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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended March 31, 2007
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period From _____ to _____
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Commission File Number: 001-09293
PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Pre-Paid Way, Ada, Oklahoma 74820-5813
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (580) 436-1234
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer | | Accelerated filer |X| Non-accelerated filer | |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes | | No |X|
The number of shares outstanding of the registrant's common stock (excluding
4,852,179 shares held in treasury) as of April 20, 2007 was 13,339,343.
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PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended March 31, 2007
CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
a) Consolidated Balance Sheets
as of March 31, 2007 (Unaudited) and December 31, 2006
b) Consolidated Statements of Income (Unaudited)
for the three months ended March 31, 2007 and 2006
c) Consolidated Statements of Comprehensive Income (Unaudited)
for the three months ended March 31, 2007 and 2006
d) Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2007 and 2006
e) Notes to Consolidated Financial Statements (Unaudited)
Item 1A. Risk Factors
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures
ITEM 1. FINANCIAL STATEMENTS
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
March 31, December 31,
2007 2006
--------------- ---------------
Current assets: (Unaudited)
Cash and cash equivalents............................................................$ 17,607 $ 12,031
Available-for-sale investments, at fair value........................................ 48,800 42,275
Membership fees receivable........................................................... 5,478 5,518
Inventories.......................................................................... 1,341 1,337
Refundable income taxes.............................................................. - 653
Deferred member and associate service costs.......................................... 17,705 15,879
Deferred income taxes................................................................ 3,995 4,235
Other assets......................................................................... 6,465 6,404
--------------- ---------------
Total current assets............................................................. 101,391 88,332
Available-for-sale investments, at fair value.......................................... 20,602 27,461
Investments pledged.................................................................... 4,151 4,145
Property and equipment, net............................................................ 58,805 59,643
Deferred member and associate service costs............................................ 2,577 2,636
Other assets........................................................................... 6,484 6,330
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Total assets...................................................................$ 194,010 $ 188,547
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits..................................................................$ 12,180 $ 11,995
Deferred revenue and fees............................................................ 27,373 26,040
Current portion of capital leases payable............................................ 21 340
Current portion of notes payable..................................................... 18,437 18,437
Income taxes payable................................................................. 6,143 -
Accounts payable and accrued expenses................................................ 14,302 13,645
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Total current liabilities.......................................................... 78,456 70,457
Capital leases payable............................................................... 951 957
Notes payable........................................................................ 68,924 73,533
Deferred revenue and fees............................................................ 2,577 2,636
Deferred income taxes................................................................ 4,615 4,897
Other non-current liabilities........................................................ 5,519 5,207
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Total liabilities................................................................ 161,042 157,687
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Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 18,200 and
18,488 issued at March 31, 2007 and December 31, 2006, respectively................ 182 185
Retained earnings.................................................................... 131,376 129,413
Accumulated other comprehensive income............................................... 438 290
Treasury stock, at cost; 4,852 shares held at March 31, 2007 and
December 31, 2006, respectively..................................................... (99,028) (99,028)
--------------- ---------------
Total stockholders' equity....................................................... 32,968 30,860
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Total liabilities and stockholders' equity.....................................$ 194,010 $ 188,547
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
---------------------------
2007 2006
----------- -----------
Revenues:
Membership fees............................................. $ 103,881 $ 101,740
Associate services.......................................... 7,064 6,963
Other....................................................... 1,139 1,257
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112,084 109,960
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Costs and expenses:
Membership benefits......................................... 36,751 35,628
Commissions................................................. 30,532 31,885
Associate services and direct marketing..................... 6,375 7,302
General and administrative.................................. 12,747 12,467
Other, net.................................................. 3,744 2,723
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90,149 90,005
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Income before income taxes.................................... 21,935 19,955
Provision for income taxes.................................... 7,207 6,884
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Net income.................................................... $ 14,728 $ 13,071
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Basic earnings per common share............................... $ 1.09 $ .85
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Diluted earnings per common share............................. $ 1.08 $ .84
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
---------------------------
2007 2006
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Net income..................................................... $ 14,728 $ 13,071
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Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... 51 (41)
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Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during period.... 25 (204)
Reclassification adjustment for realized (gains) losses
included in net income................................... 72 (27)
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97 (231)
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Other comprehensive income (loss), net of income taxes
of $62 and $(148), respectively.............................. 148 (272)
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Comprehensive income........................................... $ 14,876 $ 12,799
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
2007 2006
------------ -----------
Cash flows from operating activities:
Net income....................................................................... $ 14,728 $ 13,071
Adjustments to reconcile net income to net cash provided
by operating activities:
Benefit for deferred income taxes.............................................. (42) (108)
Depreciation and amortization.................................................. 2,090 2,043
------------ -----------
Cash provided by operating activities before changes in assets and
liabilities................................................................... 16,776 15,006
Decrease in Membership fees.................................................... 40 442
(Increase) decrease in inventories............................................. (4) 275
Decrease in refundable income taxes............................................ 653 -
Increase in deferred member and associate service costs........................ (1,767) (979)
Increase in other assets....................................................... (215) (1,129)
Increase in accrued Membership benefits........................................ 185 181
Increase in deferred revenue and fees.......................................... 1,274 581
Increase in other non-current liabilities...................................... 312 294
Increase in income taxes payable............................................... 6,143 4,610
Increase (decrease) in accounts payable and accrued expenses................... 708 (1,004)
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Net cash provided by operating activities.................................... 24,105 18,277
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Cash flows from investing activities:
Additions to property and equipment............................................ (1,252) (2,628)
Purchases of investments - available for sale.................................. (41,692) (6,935)
Maturities and sales of investments - available for sale....................... 42,117 1,604
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Net cash used in investing activities........................................ (827) (7,959)
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Cash flows from financing activities:
Proceeds from exercise of stock options........................................ 858 365
Tax benefit on exercise of stock options....................................... 364 172
Decrease in capital lease obligations.......................................... (325) (5)
Common stock dividends paid.................................................... - (4,643)
Repayments of debt............................................................. (4,609) (4,797)
Purchases and retirement of treasury stock..................................... (13,990) (16,165)
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Net cash used in financing activities ....................................... (17,702) (25,073)
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Net increase (decrease) in cash and cash equivalents............................. 5,576 (14,755)
Cash and cash equivalents at beginning of period................................. 12,031 33,957
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Cash and cash equivalents at end of period....................................... $ 17,607 $ 19,202
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Supplemental disclosure of cash flow information:
Cash paid for interest......................................................... $ 1,904 $ 666
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Cash paid for income taxes..................................................... $ 158 $ 2,059
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Except for per share amounts, dollar amounts in tables are in
thousands unless otherwise indicated)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been omitted. The
accompanying consolidated financial statements and notes thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in our 2006 Annual Report on Form 10-K. Terms such as "we", "our" and
"us" are sometimes used as abbreviated references to Pre-Paid Legal Services,
Inc.
In our opinion, the accompanying unaudited financial statements as of March
31, 2007, and for the three month periods ended March 31, 2007 and 2006, reflect
adjustments (which were normal and recurring) which, in our opinion, are
necessary for a fair statement of our financial position and results of
operations of the interim periods presented. Results for the three month period
ended March 31, 2007 are not necessarily indicative of results expected for the
full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Note 2 - Contingencies
Beginning in the second quarter of 2001 multiple lawsuits were filed
against us, certain officers, employees, sales associates and other defendants
in various Mississippi state courts by current or former members seeking actual
and punitive damages for alleged breach of contract, fraud and various other
claims in connection with the sale of Memberships. At one time, we were aware of
11 separate lawsuits involving approximately 400 plaintiffs in multiple counties
in Mississippi. These cases seek varying amounts of actual and punitive damages.
We tried three separate lawsuits in Mississippi. On September 11, 2006 we
reached a settlement agreement with counsel for the more than 400 plaintiffs in
numerous pending cases in Mississippi. For an amount significantly less than our
then accrued reserves of $2.5 million, all pending litigation against us is
being resolved in Mississippi, including the Barbara Booth v. Pre-Paid Legal
Services, Inc. case in which the $9.9 million punitive damage verdict was
entered. Settlement and dismissal of almost all pending litigation has been
approved by the plaintiffs.
On March 27, 2006 we received a complaint filed by a former provider
attorney law firm in Davidson County, Tennessee seeking compensatory and
punitive damages on the basis of allegations of breach of contract. On May 15,
2006 the trial court dismissed plaintiff's complaint in its entirety. Plaintiff
filed a notice of appeal on June 13, 2006. The matter is set for oral argument
in May 2007. 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
March 31, 2007 was $75,000. 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 memberships in force, is reasonable. We have
established an accrued liability we believe will be sufficient to cover the
estimated tax assessment in connection with these items, which at March 31, 2007
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 13
million shares during subsequent board meetings. At March 31, 2007 we had
purchased 11.7 million treasury shares under these authorizations for a total
consideration of $310.0 million, an average price of $26.49 per share. We
purchased and formally retired 328,823 shares of our common stock during the
2007 first quarter for $14.0 million, or an average price of $42.55 per share,
reducing our common stock by $3,288 and our retained earnings by $14.0 million.
See Note 6 below. Given the current interest rate environment, the nature of
other investments available and our expected cash flows, we believe that
purchasing treasury shares enhances shareholder value and may seek alternative
sources of financing to continue or accelerate the program. Any additional
treasury stock purchases will be made at prices that we consider attractive and
at such times that we believe will not unduly impact our liquidity.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
respective period. Diluted earnings per common share are computed by dividing
net income by the weighted average number of shares of common stock and dilutive
potential common shares outstanding during the respective period. The weighted
average number of common shares is increased by the number of dilutive potential
common shares issuable on the exercise of options less the number of common
shares assumed to have been purchased with the proceeds from the exercise of the
options pursuant to the treasury stock method; those purchases are assumed to
have been made at the average price of the common stock during the respective
period.
Three Months
Ended March 31,
------------------------
Basic Earnings Per Share: 2007 2006
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Earnings:
---------
Net income........................................................... $ 14,728 $ 13,071
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Shares:
-------
Weighted average shares outstanding.................................. 13,541 15,430
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Diluted Earnings Per Share:
Earnings:
---------
Net income........................................................... $ 14,728 $ 13,071
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Shares:
-------
Weighted average shares outstanding.................................. 13,541 15,430
Assumed exercise of options.......................................... 76 142
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Weighted average number of shares, as adjusted....................... 13,617 15,572
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Shares issued pursuant to option exercises........................... 40 22
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Options to purchase shares of common stock are excluded from the
calculation of diluted earnings per share when their inclusion would have an
anti-dilutive effect on the calculation. No options were excluded for the three
months ended March 31, 2007 and 2006.
Note 5 - Recently Issued Accounting Pronouncements
We adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"), on January 1, 2007. The adoption of FIN 48 did not have a
material effect on our consolidated financial position or results of operations.
We and our subsidiaries are subject to U.S. federal income tax, Canadian
income tax, as well as income tax of multiple state and local jurisdictions. Our
2003 - 2006 U.S. federal income tax returns remain open to examination by the
Internal Revenue Service (IRS). Our state and local income tax returns for years
1999 through 2006 remain open to examination by the state and local taxing
authorities. Canadian income tax returns for 1999 through 2002 are currently
under examination and years 1999 - 2006 are open to examination. The IRS
examined our U.S. federal income tax return for 2004 resulting in no recommended
adjustments to the tax return.
Canadian taxing authorities are challenging portions of our commission and
general and administrative deductions for tax years 1999 - 2002 and have tax
assessments which aggregate $5.7 million. The Canadian taxing authorities
contend commission deductions should be matched with the membership revenue as
received, we contend these commissions are deductible when paid. Under Canadian
tax laws, our commission payments are treated as a prepaid expense. We base our
deduction of commission on the fact that all the services (the sale of the
membership) have been performed by the sales associate at the time of sale
therefore this prepaid expense (the commission payments) is deductible when
paid. Also, the commission payment is taxable to the sales associate when paid
and each year we issue a T4 (Canadian 1099 equivalent) to sales associates for
the total commission payments made during that year. In addition, Canadian
taxing authorities have challenged our allocation of general and administrative
expenses to Canadian operations. We contend the allocation of general and
administrative expenses, based on the percentage of Canadian new memberships
written and the Canadian percentage memberships in force, is reasonable. We have
established an accrued liability we believe will be sufficient to cover the
estimated tax assessment in connection with these items, which at March 31, 2007
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.
We are continuing our practice of recognizing interest and/or penalties
related to income tax matters in general and administrative expenses.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This statement
clarifies how to measure fair value as permitted under other accounting
pronouncements but does not require any new fair value measurements. However,
for some entities, the application of this statement will change current
practice. We will be required to adopt SFAS No. 157 as of January 1, 2008 and
are currently evaluating the impact of SFAS No. 157 and have not yet determined
the effect on our earnings or financial position.
In March 2006, the FASB Emerging Issues Task Force issued Issue 06-3, How
Sales Taxes Collected From Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement ("EITF 06-3"). A tentative consensus
was reached that a company should disclose its accounting policy (i.e., gross or
net presentation) regarding presentation of taxes within the scope of EITF 06-3.
If taxes are significant, a company should disclose the amount of such taxes for
each period for which an income statement is presented. Sales taxes are not
significant and our accounting policy is to present them on a net basis
(excluded from revenues).
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for us January 1, 2008. We are evaluating the impact that the adoption
of SFAS No. 159 will have on our consolidated financial statements.
Note 6 - Notes Payable
On June 23, 2006, we received $80 million of senior, secured financing (the
"Senior Loan") from Wells Fargo Foothill, Inc. ("Wells Fargo") consisting of a
$75 million five year term loan facility (the "Term Facility") and a $5 million
five year revolving credit facility (the "Revolving Facility"). At March 31,
2007, we have the full Revolving Facility available to us. After payment of an
origination fee of 1%, lender costs and retirement of $15.3 million of existing
bank indebtedness, the net proceeds of the Term Facility we received were $58.8
million. Since receiving the net proceeds, we used a portion of them to purchase
1.2 million shares of treasury stock at a cost of $49.8 million, or an average
price of $40.94 per share. The remaining proceeds will be used primarily to fund
further share repurchases.
The Term Facility was fully funded on June 23, 2006 and 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 plus 150 basis points or at the LIBOR plus 250 basis
points. The interest rate at March 31, 2007 was 7.82%. 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. We expect to be able to repay the
facilities with cash flow from operations. We have the right to prepay the Term
Facility in whole or in part, subject to a prepayment premium of 1% in the first
year, 0.5% in the second year and none thereafter, with a reduction of 50% of
the prepayment premium if the prepayment is from the proceeds of another loan
provided by Wells Fargo.
The Senior Loan is guaranteed by our non-regulated 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 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; and
* a requirement to maintain a Leverage Ratio (funded indebtedness as of
the end of each quarter divided by EBITDA for the trailing twelve
months) of no more than 1.5 to 1.
We were in compliance with these covenants at March 31, 2007.
In addition to customary events of default, it is an event of default 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 used the proceeds of the Term Facility to repay in full the $5.3
remaining balance of our existing stock loan with Bank of Oklahoma, N.A., First
United Bank and Trust and Comerica Bank, which was originated in 2003 and the
$10 million we borrowed from Bank of Oklahoma, N. A. earlier in June 2006. The
related loan agreements were thereby terminated and the associated collateral
was released. As a part of the transaction, we also amended our existing $20
million real estate loan which we incurred in 2002 to finance our new
headquarters building in Ada, Oklahoma to extend the final maturity from
September 2008 to August 2011. This loan, with interest at the 30 day LIBOR rate
plus 2.25%, adjusted monthly, remains secured by a mortgage on our headquarters,
but the additional security interest in our membership contracts was released.
The interest rate at March 31, 2007 was 7.57%. We will continue to be required
to make the same monthly payments on this loan of $191,000 plus interest with
the balance of approximately $2.3 million due at maturity. The real estate loan
was also amended to conform the financial covenants to those under the new
Senior Loan.
Our $11.5 million aircraft loan was fully funded in November 2005 with
interest payable monthly at the 30 day LIBOR rate plus 1.75%, adjusted monthly,
and requires monthly principal installments of $96,000 which began December 31,
2005 with the remaining balance payable in a final installment due November 30,
2012. The interest rate at March 31, 2007 was 7.07%. The loan is collateralized
by the aircraft purchased. In addition to customary events of default, if
Harland C. Stonecipher ceases to be our Chief Executive Officer for a period of
90 consecutive days an event of default will occur.
A schedule of outstanding balances as of March 31, 2007 is as follows:
Senior loan................................ $ 65,000
Real estate loan........................... 12,381
Aircraft loan.............................. 9,980
----------
Total notes payable........................ 87,361
Less: Current portion of notes payable..... (18,437)
----------
Long term portion.......................... $ 68,924
----------
A schedule of future maturities as of March 31, 2007 is as follows:
Repayment Schedule commencing
April 2007:
-------------------------------------------
Year 1..................................... $ 18,437
Year 2..................................... 18,437
Year 3..................................... 18,437
Year 4..................................... 18,437
Year 5..................................... 9,390
Thereafter................................. 4,223
----------
Total notes payable........................ $ 87,361
----------
Note 7 - Share-based Compensation
During the three months ended March 31, 2007, 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, 2007.................... $ 23.26 273,040
Granted....................................... - -
Cancelled..................................... 22.87 (5,597)
Exercised..................................... 24.27 (45,443)
-------------- ---------------
Outstanding, March 31, 2007..................... $ 23.07 222,000 1.02 $ 6,003
-------------- --------------- ---------------- ---------------
Options exercisable as of March 31, 2007........ $ 23.07 222,000 1.02 $ 6,003
-------------- --------------- ---------------- ---------------
Other information pertaining to option activity during the three months
ended March 31, 2007 and 2006 was as follows:
March 31, 2007 March 31, 2006
------------------ ------------------
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................. $934 $156
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.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123R, Share-Based Payment ("SFAS No. 123R" or the "Statement"). This Statement
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), and supersedes Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25") and its related implementation
guidance. On January 1, 2006, we adopted the provisions of SFAS No. 123R using
the modified prospective method. SFAS No. 123R focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. The Statement requires entities to recognize compensation
expense for awards of equity instruments to employees based on the grant-date
fair value of those awards (with limited exceptions). SFAS No. 123R also
requires the benefits of tax deductions in excess of recognized compensation
expense to be reported as financing cash flows, rather than as an operating cash
flow as prescribed under the prior accounting rules. This requirement reduces
net operating cash flows and increases net financing cash flows in periods after
adoption. Total cash flow remains unchanged from what would have been reported
under prior accounting rules.
Prior to the adoption of SFAS No. 123R, we followed the intrinsic value
method in accordance with APB No. 25 to account for our employee stock options.
Accordingly, no compensation expense was recognized in connection with the
issuance of stock options under any of our stock option plans for periods ended
prior to January 1, 2006. The adoption of SFAS No. 123R primarily resulted in a
change in our method of recognizing the fair value of share-based compensation.
Our adoption of SFAS No. 123R did not result in our recording compensation
expense for employee stock options, since all options had vested, no
modifications were made to existing options and no new options were granted.
We do not expect to grant any additional employee options or modify any
existing options and therefore recognize any share-based payments' expense from
the issuance of employee stock options in 2007. The options outstanding at
December 31, 2005 did not and will not impact 2006 or 2007 consolidated results
of operations and financial position since all option-holders were fully vested
in such options at December 31, 2005.
ITEM 1A. RISK FACTORS
--------------------------
There are a number of risk factors that could affect our financial
condition or results of operations. See Note 2 - Contingencies and Part II, Item
1 - Legal Proceedings. Please refer to page 14 and 15 of our 2006 Annual Report
on Form 10-K for a description of other risk factors. There have not been any
material changes in the risk factors disclosed in the Annual Report.
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, 2006, which
describes, among other things, our basic business model, critical accounting
policies, measures of Membership retention, and basic cash flow characteristics
of our business. The following tables set forth changes in the principal
categories of revenues and expenses and Membership and recruiting activity for
the first quarter of 2007 compared to the first quarter of 2006 and the fourth
quarter of 2006 (Table amounts in 000's). The sum of the percentages in the
tables may not total due to rounding.
Three Months Ended March 31, 2007 Three % % Three Three
compared to Months Change Change Months Months
Three Months Ended March 31, 2006 Ended % of from from Ended % of Ended % of
and compared to March 31, Total Prior Sequential March 31, Total Dec. 31, Total
Three Months Ended December 31, 2006 2007 Revenue Year Period 2006 Revenue 2006 Revenue
------------------------------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues:
Membership fees.................... $ 103,881 92.7 2.1 0.1 $ 101,740 92.5 $ 103,757 92.9
Associate services................. 7,064 6.3 1.5 5.3 6,963 6.3 6,706 6.0
Other.............................. 1,139 1.0 (9.4) (5.8) 1,257 1.1 1,209 1.1
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
112,084 100.0 1.9 0.4 109,960 100.0 111,672 100.0
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Membership benefits................ 36,751 32.8 3.2 (0.9) 35,628 32.4 37,075 33.2
Commissions........................ 30,532 27.2 (4.2) (0.7) 31,885 29.0 30,739 27.5
Associate services and direct marketing 6,375 5.7 (12.7) (14.6) 7,302 6.6 7,463 6.7
General and administrative......... 12,747 11.4 2.2 3.1 12,467 11.3 12,362 11.1
Other, net......................... 3,744 3.3 37.5 1.8 2,723 2.5 3,677 3.3
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
90,149 80.4 (0.2) (1.3) 90,005 81.9 91,316 81.8
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes........... 21,935 19.6 9.9 7.8 19,955 18.1 20,356 18.2
Provision for income taxes........... 7,207 6.4 4.7 1.2 6,884 6.3 7,125 6.4
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................... $ 14,728 13.1 12.7 11.3 $13,071 11.8 $13,231 11.9
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Three Months Ended
New Memberships: 3/31/2007 12/31/2006 3/31/2006
---------------- ----------- ------------ -----------
New legal service membership sales.......................................... 147,742 131,628 158,426
New "stand-alone" IDT membership sales...................................... 13,788 8,010 6,800
--------- ---------- ---------
Total new membership sales......................................... 161,530 139,638 165,226
--------- ---------- ---------
New "add-on" IDT membership sales........................................... 93,204 88,255 100,405
Average Annual Membership fee............................................... $309.86 $323.54 $327.43
Active Memberships:
Active legal service memberships at end of period.......................... 1,477,604 1,473,710 1,488,308
Active "stand-alone" IDT memberships at end of period (see note below)...... 73,525 65,030 54,453
--------- ---------- ---------
Total active memberships at end of period..........................1,551,129 1,538,740 1,542,761
--------- ---------- ---------
Active "add-on" IDT memberships at end of period (see note below)........... 562,075 540,253 485,246
New Sales Associates:
New sales associates recruited.............................................. 31,043 35,311 49,776
Average enrollment fee paid by new sales associates......................... $103.13 $49.47 $49.82
Average Membership fee in force:
Average Annual Membership fee............................................... $294.17 $293.00 $288.92
Note - reflects 6,178 net transfers from "add-on" status to "stand-alone" status during the 2007 quarter
Identity Theft Shield ("IDT") memberships sold in conjunction with new
legal plan memberships or "added-on" to existing legal plan memberships sell for
$9.95 per month and are not counted as "new" memberships but do increase the
average premium and related direct expenses (membership benefits and
commissions) of our membership base, while "stand alone" Identity Theft Shield
memberships are not attached to a legal plan membership and sell for $12.95 per
month.
Recently Issued Accounting Pronouncements
See Note 5 - Recently Issued Accounting Pronouncements in Item 1 above.
Results of Operations - First Quarter of 2007 compared to First Quarter of 2006
--------------------------------------------------------------------------------
Net income increased 13% for the first quarter of 2007 to $14.7 million
from $13.1 million for the prior year's first quarter primarily due to an
increase in membership fees of $2.1 million and a decrease in commissions of
$1.4 million partially offset by an increase in Membership benefits of $1.1
million and an increase in other, net expenses of $1.0 million. Diluted earnings
per share increased 29% to $1.08 per share from 84 cents per share for the prior
year's comparable quarter due to the 13% increase in net income and an
approximate 13% decrease in the weighted average number of diluted shares
outstanding.
Membership fees totaled $103.9 million during the 2007 first quarter
compared to $101.7 million for 2006, an increase of 2%. 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 2% during the three
months ended March 31, 2007 to 161,530 from 165,226 during the comparable period
of 2006. At March 31, 2007, there were 1,551,129 active Memberships in force
compared to 1,542,761 at March 31, 2006, an increase of 1%. Additionally, the
average annual fee per Membership has increased from $289 for all Memberships in
force at March 31, 2006 to $294 for all Memberships in force at March 31, 2007,
primarily as a result of a larger number of Identity Theft Shield memberships.
Although total new associates enrolled during the first quarter of 2007
decreased 38% compared to the 2006 period, associate services revenue increased
by approximately $101,000 to $7.1 million. New associates enrolled were 31,043
during the 2007 period compared to 49,776 for the same period of 2006, but
average enrollment fees paid by new sales associates increased from $50 during
the 2006 period to $103 during the 2007 quarter due to a higher enrollment fee
in place for most of the 2007 first quarter. We expect to continue some form of
reduced enrollment programs for the remainder of the year. Associate enrollment
fees increased from $2.7 million for the first quarter of 2006 to $3.4 million
during the comparable period of 2007. The eService fees decreased slightly to
$3.0 million during the first quarter of 2007 compared to $3.2 million for the
comparable period of 2006. Future revenues from associate services will depend
primarily on the number of new associates enrolled, the average enrollment fee
paid 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 9% from $1.3 million for the 2006 period to $1.1
million for the 2007 period.
Total revenues increased 2% to $112.1 million for the three months ended
March 31, 2007 from $110.0 million during the comparable period of 2006 due to a
$2.1 million increase in Membership fees.
Membership benefits totaled $36.8 million for the three months ended March
31, 2007 compared to $35.6 million for the comparable period of 2006, and
represented 35% of Membership fees for both periods. This Membership benefit
ratio (Membership benefits as a percentage of Membership fees) should be reduced
going forwward 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.
Commissions to associates decreased 4% to $30.5 million for the three
months ended March 31, 2007 compared to $31.9 million for the comparable period
of 2006, and represented 29% and 31% of Membership fees for the respective
periods. Commissions to associates are primarily dependent on the number of new
memberships sold, including add-on membership sales, during a period.
Commissions to associates per new membership sold were $189 per membership for
the three months ended March 31, 2007 compared to $193 for the comparable period
of 2006. The average commission per new membership sold varies depending on the
compensation structure that is in place at the time a new membership is sold,
the amount of the Membership fee and the amount of any charge-backs (recoupment
of previous commission advances) that are deducted from amounts that would
otherwise be paid to the various sales associates that are compensated for the
membership sale. Should we add additional commissions to our compensation plan
or reduce the amount of chargebacks collected from our associates as we have
from time to time, the commission cost per new Membership will increase
accordingly.
Associate services and direct marketing expenses decreased to $6.4 million
for the three months ended March 31, 2007 from $7.3 million for the comparable
period of 2006. The decrease was primarily a result of decreased costs for
incentive trips and bonuses 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 March 31,
2007 and 2006 were $12.7 million and $12.5 million, respectively, and
represented 12% of Membership fees for both periods.
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, were $3.7 million for the three months ended March 31, 2007 compared to
$2.7 million for the 2006 comparable period. Depreciation increased to $2.1
million for the first quarter of 2007 from $2.0 million for the comparable
period of 2006. Interest expense increased to $1.9 million during the 2007
period from $678,000 during the comparable period of 2006 as a result of
additional debt. Premium taxes increased from $389,000 for the three months
ended March 31, 2006 to $506,000 for the comparable period of 2007. Interest
income increased $345,000 to $732,000 for the three months ended March 31, 2007
from $387,000 for the comparable period of 2006, due to an increase in cash and
investment balances. We have recorded a provision for income taxes of $7.2
million (32.9% of pretax income) and $6.8 million (34.4% of pretax income) for
the three months ended March 31, 2007 and 2006, respectively. The decrease in
the tax rate is primarily due to an increase in non taxable interest income.
Results of Operations - First Quarter of 2007 compared to Fourth Quarter of 2006
--------------------------------------------------------------------------------
First quarter 2007 membership fees increased slightly, less than 1%, to
$103.9 million from $103.8 million for the fourth quarter of 2006. Associate
services revenues increased during the 2007 first quarter by approximately
$358,000 to $7.1 million from $6.7 million for the 2006 fourth quarter and
associate services and direct marketing expenses decreased by $1.1 million
during the same period. Membership benefits totaled $36.8 million in the first
quarter of 2007 compared to $37.1 million for the 2006 fourth quarter and
represented 35% and 36%, respectively, of membership fees for the two periods.
Commissions to associates totaled $30.5 million in the 2007 first quarter
compared to $30.7 million for the 2006 fourth quarter and represented 29% and
30%, respectively, of membership fees for the two periods. General and
administrative expenses increased slightly during the 2007 first quarter to
$12.7 million compared to $12.4 million for the 2006 fourth quarter and
represented 12% of membership fees for both periods.
Liquidity and Capital Resources
-------------------------------
General
Consolidated net cash provided from operating activities for the first
three months of 2007 increased $5.8 million to $24.1 million from $18.3 million
for the 2006 period, while cash provided from operating activities before
changes in assets and liabilities only increased $1.8 million from $15.0 million
to $16.8 million. The increase of $1.8 million resulted primarily from the
increase in net income of $1.7 million.
Consolidated net cash used in investing activities was $827,000 for the
first three months of 2007 compared to $8.0 million for the comparable period of
2006. This $7.1 million change in investing activities resulted from a $1.4
million decrease in additions to property and equipment and a $40.5 million
increase in the maturities and sales of investments partially offset by a $34.8
million increase in investment purchases.
Net cash used in financing activities during the first three months of 2007
was $17.7 million compared to $25.1 million for the comparable period of 2006.
This $7.4 million change was primarily comprised of the $4.6 million decrease in
common stock dividends paid and the $2.2 million decrease in purchases of
treasury stock.
We purchased and formally retired 328,823 shares of our common stock during
the 2007 first quarter for $14.0 million, or an average price of $42.55 per
share, reducing our common stock by $3,288 and our retained earnings by $14.0
million. We had positive working capital of $22.9 million at March 31, 2007, an
increase of $5.1 million compared to working capital of $17.9 million at
December 31, 2006. The increase was primarily due to a $5.6 million increase in
cash and cash equivalents and an increase of $6.5 million in the current portion
of available-for-sale investments partially offset by an increase of $6.1
million in income taxes payable,. The $22.9 million positive working capital at
March 31, 2007 would have been a $32.6 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 short term or the long
term.
At March 31, 2007 we reported $87.0 million in cash and cash equivalents
and unpledged investments compared to $81.8 million at December 31, 2006. Our
investments consist of common stocks, investment grade (rated Baa or higher)
bonds primarily issued by corporations, the United States Treasury, federal
agencies, federally sponsored agencies and enterprises as well as
mortgage-backed securities, auction rate certificates and state and municipal
tax-exempt bonds.
We generally advance significant commissions at the time a Membership is
sold. During the three months ended March 31, 2007, we advanced commissions, net
of chargebacks, of $30.7 million on new Membership sales compared to $31.2
million for the same period of 2006. Since approximately 95% of Membership fees
are collected on a monthly basis, a significant cash flow deficit is created on
a per Membership basis at the time a Membership is sold. Since there are no
further commissions paid on a Membership during the advance period, we typically
derive significant positive cash flow from the Membership over its remaining
life.
We expense advance commissions ratably over the first month of the related
Membership. As a result of this accounting policy, our commission expenses are
all recognized over the first month of a Membership and there is no commission
expense recognized for the same Membership during the remainder of the advance
period. We track our unearned advance commission balances outstanding in order
to ensure the advance commissions are recovered before any renewal commissions
are paid and for internal purposes of analyzing our commission advance program.
While not recorded as an asset, unearned advance commission balances from
associates as of March 31, 2007, and related activity for the three month period
then ended, were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)............................... $ 188,647
Advance commission payments, net................................................. 30,681
Earned commissions applied....................................................... (30,895)
Advance commission payment write-offs............................................ (940)
------------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 187,493
Estimated unrecoverable advance commission payments (1).......................... (40,987)
------------------
Ending unearned advance commission payments, net (1)............................. $ 146,506
------------------
(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 $51.0 million.
As such, at March 31, 2007 future commission payments and related expense should
be reduced as unearned advance commission payments of $95.5 million are
recovered. Commissions are earned by the associate as Membership premiums are
earned by us, usually on a monthly basis. For additional information concerning
these commission advances, see our Annual report on Form 10-K under the heading
Commissions to Associates in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
We believe that we have significant ability to finance expected future
growth in Membership sales based on our recurring cash flow and existing amount
of cash and cash equivalents and unpledged investments at March 31, 2007 of
$87.0 million. We expect to maintain cash and investment balances, including
pledged investments, on an on-going basis of approximately $20 to $30 million in
order to meet expected working capital needs and regulatory capital
requirements. Cash balances in excess of this amount would be used for
discretionary purposes such as additional treasury stock purchases subject to
limitations in the Term Facility.
Notes Payable
See Note 6 - Notes Payable in Item 1 above.
Parent Company Funding and Dividends Although we are the operating entity
in many jurisdictions, our subsidiaries serve as operating companies in various
states that regulate Memberships as insurance or specialized legal expense
products. The most significant of these wholly owned subsidiaries are Pre-Paid
Legal Casualty, Inc. ("PPLCI"), Pre-Paid Legal Services Inc. of Florida
("PPLSIF") and Legal Service Plans of Virginia, Inc. ("LSPV"). The ability of
these entities to provide funds to us is subject to a number of restrictions
under various insurance laws in the jurisdictions in which they conduct
business, including limitations on the amount of dividends and management fees
that may be paid and requirements to maintain specified levels of capital and
reserves. In addition PPLCI will be required to maintain its stockholders'
equity at levels sufficient to satisfy various state or provincial regulatory
requirements, the most restrictive of which is currently $3 million. Additional
capital requirements of these entities, or any of our regulated subsidiaries,
will be funded by us in the form of capital contributions or surplus debentures.
At March 31, 2007, none of these entities had funds available for payment of
substantial dividends without the prior approval of the insurance commissioner.
We received a $1.6 million dividend from LSPV during March 2007 and a $7.4
million dividend from PPLCI during April 2007.
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, 2006.
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, 2006. There were no significant
changes in the application of critical accounting policies or estimates during
the first three months of 2007. 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 as we
have existing authorization from the Board to purchase an additional 1.3 million
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 March 31, 2007 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, 2006. 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
--------------------------------------------------------------------
Our consolidated balance sheets include a certain amount of assets and
liabilities whose fair values are subject to market risk. Due to our significant
investment in fixed-maturity investments, interest rate risk represents the
largest market risk factor affecting our consolidated financial position.
Increases and decreases in prevailing interest rates generally translate into
decreases and increases in fair values of those instruments. Additionally, fair
values of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment options, relative values of
alternative investments, liquidity of the instrument and other general market
conditions.
As of March 31, 2007, substantially all of our investments were in
investment grade (rated Baa or higher) fixed-maturity investments and
interest-bearing money market accounts including certificates of deposit. 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 in Estimated fair value
(In '000's) interest rate after hypothetical
Fair value (bp = basis points) change in interest rate
-------------- ------------------------- -------------------------
Fixed-maturity investments at March 31, 2007 (1)....... $ 22,272 100 bp increase $ 21,435
200 bp increase 20,606
50 bp decrease 22,686
100 bp decrease 23,101
Fixed-maturity investments at December 31, 2006 (1).... $ 31,420 100 bp increase $ 30,170
200 bp increase 28,975
50 bp decrease 31,965
100 bp decrease 32,568
-------------------
(1) Excluding short-term investments with a fair value of $51.2 million
(Certificates of deposit, auction rate securities and EURO deposits) at
March 31, 2007 and $42.4 million at December 31, 2006.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 2007 would reduce the
estimated fair value of our fixed-maturity investments by approximately
$1.7 million at that date. At December 31, 2006, 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.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates. As of
March 31, 2007, we had $87.4 million in notes payable outstanding at interest
rates indexed to the 30 day LIBOR rate that exposes us to the risk of increased
interest costs if interest rates rise. Assuming a 100 basis point increase in
interest rates on the floating rate debt, annual interest expense would increase
by approximately $874,000. As of March 31, 2007, 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.
ITEM 4. CONTROLS AND PROCEDURES
----------------------------------
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of March 31, 2007, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the
quarter ended March 31, 2007 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
---------------------------------------------------------------------
Issuer Purchases of Equity Securities
The following table provides information about our purchases of stock in
the open market during the first quarter of 2007.
Total Number of Maximum Number
Shares Purchased as of Shares that May
Total Number of Part of Publicly Yet Be Purchased
of Shares Average Price Announced Plans or Under the Plans or
Period Purchased Paid Per Share Programs Programs (1)
---------------------- --------------------- --------------------- ----------------------------- -----------------------
January 2007.......... 13,578 $ 38.72 13,578 613,017
February 2007......... 108,391 41.66 108,391 504,626
March 2007............ 206,854 43.26 206,854 1,297,772
Total................. --------------------- --------------------- -----------------------------
328,823 $ 42.55 328,823
----------- --------------------- --------------------- -----------------------------
(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 13 million shares.
The most recent authorization was for 1 million additional shares on March
7, 2007 and there has been no time limit set for completion of the
repurchase program.
See Part I, Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operation-Liquidity and Capital Resources" for a description of
loan covenants that limit our ability to repurchase shares and pay dividends.
ITEM 6. EXHIBITS.
------------------
(a) Exhibits:
Exhibit No. Description
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3.1 Amended and Restated Certificate of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 of
the Company's Report on Form 8-K dated June 27, 2005)
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10-Q
for the period ended June 30, 2003)
*10.1 Employment Agreement effective January 1, 1993 between the Company and Harland C. Stonecipher (Incorporated by reference
to Exhibit 10.1 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1992)
*10.2 Agreements between Shirley Stonecipher, New York Life Insurance Company and the Company regarding life insurance policy
covering Harland C. Stonecipher (Incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1985)
*10.3 Amendment dated January 1, 1993 to Split Dollar Agreement between Shirley Stonecipher and the Company regarding life
insurance policy covering Harland C. Stonecipher (Incorporated by reference to Exhibit 10.3 of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1992)
*10.4 Form of New Business Generation Agreement Between the Company and Harland C. Stonecipher (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 Purchase Agreement dated August 19, 2005 between us and Learjet, Inc., with Addendum. (Incorporated by reference to
Exhibit 10.1 of the Company's Report on Form 8-K dated August 19, 2005)
10.13 Loan Agreement dated November 30, 2005 between Pre-Paid legal Services, Inc and Bank of Oklahoma, N.A. and First United
Bank and Trust (Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K dated November 30, 2005)
10.14 Aircraft Chattel Mortgage, Security Agreement and Assignment of Rents dated November 30, 2005 between Pre-Paid legal
Services, Inc and Bank of Oklahoma, N.A. and First United Bank and Trust (Incorporated by reference to Exhibit 10.2 of the
Company's Report on Form 8-K dated November 30, 2005)
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 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)
21.1 List of Subsidiaries of the Company (Incorporated by reference to Exhibit 21.1 of our Annual Report on Form 10-K for the
year ended December 31, 2005)
31.1 Certification of Harland C. Stonecipher, Chairman, Chief Executive Officer and President, Pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934
31.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934
32.1 Certification of Harland C. Stonecipher, Chairman, Chief Executive Officer and President, Pursuant to 18 U.S.C. Section
1350
32.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350
--------------------
* Constitutes a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
------------------------------------
(Registrant)
Date: April 23, 2007 /s/ Harland C. Stonecipher
--------------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: April 23, 2007 /s/ Randy Harp
---------------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: April 23, 2007 /s/ Steve Williamson
---------------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 31.1
CERTIFICATION
-------------
I, Harland C. Stonecipher, Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 23, 2007 /s/ Harland C. Stonecipher
---------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 31.2
CERTIFICATION
-------------
I, Steve Williamson, Chief Financial Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 23, 2007 /s/ Steve Williamson
------------------------
Steve Williamson
Chief Financial Officer
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 23, 2007 /s/ Harland C. Stonecipher
------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 23, 2007 /s/ Steve Williamson
-------------------------------
Steve Williamson
Chief Financial Officer