================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended September 30, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period From _____ to _____
---------------
Commission File Number: 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
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 | | 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 October 22, 2008 was 11,616,604.
================================================================================
PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended September 30, 2008
CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
a) Consolidated Balance Sheets as of September 30, 2008 (Unaudited)
and December 31, 2007
b) Consolidated Statements of Income (Unaudited) for the three month
and nine month periods ended September 30, 2008 and 2007
c) Consolidated Statements of Comprehensive Income (Unaudited) for
the three month and nine month periods ended September 30, 2008
and 2007
d) Consolidated Statements of Cash Flows (Unaudited) for the nine
month periods ended September 30, 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
September 30, December 31,
2008 2007
-------------- -------------
Current assets: (Unaudited)
Cash and cash equivalents............................................................ $ 21,450 $ 24,941
Available-for-sale investments, at fair value........................................ 14,153 13,177
Membership fees receivable........................................................... 6,326 5,831
Inventories.......................................................................... 1,209 1,511
Refundable income taxes.............................................................. 4,162 2,253
Deferred member and associate service costs.......................................... 16,141 16,510
Deferred income taxes................................................................ 5,567 5,163
Other assets......................................................................... 7,089 6,793
-------------- -------------
Total current assets............................................................. 76,097 76,179
Available-for-sale investments, at fair value.......................................... 19,250 20,766
Investments pledged.................................................................... 4,005 4,341
Property and equipment, net............................................................ 54,837 56,963
Deferred member and associate service costs............................................ 2,118 2,380
Other assets........................................................................... 7,637 7,003
-------------- -------------
Total assets................................................................... $ 163,944 $ 167,632
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.................................................................. $ 12,265 $ 12,155
Deferred revenue and fees............................................................ 27,617 27,271
Current portion of capital leases payable............................................ 23 22
Current portion of notes payable..................................................... 24,908 18,241
Income taxes payable................................................................. - 5,590
Accounts payable and accrued expenses................................................ 15,858 15,891
-------------- -------------
Total current liabilities.......................................................... 80,671 79,170
Capital leases payable............................................................... 917 934
Notes payable........................................................................ 41,811 55,492
Deferred revenue and fees............................................................ 2,118 2,380
Deferred income taxes................................................................ 5,303 5,273
Other non-current liabilities........................................................ 7,568 6,544
-------------- -------------
Total liabilities................................................................ 138,388 149,793
-------------- -------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 16,472 and
17,291 issued at September 30, 2008 and December 31, 2007, respectively............ 165 173
Retained earnings.................................................................... 123,797 114,873
Accumulated other comprehensive income............................................... 622 1,821
Treasury stock, at cost; 4,852 shares held at September 30, 2008 and
December 31, 2007, respectively and 2004, respectively............................. (99,028) (99,028)
-------------- -------------
Total stockholders' equity....................................................... 25,556 17,839
-------------- -------------
Total liabilities and stockholders' equity..................................... $ 163,944 $ 167,632
-------------- -------------
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 Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Revenues:
Membership fees............................................. $ 109,268 $ 107,713 $ 327,784 $ 318,530
Associate services.......................................... 6,236 6,032 18,582 19,064
Other....................................................... 1,019 1,132 3,215 3,427
---------- ---------- ---------- ----------
116,523 114,877 349,581 341,021
---------- ---------- ---------- ----------
Costs and expenses:
Membership benefits......................................... 37,587 37,475 112,699 111,153
Commissions................................................. 33,678 33,646 95,698 98,421
Associate services and direct marketing..................... 5,358 8,902 17,991 21,959
General and administrative.................................. 12,531 13,717 38,866 39,847
Other, net.................................................. 3,043 3,584 10,136 10,621
---------- ---------- ---------- ----------
92,197 97,324 275,390 282,001
---------- ---------- ---------- ----------
Income before income taxes.................................... 24,326 17,553 74,191 59,020
Provision for income taxes.................................... 9,884 5,980 28,751 19,540
---------- ---------- ---------- ----------
Net income.................................................... $ 14,442 $ 11,573 $ 45,440 $ 39,480
---------- ---------- ---------- ----------
Basic earnings per common share............................... $ 1.23 $ .89 $ 3.77 $ 2.97
---------- ---------- ---------- ----------
Diluted earnings per common share............................. $ 1.23 $ .88 $ 3.77 $ 2.96
---------- ---------- ---------- ----------
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 Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Net income..................................................... $ 14,442 $ 11,573 $ 45,440 $ 39,480
---------- ---------- ---------- ----------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment...................... (265) 529 (529) 1,133
---------- ---------- ---------- ----------
Unrealized (losses) gains on investments:
Unrealized holding (losses) gains arising during period.... (357) 158 (722) (9)
Reclassification adjustment for realized losses
included in net income................................... - 99 52 167
---------- ---------- ---------- ----------
(357) 257 (670) 158
---------- ---------- ---------- ----------
Other comprehensive (loss) income, net of income taxes of
$(192) and $164 for the three months and $(361) and $101
for the nine months ended September 30, 2008 and 2007,
respectively............................................. (622) 786 (1,199) 1,291
---------- ---------- ---------- ----------
Comprehensive income........................................... $ 13,820 $ 12,359 $ 44,241 $ 40,771
---------- ---------- ---------- ----------
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)
Nine Months Ended
September 30,
------------------------
2008 2007
---------- ----------
Cash flows from operating activities:
Net income............................................................................. $ 45,440 $ 39,480
Adjustments to reconcile net income to net cash provided by operating activities:
Benefit for deferred income taxes.................................................... (374) (905)
Depreciation and amortization........................................................ 6,571 6,381
Increase in Membership fees receivable............................................... (495) (610)
Decrease in inventories.............................................................. 302 144
Increase in refundable income taxes.................................................. (1,909) (543)
Decrease (increase) in deferred member and associate service costs................... 631 (233)
Increase in other assets............................................................. (930) (1,317)
Increase in accrued Membership benefits.............................................. 110 223
Increase in deferred revenue and fees................................................ 84 1,340
Increase in other non-current liabilities............................................ 1,024 923
Decrease in income taxes payable..................................................... (5,590) -
(Decrease) increase in accounts payable and accrued expenses......................... (546) 2,528
---------- ----------
Net cash provided by operating activities.......................................... 44,318 47,411
---------- ----------
Cash flows from investing activities:
Additions to property and equipment.................................................. (4,461) (3,511)
Purchases of investments - available for sale........................................ (49,274) (188,465)
Maturities and sales of investments - available for sale............................. 49,480 218,427
---------- ----------
Net cash (used in) provided by investing activities................................ (4,255) 26,451
---------- ----------
Cash flows from financing activities:
Proceeds (use) from exercise of stock options........................................ 278 (84)
Tax benefit on exercise of stock options............................................. 142 790
Proceeds from issuance of debt....................................................... 10,000 9,556
Decrease in capital lease obligations................................................ (16) (335)
Repayments of debt................................................................... (17,014) (23,232)
Purchases and retirement of treasury stock........................................... (36,944) (43,558)
Net cash used in financing activities ............................................. ------------- -------------
(43,554) (56,863)
---------- ----------
Net (decrease) increase in cash and cash equivalents................................... (3,491) 16,999
Cash and cash equivalents at beginning of period....................................... 24,941 12,031
Cash and cash equivalents at end of period............................................. ------------- -------------
$ 21,450 $ 29,030
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................................... $ 3,146 $ 5,042
---------- ----------
Cash paid for income taxes........................................................... $ 36,318 $ 20,317
---------- ----------
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
September 30, 2008, and for the three month and nine month periods ended
September 30, 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 and nine month periods ended September 30, 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
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. 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.
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
September 30, 2008 was $500,000. 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 of 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. We met with the
Canadian taxing authorities during March 2008 to explain our position relative
to commissions and in July 2008 submitted a letter summarizing our position.
During October 2008 the Canadian taxing authorities informed us they continue to
believe our commission deductions should be matched with membership revenue as
received. We are currently evaluating further appeals. 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 September 30,
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 September 30, 2008 we had
purchased 13.5 million treasury shares under these authorizations for a total
consideration of $399.4 million, an average price of $29.53 per share. We
purchased and formally retired 209,863 shares of our common stock during the
2008 third quarter for $9.2 million, or an average price of $43.75 per share,
reducing our common stock by $2,099 and our retained earnings by $9.2 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Basic Earnings Per Share: 2008 2007 2008 2007
---------- -------- --------- --------
Earnings:
Net income........................................................... $ 14,442 $ 11,573 $ 45,440 $ 39,480
---------- -------- --------- --------
Shares:
Weighted average shares outstanding.................................. 11,746 13,068 12,039 13,293
---------- -------- --------- --------
Diluted Earnings Per Share:
Earnings:
Net income........................................................... $ 14,442 $ 11,573 $ 45,440 $ 39,480
---------- -------- --------- --------
Shares:
-------
Weighted average shares outstanding.................................. 11,746 13,068 12,039 13,293
Assumed exercise of options.......................................... 17 26 19 54
---------- -------- --------- --------
Weighted average number of shares, as adjusted....................... 11,763 13,094 12,058 13,347
---------- -------- --------- --------
Shares issued pursuant to option exercises........................... 8 - 14 122
---------- -------- --------- --------
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 nine month periods ended September 30, 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 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 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." We have evaluated the
new statement and have determined that it will 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 statements
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 September 30,
2008, 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 September 30, 2008
was 3.99%, but increased to 5.22% effective October 1, 2008. 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 0.60 to
1 at September 30, 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 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; 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 September 30, 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 September 30, 2008 was 3.99%, but increased to 5.50% effective October
1, 2008, 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 September 30, 2008 was 3.38%, but increased to 4.89% effective
October 1, 2008, with monthly principal payments of $80,000 plus interest.
During June 2008 we received additional financing from Bank of Oklahoma 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. The interest rate at September 30, 2008 was 4.11%, but increased to
5.63% effective October 1, 2008, with monthly principal payments of $833,000
plus interest.
A schedule of outstanding balances as of September 30, 2008 is as follows:
Senior loan................................ $ 42,500
Real estate loan........................... 8,952
Aircraft loan.............................. 8,600
Unsecured stock repurchase loan............ 6,667
---------
Total notes payable........................ 66,719
Less: Current portion of notes payable..... (24,908)
---------
Long term portion.......................... $ 41,811
---------
A schedule of future maturities as of September 30, 2008 is as follows:
Repayment Schedule commencing
October 2008:
--------------------------------------------
Year 1..................................... $ 24,908
Year 2..................................... 18,241
Year 3..................................... 17,836
Year 4..................................... 956
Year 5..................................... 956
Thereafter................................. 3,822
---------
Total notes payable........................ $ 66,719
---------
Note 7 - Share-based Compensation
During the nine months ended September 30, 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..................................... 20.57 (13,500)
Outstanding, September 30, 2008................. ----------- -----------
$ 19.94 45,000 2.11 $ 960
---------- ----------- ------------ ----------
Options exercisable as of September 30, 2008.... $ 19.94 45,000 2.11 $ 960
---------- ----------- ------------ ----------
Other information pertaining to option activity during the nine months
ended September 30, 2008 and 2007 was as follows:
September 30, September 30,
2008 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..................... $ 363 $ 6,821
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 September 30, 2008 by
level within the fair value hierarchy (in thousands):
Fair Value Measurements Using
---------------------------------------
Level 1 Level 2 Level 3
---------- ---------- ------------
Available for sale investments..................... $ - $ 37,408 $ -
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 third quarter of 2008 compared to the third quarter of 2007 and the second
quarter of 2008 (Table amounts in 000's). The sum of the percentages in the
tables may not total due to rounding.
Three Months Ended September 30, 2008 Three % % Three Three
compared to Months Change Change Months Months
Three Months Ended September 30, 2007 Ended % of from from Ended % of Ended % of
and compared to Sept. Total Prior Sequential Sept. 30, Total June 30, Total
Three Months Ended June 30, 2008 30, 2008 Revenue Year Period 2007 Revenue 2008 Revenue
-------------------------------------- --------- -------- -------- ---------- ---------- -------- --------- --------
Revenues:
Membership fees.................... $109,268 93.8 1.4 (0.2) $107,713 93.8 $109,456 93.7
Associate services................. 6,236 5.3 3.4 (1.1) 6,032 5.2 6,303 5.4
Other.............................. 1,019 0.9 (10.0) (7.0) 1,132 1.0 1,096 0.9
--------- -------- -------- ---------- ---------- -------- --------- --------
116,523 100.0 1.4 (0.3) 114,877 100.0 116,855 100.0
--------- -------- -------- ---------- ---------- -------- --------- --------
Costs and expenses:
Membership benefits................ 37,587 32.3 0.3 (0.7) 37,475 32.6 37,850 32.4
Commissions........................ 33,678 28.9 0.1 8.0 33,646 29.3 31,196 26.7
Associate services and direct
marketing........................ 5,358 4.6 (39.8) (23.8) 8,902 7.8 7,029 6.0
General and administrative......... 12,531 10.7 (8.6) (8.9) 13,717 11.9 13,761 11.8
Other, net......................... 3,043 2.6 (15.1) 4.0 3,584 3.1 2,927 2.5
--------- -------- -------- ---------- ---------- -------- --------- --------
92,197 79.1 (5.3) (0.6) 97,324 84.7 92,763 79.4
--------- -------- -------- ---------- ---------- -------- --------- --------
Income before income taxes........... 24,326 20.9 38.6 1.0 17,553 15.3 24,092 20.6
Provision for income taxes........... 9,884 8.5 65.3 9.4 5,980 5.2 9,036 7.7
--------- -------- -------- ---------- ---------- -------- --------- --------
Net income........................... $14,442 12.4 24.8 (4.1) $11,573 10.1 $15,056 12.9
--------- -------- -------- ---------- ---------- -------- --------- --------
Three Months Ended
New Memberships: 9/30/2008 6/30/2008 9/30/2007
---------------- --------- --------- ---------
New legal service membership sales.......................................... 137,227 127,804 145,530
New "stand-alone" IDT membership sales...................................... 7,814 6,642 8,771
--------- --------- ---------
Total new membership sales......................................... 145,041 134,466 154,301
--------- --------- ---------
New "add-on" IDT membership sales........................................... 95,762 82,623 100,888
Average Annual Membership fee............................................... $326.14 $329.44 $325.98
Active Memberships:
Active legal service memberships at end of period........................... 1,488,259 1,481,051 1,496,319
Active "stand-alone" IDT memberships at end of period (see note below)...... 87,634 85,588 78,237
--------- --------- ---------
Total active memberships at end of period.......................... 1,575,893 1,566,639 1,574,556
--------- --------- ---------
Active "add-on" IDT memberships at end of period (see note below)........... 681,118 658,365 616,919
New Sales Associates:
New sales associates recruited.............................................. 37,820 26,102 43,555
Average enrollment fee paid by new sales associates......................... $56.17 $98.93 $40.74
Average Membership fee in force:
Average Annual Membership fee............................................... $301.40 $300.46 $297.52
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 - Third Quarter of 2008 compared to Third Quarter of 2007
-------------------------------------------------------------------------------
Net income increased 25% for the third quarter of 2008 to $14.4 million
from $11.6 million for the prior year's third quarter primarily due to an
increase in membership fees of $1.6 million, a decrease in general and
administrative expenses of $1.2 million and a decrease in associate services and
direct marketing of $3.5 million partially offset by an increase in Membership
benefits of $112,000 and an increase in provision for income taxes of $3.9
million. Diluted earnings per share increased 40% to $1.23 per share from 88
cents per share for the prior year's comparable quarter due to the 25% increase
in net income and a 10% decrease in the weighted average number of diluted
shares outstanding.
Membership fees totaled $109.3 million during the 2008 third quarter
compared to $107.7 million for 2007, an increase of 1%. 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 6% during the three
months ended September 30, 2008 to 145,041 from 154,301 during the comparable
period of 2007. At September 30, 2008, there were 1,575,893 active Memberships
in force compared to 1,574,556 at September 30, 2007, an increase of less than
1%. Additionally, the average annual fee per Membership has increased from $298
for all Memberships in force at September 30, 2007 to $301 for all Memberships
in force at September 30, 2008, primarily as a result of a larger number of
Identity Theft Shield memberships.
Associate services revenue increased by approximately $204,000 to $6.2
million during the third quarter of 2008 when compared to the 2007 quarter. New
associates enrolled were 37,820 during the 2008 period compared to 43,555 for
the same period of 2007. The average enrollment fees paid by new sales
associates was $56 and $41 for the respective periods. The eService fees
decreased to $3.0 million for the third quarter of 2008 compared to $3.2 million
for the 2007 quarter. Future revenues from associate services will depend
primarily on the number of new associates enrolled, the price charged for the
Certified Field Trainer program 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 10% from $1.1 million for the 2007 period to $1.0
million for the 2008 period.
Total revenues increased 1% to $116.5 million for the three months ended
September 30, 2008 from $114.9 million during the comparable period of 2007 due
to a $1.6 million increase in Membership fees and a $204,000 increase in
associate services revenue.
Membership benefits totaled $37.6 million for the three months ended
September 30, 2008 compared to $37.5 million for the comparable period of 2007,
and represented 34% and 35% of Membership fees for the 2008 and 2007 periods
respectively. 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, 2008, 2009 and 2010. During the three months
ended September 30, 2008 we did incur additional cost associated with the
installation of improved communications equipment to a portion of our provider
firms.
Commissions to associates decreased less than 1% to $33.7 million for the
three months ended September 30, 2008 compared to $33.6 million for the
comparable period of 2007, and represented 31% of Membership fees for both
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 third quarter of 2008 totaled 145,041, a 6% decrease
from the 154,301 for 2007, and the "add-on" IDT Membership sales which are not
included in these totals decreased 5% to 95,762 for the third quarter of 2008
from 100,888 for 2007. Our average Annual Membership fee written during the
quarter of 2008 had a slight increase to $326.14 from $325.98 during the 2007
period. Our new Membership fees written during the third quarter of 2008
decreased 6% from 2007. Average commission per new Membership increased 6% to
$232 for the 2008 third quarter from $218 for the 2007 period. The 6% decline in
new Membership fees written would have resulted in an approximate 6% decline in
commissions but we paid $2.1 million in additional commissions due to a new
bonus program that began in June 2008. 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 $5.4 million
for the three months ended September 30, 2008 from $8.9 million for the
comparable period of 2007. The decrease was primarily a result of decreased
costs for incentive trips and bonuses, decreased costs of conventions and
decreased costs for materials 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 September
30, 2008 and 2007 were $12.5 million and $13.7 million, respectively, and
represented 11% and 13%, respectively, of Membership fees for both periods. The
$1.2 million decrease in general and administrative expenses included decreases
in advertising , bank services charges and telephone expense which were
partially offset by increases in employee salaries and health care cost and
consulting fees associated with Payment Card Industry compliance.
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, were $3.0 million for the three months ended September 30, 2008 compared
to $3.6 million for the 2007 comparable period. Depreciation expense was $2.2
million for the three months ended September 30, 2008 and $2.1 million for the
2007 comparable period. Interest expense decreased to $924,000 during the 2008
period from $1.7 million during the comparable period of 2007 as a result of the
reduction in debt and lower interest rates. Premium taxes decreased from
$494,000 for the three months ended September 30, 2007 to $455,000 for the
comparable period of 2008. Interest income decreased from $674,000 for the three
months ended September 30, 2007 to $532,000 for the three months ended September
30, 2008, due to a decrease in cash and investment balances.
We have recorded a provision for income taxes of $9.9 million (40.6% of
pretax income) and $6.0 million (34.1% of pretax income) for the three months
ended September 30, 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 - Third Quarter of 2008 compared to Second Quarter of 2008
--------------------------------------------------------------------------------
Third quarter 2008 membership fees decreased $188,000 to $109.3 million
from $109.5 million for the second quarter of 2008. Associate services revenues
decreased during the 2008 third quarter by approximately $67,000 to $6.2 million
from $6.3 million for the 2008 second quarter and associate services and direct
marketing expenses decreased by $1.7 million during the same period. Membership
benefits totaled $37.6 million in the third quarter of 2008 compared to $37.9
million for the 2008 second quarter and represented 34% of membership fees for
the third quarter and 35% for the second quarter. Commissions to associates
totaled $33.7 million in the 2008 third quarter compared to $31.2 million for
the 2008 second quarter and represented 31% and 29%, respectively, of membership
fees for the two periods. General and administrative expenses decreased during
the 2008 third quarter to $12.5 million compared to $13.8 million for the 2008
second quarter and represented 11% and 13%, respectively, of membership fees for
the two periods. The $1.2 million decrease in general and administrative
expenses included decreases in employee salaries and health care cost, postage
and legal expenses which were partially offset by increases in computer
maintenance fees, utilities and other taxes.
Results of Operations - First Nine Months of 2008 compared to First Nine Months
-------------------------------------------------------------------------------
of 2007
-------
Membership revenues increased 3% in the first nine months of 2008 to a
record $327.8 million compared to $318.5 million for the first nine months of
2007. Net income increased 15% for the first nine months of 2008 to $45.4
million from $39.5 million for the prior year's comparable period primarily due
to the increase of $9.3 million in membership fees and a $4.0 million decrease
in associate services and direct marketing expenses, a $2.7 million decrease in
commissions, a $981,000 decrease in general and administrative expenses, a
$485,000 decrease in other expenses, net partially offset by increases in
Membership benefits expense of $1.5 million and the provision for income taxes
of $9.2 million. Diluted earnings per share increased 27% to $3.77 per share
from $2.96 per share for the prior year's comparable nine month period due to
the 15% increase in net income and an approximate 10% 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 9% during the nine months ended
September 30, 2008 to 419,686 from 461,996 during the comparable period of 2007.
At September 30, 2008, there were 1,575,893 active Memberships in force compared
to 1,574,556 at September 30, 2007, an increase of less than 1%. Additionally,
the average annual fee per Membership has increased from $298 for all
Memberships in force at September 30, 2007 to $301 for all Memberships in force
at September 30, 2008, primarily as a result of a larger number of Identity
Theft Shield memberships.
Associate services revenue decreased 3% from $19.1 million for the first
nine months of 2007 to $18.6 million during the comparable period of 2008 due to
a decrease in new associates enrolled. Total new associates enrolled during the
first nine months of 2008 were 89,722 compared to 112,773 for the same period of
2007. The eService fees remained relatively unchanged at $9.2 million for both
periods Future revenues from associate services will depend primarily on the
number of new associates enrolled, the price charged for the Certified Field
Trainer program 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 $212,000 from $3.4 million for the nine month
period ending September 2007 to $3.2 million for the same period of 2008.
Primarily as a result of the increase in Membership fees, total revenues
increased to $349.6 million for the nine months ended September 30, 2008 from
$341.0 million during the comparable period of 2007 an increase of 3%.
Membership benefits totaled $112.7 million for the nine months ended
September 30, 2008 compared to $111.2 million for the comparable period of 2007,
and represented 34% of Membership fees for 2008 and 35% for the 2007 period.
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, 2008, 2009 and 2010. During the nine months ended
September 30, 2008 we did incur additional cost associated with the installation
of improved communications equipment a portion of our provider firms.
Commissions to associates decreased 3% to $95.7 million for the nine months
ended September 30, 2008 compared to $98.4 million for the comparable period of
2007, and represented 29% and 31% 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 nine months of 2008 totaled 419,686 a 9%
decrease from the 461,996 for 2007, and the "add-on" IDT Membership sales which
are not included in these totals decreased 9% to 259,648 for the third quarter
of 2008 from 286,474 for 2007. Our average Annual Membership fee written during
the first nine months of 2008 increased 2% to $325.64 from $320.36 for 2007. Our
new Membership fees written during the first nine months of 2008 decreased 8%
from 2007. The 8% decline in new Membership fees written would have resulted in
an approximate 8% decline in commissions but we paid $3.2 million in additional
commissions due to a new bonus program that began in June 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 decreased to $18.0 million
for the nine months ended September 30, 2008 from $22.0 million for the
comparable period of 2007. The decrease was primarily a result of fewer new
associates enrolled during the nine month period and decreased cost for
incentive trips and bonuses. 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 nine months ended September
30, 2008 and 2007 decreased $981,000 to $38.9 million from $39.8 million, and
represented 12% and 13% of Membership fees for the two periods. The decrease in
general and administrative expenses included decreases in state taxes, bank
service charges and telephone expenses partially offset by an increase in
accounting fees, advertising, employee salaries and health care cost, consulting
fee associated with PCI compliance and legal fees.
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, was $10.1 million for the nine months ended September 30, 2008 compared
to $10.6 million for the 2007 comparable period. Depreciation increased to $6.6
million for the first nine months of 2008 from $6.4 million for the comparable
period of 2007. Litigation accruals increased by $873,000 for the first nine
months of 2008 to $888,000 from 2007. Interest expense decreased to $3.1 million
during the 2008 period from $5.3 million during the comparable period of 2007 as
a result of lower indebtedness and lower interest rates. Premium taxes decreased
from $1.5 million for the nine months ended September 30, 2007 to $1.4 million
for the comparable period of 2008. Interest income decreased $819,000 to $1.8
million for the nine months ended September 30, 2008 from $2.6 million for the
comparable period of 2007, due to decreased cash and investment balances.
We have recorded a provision for income taxes of $28.8 million (38.8% of
pretax income) and $19.5 million (33.1% of pretax income) for the first nine
months ended September 30, 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.
Liquidity and Capital Resources
-------------------------------
General
Net cash flow provided by operating activities was $44.3 million for the
nine months ended September 30, 2008 compared to $47.4 million for the same
period in 2007. This $3.1 million decrease was primarily the result of a $7.5
million increase in cash receipts from our members, a $1.9 million decrease in
cash paid for interest and a $4.0 million decrease in cash paid to our
associates for commissions, offset by a $1.4 million increase in cash paid to
our providers for the delivery of benefits and a $16.0 million increase in
income tax payments.
Consolidated net cash used by investing activities was $4.3 million for the
first nine months of 2008 compared to net cash provided of $26.5 million for the
comparable period of 2007. This $30.8 million change in investing activities
resulted from a $1 million decrease in additions to property and equipment and a
$168.9 million decrease in the maturities and sales of investments partially
offset by a $139.2 million decrease in investment purchases.
Net cash used in financing activities during the first nine months of 2008
was $43.6 million compared to $56.9 million for the comparable period of 2007.
This $13.3 million change was primarily comprised of a $6.2 million decrease in
debt repayments, $6.6 million decreased treasury stock purchases, and the
$319,000 decrease in capital lease obligation payments.
We purchased and formally retired 832,848 shares of our common stock during
the first nine months of 2008 for $36.9 million, or an average price of $44.36
per share, reducing our common stock by $8,328 and our retained earnings by
$36.9 million. We had negative working capital of $4.6 million at September 30,
2008, an increase of $1.6 million compared to our negative working capital of
$3.0 million at December 31, 2007. The increase was primarily due to a $5.6
million decrease in income taxes payable, a $1.9 million increase in refundable
income taxes and a $1.0 million increase in the current portion of
available-for-sale investments offset by a decrease of $3.5 million in cash and
cash equivalents and a $6.7 million increase in the current portion of notes
payable. The $4.6 million negative working capital at September 30, 2008 would
have been a $6.9 million 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 September 30, 2008 we reported $54.9 million in cash and cash
equivalents and unpledged investments compared to $58.9 million at December 31,
2007. Our investments typically consist of certificates of deposit, investment
grade (rated Baa or higher) bonds primarily issued by corporations and the
United States Treasury, auction rate certificates and state and municipal
tax-exempt bonds.
We generally advance significant commissions at the time a Membership is
sold. During the nine months ended September 30, 2008, we advanced commissions,
net of chargebacks, of $91.2 million on new Membership sales compared to $96.0
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 September 30, 2008, and related activity for the nine month
period then ended, were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)............................... $ 184,531
Advance commission payments, net................................................. 91,189
Earned commissions applied....................................................... (96,644)
Advance commission payment write-offs............................................ (2,624)
------------------)
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 176,452
Estimated unrecoverable advance commission payments (1).......................... (43,884)
------------------
Ending unearned advance commission payments, net (1)............................. $ 132,568
------------------
(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 $60.7 million.
As such, at September 30, 2008 future commission payments and related expense
should be reduced as unearned advance commission payments of $72 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 September 30, 2008 of $54.9
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. We received a $1.6 million
dividend from LSPV during March 2008 and a $2.5 million dividend in October
2008. Additionally, we received a $7.4 million dividend from PPLCI during April
2008 and received regulatory approval for a $7.5 million dividend from PPLCI
that we expect to pay in October 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, other than the
incurrence of $10 million in unsecured indebtedness in June 2008 to purchase
additional shares of treasury stock which is repayable in equal monthly
principal installments over the following 12 months with interest at LIBOR plus
162.5 basis points.
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 nine 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 475,026 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 September 30, 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 September 30, 2008, our investments consisted of the following:
Description Fair Value
--------------------------------------------------------- ------------
Obligations of state and political subdivisions.......... $ 29,392
Certificates of deposit.................................. 6,189
Municipal Variable Rate Demand notes..................... 1,000
Auction Rate Securities.................................. 375
U. S. Government obligations............................. 221
Corporate obligations.................................... 231
-------------
Total investments......................................... $ 37,408
-------------
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 value after hypothetical
Fair value (bp = basis points) change in interest rate
----------- ------------------- ------------------------
Fixed-maturity investments at September 30, 2008 (1)... $ 29,844 100 bp increase $ 28,328
200 bp increase 26,930
50 bp decrease 30,680
100 bp decrease 31,516
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)
(2) Excluding short-term investments with a fair value of $7.6 million ($6.2
million in certificates of deposit, $1.0 million of variable rate demand
notes and $375,000 in auction rate securities) at September 30, 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 September 30, 2008 would reduce
the estimated fair value of our fixed-maturity investments by approximately
$2.9 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 September 30, 2008, we had $66.7 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. The 30 day LIBOR rate
increased by 144 basis points from 2.49% in September 2008 to 3.93% in October
2008 and was 3.53% at October 21, 2008. Assuming a 100 basis point increase in
interest rates on the floating rate debt, annual interest expense would increase
by approximately $667,000. As of September 30, 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
$265,000 for the three months ended September 30, 2008 and have a cumulative
positive foreign currency translation adjustment balance of $1.1 million at
September 30, 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 September 30, 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 September 30, 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.
---------------------------------------------------------------------
Issuer Purchases of Equity Securities
The following table provides information about our purchases of stock in
the open market during the third 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)
---------------------- --------------- ---------------- -------------------- ---------------------
July 2008............. 13,036 $ 42.09 13,036 671,853
August 2008........... 107,350 44.14 107,350 564,503
September 2008........ 89,477 43.52 89,477 475,026
--------------- ---------------- --------------------
Total................. 209,863 $ 43.75 209,863
--------------- ---------------- --------------------
-----------
(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
----------- ------------
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
(Incorporated 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)
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: October 27, 2008 /s/ Harland C. Stonecipher
---------------------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: October 27, 2008 /s/ Randy Harp
---------------------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: October 27, 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: October 27, 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: October 27, 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 September 30, 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: October 27, 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 September 30, 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: October 27, 2008 /s/ Steve Williamson
---------------------------------------------------
Steve Williamson
Chief Financial Officer