 2008. This $3.8 million change in investing activities
resulted from a $1.9 million decrease in additions to property and equipment and
a $12.6 million decrease in the maturities and sales of investments partially
offset by a $6.8 million decrease in investment purchases.
Net cash used in financing activities during the first six months of 2009
was $27.2 million compared to $27.5 million for the comparable period of 2008.
This $300,000 change was primarily comprised of a $10.0 million decrease in
proceeds from issuance of debt and a $3.3 million increase in debt repayments
offset by $13.7 million decreased treasury stock purchases.
We purchased and formally retired 435,820 shares of our common stock during
the first six months of 2009 for $14.1 million, or an average price of $32.27
per share, reducing our common stock by $4,358 and our retained earnings by
$14.1 million. We had working capital of $2.7 million at June 30, 2009, an
increase of $5.0 million compared to our negative working capital of $2.3
million at December 31, 2008. The increase was primarily due to a $2.5 million
increase in cash and cash equivalents, a $1.1 million increase in refundable
income taxes, a $1.0 million decrease in accounts payable and accrued expenses
and a $4.2 million decrease in the current portion of notes payable partially
offset by a $2.6 million decrease in the current portion of available-for-sale
investments and a $691,000 decrease in Membership fees receivable. The $2.7
million working capital at June 30, 2009 would have been a $15.2 million in
working capital excluding the current portion of deferred revenue and fees in
excess of the current portion of deferred member and associate service costs.
These amounts will be eliminated by the passage of time without the utilization
of other current assets or us incurring other current liabilities. We do not
expect any difficulty in meeting our financial obligations in the next 12
months.
At June 30, 2009 we reported $67.0 million in cash and cash equivalents and
unpledged investments compared to $60.0 million at December 31, 2008. Our
investments typically consist of certificates of deposit, investment grade
(rated Baa or higher) bonds primarily issued by corporations and the United
States Treasury and state and municipal tax-exempt bonds.
We generally advance significant commissions at the time a Membership is
sold. During the six months ended June 30, 2009, we advanced commissions, net of
chargebacks, of $53.7 million on new Membership sales compared to $58.6 million
for the same period of 2008. Since approximately 95% of Membership fees are
collected on a monthly basis, a significant cash flow deficit is created on a
per Membership basis at the time a Membership is sold. Since there are no
further commissions paid on a Membership during the advance period, we typically
derive significant positive cash flow from the Membership over its remaining
life.
We expense advance commissions ratably over the first month of the related
Membership. As a result of this accounting policy, our commission expenses are
all recognized over the first month of a Membership and there is no commission
expense recognized for the same Membership during the remainder of the advance
period. We track our unearned advance commission balances outstanding in order
to ensure the advance commissions are recovered before any renewal commissions
are paid and for internal purposes of analyzing our commission advance program.
While not recorded as an asset, unearned advance commission balances from
associates as of June 30, 2009, and related activity for the six month period
then ended, were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)............................... $ 174,371
Advance commission payments, net................................................. 53,679
Earned commissions applied....................................................... (57,504)
Advance commission payment write-offs............................................ (2,000)
------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 168,546
Estimated unrecoverable advance commission payments (1).......................... (45,579)
------------
Ending unearned advance commission payments, net (1)............................. $ 122,967
------------
(1) These amounts do not represent fair value, as they do not take into
consideration timing of estimated recoveries.
The ending unearned advance commission payments, net, above includes net
unearned advance commission payments to non-vested associates of $65.3 million.
As such, at June 30, 2009 future commission payments and related expense should
be reduced as unearned advance commission payments of $58 million are recovered.
Commissions are earned by the associate as Membership premiums are earned by us,
usually on a monthly basis. For additional information concerning these
commission advances, see our Annual report on Form 10-K under the heading
Commissions to Associates in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
We believe that we have significant ability to finance any future growth in
Membership sales based on our recurring cash flow and existing amount of cash
and cash equivalents and unpledged investments at June 30, 2009 of $67.0
million. We expect to maintain cash and investment balances, including pledged
investments, on an on-going basis of approximately $20 to $30 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 additional treasury stock purchases subject to limitations in the Term
Facility.
Notes Payable
See Note 6 - Notes Payable in Item 1 above.
Parent Company Funding and Dividends
Although we are the operating entity in many jurisdictions, our
subsidiaries serve as operating companies in various states that regulate
Memberships as insurance or specialized legal expense products. The most
significant of these wholly owned subsidiaries are Pre-Paid Legal Casualty, Inc.
("PPLCI"), Pre-Paid Legal Services Inc. of Florida ("PPLSIF") and Legal Service
Plans of Virginia, Inc. ("LSPV"). The ability of these entities to provide funds
to us is subject to a number of restrictions under various insurance laws in the
jurisdictions in which they 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 will be
required to maintain its stockholders' equity at levels sufficient to satisfy
various state or provincial regulatory requirements, the most restrictive of
which is currently $3 million. Additional capital requirements of these
entities, or any of our regulated subsidiaries, will be funded by us in the form
of capital contributions or surplus debentures. During 2008, we received $4.1
million in dividends from LSPV and $14.9 million in dividends from PPLCI.
Contractual Obligations
There have been no material changes outside of the ordinary course of
business in our contractual obligations from those disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008.
Critical Accounting Policies
----------------------------
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. If these estimates or assumptions are
incorrect, there could be a material change in our financial condition or
operating results. Many of these "critical accounting policies" are common in
the insurance and financial services industries; others are specific to our
business and operations. Our critical accounting policies include estimates
relating to revenue recognition related to Membership and associate fees,
deferral of Membership and associate related costs, expense recognition related
to commissions to associates, accrual of incentive awards payable and accounting
for legal contingencies. Each of these accounting policies and the application
of critical accounting policies and estimates was discussed in our Annual Report
on Form 10-K for the year ended December 31, 2008. There were no significant
changes in the application of critical accounting policies or estimates during
the first six months of 2009. We are not aware of any reasonably likely events
or circumstances which would result in different amounts being reported that
would materially affect our financial condition or results of operations.
Capital and Dividend Plans
--------------------------
We continue to evaluate the desirability of additional share repurchases
and additional cash dividends. We declared dividends of $0.50 per share during
2004 and $0.60 per share during 2005 and have previously announced that we will
continue share repurchases, pay a dividend, or both, depending on our financial
condition, available resources and market conditions, as well as compliance with
our various loan covenants which limit our ability to repurchase shares or pay
cash dividends. We expect to continue our open market repurchase program when we
can acquire shares at prices we believe are attractive as we have existing
authorization from the Board to purchase an additional 818,440 shares. We also
continue to evaluate additional sources of financing that may enable us to
accelerate the repurchase program at prices we believe are attractive.
Forward-Looking Statements
--------------------------
All statements in this report other than purely historical information,
including but not limited to, statements relating to our future plans and
objectives, expected operating results 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 and are based on our historical operating
trends and financial condition as of June 30, 2009 and other information
currently available to management. We caution that the Forward-Looking
Statements are subject to all the risks and uncertainties incident to our
business, including but not limited to risks described in Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2008. Moreover, we 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.
We assume no obligation to update the Forward-Looking Statements to reflect
events or circumstances occurring after the date of the statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
Disclosures About Market Risk
Our consolidated balance sheets include a certain amount of assets and
liabilities whose fair values are subject to market risk. Due to our significant
investment in fixed-maturity investments, interest rate risk represents the
largest market risk factor affecting our 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, 2009, our investments consisted of the following:
Description Fair Value
----------------------------------------------- -------------
Obligations of state and political subdivisions.......... $ 31,029
Certificates of deposit.................................. 7,627
Government guaranteed bank debt.......................... 1,590
U. S. Government obligations............................. 1,426
Auction Rate Securities.................................. 375
Corporate obligations.................................... 33
Total investments........................................ ---------------
$ 42,080
---------------
We do 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 our fixed-maturity investment portfolio. It
is assumed that the changes occur immediately and uniformly, with no effect
given to any steps that we 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:
Hypothetical change Estimated fair value
(In 000's) in interest rate after hypothetical
Fair value (bp = basis points) change in interest rate
---------- ------------------- -----------------------
Fixed-maturity investments at June 30, 2009 (1)........ $ 34,078 100 bp increase $ 31,884
200 bp increase 30,427
50 bp decrease 34,745
100 bp decrease 35,595
Fixed-maturity investments at December 31, 2008 (1).... $ 31,360 100 bp increase $ 29,831
200 bp increase 28,457
50 bp decrease 32,134
100 bp decrease 32,907
-------------------
(1) Excluding short-term investments (certificates of deposits and auction rate
certificates) with a fair value of $8.0 million at June 30, 2009 and $6.1
million at December 31, 2008.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at June 30, 2009 would reduce the
estimated fair value of our fixed-maturity investments by approximately
$3.7 million at that date. At December 31, 2008, an instantaneous 200 basis
point increase in market interest rates would have reduced the estimated
fair value of our fixed-maturity investments by approximately $2.9 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 we do not believe such risk is material.
We primarily manage our exposure to investment interest rate risk by
purchasing investments that can be readily liquidated should the interest rate
environment begin to significantly change.
Interest Rate Risk
As of June 30, 2009, we had $46.4 million in notes payable outstanding at
interest rates indexed to the 30 day LIBOR rate that exposes us to the risk of
increased interest costs if interest rates rise. Assuming a 100 basis point
increase in interest rates on the floating rate debt, annual interest expense
would increase by approximately $464,000. As of June 30, 2009, we had not
entered into any interest rate swap agreements with respect to the term loans or
our floating rate municipal bonds.
Foreign Currency Exchange Rate Risk
Although we are exposed to foreign currency exchange rate risk inherent in
revenues, net income and assets and liabilities denominated in Canadian dollars,
the potential change in foreign currency exchange rates is not a substantial
risk, as approximately 1% of our revenues are derived outside of the United
States. As reflected in the attached Consolidated Statements of Comprehensive
Income, we have recorded positive foreign currency translation adjustments of
$503,000 for the six months ended June 30, 2009 and have a cumulative positive
foreign currency translation adjustment balance of $78,000 at June 30, 2009.
These amounts are subject to change dynamically in conjunction with the relative
values of the Canadian and U.S. dollars.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of June 30, 2009, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the
quarter ended June 30, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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 1A. RISK FACTORS
----------------------
There are a number of risk factors that could affect our financial
condition or results of operations. 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. Please refer to pages 15 - 17 of our 2008
Annual Report on Form 10-K for a description of other risk factors. There has
not been any material changes in the risk factors disclosed in the Annual
Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
---------------------------------------------------------------------
Issuer Purchases of Equity Securities
The following table provides information about our purchases of stock in
the open market during the first quarter of 2009.
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Total Number Part of Publicly Be Purchased Under
of Shares Average Price Announced Plans or the Plans or
Period Purchased Paid per Share Programs Programs (1)
---------------------- ------------- --------------- -------------------- --------------------
April 2009............ 3,834 $ 32.41 3,834 827,921
May 2009.............. 4,421 41.27 4,421 823,500
June 2009............. 5,060 43.10 5,060 818,440
------------ --------------- --------------------
Total................. 13,315 $ 39.42 13,315
------------ --------------- --------------------
-----------
(1) We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock
in the open market. The Board of Directors has subsequently from time to
time increased such authorization from 500,000 shares to 15 million shares.
The most recent authorization was for 1 million additional shares on
February 18, 2009 and there has been no time limit set for completion of
the repurchase program.
See Part I, Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operation-Liquidity and Capital Resources" for a
description of loan covenants that limit our ability to repurchase shares and
pay dividends.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------
The 2009 Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held on May 22, 2009. The following matters were submitted to a
vote of the Company's shareholders at the Annual Meeting.
Proposal 1 - Election of Directors.
-----------------------------------
The results of the election for the director were as follows:
Abstentions and
Votes For Votes Withheld
--------- ---------------
John W. Hail 9,500,067 618,739
Thomas W. Smith 9,472,213 646,593
Our Board of Directors currently consists of seven 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 Messrs. Hail and
Smith will expire in 2012. The terms of the other five 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: Orland G. Aldridge
- 2010, Peter K. Grunebaum - 2010 and Duke R. Ligon. - 2010; Martin H. Belsky -
2011 and Harland C. Stonecipher - 2011.
Proposal 2 - Ratify the selection of Grant Thornton LLP as our independent
--------------------------------------------------------------------------------
registered public accounting firm.
----------------------------------
Votes For Votes Against Abstentions
--------------- ------------------ -------------
10,096,624 15,541 6,640
ITEM 6. EXHIBITS.
------------------
(a) Exhibits:
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
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
31.2 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
32.2 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.
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.
-----------------------------
(Registrant)
Date: July 27, 2009 /s/ Harland C. Stonecipher
-------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: July 27, 2009 /s/ Randy Harp
-------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: July 27, 2009 /s/ Steve Williamson
-------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 31.1
CERTIFICATION
-------------
I, Harland C. Stonecipher, certify that:
(1) I have reviewed this quarterly report on Form 10-Q 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(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-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; and
(5) The registrant's other certifying officer(s) 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; and
(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.
Date: July 27, 2009 /s/ Harland C. Stonecipher
-------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 31.2
CERTIFICATION
I, Steve Williamson, certify that:
(1) I have reviewed this quarterly report on Form 10-Q 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(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-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; and
(5) The registrant's other certifying officer(s) 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; and
(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.
Date: July 27, 2009 /s/ Steve Williamson
-------------------------------------
Steve Williamson
Chief Financial Officer
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 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 Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009 (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: July 27, 2009 /s/ Harland C. Stonecipher
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Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 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 Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009 (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: July 27, 2009 /s/ Steve Williamson
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Steve Williamson
Chief Financial Officer