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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 March 31, 2008
[ ] 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer | | Accelerated filer |X| Non-accelerated filer | |
Smaller reporting Company | | (do not check if a 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 April 25, 2008 was 12,160,821.
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PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended March 31, 2008
CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
a) Consolidated Balance Sheets
as of March 31, 2008 (Unaudited) and December 31, 2007
b) Consolidated Statements of Income (Unaudited)
for the three month periods ended March 31, 2008 and 2007
c) Consolidated Statements of Comprehensive Income (Unaudited)
for the three month periods ended March 31, 2008 and 2007
d) Consolidated Statements of Cash Flows (Unaudited)
for the three month periods ended March 31, 2008 and 2007
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 6. Exhibits
Signatures
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
March 31, December 31,
2008 2007
------------- -------------
Current assets: (Unaudited)
Cash and cash equivalents............................................................ $ 18,089 $ 24,941
Available-for-sale investments, at fair value........................................ 14,077 13,177
Membership fees receivable........................................................... 5,639 5,831
Inventories.......................................................................... 1,560 1,511
Refundable income taxes.............................................................. - 2,253
Deferred member and associate service costs.......................................... 15,809 16,510
Deferred income taxes................................................................ 4,852 5,163
Other assets......................................................................... 7,509 6,793
------------- -------------
Total current assets............................................................. 67,535 76,179
Available-for-sale investments, at fair value.......................................... 28,239 20,766
Investments pledged.................................................................... 4,288 4,341
Property and equipment, net............................................................ 56,790 56,963
Deferred member and associate service costs............................................ 2,265 2,380
Other assets........................................................................... 7,291 7,003
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Total assets................................................................... $ 166,408 $ 167,632
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.................................................................. $ 12,092 $ 12,155
Deferred revenue and fees............................................................ 28,147 27,271
Current portion of capital leases payable............................................ 22 22
Current portion of notes payable..................................................... 18,241 18,241
Income taxes payable................................................................. 5,491 5,590
Accounts payable and accrued expenses................................................ 15,410 15,891
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Total current liabilities.......................................................... 79,403 79,170
Capital leases payable............................................................... 928 934
Notes payable........................................................................ 50,932 55,492
Deferred revenue and fees............................................................ 2,265 2,380
Deferred income taxes................................................................ 5,359 5,273
Other non-current liabilities........................................................ 6,872 6,544
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Total liabilities................................................................ 145,759 149,793
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Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 17,018 and
17,291 issued at March 31, 2008 and December 31, 2007, respectively................ 170 173
Retained earnings.................................................................... 118,115 114,873
Accumulated other comprehensive income............................................... 1,392 1,821
Treasury stock, at cost; 4,852 shares held at March 31, 2008 and
December 31, 2007, respectively.................................................... (99,028) (99,028)
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and 2004, respectively.................................................................
Total stockholders' equity....................................................... 20,649 17,839
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Total liabilities and stockholders' equity..................................... $ 166,408 $ 167,632
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
--------------------------
2008 2007
------------ ------------
Revenues:
Membership fees................................................ $ 109,060 $ 103,881
Associate services............................................. 6,043 7,064
Other.......................................................... 1,100 1,139
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116,203 112,084
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Costs and expenses:
Membership benefits............................................ 37,262 36,751
Commissions.................................................... 30,824 30,532
Associate services and direct marketing........................ 5,604 6,375
General and administrative..................................... 12,574 12,747
Other, net..................................................... 4,166 3,744
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90,430 90,149
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Income before income taxes....................................... 25,773 21,935
Provision for income taxes....................................... 9,831 7,207
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Net income....................................................... $ 15,942 $ 14,728
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Basic earnings per common share.................................. $ 1.29 $ 1.09
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Diluted earnings per common share................................ $ 1.29 $ 1.08
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
-----------------------
2008 2007
----------- -----------
Net income..................................................... $ 15,942 $ 14,728
----------- -----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... (375) 51
----------- -----------
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during period.... (95) 25
Reclassification adjustment for realized losses
included in net income................................... 41 72
----------- -----------
(54) 97
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Other comprehensive (loss) income, net of income taxes
of $(35) and $62 for the three months ended
March 31, 2008 and 2007, respectively........................ (429) 148
----------- -----------
Comprehensive income........................................... $ 15,513 $ 14,876
----------- -----------
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)
Three Months Ended
March 31,
-----------------------
2008 2007
---------- -----------
Cash flows from operating activities:
Net income....................................................................... $ 15,942 $ 14,728
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision (benefit) for deferred income taxes.................................. 397 (42)
Depreciation and amortization.................................................. 2,191 2,090
Decrease in Membership fees receivable......................................... 192 40
Increase in inventories........................................................ (49) (4)
Decrease in refundable income taxes............................................ 2,253 653
Decrease (increase) in deferred member and associate service costs............. 816 (1,767)
Increase in other assets....................................................... (1,004) (215)
(Decrease) increase in accrued Membership benefits............................. (63) 185
Increase in deferred revenue and fees.......................................... 761 1,274
Increase in other non-current liabilities...................................... 328 312
(Decrease) increase in income taxes payable.................................... (99) 6,143
(Decrease) increase in accounts payable and accrued expenses................... (840) 708
---------- -----------
Net cash provided by operating activities.................................... 20,825 24,105
---------- -----------
Cash flows from investing activities:
Additions to property and equipment............................................ (2,034) (1,252)
Purchases of investments - available for sale.................................. (29,188) (41,692)
Maturities and sales of investments - available for sale....................... 20,814 42,117
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Net cash used in investing activities........................................ (10,408) (827)
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Cash flows from financing activities:
Proceeds from exercise of stock options........................................ 102 858
Tax benefit on exercise of stock options....................................... 79 364
Decrease in capital lease obligations.......................................... (6) (325)
Repayments of debt............................................................. (4,560) (4,609)
Purchases and retirement of treasury stock..................................... (12,884) (13,990)
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Net cash used in financing activities ....................................... (17,269) (17,702)
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Net (decrease) increase in cash and cash equivalents............................. (6,852) 5,576
Cash and cash equivalents at beginning of period................................. 24,941 12,031
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Cash and cash equivalents at end of period....................................... $ 18,089 $ 17,607
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Supplemental disclosure of cash flow information:
Cash paid for interest......................................................... $ 999 $ 1,904
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Cash paid for income taxes..................................................... $ 8,228 $ 158
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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 2007 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 March
31, 2008, and for the three month periods ended March 31, 2008 and 2007, 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 period
ended March 31, 2008 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
Beginning in the second quarter of 2001 multiple lawsuits were filed
against us, certain officers, employees, sales associates and other defendants
in various Mississippi state courts by current or former members seeking actual
and punitive damages for alleged breach of contract, fraud and various other
claims in connection with the sale of Memberships. At one time, we were aware of
11 separate lawsuits involving approximately 400 plaintiffs in multiple counties
in Mississippi. On September 11, 2006 we reached a settlement agreement with
counsel for the more than 400 plaintiffs in numerous pending cases in
Mississippi. For an amount significantly less than our then accrued reserves of
$2.5 million, all pending member litigation against us has been resolved in
Mississippi.
On March 27, 2006 we received a complaint filed on March 24, 2006 by a
former provider attorney law firm, Blackburn & McCune, PLLC, in Chancery Court
of Davidson County, Tennessee seeking compensatory and punitive damages on the
basis of allegations of breach of contract against the Company and our
subsidiary Pre-Paid Legal Services, Inc. of Tennessee. On May 15, 2006 the trial
court dismissed plaintiff's complaint in its entirety. Plaintiff filed a notice
of appeal on June 13, 2006, and 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. We filed a Petition for Rehearing which was denied on
September 26, 2007. Discovery is ongoing and the matter will be assigned to a
trial judge in the coming months. The ultimate outcome of this matter is not
determinable.
On March 23, 2007 we received a Civil Investigative Demand from the Federal
Trade Commission requesting information relating to our Identity Theft Shield
and ADRS Program. We are working with the Federal Trade Commission to resolve
the matter. The ultimate outcome of the matter is not determinable.
On December 7, 2006, we received a complaint filed on November 27, 2006 by
an individual member, the Rockland Corp., in District Court in Dallas County,
Texas seeking compensatory and punitive damages on the basis of negligent and
fraudulent misrepresentations by us related to our referral of the member to an
attorney to assist the member in the defense of a civil case. The attorney
involved was not one of our regular provider attorneys. Discovery is ongoing and
trial is set for July 21, 2008. The ultimate outcome of the matter is not
determinable.
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
March 31, 2008 was $1.0 million. We believe that we have meritorious defenses in
all pending cases and will vigorously defend against the plaintiffs' 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. 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 have challenged our allocation of general and administrative
expenses to Canadian operations. We contend the allocation of general and
administrative expenses, based on the percentage of Canadian new memberships
written and the Canadian percentage memberships in force, is reasonable. During
July 2007 we received 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 would allow us to deduct the remaining 30% of these items on
our US federal tax returns. We accepted this offer during the fourth quarter of
2007 and filed amended US federal tax returns. Although we did meet with the
Canadian taxing authorities during March 2008 to explain our position relative
to commissions, this issue is still outstanding. The Canadian taxing authorities
would not permit us to file the amended Canadian tax returns to reflect the
changes in our general and administrative expense. We have established an
accrued liability we believe will be sufficient to cover the estimated tax
assessment in connection with these items, which at March 31, 2008 was $477,000.
As stated above, we believe that we have reasonable basis for 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 14
million shares during subsequent board meetings. At March 31, 2008 we had
purchased 13.0 million treasury shares under these authorizations for a total
consideration of $375.3 million, an average price of $28.93 per share. We
purchased and formally retired 279,576 shares of our common stock during the
2008 first quarter for $12.9 million, or an average price of $46.08 per share,
reducing our common stock by $2,796 and our retained earnings by $12.9 million.
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 Ended
March 31,
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Basic Earnings Per Share: 2008 2007
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Earnings:
Net income.................................................... $ 15,942 $ 14,728
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Shares (in thousands):
Weighted average shares outstanding........................... 12,361 13,541
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Diluted Earnings Per Share:
Earnings:
Net income.................................................... $ 15,942 $ 14,728
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Shares (in thousands):
----------------------
Weighted average shares outstanding........................... 12,361 13,541
Assumed exercise of options................................... 21 76
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Weighted average number of shares, as adjusted................ 12,382 13,617
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Shares issued pursuant to option exercises.................... 6 40
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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 periods ended March 31, 2008 and 2007.
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. We are evaluating the effect the
implementation of SFAS 157 for our nonfinancial assets and nonfinancial
liabilities will have on our consolidated financial statements. See Note 8
below.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits
entities to choose to measure certain financial instruments and other eligible
items at fair value when the items are not otherwise currently required to be
measured at fair value. We adopted SFAS 159 effective January 1, 2008. Upon
adoption, we did not elect the fair value option for any items within the scope
of SFAS 159 and, therefore, the adoption of SFAS 159 did not have an impact on
our consolidated financial statements.
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. We are currently evaluating the potential impact of the
adoption of SFAS 160 on our consolidated financial position, results of
operations or cash flows.
In September 2006, the FASB ratified EITF Issue No. 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements ("EITF 06-4"). EITF 06-4 indicates that
an employer should recognize a liability for future post-employment benefits
based on the substantive agreement with the employee, and is effective for
fiscal years beginning after December 15, 2007. The adoption of EITF 06-4
effective January 1, 2008 had no impact on our consolidated financial position
and results of operation.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements"
(EITF 06-10). EITF 06-10 provides guidance for determining a liability for the
postretirement benefit obligation as well as recognition and measurement of the
associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15,
2007. The adoption of EITF 06-10 effective January 1, 2008 had no impact on our
consolidated financial position and results of operation.
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 March 31,
2008, we have 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 March 31, 2008 was
4.62%. 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 0.68 to 1 at March 31, 2008. 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, subject to a prepayment premium 0.5% until
June 2008 and none thereafter, with a reduction of 50% of any prepayment premium
if the prepayment is from the proceeds of another loan provided by Wells Fargo.
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; and
* 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.
* 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 March 31, 2008.
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 March 31, 2008 was 4.59% 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 March 31, 2008 was 4.00% with monthly principal payments of
$80,000 plus interest.
A schedule of outstanding balances as of March 31, 2008 is as follows:
Senior loan................................ $ 50,000
Real estate loan........................... 10,095
Aircraft loan.............................. 9,078
-----------
Total notes payable........................ 69,173
Less: Current portion of notes payable..... (18,241)
-----------
Long term portion.......................... $ 50,932
-----------
A schedule of future maturities as of March 31, 2008 is as follows:
Repayment Schedule commencing
April 2008:
------------------------------------------------------
Year 1..................................... $ 18,241
Year 2..................................... 18,241
Year 3..................................... 18,241
Year 4..................................... 9,194
Year 5..................................... 956
Thereafter................................. 4,300
-----------
Total notes payable........................ $ 69,173
-----------
Note 7 - Share-based Compensation
During the three months ended March 31, 2008, 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, 2008.................... $ 20.08 58,500
Granted....................................... - -
Cancelled..................................... - -
Exercised..................................... 17.03 (6,000)
--------- -----------
Outstanding, March 31, 2008..................... $ 20.43 52,500 2.42 $ 1,154
--------- ----------- -------------- ------------
Options exercisable as of March 31, 2008........ $ 20.43 52,500 2.42 $ 1,154
--------- ----------- -------------- ------------
Other information pertaining to option activity during the three months
ended March 31, 2008 and 2007 was as follows:
March 31, 2008 March 31, 2007
-------------- --------------
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..................... $ 201 $ 934
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 is effective for
fiscal years beginning after November 15, 2007, except for nonfinancial assets
and liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis, for which application has been deferred for
one year.
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 non-exchange-traded
derivatives such as over the counter forwards, options and repurchase
agreements.
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 March 31, 2008 by level
within the fair value hierarchy (in thousands):
Fair Value Measurements Using
---------------------------------------
Level 1 Level 2 Level 3
----------- ----------- -----------
Available for sale investments..................... $ - $ 46,605 $ -
Liabilities........................................ $ - $ - $ -
For securities without a readily ascertainable market value (Level 2), we
utilize pricing services and broker quotes. 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.
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, 2007, 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 first quarter of 2008 compared to the first quarter of 2007 and the fourth
quarter of 2007 (Table amounts in 000's). The sum of the percentages in the
tables may not total due to rounding.
Three Months Ended March 31, 2008 Three % % Three Three
compared to Months Change Change Months Months
Three Months Ended March 31, 2007 Ended % of from from Ended % of Ended % of
and compared to March 31, Total Prior Sequential March 31, Total Dec. 31, Total
Three Months Ended December 31, 2007 2008 Revenue Year Period 2007 Revenue 2007 Revenue
------------------------------------- --------- --------- -------- --------- --------- --------- --------- ----------
Revenues:
Membership fees.................... $ 109,060 93.9 5.0 0.1 $103,881 92.7 $108,898 93.8
Associate services................. 6,043 5.2 (14.5) (0.1) 7,064 6.3 6,048 5.2
Other.............................. 1,100 0.9 (3.4) (2.0) 1,139 1.0 1,122 1.0
--------- --------- -------- --------- --------- --------- --------- ----------
116,203 100.0 3.7 0.1 112,084 100.0 116,068 100.0
--------- --------- -------- --------- --------- --------- --------- ----------
Costs and expenses:
Membership benefits................ 37,262 32.1 1.4 (1.0) 36,751 32.8 37,639 32.4
Commissions........................ 30,824 26.5 1.0 (4.2) 30,532 27.2 32,172 27.7
Associate services and direct
marketing........................ 5,604 4.8 (12.1) (19.0) 6,375 5.7 6,916 6.0
General and administrative......... 12,574 10.8 (1.4) 18.3 12,747 11.4 10,627 9.2
Other, net......................... 4,166 3.6 11.3 29.4 3,744 3.3 3,220 2.8
--------- --------- -------- --------- --------- --------- --------- ----------
90,430 77.8 0.3 (0.2) 90,149 80.4 90,574 78.0
--------- --------- -------- --------- --------- --------- --------- ----------
Income before income taxes........... 25,773 22.2 17.5 1.1 21,935 19.6 25,494 22.0
Provision for income taxes........... 9,831 8.5 36.4 (28.6) 7,207 6.4 13,772 11.9
--------- --------- -------- --------- --------- --------- --------- ----------
Net income........................... $ 15,942 13.7 8.2 36.0 $ 14,728 13.1 $ 11,722 10.1
--------- --------- -------- --------- --------- --------- --------- ----------
Three Months Ended
------------------
New Memberships: 3/31/2008 12/31/2007 3/31/2007
---------------- --------- ---------- ---------
New legal service membership sales.......................................... 131,862 139,282 147,742
New "stand-alone" IDT membership sales...................................... 8,337 10,818 13,788
--------- ---------- ---------
Total new membership sales......................................... 140,199 150,100 161,530
--------- ---------- ---------
New "add-on" IDT membership sales........................................... 81,263 94,945 93,204
Average Annual Membership fee............................................... $321.47 $321.32 $309.86
Active Memberships:
Active legal service memberships at end of period........................... 1,481,531 1,492,341 1,477,604
Active "stand-alone" IDT memberships at end of period (see note below)...... 85,428 83,461 73,525
--------- ---------- ---------
Total active memberships at end of period.......................... 1,566,959 1,575,802 1,551,129
--------- ---------- ---------
Active "add-on" IDT memberships at end of period (see note below)........... 641,997 631,910 562,075
New Sales Associates:
New sales associates recruited.............................................. 25,800 36,029 31,043
Average enrollment fee paid by new sales associates......................... $94.71 $48.99 $103.13
Average Membership fee in force:
Average Annual Membership fee............................................... $298.54 $297.62 $294.17
Note - reflects 5,210 net transfers from "add-on" status to "stand-alone" status during the quarter
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 - First Quarter of 2008 compared to First Quarter of 2007
-------------------------------------------------------------------------------
Net income increased 8% for the first quarter of 2008 to $15.9 million from
$14.7 million for the prior year's first quarter primarily due to an increase in
Membership fees of $5.2 million and a decrease in associate services and direct
marketing expenses of $700,000 partially offset by a decrease in associate
services income of $1 million, an increase in other expenses of $400,000 and an
increase in the provision for income taxes of $2.6 million. Diluted earnings per
share increased 19% to $1.29 per share from $1.08 per share for the prior year's
comparable quarter, higher than the net income increase, due to an approximate
9% decrease in the weighted average number of diluted shares outstanding.
Membership fees totaled $109.1 million during the 2008 first quarter
compared to $103.9 million for 2007, an increase of 5%. 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 13% during the
three months ended March 31, 2008 to 140,199 from 161,530 during the comparable
period of 2007. At March 31, 2008, there were 1,566,959 active Memberships in
force compared to 1,551,129 at March 31, 2007, an increase of 1%. Additionally,
the average annual fee per Membership has increased from $294 for all
Memberships in force at March 31, 2007 to $299 for all Memberships in force at
March 31, 2008, primarily as a result of a larger number of Identity Theft
Shield memberships.
Associate services revenue remained unchanged at $6.0 million for both the
2008 and 2007 first quarters. The eService fees totaled $3.1 million during the
2008 period compared to $3.0 million for 2007, an increase of 3%. We recognized
revenue from associate fees of approximately $2.0 million during the 2008 period
compared to $3.2 million during 2007, a decrease of 38%. New associates
typically pay a fee ranging from $49 to $249, depending on special promotions we
implement from time to time. New enrollments of sales associates decreased 17%
during the first quarter of 2008 to 25,800 from 31,043 for 2007, and the average
associate fee paid during 2008 was $95 compared to $103 for 2007, a decrease of
8%. 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 largely offset by the direct and indirect cost to
us of training, providing associate services and other direct marketing
expenses.
Other revenue remained unchanged at $1.1 million for both the 2008 and 2007
periods.
Total revenues increased 4% to $116.2 million for the three months ended
March 31, 2008 from $112.1 million during the comparable period of 2007 due to
the $5.2 million increase in Membership fees partially offset by the $1 million
decline in associate services revenue.
Membership benefits, which primarily represent payments to provider law
firms and Kroll, totaled $37.3 million for the three months ended March 31, 2008
compared to $36.8 million for the 2007 period and represented 34% and 35% of
Membership fees, respectively. This Membership benefit ratio (Membership
benefits as a percentage of Membership fees) should be slightly 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 additional reductions effective beginning January 1, 2008,
2009 and 2010.
Commissions to associates increased 1% from $30.5 million for the first
quarter of 2007 to $30.8 million for 2008, and represented 28% and 29% of
Membership fees, respectively. 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 quarter of 2008 totaled
140,199, a 13% decrease from the 161,530 sold during 2007, and the "add-on" IDT
Membership sales which are not included in these totals decreased 13% to 81,263
for the first quarter of 2008 from 93,204 for 2007. Although our new Membership
fees written during the first quarter of 2008 decreased 10%, the 1% increase in
commissions to associates resulted due to a change effective April 1, 2007 when
we began advancing commissions on the first Membership sale.
Associate services and direct marketing expenses decreased $800,000 to $5.6
million for the 2008 first quarter from $6.4 million for 2007. The decrease was
primarily a result of decreased costs for incentive trips. 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 include the
costs of providing associate services and marketing expenses.
General and administrative expenses during the three months ended March 31,
2008 and 2007 were $12.6 million and $12.7 million, respectively, and
represented 12% of Membership fees for both periods. The slight decrease in
general and administrative expenses is due primarily to the reclassification of
state tax expense to the provision for income taxes. State tax expense included
in general and administrative expenses for the three months ended March 31, 2007
was $881,000 compared to $1.5 million included in the provision for income taxes
for the 2008 period. Decreases in employee expense of $189,000; in telephone and
utility expense of $95,000, in other taxes of $112,000; in consulting expenses
of $125,000 and in bank service charges of $82,000 were primarily offset by an
increase in legal fees of $951,000.
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, were $4.2 million for the three months ended March 31, 2008 compared to
$3.7 million for the 2007 comparable period. Depreciation expense was $2.2
million and $2.1 million, respectively, for the two periods. Interest expense
decreased to $1.3 million during the 2008 period from $1.9 million during the
comparable period of 2007 as a result of reduced debt levels and lower interest
rates. Litigation accruals increased by $910,000 for the first quarter of 2008
from the 2007 period due to increased litigation activity described in Note 2
above. Premium taxes decreased from $506,000 for the three months ended March
31, 2007 to $422,000 for the comparable period of 2007. Interest income
decreased $21,000 to $711,000 for the three months ended March 31, 2008 from
$732,000 for the comparable period of 2007, due to a decrease in average cash
and investment balances and a decrease in interest rates.
We have recorded a provision for income taxes of $9.8 million (38.1% of
pretax income) and $7.2 million (32.9% of pretax income) for the three months
ended March 31, 2008 and 2007, respectively. The increase in the tax rate for
2008 compared to 2007 is due to the inclusion of all income based taxes in the
provision for income taxes and we expect the 2008 rate to be representative on a
go forward basis.
Results of Operations - First Quarter of 2008 compared to Fourth Quarter of 2007
--------------------------------------------------------------------------------
First quarter 2008 membership fees remained stable at $109.1 million
compared to $108.9 million for the 2007 fourth quarter while associate services
revenues remained unchanged at $6.0 million for both periods. Commissions
decreased 4% while associate services and direct marketing expenses decreased
approximately 19%. Membership benefits were 34% and 35% of membership fees,
respectively for the two periods. Commissions, as a percent of membership fees,
were 28% and 30%, respectively, for the two periods while general and
administrative expenses were 12% and 10%, respectively, for the two periods.
Liquidity and Capital Resources
-------------------------------
General
Net cash flow provided by operating activities was $20.8 million for the
three months ended March 31, 2008 compared to $24.1 million for the same period
in 2007. This $3.3 million decrease was primarily the result of a $4.5 million
increase in cash receipts from our members and a $282,000 decrease in cash paid
to our associates for commissions, offset by a $683,000 increase in cash paid to
our providers for the delivery of benefits and an $8 million increase in income
tax payments.
Consolidated net cash used in investing activities was $10.4 million for
the first three months of 2008 compared to $827,000 for the comparable period of
2007. This $9.6 million change in investing activities resulted from a $782,000
increase in additions to property and equipment and a $21.3 million increase in
the maturities and sales of investments partially offset by a $12.5 million
increase in investment purchases.
Net cash used in financing activities during the first three months of 2008
was $17.3 million compared to $17.7 million for the comparable period of 2007.
This $400,000 change was primarily comprised of a $1.1 million decrease in
treasury stock purchases partially offset by the $756,000 decrease in proceeds
from stock option exercises.
We purchased and formally retired 279,576 shares of our common stock during
the first three months of 2008 for $12.9 million, or an average price of $46.08
per share, reducing our common stock by $2,796 and our retained earnings by
$12.9 million. We had negative working capital of $11.9 million at March 31,
2008, a decrease of $8.9 million compared to working capital deficit of $3.0
million at December 31, 2007. The decrease was primarily due to a decrease in
cash of $6.9 million and a decrease of $2.2 million in refundable income taxes.
The $11.9 million working capital deficit at March 31, 2008 would have been
$470,000 positive 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 March 31, 2008 we reported $60.4 million in cash and cash equivalents
and unpledged investments compared to $58.9 million at December 31, 2007. Our
investments consist of common stocks, investment grade (rated Baa or higher)
bonds primarily issued by corporations, the United States Treasury, federal
agencies, federally sponsored agencies and enterprises, auction rate
certificates and state and municipal tax-exempt bonds. As of March 31, 2008 we
had $9.3 million of auction rate securities of which all but $775,000 were sold
at no loss to the Company by April 25, 2008. If necessary, we have the ability
to hold the remaining $775,000 of auction rate securities to final maturity.
We generally advance significant commissions at the time a Membership is
sold. During the three months ended March 31, 2008, we advanced commissions, net
of chargebacks, of $28.9 million on new Membership sales compared to $30.7
million for the same period of 2007. 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 March 31, 2008, and related activity for the three month period
then ended, were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)............................... $ 184,531
Advance commission payments, net................................................. 28,855
Earned commissions applied....................................................... (32,060)
Advance commission payment write-offs............................................ (852)
-------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 180,474
Estimated unrecoverable advance commission payments (1).......................... (43,501)
-------------
Ending unearned advance commission payments, net (1)............................. $ 136,973
-------------
(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 $58.5 million.
As such, at March 31, 2008 future commission payments and related expense should
be reduced as unearned advance commission payments of $78.5 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 March 31, 2008 of $60.4
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. At March 31, 2008, none of these
entities had funds available for payment of substantial dividends without the
prior approval of the insurance commissioner. We received a $1.6 million
dividend from LSPV during March 2008 and a $7.4 million dividend from PPLCI
during April 2008.
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, 2007.
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, 2007. There were no significant
changes in the application of critical accounting policies or estimates during
the first three months of 2008. 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 1 million shares. Should
we experience increases in our common stock market price, we may reduce or defer
further stock repurchases.
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 March 31, 2008 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, 2007. 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
-------------------------------------------------------------------
Interest Rate 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 March 31, 2008, substantially all of our investments consist of
common stocks, investment grade (rated Baa or higher) bonds primarily issued by
corporations, the United States Treasury, federal agencies, federally sponsored
agencies and enterprises, auction rate certificates and state and municipal
tax-exempt bonds. 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 March 31, 2008 (1)....... $ 32,869 100 bp increase $ 31,105
200 bp increase 29,594
50 bp decrease 33,695
100 bp decrease 34,522
Fixed-maturity investments at December 31, 2007 (1).... $ 33,692 100 bp increase $ 32,307
200 bp increase 31,019
50 bp decrease 34,310
100 bp decrease 34,928
-------------------
(1) Excluding short-term investments with a fair value of $13.7 million
(Certificates of deposit and auction rate securities) at March 31,
2008 and $4.5 million at December 31, 2007.
The table above illustrates, for example, that an instantaneous 200
basis point increase in market interest rates at March 31, 2008 would
reduce the estimated fair value of our fixed-maturity investments by
approximately $3.3 million at that date. At December 31, 2007, an
instantaneous 200 basis point increase in market interest rates would
have reduced the estimated fair value of our fixed-maturity
investments by approximately $2.7 million at that date. The definitive
extent of the interest rate risk is not quantifiable or predictable
due to the variability of future interest rates, but 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.
As of March 31, 2008, we had $69.2 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 $692,000. As of March 31, 2008, 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 negative foreign currency translation adjustments of
$375,000 for the three months ended March 31, 2008 but have a cumulative
positive foreign currency translation adjustment balance of $1.2 million at
March 31, 2008. 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 March 31, 2008, 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 March 31, 2008 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 in Part 1, Item 1 - Contingencies
and Part II, Item 1 - Legal Proceedings. Please refer to page 14 and 15 of our
2007 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.
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Issuer Purchases of Equity Securities
The following table provides information about our purchases of stock in
the open market during the first quarter of 2008.
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)
---------------------- ------------- --------------- -------------------- ---------------------
January 2008.......... 4,777 $ 52.78 4,777 303,097
February 2008......... 84,912 47.57 84,912 218,185
March 2008............ 189,887 45.25 189,887 1,028,298
Total................. --------------- ---------------- --------------------
279,576 $ 46.08 279,576
--------------- --------------- --------------------
-----------
(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 14
million shares. The most recent authorization was for 1 million
additional shares on March 7, 2008 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 6. EXHIBITS.
------------------
(a) Exhibits:
Exhibit No. Description
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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
(Incorporated 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)
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: April 28, 2008 /s/ Harland C. Stonecipher
---------------------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: April 28, 2008 /s/ Randy Harp
---------------------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: April 28, 2008 /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: April 28, 2008 /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: April 28, 2008 /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 March 31, 2008 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 28, 2008 /s/ Harland C. Stonecipher
---------------------------------------------------
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 March 31, 2008 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 28, 2008 /s/ Steve Williamson
---------------------------------------------------
Steve Williamson
Chief Financial Officer