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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 September 30, 2009
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period From _____ to _____
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Commission File Number: 001-09293
PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Pre-Paid Way, Ada, Oklahoma 74820-5813
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (580) 436-1234
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes |X| No | |
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | Accelerated filer |X| Non-accelerated filer | |
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 20, 2009 was 10,952,223.
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1
PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended September 30, 2009
CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements:
a) Consolidated Balance Sheets
as of September 30, 2009 (Unaudited) and December 31, 2008............ 3
b) Consolidated Statements of Income (Unaudited)
for the three month and nine month periods ended
September 30, 2009 and 2008........................................... 4
c) Consolidated Statements of Comprehensive Income (Unaudited)
for the three month nine month periods ended
September 30, 2009 and 2008........................................... 5
d) Consolidated Statements of Cash Flows (Unaudited) for
the three month and nine month periods ended
September 30, 2009 and 2008........................................... 6
e) Notes to Consolidated Financial Statements (Unaudited)................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations................................................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 22
Item 4. Controls and Procedures.................................................. 24
Part II. Other Information
Item 1. Legal Proceedings........................................................ 24
Item 1A.Risk Factors............................................................. 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............. 25
Item 6. Exhibits................................................................. 25
Signatures............................................................................... 28
2
ITEM 1. FINANCIAL STATEMENTS
----------------------------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
September 30, December 31,
2009 2008
------------- --------------
Current assets: (Unaudited)
Cash and cash equivalents............................................................ $ 38,880 $ 26,528
Available-for-sale investments, at fair value........................................ 5,605 12,812
Membership fees receivable........................................................... 6,362 6,639
Inventories.......................................................................... 1,359 1,285
Refundable income taxes.............................................................. 4,139 687
Deferred member and associate service costs.......................................... 19,255 15,737
Deferred income taxes................................................................ 4,744 5,151
Other assets......................................................................... 6,636 6,200
------------- --------------
Total current assets............................................................. 86,980 75,039
------------- --------------
Available-for-sale investments, at fair value.......................................... 29,061 20,637
Investments pledged.................................................................... 4,342 4,039
Property and equipment, net............................................................ 50,333 53,445
Deferred member and associate service costs............................................ 1,991 2,003
Other assets........................................................................... 9,330 7,680
------------- --------------
Total assets................................................................... $ 182,037 $ 162,843
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits payable.......................................................... $ 11,962 $ 12,013
Deferred revenue and fees............................................................ 29,531 26,556
Current portion of capital leases payable............................................ 245 24
Current portion of notes payable..................................................... 18,241 22,408
Accounts payable and accrued expenses................................................ 18,234 16,327
------------- --------------
Total current liabilities.......................................................... 78,213 77,328
------------- --------------
Capital leases payable............................................................... 892 910
Notes payable........................................................................ 23,570 37,251
Deferred revenue and fees............................................................ 1,991 2,003
Deferred income taxes................................................................ 5,741 5,646
Other non-current liabilities........................................................ 8,881 7,898
------------- --------------
Total liabilities................................................................ 119,288 131,036
------------- --------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 15,807 and
16,254 issued at September 30, 2009 and December 31, 2008, respectively............ 158 163
Retained earnings.................................................................... 159,857 130,832
Accumulated other comprehensive income (loss)........................................ 1,762 (160)
Treasury stock, at cost; 4,852 shares held at September 30, 2009 and
December 31, 2008, respectively.................................................... (99,028) (99,028)
------------- --------------
Total stockholders' equity....................................................... 62,749 31,807
------------- --------------
Total liabilities and stockholders' equity..................................... $ 182,037 $ 162,843
------------- --------------
The accompanying notes are an integral part of these financial statements.
3
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,
------------------------------------------------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Revenues:
Membership fees............................................. $ 105,435 $ 109,268 $ 317,856 $ 327,784
Associate services.......................................... 7,624 6,236 18,814 18,582
Other....................................................... 888 1,019 2,790 3,215
---------- ---------- ---------- ----------
113,947 116,523 339,460 349,581
---------- ---------- ---------- ----------
Costs and expenses:
Membership benefits......................................... 35,991 37,587 108,209 112,699
Commissions................................................. 36,676 33,678 93,023 95,698
Associate services and direct marketing..................... 7,827 5,358 21,132 17,991
General and administrative.................................. 12,613 12,531 38,918 38,866
Other, net.................................................. 2,361 3,043 6,495 10,136
---------- ---------- ---------- ----------
95,468 92,197 267,777 275,390
---------- ---------- ---------- ----------
Income before income taxes.................................... 18,479 24,326 71,683 74,191
Provision for income taxes.................................... 7,648 9,884 27,960 28,751
---------- ---------- ---------- ----------
Net income.................................................... $ 10,831 $ 14,442 $ 43,723 $ 45,440
---------- ---------- ---------- ----------
Basic earnings per common share............................... $ .99 $ 1.23 $ 3.96 $ 3.77
---------- ---------- ---------- ----------
Diluted earnings per common share............................. $ .99 $ 1.23 $ 3.95 $ 3.77
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
4
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,
------------------------------------------------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Net income..................................................... $ 10,831 $ 14,442 $ 43,723 $ 45,440
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... 646 (265) 1,149 (529)
---------- ---------- ---------- ----------
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during period.... 641 (357) 858 (722)
Reclassification adjustment for realized (gains) losses
included in net income................................... - - (85) 52
---------- ---------- ---------- ----------
641 (357) 773 (670)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of income taxes of $345
and $(192) for the three months and $416 and $(361)
for the nine months ended September 30, 2009 and 2008,
respectively................................................. 1,287 (622) 1,922 (1,199)
---------- ---------- ---------- ----------
Comprehensive income........................................... $ 12,118 $ 13,820 $ 45,645 $ 44,241
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
5
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2009 2008
------------ ------------
Cash flows from operating activities:
Net income............................................................................. $ 43,723 $ 45,440
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (benefit) for deferred income taxes........................................ 502 (374)
Depreciation and amortization........................................................ 6,074 6,571
Decrease (increase) in Membership fees receivable.................................... 277 (495)
(Increase) decrease in inventories................................................... (74) 302
Increase in refundable income taxes.................................................. (3,452) (1,909)
(Increase) decrease in deferred member and associate service costs................... (3,506) 631
Increase in other assets............................................................. (2,086) (930)
(Decrease) increase in accrued Membership benefits................................... (51) 110
Increase in deferred revenue and fees................................................ 2,963 84
Increase in other non-current liabilities............................................ 983 1,024
Decrease in income taxes payable..................................................... - (5,590)
Increase (decrease) increase in accounts payable and accrued expenses................ 3,056 (546)
------------ ------------
Net cash provided by operating activities.......................................... 48,409 44,318
------------ ------------
Cash flows from investing activities:
Additions to property and equipment.................................................. (2,516) (4,461)
Purchases of investments - available for sale........................................ (12,609) (49,274)
Maturities and sales of investments - available for sale............................. 11,862 49,480
------------ ------------
Net cash used in by investing activities........................................... (3,263) (4,255)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options.............................................. 108 278
Tax benefit on exercise of stock options............................................. 14 142
Proceeds from issuance of debt....................................................... - 10,000
Decrease in capital lease obligations................................................ (243) (16)
Repayments of debt................................................................... (17,848) (17,014)
Purchases and retirement of treasury stock........................................... (14,825) (36,944)
------------ ------------
Net cash used in financing activities ............................................. (32,794) (43,554)
------------ ------------
Net increase (decrease) in cash and cash equivalents................................... 12,352 (3,491)
Cash and cash equivalents at beginning of period....................................... 26,528 24,941
------------ ------------
Cash and cash equivalents at end of period............................................. $ 38,880 $ 21,450
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................................... $ 982 $ 3,146
------------ ------------
Cash paid for income taxes........................................................... $ 32,918 $ 36,318
------------ ------------
Non-cash activities - capital lease obligations incurred............................. $ 446 $ -
------------ ------------
The accompanying notes are an integral part of these financial statements.
6
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Except for per share amounts, dollar amounts in tables are
in thousands unless otherwise indicated)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been omitted. The
accompanying consolidated financial statements and notes thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in our 2008 Annual Report on Form 10-K. Terms such as "we", "our" and
"us" are sometimes used as abbreviated references to Pre-Paid Legal Services,
Inc.
In our opinion, the accompanying unaudited financial statements as of
September 30, 2009, and for the three month and nine month periods ended
September 30, 2009 and 2008, reflect adjustments (which were normal and
recurring) which, in our opinion, are necessary for a fair statement of our
financial position and results of operations of the interim periods presented.
Results for the three month and nine month periods ended September 30, 2009 are
not necessarily indicative of results expected for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Note 2 - Contingencies
On March 27, 2006 we received a complaint filed by Blackburn & McCune PLLC,
a former provider attorney law firm, in the Second Circuit Court of Davidson
County, Tennessee seeking compensatory and punitive damages on the basis of
allegations of breach of contract and fraud. On May 15, 2006 the trial court
dismissed plaintiff's complaint in its entirety. Plaintiff amended the complaint
to allege fraud and breach of fiduciary duty on June 12, 2006 and filed a notice
of appeal on June 13, 2006. On August 24, 2007 the Court of Appeals reversed the
ruling of the trial court and remanded the suit to the trial court for further
proceedings. On June 24, 2009, the trial court granted our motion for summary
judgment and dismissed plaintiff's action against us in its entirety. Plaintiff
has appealed this order. The ultimate outcome of this matter is not
determinable.
On March 23, 2007 we received a Civil Investigative Demand ("CID") from the
Federal Trade Commission ("FTC") requesting information relating to our Identity
Theft Shield and ADRS Program. On April 20, 2009 we received a letter from the
FTC alleging misrepresentations in sales materials used in our Identity Theft
Shield and ADRS program such that we made false and misleading claims about the
effectiveness of ADRS for helping organizations comply with government data
security requirements. Revisions to the marketing materials originally provided
to the FTC have been made subsequent to the initial communication with the FTC.
The FTC could decide to commence administrative or federal court proceedings for
purposes of determining whether there has been a violation and might seek a
variety of remedies, including injunctive relief. We are working with the FTC to
reach a mutually acceptable resolution. The ultimate outcome of the matter is
not determinable but we will vigorously defend our interests in this matter.
On October 5, 2009 we received a subpoena from the Division of Enforcement
of the Securities and Exchange Commission ("SEC"). The subpoena requires us to
produce a variety of documents pertaining to our treasury stock repurchase
program; our ADRS program and other marketing practices; membership statistical
information; segment reporting; the FTC contingency disclosure; and other
operational practices. This investigation is a fact-finding inquiry and does not
mean that the SEC has reached any conclusions. We are cooperating with the staff
of the SEC and providing the requested information and expect to continue to do
so. We are not able to predict what the outcome of these inquiries and comments
may be or when they will be resolved.
7
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 believe that we have meritorious defenses in all pending cases and
will vigorously defend against the claims and have not established an accrued
liability for any estimated damages in connection with these various cases.
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. During 2007 we reached a settlement
with Canadian taxing authorities regarding the general and administrative
deductions which would allow us to claim a deduction on the Canadian tax return
for over 70% of these items. This settlement offer allowed us to amend our U.S.
federal tax returns and deduct the remaining 30% of these items. The Canadian
and U.S. tax returns have been amended to reflect the changes in our general and
administrative expense and credits/refunds for the associated taxes, penalty and
interest. The Canadian taxing authorities contend commission deductions should
be matched with the membership revenue as received, we contend these commissions
are deductible when paid. Under Canadian tax laws, our commission payments are
treated as a prepaid expense and we base our deduction of commission on the fact
that all the services (the sale of the membership) have been performed by the
sales associate at the time of sale, therefore this prepaid expense (the
commission payments) is deductible when paid. Also, the commission payment is
taxable to the sales associate when paid and each year we issue a T4 (Canadian
1099 equivalent) to sales associates for the total commission payments made
during that year. We did not prevail on the commission issue on our appeal to
the Canadian taxing authorities and on December 19, 2008 filed our Notice of
Appeal with the Tax Court of Canada. During the 3rd quarter 2009 the Canadian
taxing authorities indicated they are amenable to a settlement. We have paid all
the assessed tax, penalty and interest relating to the commission issue and at
September 30, 2009 have $3 million recorded in Other Assets, Current which
represents the amount of previously paid tax, penalty and interest for tax years
1999 through 2002 we expect to ultimately receive. It is possible that an
adverse outcome could have an adverse effect upon our financial condition,
operating results or cash flows in particular quarterly or annual periods.
Note 3 - Treasury Stock Purchases
We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock. The
Board of Directors has increased such authorization from 500,000 shares to 15
million shares through subsequent board actions. At September 30, 2009 we had
purchased 14.2 million treasury shares under these authorizations for a total
consideration of $422.0 million, an average price of $29.72 per share. We
purchased and formally retired 15,666 shares of our common stock during the 2009
third quarter for $762,000, or an average price of $48.62 per share, reducing
our common stock by $157 and our retained earnings by $762,000. See Note 6
below. Given the current interest rate environment, the nature of other
investments available and our expected cash flows, we believe that purchasing
treasury shares enhances shareholder value and may seek alternative sources of
financing to continue or accelerate the program. Any additional treasury stock
purchases will be made at prices that we consider attractive and at such times
that we believe will not unduly impact our liquidity.
8
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 Sept. 30, Ended Sept. 30,
------------------------------------------
Basic Earnings Per Share: 2009 2008 2009 2008
--------- ---------- ---------- ----------
Earnings:
Net income........................................................... $ 10,831 $ 14,442 $ 43,723 $ 45,440
--------- ---------- ---------- ----------
Shares:
Weighted average shares outstanding.................................. 10,967 11,746 11,048 12,039
--------- ---------- ---------- ----------
Diluted Earnings Per Share:
Earnings:
Net income........................................................... $ 10,831 $ 14,442 $ 43,723 $ 45,440
--------- ---------- ---------- ----------
Shares:
-------
Weighted average shares outstanding.................................. 10,967 11,746 11,048 12,039
Assumed exercise of options.......................................... 16 17 13 19
--------- ---------- ---------- ----------
Weighted average number of shares, as adjusted....................... 10,983 11,763 11,061 12,058
--------- ---------- ---------- ----------
Shares issued pursuant to option exercises........................... - 8 5 14
--------- ---------- ---------- ----------
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, 2009 and 2008.
Note 5 - Recently Issued Accounting Pronouncements
In June 2009, the FASB issued guidance on the FASB Accounting Standards
Codification(TM) ("Codification") and the Hierarchy of Generally Accepted
Accounting Principles. This guidance establishes the Codification as the single
official source of authoritative United States accounting and reporting
standards for all non-governmental entities (other than guidance issued by the
SEC). The Codification changes the referencing and organization on financial
standards and is effective for interim and annual periods ending on or after
September 15, 2009. We have applied the Codification to our disclosures
beginning with our third quarter of fiscal 2009. As Codification is not intended
to change the existing accounting guidance, its adoption did not have an impact
on our financial statements.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
authoritative guidance which defined fair value, established a framework for
measuring fair value, and expanded disclosures about fair value measurements. We
adopted the guidance on January 1, 2008, as required for our financial assets
and financial liabilities. However, the FASB deferred the effective date 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 the guidance for our financial
assets and financial liabilities did not have a material impact on our
consolidated financial statements. The adoption of the guidance for our
nonfinancial assets and nonfinancial liabilities had no impact on our
consolidated financial statements.
9
In February 2007, the FASB issued guidance on the fair value option for
financial assets and financial liabilities. This guidance permits an entity to
choose, at specified election dates, to measure eligible financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value. An entity reports unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting date. Upfront costs and fees related to items for which the fair value
option is elected are recognized in earnings as incurred and not deferred. The
guidance also established presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. This guidance was
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. At the
effective date, an entity could elect the fair value option for eligible items
that existed at that date. We did not elect the fair value option for eligible
items that existed as of January 1, 2008. As such, the adoption of this guidance
did not have any impact on our consolidated financial position, results of
operations or cash flows.
In December 2007, the FASB issued guidance on business combinations which
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. This guidance also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination and is effective for us beginning January 1, 2009.
In December 2007, the FASB issued guidance on noncontrolling interests in
consolidated financial statements which 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. The guidance also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. This guidance is effective for us
beginning January 1, 2009 and the adoption of this guidance had no impact on our
consolidated financial position, results of operations or cash flows.
In May 2008, the FASB issued guidance on the hierarchy of Generally
Accepted Accounting Principles that 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 guidance, 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). This
guidance is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board. The implementation of this guidance did not have a
significant impact on the determination or reporting of our financial results.
In October 2008, the FASB issued guidance on determining the fair value of
a financial asset when the market for that asset is not active which clarified
how to determine the fair value of a financial asset when the market for that
financial asset is inactive. This guidance was effective upon issuance,
including prior periods for which financial statements had not been issued. The
implementation of this guidance did not have an impact on our consolidated
financial position, results of operations or cash flows.
In January 2009, the FASB provided additional guidance with respect to how
entities determine whether an "other-than-temporary impairment" (OTTI) exists
for certain beneficial interests in a securitized transaction, such as
asset-backed securities and mortgage-backed securities, that (1) do not have a
high quality rating or (2) can be contractually prepaid or otherwise settled
such that the holder would not recover substantially all of its investment. This
guidance was effective for us prospectively beginning October 1, 2008. We
considered this additional guidance when classifying respective additional
impairments as "temporary" or "other-than-temporary" beginning with the fourth
quarter of 2008. This guidance had no impact on such classifications on our
consolidated financial position, results of operations or cash flows.
10
On April 9, 2009, the FASB and the Accounting Principles Board (APB) issued
guidance on the interim disclosures about fair value of financial instruments to
require disclosures about fair value of financial instruments in interim
financial statements as well as in annual financial statements. The guidance
required those disclosures in all interim financial statements. This guidance is
effective for interim periods ending after June 15, 2009 and we adopted them in
second quarter 2009. See Note 8.
In May 2009, the FASB issued guidance on subsequent events which modified
the definition of what qualifies as a subsequent event--those events or
transactions that occur following the balance sheet date, but before the
financial statements are issued, or are available to be issued--and requires
companies to disclose the date through which it has evaluated subsequent events
and the basis for determining that date. We adopted this guidance beginning in
the second quarter 2009, in accordance with the effective date. We have
evaluated subsequent events through October 26, 2009.
In June 2009, the FASB issued a new accounting standard which provides
amendments to previous guidance on the consolidation of variable interest
entities. This standard clarifies the characteristics that identify a variable
interest entity (VIE) and changes how a reporting entity identifies a primary
beneficiary that would consolidate the VIE from a quantitative risk and rewards
calculation to a qualitative approach based on which variable interest holder
has controlling financial interest and the ability to direct the most
significant activities that impact the VIE's economic performance. This
statement requires the primary beneficiary assessment to be performed on a
continuous basis. It also requires additional disclosures about an entity's
involvement with a VIE, restrictions on the VIE's assets and liabilities that
are included in the reporting entity's consolidated balance sheet, significant
risk exposures due to the entity's involvement with the VIE, and how its
involvement with a VIE impacts the reporting entity's consolidated financial
statements. The standard is effective for fiscal years beginning after November
15, 2009. We will adopt the standard on January 1, 2010 and have not yet
determined the impact on our consolidated financial statements.
In August 2009, the FASB further updated the fair value measurement
guidance to clarify how an entity should measure liabilities at fair value. The
update reaffirms fair value is based on an orderly transaction between market
participants, even though liabilities are infrequently transferred due to
contractual or other legal restrictions. However, identical liabilities traded
in the active market should be used when available. When quoted prices are not
available, the quoted price of the identical liability traded as an asset,
quoted prices for similar liabilities or similar liabilities traded as an asset,
or another valuation approach should be used. This update also clarifies that
restrictions preventing the transfer of a liability should not be considered as
a separate input or adjustment in the measurement of fair value. We will adopt
the provisions of this update for fair value measurements of liabilities
effective October 1, 2009, which we do not expect to have a material impact on
our consolidated financial statements.
In October 2009, the FASB issued an update to existing guidance on revenue
recognition for arrangements with multiple deliverables. This update will allow
companies to allocate consideration received for qualified separate deliverables
using estimated selling price for both delivered and undelivered items when
vendor-specific objective evidence or third-party evidence is unavailable.
Additional disclosures discussing the nature of multiple element arrangements,
the types of deliverables under the arrangements, the general timing of their
delivery, and significant factors and estimates used to determine estimated
selling prices are required. We will adopt this update for new revenue
arrangements entered into or materially modified beginning January 1, 2011. We
have not yet determined the 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,
2009, we had the full Revolving Facility available to us. After payment of an
origination fee of 1%, lender costs and retirement of $15.3 million of existing
bank indebtedness, the net proceeds of the Term Facility we received were $58.8
million and used to purchase treasury stock.
11
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, 2009
was 1.75%. 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 0.41 to 1 at September 30, 2009. We expect to be able to
repay the facilities with cash flow from operations. We have the right to prepay
the Term Facility in whole or in part without penalty.
The Senior Loan is guaranteed by our non-regulated wholly owned
subsidiaries and is secured by all of our tangible and intangible personal
property (other than aircraft), including stock in all of our direct
subsidiaries, and a mortgage on a building we recently acquired in Duncan,
Oklahoma and remodeled to relocate and expand our existing customer service
facility in Duncan.
In addition to customary covenants for loans of a similar type, the
principal covenants for the Senior Loan are:
* a limitation on incurring any indebtedness in excess of the remaining
existing bank indebtedness outstanding and $2.3 million in permitted
capitalized leases or purchase money debt;
* a limitation on our ability to pay dividends or make stock purchases,
other than with the net proceeds of the Term Loan, unless we meet
certain cash flow tests;
* a prohibition on prepayment of other debt;
* a requirement to maintain consolidated EBITDA (Earnings before
Interest, Taxes, Depreciation and Amortization) for the twelve month
period ending December 31, 2006 and each quarter thereafter of at
least $80 million ($75 million for us and our top tier direct
subsidiaries);
* a requirement to maintain a quarterly fixed charge coverage ratio
(EBITDA (with certain adjustments) divided by the sum of interest
expense, income taxes and scheduled principal payments) of at least
1.1 to 1;
* a requirement to maintain at least 1.3 million members;
* a requirement to maintain a Leverage Ratio (funded indebtedness as of
the end of each quarter divided by EBITDA for the trailing twelve
months) of no more than 1.5 to 1;
* we must have availability (unused portion of the Revolving Facility)
plus Qualified Cash (the amount of unrestricted cash and cash
equivalents) greater than or equal to $12,500,000; and,
* an event of default occurs if Harland Stonecipher ceases to be our
Chairman and Chief Executive Officer for a period of 120 days unless
replaced with a person approved by Wells Fargo.
We were in compliance with these covenants at September 30, 2009.
Our $20 million real estate loan was fully funded in 2002 to finance our
new headquarters building in Ada, Oklahoma and has a final maturity of August
2011. This loan, with interest at the 30 day LIBOR rate plus 150 basis points
adjusted monthly, is secured by a mortgage on our headquarters. The interest
rate at September 30, 2009 was 1.75%, 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, 2009 was 1.14%, with monthly principal payments
of $80,000 plus interest.
12
During June 2008 we received additional financing from Bank of Oklahoma in
the form of an unsecured stock repurchase loan for $10 million on an unsecured
basis repayable in 12 equal monthly payments beginning June 30, 2008, together
with interest at LIBOR plus 162.5 basis points. This loan was completely repaid
pursuant to its terms.
A schedule of outstanding balances as of September 30, 2009 is as follows:
Senior loan................................ $ 27,500
Real estate loan........................... 6,667
Aircraft loan.............................. 7,644
---------
Total notes payable........................ 41,811
Less: Current portion of notes payable..... (18,241)
---------
Long term portion.......................... $ 23,570
---------
A schedule of future maturities as of September 30, 2009 is as follows:
Repayment Schedule commencing
October 2009:
------------------------------------------------------
Year 1..................................... $ 18,241
Year 2..................................... 15,741
Year 3..................................... 3,051
Year 4..................................... 956
Year 5..................................... 956
Thereafter................................. 2,866
---------
Total notes payable........................ $ 41,811
---------
Note 7 - Share-based Compensation
During the nine months ended September 30, 2009, the stock option activity
under our stock option plans was as follows:
Weighted
Average
Remaining
Weighted Contractual Aggregate
Average Number of Term Intrinsic
Price Shares (In Years) Value
----------- ------------ -------------- -----------
Outstanding, January 1, 2009.................... $ 19.70 42,500
Granted....................................... - -
Cancelled..................................... - -
Exercised..................................... 23.93 (4,500)
Outstanding, September 30, 2009................. ------------ ------------
$ 19.20 38,000 1.42 $ 1,201
----------- ------------ -------------- -----------
Options exercisable as of September 30, 2009.... $ 19.20 38,000 1.42 $ 1,201
----------- ------------ -------------- -----------
Other information pertaining to option activity during the nine months
ended September 30, 2009 and 2008 was as follows:
September 30, September 30,
2009 2008
---------------- ----------------
Weighted average grant-date fair value of stock options granted...... Not applicable Not applicable
Total fair value of stock options vested............................. Not applicable Not applicable
Total intrinsic value of stock options exercised..................... $ 40 $ 363
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.
13
Note 8 - Fair Value Measurement
On January 1, 2008, we adopted SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and expands disclosures about fair value
measurements. The Statement applies whenever other statements require or permit
assets or liabilities to be measured at fair value. SFAS 157 established the
following fair value hierarchy that prioritizes the inputs used to measure fair
value:
Level 1: Quoted prices are available in active markets for identical assets
or liabilities as of the reporting date. Active markets are those in
which transactions for the asset or liability occur in sufficient
frequency and volume to provide pricing information on an ongoing
basis. Level 1 primarily consists of financial instruments such as
exchange-traded derivatives, listed equities and U.S. government
treasury securities.
Level 2: Pricing inputs are other than quoted prices in active markets
included in Level 1, which are either directly or indirectly
observable as of the reporting date. Level 2 includes those financial
instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models
that consider various assumptions, including quoted forward prices for
commodities, time value, volatility factors, and current market and
contractual prices for the underlying instruments, as well as other
relevant economic measures. Substantially all of these assumptions are
observable in the marketplace throughout the full term of the
instrument, can be derived from observable data or are supported by
observable levels at which transactions are executed in the
marketplace. Instruments in this category include obligations of state
and political subdivisions, government guaranteed bank debt, auction
rate certificates and corporate obligations.
Level 3: Pricing inputs include significant inputs that are generally less
observable from objective sources. These inputs may be used with
internally developed methodologies that result in management's best
estimate of fair value. At each balance sheet date, we perform an
analysis of all instruments subject to SFAS No. 157 and include in
Level 3 all of those whose fair value is based on significant
unobservable inputs.
The following table presents our financial assets and liabilities that were
accounted for at fair value on a recurring basis as of September 30, 2009 by
level within the fair value hierarchy (in thousands):
Fair Value Measurements Using
--------------------------------------
September 30, 2009 Level 1 Level 2 Level 3
------------------ ----------- ---------- -----------
Available for sale investments..................... $ - $ 39,008 $ -
September 30, 2008
Available for sale investments..................... $ - $ 37,408 $ -
For securities without a readily ascertainable market value (Level 2), we
utilize pricing services and broker quotes. Our pricing service's evaluations
are based on market data. Our pricing service utilizes evaluated pricing models
that vary by asset class and incorporate available trade, bid and other market
information. Because many fixed income securities do not trade on a daily basis,
our pricing service's evaluated pricing applications apply available information
as applicable through processes such as benchmark curves, benchmarking of like
securities, sector groupings, and matrix pricing, to prepare evaluations. Such
estimated fair values do not necessarily represent the values for which these
securities could have been sold at the dates of the balance sheets.
14
Our financial instruments consist primarily of cash, certificates of
deposit, short-term investments, debt and equity securities, Membership fees
receivable, Membership benefits payable, notes payable and accounts payable and
accrued expenses. Fair value estimates have been determined by us, using
available market information and appropriate valuation methodologies. Fair
values of inactively traded debt securities are based on quoted market prices of
identical or similar securities or based on observable inputs like interest
rates. The carrying value of cash, certificates of deposit, Membership fees
receivable, Membership benefits payable and accounts payable and accrued
expenses are considered to be representative of their respective fair value, due
to the short term nature of these instruments. The carrying value of notes
payable is considered to be representative of their respective fair values, due
to the variable interest rate feature of such notes. The fair value disclosures
relating to debt and equity securities are presented above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
--------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Form 10-K for the year ended December 31, 2008, which
describes, among other things, our basic business model, critical accounting
policies, measures of Membership retention, and basic cash flow characteristics
of our business. The following tables set forth changes in the principal
categories of revenues and expenses and Membership and recruiting activity for
the third quarter of 2009 compared to the third quarter of 2008 and the second
quarter of 2009 (Table amounts in 000's). The sum of the percentages in the
tables may not total due to rounding.
Three Months Ended September 30, 2009 Three % Three Three
compared to Months % Change Change Months Months
Three Months Ended September 30, 2008 Ended % of from from Ended % of Ended % of
and compared to Sept. 30, Total Prior Sequential Sept. 30, Total June 30, Total
Three Months Ended June 30, 2009 2009 Revenue Year Period 2008 Revenue 2009 Revenue
-------------------------------------- --------- -------- -------- ---------- ---------- -------- --------- --------
Revenues:
Membership fees.................... $105,435 92.5 (3.5) (0.1) $109,268 93.8 $105,516 93.9
Associate services................. 7,624 6.7 22.3 29.0 6,236 5.3 5,908 5.2
Other.............................. 888 0.8 (12.9) (8.4) 1,019 0.9 969 0.9
--------- -------- -------- ---------- ---------- -------- --------- --------
113,947 100.0 (2.2) (1.4) 116,523 100.0 112,393 100.0
--------- -------- -------- ---------- ---------- -------- --------- --------
Costs and expenses:
Membership benefits................ 35,991 31.5 (4.2) (0.1) 37,587 32.3 36,013 32.0
Commissions........................ 36,676 32.2 8.9 25.0 33,678 28.9 29,335 26.1
Associate services and direct 7,827 6.9 46.1 20.4 5,358 4.6 6,502 5.8
marketing........................
General and administrative......... 12,613 11.1 0.7 (2.4) 12,531 10.7 12,922 11.5
Other, net......................... 2,361 2.1 (22.4) 28.0 3,043 2.6 1,845 1.6
--------- -------- -------- ---------- ---------- -------- --------- --------
95,468 83.8 3.5 10.2 92,197 79.1 86,617 77.0
--------- -------- -------- ---------- ---------- -------- --------- --------
Income before income taxes........... 18,479 16.2 (24.0) (28.3) 24,326 20.9 25,776 23.0
Provision for income taxes........... 7,648 6.7 (22.6) (23.4) 9,884 8.5 9,985 8.9
--------- -------- -------- ---------- ---------- -------- --------- --------
Net income........................... $10,831 9.5 (25.0) (31.4) $14,442 12.4 $15,791 14.1
--------- -------- -------- ---------- ---------- -------- --------- --------
15
Three Months Ended
New Memberships: 9/30/2009 6/30/2009 9/30/2008
---------------- --------- --------- ---------
New legal service membership sales.......................................... 166,377 118,050 137,227
New "stand-alone" IDT membership sales...................................... 8,645 4,180 7,814
---------- --------- ---------
Total new membership sales......................................... 175,022 122,230 145,041
---------- --------- ---------
New "add-on" IDT membership sales........................................... 112,653 78,009 95,762
Average Annual Membership fee............................................... $325.60 $328.79 $326.14
Active Memberships:
-------------------
Active legal service memberships at end of period........................... 1,455,492 1,419,092 1,488,259
Active "stand-alone" IDT memberships at end of period (see note below)...... 90,063 86,779 87,634
---------- --------- ---------
Total active memberships at end of period.......................... 1,545,555 1,505,871 1,575,893
---------- --------- ---------
Active "add-on" IDT memberships at end of period (see note below)........... 710,795 670,769 681,118
New Sales Associates:
---------------------
New sales associates recruited.............................................. 75,398 25,172 37,820
Average enrollment fee paid by new sales associates......................... $79.31 $120.98 $56.17
Average Membership fee in force:
--------------------------------
Average Annual Membership fee............................................... $302.86 $301.37 $301.40
Note - reflects 4,137 net transfers from "add-on" status to "stand-alone" status during the quarter
Identity Theft Shield ("IDT") memberships sold in conjunction with new
legal plan memberships or "added-on" to existing legal plan memberships sell for
$9.95 per month and are not counted as "new" memberships but do increase the
average premium and related direct expenses (membership benefits and
commissions) of our membership base, while "stand alone" Identity Theft Shield
memberships are not attached to a legal plan membership and sell for $12.95 per
month.
Recently Issued Accounting Pronouncements
See Note 5 - Recently Issued Accounting Pronouncements in Item 1 above.
Results of Operations - Third Quarter of 2009 compared to Third Quarter of 2008
--------------------------------------------------------------------------------
Net income decreased 25% for the third quarter of 2009 to $10.8 million
from $14.4 million for the prior year's third quarter primarily due to a
decrease in Membership fees of $3.8 million, an increase in commission expenses
of $3.0 million, an increase in associate services and direct marketing expenses
of $2.5 million, a decrease in other revenues of $131,000 and an increase in
general and administrative expenses of $82,000 partially offset by a decrease in
the provision for income taxes of $2.2 million, an increase in associate
services revenue of $1.4 million, a decrease in Membership benefits of $1.6
million, and a decrease in other, net expenses of $682,000. Diluted earnings per
share decreased 20% to $0.99 per share from $1.23 per share for the prior year's
comparable quarter due to the 25% decrease in net income and an 8% decrease in
the weighted average number of diluted shares outstanding.
Membership fees totaled $105.4 million during the 2009 third quarter
compared to $109.3 million for 2008, a decrease of 4%. Membership fees and their
impact on total revenues in any period are determined directly by the number of
active Memberships in force during any such period and the monthly amount of
such Memberships. The active Memberships in force are determined by both the
number of new Memberships sold in any period together with the renewal rate of
existing Memberships. New Membership sales increased 21% during the three months
ended September 30, 2009 to 175,022 from 145,041 during the comparable period of
2008. At September 30, 2009, there were 1,545,555 active Memberships in force
compared to 1,575,893 at September 30, 2008, a decrease of 2%. The average
annual fee per Membership has increased from $301 for all Memberships in force
at September 30, 2008 to $303 for all Memberships in force at September 30,
2009, primarily as a result of a larger number of Identity Theft Shield
memberships.
16
Associate services revenue increased by approximately $1.4 million to $7.6
million during the third quarter of 2009 when compared to the 2008 quarter. New
associates enrolled increased 99% to 75,398 during the 2009 period compared to
37,820 for the same period of 2008. The average enrollment fees paid by new
sales associates were $79 and $56 for the respective periods. The eService fees
decreased to $2.4 million for the third quarter of 2009 compared to $3.0 million
for the 2008 quarter. Future revenues from associate services will depend
primarily on the number of new associates enrolled, the price charged for new
associates and the number who choose to participate in our eService program, but
we expect that such revenues will continue to be offset by the direct and
indirect cost to us of training, providing associate services and other direct
marketing expenses.
Other revenue declined 13% from $1.0 million for the 2008 period to
$888,000 for the 2009 period.
Total revenues decreased 2% to $113.9 million for the three months ended
September 30, 2009 from $116.5 million during the comparable period of 2008 due
to a $3.8 million decrease in Membership fees and a $131,000 decrease in other
revenues offset by a $1.4 million increase in associate services revenue.
Membership benefits, which primarily represent payments to provider law
firms and Kroll Background America, Inc., a subsidiary of Kroll Inc. ("Kroll"),
totaled $36.0 million for the three months ended September 30, 2009 compared to
$37.6 million for the comparable period of 2008, and represented 34% of
Membership fees for both periods. This Membership benefit ratio (Membership
benefits as a percentage of Membership fees) should be reduced going forward as
substantially all active Memberships provide for a capitated cost and we have
reduced the capitated cost of the Identity Theft plan benefits effective April
1, 2007, with an additional reduction on January 1, 2010.
Commissions to associates increased 9% to $36.7 million for the three
months ended September 30, 2009 compared to $33.7 million for the comparable
period of 2008, and represented 35% and 31% of Membership fees for the
respective periods. Commissions to associates are primarily dependent on the
number of new Memberships sold during a period and the average fee of those
Memberships. New Memberships sold during the third quarter of 2009 totaled
175,022, a 21% increase from the 145,041 for 2008, and the "add-on" IDT
Membership sales which are not included in these totals increased 18% to 112,653
for the third quarter of 2009 from 95,762 for 2008. Our average Annual
Membership fee written during the quarter of 2009 had a slight decrease to
$325.60 from $326.14 during the 2008 period. Our new Membership fees written
during the third quarter of 2009 decreased 4% from 2008. Average commission per
new Membership decreased from $232 to $210 for the 2009 third quarter. The 21%
increase in new Memberships sold resulted in an approximate 9% increase in
commissions. Should we add additional commissions to our compensation plan or
reduce the amount of chargebacks collected from our associates as we have from
time to time, the commission cost per new Membership will increase accordingly.
Associate services and direct marketing expenses increased to $7.8 million
for the three months ended September 30, 2009 from $5.4 million for the
comparable period of 2008. The increase was primarily a result of increased
costs for bonuses and increased costs for materials and related freight sent to
new associates due to the increase 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, 2009 increased to $12.6 from $12.5 for the comparable period of 2008 and
represented 12% and 11%, respectively, of Membership fees for the two periods.
The increase in general and administrative expenses included bank service
charges, other taxes and consulting fees associated with Payment Card Industry
compliance which were partially offset by decreases in depreciation, employee
expenses and legal fees.
17
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, were $2.4 million for the three months ended September 30, 2009 compared
to $3.0 million for the 2008 comparable period. Depreciation expense was $2.0
million for the three months ended September 30, 2009 and $2.2 million for the
2008 comparable period. Interest expense decreased to $261,000 during the 2009
period from $924,000 during the comparable period of 2008 as a result of the
reduction in debt and lower interest rates. Premium taxes decreased from
$455,000 for the three months ended September 30, 2008 to $444,000 for the
comparable period of 2009. Interest income decreased from $532,000 for the three
months ended September 30, 2008 to $389,000 for the three months ended September
30, 2009, due to a decrease in interest rates.
We have recorded a provision for income taxes of $7.6 million (41.4% of
pretax income) and $9.9 million (40.6% of pretax income) for the three months
ended September 30, 2009 and 2008, respectively.
Results of Operations - Third Quarter of 2009 compared to Second Quarter of 2009
--------------------------------------------------------------------------------
Third quarter 2009 membership fees decreased approximately $81,000 to
$105.4 million from $105.5 million for the second quarter of 2009. Associate
services revenues increased during the 2009 third quarter by approximately $1.7
million to $7.6 million from $5.9 million for the 2009 second quarter and
associate services and direct marketing expenses increased by $1.3 million
during the same period. Membership benefits totaled $36.0 million for both
periods and represented 34% of membership fees for the two periods. Commissions
to associates totaled $36.7 million in the 2009 third quarter compared to $29.3
million for the 2009 second quarter and represented 35% and 28%, respectively,
of membership fees for the two periods. General and administrative expenses
decreased $309,000 during the 2009 third quarter to $12.6 million compared to
$12.9 million for the 2009 second quarter and represented 12% of membership fees
for the two periods. The decrease in general and administrative expenses
included decreases in legal fees, employee costs and consulting fees which were
partially offset by increases in postage and bank service charges.
Results of Operations - First Nine Months of 2009 compared to First Nine Months
--------------------------------------------------------------------------------
of 2008
--------
Membership revenues decreased 3% in the first nine months of 2009 to $317.9
million compared to $327.8 million for the first nine months of 2008. Net income
decreased 4% for the first nine months of 2009 to $43.7 million from $45.4
million for the prior year's comparable period primarily due to the decrease of
$9.9 million in Membership revenues, a $3.1 million increase in associate
services and direct marketing expenses, a decrease in other revenues of $425,000
and an increase in general and administrative expenses of $52,000 partially
offset by a decrease in Membership benefits of $4.5 million, a $2.7 million
decrease in commissions, a decrease in other, net expenses of $3.6 million, a
decrease in the provision for income taxes of $791,000 and an increase in
Associate services revenues of $232,000. Diluted earnings per share increased 5%
to $3.95 per share from $3.77 per share for the prior year's comparable nine
month period. The 5% increase in diluted earnings per share is due to a 4%
decrease in net income and an approximate 7% 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 increased less than one percent during the
nine months ended September 30, 2009 to 419,847 from 419,686 during the
comparable period of 2008. At September 30, 2009, there were 1,545,555 active
Memberships in force compared to 1,575,893 at September 30, 2008, a decrease of
2%. The average annual fee per Membership has increased from $301 for all
Memberships in force at September 30, 2008 to $303 for all Memberships in force
at September 30, 2009.
Associate services revenue increased 1% from $18.6 million for the first
nine months of 2008 to $18.8 million during the comparable period of 2009 due to
a increase in associate enrollment fees offset partially by a decrease in
eService fees. Total new associates enrolled increased 39% during the first nine
months of 2009 to 124,441 compared to 89,722 for the same period of 2008 and
average enrollment fees paid by new sales associates increased from $83 during
the 2008 period to $106 during the 2009 nine months due to a higher average
enrollment fee available during the 2009 period. The eService fees decreased to
$7.5 million during the first nine months of 2009 compared to $9.2 million for
the comparable period of 2008. Future revenues from associate services will
depend primarily on the number of new associates enrolled, the price charged and
the number who choose to participate in the Company's eService program, but the
Company expects that such revenues will continue to be offset by the direct and
indirect cost to the Company of training (including training bonuses paid),
providing associate services and other direct marketing expenses.
18
Other revenue decreased $425,000 from $3.2 million for the nine month
period ending September 30, 2008 to $2.8 million for the same period of 2009.
Primarily as a result of the decrease in Membership fees, total revenues
decreased to $339.5 million for the nine months ended September 30, 2009 from
$349.6 million during the comparable period of 2008, a decrease of 3%.
Membership benefits totaled $108.2 million for the nine months ended
September 30, 2009 compared to $112.7 million for the comparable period of 2008,
and represented 34% of Membership fees for both periods. This Membership benefit
ratio (Membership benefits as a percentage of Membership fees) should be reduced
going forward as substantially all active Memberships provide for a capitated
cost and we have reduced the capitated cost of the Identity Theft plan benefits
effective April 1, 2007 with subsequent additional reductions on January 1,
2010.
Commissions to associates decreased 3% to $93.0 million for the nine months
ended September 30, 2009 compared to $95.7 million for the comparable period of
2008, and represented 29% 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 first nine months of 2009 increased slightly to 419,847 for the nine months
ended September 30, 2009 from 419,686 for the comparable period of 2008, and the
"add-on" IDT Membership sales which are not included in these totals increased
1% to 263,512 for the third quarter of 2009 from 259,648 for 2008. Our average
Annual Membership fee written during the first nine months of 2009 decreased
less than one percent to $324.96 from $325.80 for 2008. Our new Membership fees
written during the first nine months of 2009 decreased 3% from 2008. Should we
add additional commissions to our compensation plan or reduce the amount of
chargebacks collected from its associates as it has from time to time, the
commission cost per new Membership will increase accordingly.
Associate services and direct marketing expenses increased to $21.1 million
for the nine months ended September 30, 2009 from $18.0 million for the
comparable period of 2008. The increase was primarily a result of increased cost
for Fast Start bonuses, incentive trip expenses and increased costs for
materials and related freight sent to new associates due to the increase in the
number of new associates enrolled during the period partially offset by a
decline in direct marketing expenses. We offer the Player's Club incentive
program to provide additional incentives to our associates as a reward for
consistent, quality business. Associates can earn the right to receive
additional monthly bonuses by meeting monthly qualification requirements for the
entire calendar year and maintaining certain personal retention rates for the
Memberships sold during the calendar year. These expenses also include the costs
of providing associate services and marketing expenses.
General and administrative expenses during the nine months ended September
30, 2009 and 2008 were unchanged at $38.9 million for both periods and
represented 12% of Membership fees for the two periods.
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, was $6.5 million for the nine months ended September 30, 2009 compared
to $10.1 million for the 2008 comparable period. Depreciation decreased to $6.1
million for the first nine months of 2009 from $6.6 million for the comparable
period of 2008. Litigation accruals decreased by $450,000 for the first nine
months of 2009 from an increase of $888,000 in the 2008 period including a
$450,000 reduction in previously accrued amounts for the nine months ended
September 30, 2009. Interest expense decreased to $925,000 during the 2009
period from $3.1 million during the comparable period of 2008 as a result of
lower indebtedness and lower interest rates. Premium taxes were $1.3 million for
the nine months ended September 30, 2009 and $1.4 million for the comparable
period of 2008. Interest income decreased $248,000 to $1.5 million for the nine
months ended September 30, 2009 from $1.8 million for the comparable period of
2008, due to lower interest rates.
19
We have recorded a provision for income taxes of $28.0 million (39.0% of
pretax income) and $28.8 million (38.8% of pretax income) for the first nine
months ended September 30, 2009 and 2008, respectively.
Liquidity and Capital Resources
-------------------------------
General
Net cash flow provided by operating activities was $48.4 million for the
nine months ended September 30, 2009 compared to $44.3 million for the same
period in 2008. This $4.1 million increase was primarily the result of a $3.4
million decrease in income tax payments, a $4.5 million decrease in cash paid to
our providers for the delivery of benefits associates, and a $2.2 million
decrease in cash paid for interest reduced by a $10.1 million decrease in cash
receipts from our members.
Consolidated net cash used by investing activities was $3.3 million for the
first nine months of 2009 compared to net cash used of $4.3 million for the
comparable period of 2008. This $1.0 million change in investing activities
resulted from a $1.9 million decrease in additions to property and equipment and
a $36.7 million decrease in the investment purchases partially offset by $37.6
million in maturities and sales of investments.
Net cash used in financing activities during the first nine months of 2009
was $32.8 million compared to $43.6 million for the comparable period of 2008.
This $10.8 million change was primarily comprised of a $10.0 million decrease in
proceeds from issuance of debt and an $834,000 increase in debt repayments
offset by a $22.1 million decreased treasury stock purchases.
We purchased and formally retired 451,486 shares of our common stock during
the first nine months of 2009 for $14.8 million, or an average price of $32.84
per share, reducing our common stock by $4,515 and our retained earnings by
$14.8 million. We had working capital of $8.8 million at September 30, 2009, an
increase of $11.1 million compared to our negative working capital of $2.3
million at December 31, 2008. The increase was primarily due to a $12.4 million
increase in cash and cash equivalents, a $3.5 million increase in refundable
income taxes, a $3.5 million increase in deferred member and associate service
costs, a $4.2 million decrease in the current portion of notes payable partially
offset by a $7.2 million decrease in the current portion of available-for-sale
investments, an increase of $3.0 million in deferred revenues and fees and a
$1.9 million increase in accounts payable and accrued expenses. The $8.8 million
working capital at September 30, 2009 would have been a $19.0 million in working
capital excluding the current portion of deferred revenue and fees in excess of
the current portion of deferred member and associate service costs. These
amounts will be eliminated by the passage of time without the utilization of
other current assets or us incurring other current liabilities. We do not expect
any difficulty in meeting our financial obligations in the next 12 months.
At September 30, 2009 we reported $73.5 million in cash and cash
equivalents and unpledged investments compared to $60.0 million at December 31,
2008. Our investments typically consist of obligations of state and political
subdivisions, certificates of deposit and government guaranteed bank debt.
We generally advance significant commissions at the time a Membership is
sold. During the nine months ended September 30, 2009, we advanced commissions,
net of chargebacks, of $94.0 million on new Membership sales compared to $94.7
million for the same period of 2008. Since approximately 95% of Membership fees
are collected on a monthly basis, a significant cash flow deficit is created on
a per Membership basis at the time a Membership is sold. Since there are no
further commissions paid on a Membership during the advance period, we typically
derive significant positive cash flow from the Membership over its remaining
life.
20
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, 2009, and related activity for the nine month
period then ended, were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)........... $ 174,371
Advance commission payments, net............................. 88,855
Earned commissions applied................................... (84,109)
Advance commission payment write-offs........................ (2,995)
------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)....................... 176,122
Estimated unrecoverable advance commission payments (1)...... (46,130)
------------
Ending unearned advance commission payments, net (1)..... $ 129,992
------------
(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 $66.5 million.
As such, at September 30, 2009 future commission payments and related expense
should be reduced as unearned advance commission payments of $64 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 the ability to finance the next twelve months of
operations, anticipated capital expenditures and required debt repayment
obligations based on our existing amount of cash and cash equivalents and
unpledged investments at September 30, 2009 of $73.5 million. We believe our
long-term liquidity needs will be met by our ability to generate cash flow from
operations and our existing cash and cash equivalent balances. We expect to
maintain cash and investment balances, including pledged investments, on an
on-going basis of approximately $20 to $30 million in order to meet expected
working capital needs and regulatory capital requirements. Cash balances in
excess of this amount would be used for discretionary purposes such as
additional treasury stock purchases subject to limitations in the Term Facility.
Notes Payable
See Note 6 - Notes Payable in Item 1 above.
Parent Company Funding and Dividends
Although we are the operating entity in many jurisdictions, our
subsidiaries serve as operating companies in various states that regulate
Memberships as insurance or specialized legal expense products. The most
significant of these wholly owned subsidiaries are Pre-Paid Legal Casualty, Inc.
("PPLCI"), Pre-Paid Legal Services Inc. of Florida ("PPLSIF") and Legal Service
Plans of Virginia, Inc. ("LSPV"). The ability of these entities to provide funds
to us is subject to a number of restrictions under various insurance laws in the
jurisdictions in which they conduct business, including limitations on the
amount of dividends and management fees that may be paid and requirements to
maintain specified levels of capital and reserves. In addition PPLCI will be
required to maintain its stockholders' equity at levels sufficient to satisfy
various state or provincial regulatory requirements, the most restrictive of
which is currently $3 million. Additional capital requirements of these
entities, or any of our regulated subsidiaries, will be funded by us in the form
of capital contributions or surplus debentures. During 2008, we received $4.1
million in dividends from LSPV and $14.9 million in dividends from PPLCI.
21
Contractual Obligations
There have been no material changes outside of the ordinary course of
business in our contractual obligations from those disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008.
Critical Accounting Policies
----------------------------
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. If these estimates or assumptions are
incorrect, there could be a material change in our financial condition or
operating results. Many of these "critical accounting policies" are common in
the insurance and financial services industries; others are specific to our
business and operations. Our critical accounting policies include estimates
relating to revenue recognition related to Membership and associate fees,
deferral of Membership and associate related costs, expense recognition related
to commissions to associates, accrual of incentive awards payable and accounting
for legal contingencies. Each of these accounting policies and the application
of critical accounting policies and estimates was discussed in our Annual Report
on Form 10-K for the year ended December 31, 2008. There were no significant
changes in the application of critical accounting policies or estimates during
the first nine months of 2009. We are not aware of any reasonably likely events
or circumstances which would result in different amounts being reported that
would materially affect our financial condition or results of operations.
Capital and Dividend Plans
--------------------------
We continue to evaluate the desirability of additional share repurchases
and additional cash dividends. We declared dividends of $0.50 per share during
2004 and $0.60 per share during 2005 and have previously announced that we will
continue share repurchases, pay a dividend, or both, depending on our financial
condition, available resources and market conditions, as well as compliance with
our various loan covenants which limit our ability to repurchase shares or pay
cash dividends. We expect to continue our 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 802,774 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, 2009 and other information
currently available to management. We caution that the Forward-Looking
Statements are subject to all the risks and uncertainties incident to our
business, including but not limited to risks described in Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2008. Moreover, we may make
acquisitions or dispositions of assets or businesses, enter into new marketing
arrangements or enter into financing transactions. None of these can be
predicted with certainty and, accordingly, are not taken into consideration in
any of the Forward-Looking Statements made herein. For all of the foregoing
reasons, actual results may vary materially from the Forward-Looking Statements.
We assume no obligation to update the Forward-Looking Statements to reflect
events or circumstances occurring after the date of the statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
Disclosures About Market Risk
Our consolidated balance sheets include a certain amount of assets and
liabilities whose fair values are subject to market risk. Due to our significant
investment in fixed-maturity investments, interest rate risk represents the
largest market risk factor affecting our consolidated financial position.
Increases and decreases in prevailing interest rates generally translate into
decreases and increases in fair values of those instruments. Additionally, fair
values of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment options, relative values of
alternative investments, liquidity of the instrument and other general market
conditions. As of September 30, 2009, our investments consisted of the
following:
22
Description Fair Value
--------------------------------------------------------------------- ----------------
Obligations of state and political subdivisions...................... $ 32,327
Certificates of deposit.............................................. 4,070
Government guaranteed bank debt...................................... 1,602
Corporate obligations................................................ 407
Auction Rate Securities.............................................. 375
U. S. Government obligations......................................... 227
----------------
Total investments.................................................... $ 39,008
----------------
We do not hold any investments classified as trading account assets or
derivative financial instruments.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on our fixed-maturity investment portfolio. It
is assumed that the changes occur immediately and uniformly, with no effect
given to any steps that we might take to counteract that change. The
hypothetical changes in market interest rates reflect what could be deemed best
and worst case scenarios. The fair values shown in the following table are based
on contractual maturities. Significant variations in market interest rates could
produce changes in the timing of repayments due to prepayment options available.
The fair value of such instruments could be affected and, therefore, actual
results might differ from those reflected in the following table:
Hypothetical change Estimated fair value
(in 000's) in interest rate after hypothetical
Fair value (bp = basis points) change in interest rate
----------- --------------------- ------------------------
Fixed-maturity investments at September 30, 2009 (1)... $ 34,563 100 bp increase $ 32,942
200 bp increase 31,405
50 bp decrease 35,302
100 bp decrease 36,086
Fixed-maturity investments at December 31, 2008 (1).... $ 31,360 100 bp increase $ 29,831
200 bp increase 28,457
50 bp decrease 32,134
100 bp decrease 32,907
-------------------
(1) Excluding short-term investments (certificates of deposits and auction rate
certificates) with a fair value of $4.4 million at September 30, 2009 and
$6.1 million at December 31, 2008.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at September 30, 2009 would reduce
the estimated fair value of our fixed-maturity investments by approximately
$3.2 million at that date. At December 31, 2008, an instantaneous 200 basis
point increase in market interest rates would have reduced the estimated
fair value of our fixed-maturity investments by approximately $2.9 million
at that date. The definitive extent of the interest rate risk is not
quantifiable or predictable due to the variability of future interest
rates, but we do not believe such risk is material.
We primarily manage our exposure to investment interest rate risk by
purchasing investments that can be readily liquidated should the interest rate
environment begin to significantly change.
Interest Rate Risk
As of September 30, 2009, we had $41.8 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 $418,000. As of September 30, 2009, we had not
entered into any interest rate swap agreements with respect to the term loans or
our floating rate municipal bonds.
23
Foreign Currency Exchange Rate Risk
Although we are exposed to foreign currency exchange rate risk inherent in
revenues, net income and assets and liabilities denominated in Canadian dollars,
the potential change in foreign currency exchange rates is not a substantial
risk, as approximately 1% of our revenues are derived outside of the United
States. As reflected in the attached Consolidated Statements of Comprehensive
Income, we have recorded positive foreign currency translation adjustments of
$1.1 million for the nine months ended September 30, 2009 and have a cumulative
positive foreign currency translation adjustment balance of $724,000 at
September 30, 2009. These amounts are subject to change dynamically in
conjunction with the relative values of the Canadian and U.S. dollars.
ITEM 4. CONTROLS AND PROCEDURES
----------------------------------
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of September 30, 2009, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the
quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
---------------------------
See Note 2 of the Notes to Consolidated Financial Statements included in
Part I, Item 1 of this report for information with respect to legal proceedings.
ITEM 1A. RISK FACTORS
--------------------------
There are a number of risk factors that could affect our financial
condition or results of operations. See Note 2 of the Notes to Consolidated
Financial Statements included in Part I, Item 1 of this report for information
with respect to legal proceedings, any of which could have a material adverse
effect on our financial condition and results of operations. Please refer to
pages 15 - 17 of our 2008 Annual Report on Form 10-K for a description of other
risk factors. There has not been any material changes in the risk factors
disclosed in the Annual Report.
24
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
during the third quarter of 2009.
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Total Number Part of Publicly Be Purchased Under
of Shares Average Price Announced Plans or the Plans or
Period Purchased Paid per Share Programs Programs (1)
---------------------- --------------- ---------------- -------------------- ----------------------
July 2009............. 8,274 $ 48.82 8,274 810,166
August 2009........... 3,756 47.57 3,756 806,410
September 2009........ 3,636 49.28 3,636 802,774
--------------- ---------------- --------------------
Total................. 15,666 $ 48.62 15,666
--------------- ---------------- --------------------
-----------
(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.
The Board of Directors has subsequently from time to time increased such
authorization from 500,000 shares to 15 million shares. The most recent
authorization was for 1 million additional shares on February 18, 2009 and
there has been no time limit set for completion of the repurchase program.
See Part I, Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operation-Liquidity and Capital Resources" for a
description of loan covenants that limit our ability to repurchase shares and
pay dividends.
ITEM 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 l ife
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)
25
*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)
26
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.
27
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 26, 2009 /s/ Harland C. Stonecipher
----------------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: October 26, 2009 /s/ Randy Harp
----------------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: October 26, 2009 /s/ Steve Williamson
----------------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28