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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, 2007
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period From _____ to _____
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Commission File Number: 001-09293
PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Pre-Paid Way, Ada, Oklahoma 74820-5813
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (580) 436-1234
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer | | Accelerated filer |X| Non-accelerated filer | |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes | | No |X|
The number of shares outstanding of the registrant's common stock (excluding
4,852,179 shares held in treasury) as of October 19, 2007 was 12,882,462.
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PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended September 30, 2007
CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
a) Consolidated Balance Sheets
as of September 30, 2007 (Unaudited) and December 31, 2006
b) Consolidated Statements of Income (Unaudited)
for the three month and nine month periods
ended September 30, 2007 and 2006
c) Consolidated Statements of Comprehensive Income (Unaudited)
for the three month and nine month periods
ended September 30, 2007 and 2006
d) Consolidated Statements of Cash Flows (Unaudited)
for the nine month periods ended September 30, 2007 and
2006
e) Notes to Consolidated Financial Statements (Unaudited)
Item 1A. Risk Factors
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
September 30, December 31,
2007 2006
-------------- --------------
Current assets: (Unaudited)
Cash and cash equivalents............................................................ $ 29,030 $ 12,031
Available-for-sale investments, at fair value........................................ 13,325 42,275
Membership fees receivable........................................................... 6,128 5,518
Inventories.......................................................................... 1,193 1,337
Refundable income taxes.............................................................. 1,196 653
Deferred member and associate service costs.......................................... 16,301 15,879
Deferred income taxes................................................................ 5,008 4,235
Other assets......................................................................... 7,370 6,404
-------------- --------------
Total current assets............................................................. 79,551 88,332
Available-for-sale investments, at fair value.......................................... 26,402 27,461
Investments pledged.................................................................... 4,350 4,145
Property and equipment, net............................................................ 56,767 59,643
Deferred member and associate service costs............................................ 2,447 2,636
Other assets........................................................................... 6,681 6,330
-------------- --------------
Total assets................................................................... $ 176,198 $ 188,547
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.................................................................. $ 12,218 $ 11,995
Deferred revenue and fees............................................................ 27,569 26,040
Current portion of capital leases payable............................................ 22 340
Current portion of notes payable..................................................... 18,241 18,437
Accounts payable and accrued expenses................................................ 15,034 13,645
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Total current liabilities.......................................................... 73,084 70,457
-------------- --------------
Capital leases payable............................................................... 940 957
Notes payable........................................................................ 60,053 73,533
Deferred revenue and fees............................................................ 2,447 2,636
Deferred income taxes................................................................ 4,765 4,897
Other non-current liabilities........................................................ 6,130 5,207
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Total liabilities................................................................ 147,419 157,687
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Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 17,738 and
18,488 issued at September 30, 2007 and December 31, 2006, respectively............ 177 185
Retained earnings.................................................................... 126,049 129,413
Accumulated other comprehensive income............................................... 1,581 290
Treasury stock, at cost; 4,852 shares held at September 30, 2007 and
December 31, 2006, respectively.................................................... (99,028) (99,028)
-------------- --------------
Total stockholders' equity....................................................... 28,779 30,860
-------------- --------------
Total liabilities and stockholders' equity..................................... $ 176,198 $ 188,547
-------------- --------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Revenues:
Membership fees................................................ $ 107,713 $ 103,592 $ 318,530 $ 308,443
Associate services............................................. 6,032 6,368 19,064 20,151
Other.......................................................... 1,132 1,234 3,427 3,758
---------- ---------- ---------- ----------
114,877 111,194 341,021 332,352
---------- ---------- ---------- ----------
Costs and expenses:
Membership benefits............................................ 37,475 36,578 111,153 108,696
Commissions.................................................... 33,646 31,393 98,421 96,023
Associate services and direct marketing........................ 8,902 7,144 21,959 22,030
General and administrative..................................... 13,717 12,229 39,847 37,716
Other, net..................................................... 3,584 2,932 10,621 8,555
---------- ---------- ---------- ----------
97,324 90,276 282,001 273,020
---------- ---------- ---------- ----------
Income before income taxes....................................... 17,553 20,918 59,020 59,332
Provision for income taxes....................................... 5,980 7,512 19,540 20,765
---------- ---------- ---------- ----------
Net income....................................................... $ 11,573 $ 13,406 $ 39,480 $ 38,567
---------- ---------- ---------- ----------
Basic earnings per common share.................................. $ .89 $ .93 $ 2.97 $ 2.59
---------- ---------- ---------- ----------
Diluted earnings per common share................................ $ .88 $ .93 $ 2.96 $ 2.58
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net income..................................................... $ 11,573 $ 13,406 $ 39,480 $ 38,567
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... 529 (31) 1,133 160
---------- ---------- ---------- ----------
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during period.... 158 358 (9) (14)
Reclassification adjustment for realized (gains) losses
included in net income................................... 99 (15) 167 4
---------- ---------- ---------- ----------
257 343 158 (10)
---------- ---------- ---------- ----------
Other comprehensive income, net of income taxes of $164 and
$219 for the three months and $101 and $(6) for the nine
months ended September 30, 2007 and 2006, respectively....... 786 312 1,291 150
---------- ---------- ---------- ----------
Comprehensive income........................................... $ 12,359 $ 13,718 $ 40,771 $ 38,717
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Nine Months Ended
September 30,
-------------------------
2007 2006
----------- -----------
Cash flows from operating activities:
Net income............................................................................. $ 39,480 $ 38,567
Adjustments to reconcile net income to net cash provided by operating activities:
(Benefit) provision for deferred income taxes........................................ (905) 310
Depreciation and amortization........................................................ 6,381 6,139
Increase in Membership fees receivable............................................... (610) (324)
Decrease in inventories.............................................................. 144 346
Increase in refundable income taxes.................................................. (543) (19)
Increase in deferred member and associate service costs.............................. (233) (1,259)
Increase in other assets............................................................. (1,317) (2,344)
Increase in accrued Membership benefits.............................................. 223 345
Increase in deferred revenue and fees................................................ 1,340 710
Increase in other non-current liabilities............................................ 923 881
Decrease in income taxes payable..................................................... - (1,738)
Increase (decrease) in accounts payable and accrued expenses......................... 2,528 (3,043)
----------- -----------
Net cash provided by operating activities.......................................... 47,411 38,571
----------- -----------
Cash flows from investing activities:
Additions to property and equipment.................................................. (3,511) (8,046)
Purchases of investments - available for sale........................................ (188,465) (88,843)
Maturities and sales of investments - available for sale............................. 218,427 53,522
----------- -----------
Net cash provided by (used in) investing activities................................ 26,451 (43,367)
----------- -----------
Cash flows from financing activities:
(Use) proceeds from exercise of stock options........................................ (84) 288
Tax benefit on exercise of stock options............................................. 790 649
Proceeds from issuance of debt....................................................... 9,556 85,000
Decrease in capital lease obligations................................................ (335) (315)
Common stock dividends paid.......................................................... - (4,643)
Repayments of debt................................................................... (23,232) (26,891)
Purchases and retirement of treasury stock........................................... (43,558) (48,889)
----------- -----------
Net cash (used in) provided by financing activities ............................... (56,863) 5,199
----------- -----------
Net increase in cash and cash equivalents.............................................. 16,999 403
Cash and cash equivalents at beginning of period....................................... 12,031 33,957
----------- -----------
Cash and cash equivalents at end of period............................................. $ 29,030 $ 34,360
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Supplemental disclosure of cash flow information:
Cash paid for interest............................................................... $ 5,042 $ 3,233
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Cash paid for income taxes........................................................... $ 20,317 $ 21,633
----------- -----------
Purchases of treasury stock pursuant to tender offer................................. $ - $ 6,584
----------- -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Except for per share amounts, dollar amounts in tables are in thousands
unless otherwise indicated)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been omitted. The
accompanying consolidated financial statements and notes thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in our 2006 Annual Report on Form 10-K. Terms such as "we", "our" and
"us" are sometimes used as abbreviated references to Pre-Paid Legal Services,
Inc.
In our opinion, the accompanying unaudited financial statements as of
September 30, 2007, and for the three month and nine month periods ended
September 30, 2007 and 2006, reflect adjustments (which were normal and
recurring) which, in our opinion, are necessary for a fair statement of our
financial position and results of operations of the interim periods presented.
Results for the three month and nine month periods ended September 30, 2007 are
not necessarily indicative of results expected for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Note 2 - Contingencies
Beginning in the second quarter of 2001 multiple lawsuits were filed
against us, certain officers, employees, sales associates and other defendants
in various Mississippi state courts by current or former members seeking actual
and punitive damages for alleged breach of contract, fraud and various other
claims in connection with the sale of Memberships. At one time, we were aware of
11 separate lawsuits involving approximately 400 plaintiffs in multiple counties
in Mississippi. These cases seek varying amounts of actual and punitive damages.
We tried three separate lawsuits in Mississippi. On September 11, 2006 we
reached a settlement agreement with counsel for the more than 400 plaintiffs in
numerous pending cases in Mississippi. For an amount significantly less than our
then accrued reserves of $2.5 million, all pending litigation against us is
being resolved in Mississippi, including the Barbara Booth v. Pre-Paid Legal
Services, Inc. case in which the $9.9 million punitive damage verdict was
entered. Settlement and dismissal of almost all pending litigation has been
approved by the plaintiffs.
On March 27, 2006 we received a complaint filed by a former provider
attorney law firm in Davidson County, Tennessee seeking compensatory and
punitive damages on the basis of allegations of breach of contract. On May 15,
2006 the trial court dismissed plaintiff's complaint in its entirety. Plaintiff
filed a notice of appeal on June 13, 2006, and on August 24, 2007 the Court of
Appeals reversed the ruling of the trial court and remanded the suit to the
trial court for further proceedings. We filed a Petition for Rehearing which was
denied on September 26, 2007. The ultimate outcome of this matter is not
determinable.
On March 23, 2007 we received a Civil Investigative Demand from the Federal
Trade Commission requesting information relating to our Identity Theft Shield
and ADRS Program. We are working with the Federal Trade Commission to resolve
the matter. The ultimate outcome of the matter is not determinable.
We are a defendant in various other legal proceedings that are routine and
incidental to our business. We will vigorously defend our interests in all
proceedings in which we are named as a defendant. We also receive periodic
complaints or requests for information from various state and federal agencies
relating to our business or the activities of our marketing force. We promptly
respond to any such matters and provide any information requested.
While the ultimate outcome of these proceedings is not determinable, we do
not currently anticipate that these contingencies will result in any material
adverse effect to our financial condition or results of operation, unless an
unexpected result occurs in one of the cases. The costs of the defense of these
various matters are reflected as a part of general and administrative expense,
or Membership benefits if fees relate to Membership issues, in the consolidated
statements of income. We have established an accrued liability, we believe will
be sufficient to cover estimated damages in connection with various cases
(exclusive of ongoing defense costs which are expensed as incurred), which at
September 30, 2007 was $75,000. We believe that we have meritorious defenses in
all pending cases and will vigorously defend against the plaintiffs' claims.
However, it is possible that an adverse outcome in certain cases or increased
litigation costs could have an adverse effect upon our financial condition,
operating results or cash flows in particular quarterly or annual periods.
Canadian taxing authorities are challenging portions of our commission and
general and administrative deductions for tax years 1999 - 2002 and have tax
assessments which aggregate $5.7 million. The Canadian taxing authorities
contend commission deductions should be matched with the membership revenue as
received, we contend these commissions are deductible when paid. Under Canadian
tax laws, our commission payments are treated as a prepaid expense. We base our
deduction of commission on the fact that all the services (the sale of the
membership) have been performed by the sales associate at the time of sale
therefore this prepaid expense (the commission payments) is deductible when
paid. Also, the commission payment is taxable to the sales associate when paid
and each year we issue a T4 (Canadian 1099 equivalent) to sales associates for
the total commission payments made during that year. In addition, Canadian
taxing authorities have challenged our allocation of general and administrative
expenses to Canadian operations. We contend the allocation of general and
administrative expenses, based on the percentage of Canadian new memberships
written and the Canadian percentage memberships in force, is reasonable. During
July 2007 we received a settlement offer from the Canadian taxing authorities
regarding the general and administrative deductions which if accepted would
allow us to claim a deduction on the Canadian tax return for over 70% of these
items. This settlement offer would allow us to deduct the remaining 30% of these
items on our US federal tax returns. We have established an accrued liability we
believe will be sufficient to cover the estimated tax assessment in connection
with these items, which at September 30, 2007 was $477,000. As stated above, we
believe that we have reasonable basis for our tax position relative to these
items, however, it is possible that an adverse outcome could have an adverse
effect upon our financial condition, operating results or cash flows in
particular quarterly or annual periods.
Note 3 - Treasury Stock Purchases
We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock. The
Board of Directors has increased such authorization from 500,000 shares to 13
million shares during subsequent board meetings. At September 30, 2007 we had
purchased 12.2 million treasury shares under these authorizations for a total
consideration of $339.5 million, an average price of $27.73 per share. We
purchased and formally retired 357,439 shares of our common stock during the
2007 third quarter for $18.5 million, or an average price of $51.82 per share,
reducing our common stock by $3,574 and our retained earnings by $18.5 million.
See Note 6 below. Given the current interest rate environment, the nature of
other investments available and our expected cash flows, we believe that
purchasing treasury shares enhances shareholder value and may seek alternative
sources of financing to continue or accelerate the program. Any additional
treasury stock purchases will be made at prices that we consider attractive and
at such times that we believe will not unduly impact our liquidity.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
respective period. Diluted earnings per common share are computed by dividing
net income by the weighted average number of shares of common stock and dilutive
potential common shares outstanding during the respective period. The weighted
average number of common shares is increased by the number of dilutive potential
common shares issuable on the exercise of options less the number of common
shares assumed to have been purchased with the proceeds from the exercise of the
options pursuant to the treasury stock method; those purchases are assumed to
have been made at the average price of the common stock during the respective
period.
Three Months Ended Nine Months
September 30, Ended September 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Basic Earnings Per Share:
Earnings:
Net income.................................................... $ 11,573 $ 13,406 $ 39,480 $ 38,567
-------- -------- -------- --------
Shares (in thousands):
Weighted average shares outstanding........................... 13,068 14,360 13,293 14,867
-------- -------- -------- --------
Diluted Earnings Per Share:
Earnings:
Net income.................................................... $ 11,573 $ 13,406 $ 39,480 $ 38,567
-------- -------- -------- --------
Shares (in thousands):
----------------------
Weighted average shares outstanding........................... 13,068 14,360 13,293 14,867
Assumed exercise of options................................... 26 67 54 101
-------- -------- -------- --------
Weighted average number of shares, as adjusted................ 13,094 14,427 13,347 14,968
-------- -------- -------- --------
Shares issued pursuant to option exercises.................... - 3 122 113
-------- -------- -------- --------
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, 2007 and 2006.
Note 5 - Recently Issued Accounting Pronouncements
We adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"), on January 1, 2007. The adoption of FIN 48 did not have a
material effect on our consolidated financial position or results of operations.
We and our subsidiaries are subject to U.S. federal income tax, Canadian
income tax, as well as income tax of multiple state and local jurisdictions. Our
2003 - 2006 U.S. federal income tax returns remain open to examination by the
Internal Revenue Service (IRS). Our state and local income tax returns for years
1999 through 2006 remain open to examination by the state and local taxing
authorities. Canadian income tax returns for 1999 through 2002 are currently
under examination and years 1999 - 2006 are open to examination. The IRS
examined our U.S. federal income tax return for 2004 resulting in no recommended
adjustments to the tax return.
See Note 2 above for certain information about contingencies relating to
Canadian tax matters.
We are continuing our practice of recognizing interest and/or penalties
related to income tax matters in general and administrative expenses.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This statement
clarifies how to measure fair value as permitted under other accounting
pronouncements but does not require any new fair value measurements. However,
for some entities, the application of this statement will change current
practice. We will be required to adopt SFAS No. 157 as of January 1, 2008 and
are currently evaluating the impact of SFAS No. 157 and have not yet determined
the effect on our earnings or financial position.
In March 2006, the FASB Emerging Issues Task Force issued Issue 06-3, How
Sales Taxes Collected From Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement ("EITF 06-3"). A tentative consensus
was reached that a company should disclose its accounting policy (i.e., gross or
net presentation) regarding presentation of taxes within the scope of EITF 06-3.
If taxes are significant, a company should disclose the amount of such taxes for
each period for which an income statement is presented. Sales taxes are not
significant and our accounting policy is to present them on a net basis
(excluded from revenues).
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for us January 1, 2008. We are evaluating the impact that the adoption
of SFAS No. 159 will have on our consolidated financial statements.
Note 6 - Notes Payable
On June 23, 2006, we received $80 million of senior, secured financing (the
"Senior Loan") from Wells Fargo Foothill, Inc. ("Wells Fargo") consisting of a
$75 million five year term loan facility (the "Term Facility") and a $5 million
five year revolving credit facility (the "Revolving Facility"). At September 30,
2007, we have the full Revolving Facility available to us. After payment of an
origination fee of 1%, lender costs and retirement of $15.3 million of existing
bank indebtedness, the net proceeds of the Term Facility we received were $58.8
million. Since receiving the net proceeds, we used them to purchase 1.4 million
shares of treasury stock at an average price of $42.95 per share.
The Term Facility was fully funded on June 23, 2006 and provides for a
five-year maturity and amortizes in monthly installments of $1.25 million
commencing August 1, 2006, with interest on the outstanding balances under the
Term Facility and the Revolving Facility payable, at our option, at a rate
originally equal to Wells Fargo base rate plus 150 basis points or at the LIBOR
plus 250 basis points. On September 10, 2007 we entered into an amendment to the
Senior Loan which reduced the margin on LIBOR rate loans from 250 basis points
to 150 basis points and fixed all LIBOR rate loans on 30 day interest periods;
reduced the margin on base rate loans from 150 basis points to zero basis
points; and increased the amounts of cash flow that we may use in each quarter
to pay dividends or repurchase shares of common stock by accumulating unused
amounts available for such purposes for up to a 24 month period that will phase
in from June 30, 2007 to June 30, 2008. No other material amendments were made
to the Senior Loan. The interest rate at September 30, 2007 was 7.00%. 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
0.83 to 1 at September 30, 2007. We expect to be able to repay the facilities
with cash flow from operations. We have the right to prepay the Term Facility in
whole or in part, subject to a prepayment premium of 1% in the first year, 0.5%
in the second year and none thereafter, with a reduction of 50% of the
prepayment premium if the prepayment is from the proceeds of another loan
provided by Wells Fargo.
The Senior Loan is guaranteed by our non-regulated subsidiaries and is
secured by all of our tangible and intangible personal property (other than
aircraft), including stock in all of our direct subsidiaries, and a mortgage on
a building we recently acquired in Duncan, Oklahoma and remodeled to relocate
and expand our existing customer service facility in Duncan.
In addition to customary covenants for loans of a similar type, the
principal covenants for the Senior Loan are:
* a limitation on incurring any indebtedness in excess of the remaining
existing bank indebtedness outstanding and $2.3 million in permitted
capitalized leases or purchase money debt;
* a limitation on our ability to pay dividends or make stock purchases,
other than with the net proceeds of the Term Loan, unless we meet
certain cash flow tests; * a prohibition on prepayment of other debt;
* a requirement to maintain consolidated EBITDA for the twelve month
period ending December 31, 2006 and each quarter thereafter of at
least $80 million ($75 million for us and our top tier direct
subsidiaries);
* a requirement to maintain a quarterly fixed charge coverage ratio
(EBITDA (with certain adjustments) divided by the sum of interest
expense, income taxes and scheduled principal payments) of at least
1.1 to 1; * a requirement to maintain at least 1.3 million members;
and
* a requirement to maintain a Leverage Ratio (funded indebtedness as of
the end of each quarter divided by EBITDA for the trailing twelve
months) of no more than 1.5 to 1.
We were in compliance with these covenants at September 30, 2007.
In addition to customary events of default, it is an event of default if
Harland Stonecipher ceases to be our Chairman and Chief Executive Officer for a
period of 120 days unless replaced with a person approved by Wells Fargo.
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 originally at the 30 day LIBOR rate plus 225
basis points was modified on September 25, 2007 to reduce the interest rate to
LIBOR plus 150 basis points effective September 1, 2007, adjusted monthly, and
is secured by a mortgage on our headquarters. The interest rate at September 30,
2007 was 7.57% 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.
On September 28, 2007, we entered into a term loan agreement with Wells
Fargo Equipment Finance, Inc. to refinance our existing indebtedness of $9.6
million related to our aircraft. The new loan has an interest rate of 89 basis
points above the monthly LIBOR rate (compared to LIBOR plus 175 basis points
under the previous loan) and will be repaid over 10 years in monthly payments of
principal of $80,000 (compared to $96,000 under the previous loan) plus interest
and is secured by the aircraft and engines. The interest rate at September 30,
2007 was 6.65%.
A schedule of outstanding balances as of September 30, 2007 is as follows:
Senior loan................................ $ 57,500
Real estate loan........................... 11,238
Aircraft loan.............................. 9,556
---------
Total notes payable........................ 78,294
Less: Current portion of notes payable..... (18,241)
---------
Long term portion.......................... $ 60,053
----------
A schedule of future maturities as of September 30, 2007 is as follows:
Repayment Schedule commencing
October 2007:
------------------------------------------------------
Year 1..................................... $ 18,241
Year 2..................................... 18,241
Year 3..................................... 18,241
Year 4..................................... 17,837
Year 5..................................... 956
Thereafter................................. 4,778
--------
Total notes payable........................ $ 78,294
--------
Note 7 - Share-based Compensation
During the nine months ended September 30, 2007, the stock option activity
under our stock option plans was as follows:
Weighted
Average
Remaining
Weighted Contractual Aggregate
Average Number of Term Intrinsic
Price Shares (In Years) Value
---------- ----------- ------------ -----------
Outstanding, January 1, 2007.................... $ 23.26 273,040
Granted....................................... - -
Cancelled..................................... 22.87 (5,597)
Exercised..................................... 24.17 (208,943)
Outstanding, September 30, 2007................. ---------- ------------
$ 20.08 58,500 2.67 $ 2,070
---------- ----------- ------------ -----------
Options exercisable as of September 30, 2007.... $ 20.08 58,500 2.67 $ 2,070
---------- ----------- ------------ -----------
Other information pertaining to option activity during the nine months
ended September 30, 2007 and 2006 was as follows:
September 30, September 30,
2007 2006
-------------- ---------------
Weighted average grant-date fair value of stock options granted.. Not applicable Not applicable
Total fair value of stock options vested......................... Not applicable Not applicable
Total intrinsic value of stock options exercised................. $ 6,821 $ 3,638
Under our stock option plan, 1,346,252 shares of our Common Stock are
available for issuance. Options outstanding and exercisable were granted at a
stock option price which was not less than the fair market value of our Common
Stock on the date the option was granted and no option has a term in excess of
ten years. Additionally, options vested and became exercisable either on the
grant date or up to five years from the option grant date.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123R, Share-Based Payment ("SFAS No. 123R" or the "Statement"). This Statement
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), and supersedes Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25") and its related implementation
guidance. On January 1, 2006, we adopted the provisions of SFAS No. 123R using
the modified prospective method. SFAS No. 123R focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. The Statement requires entities to recognize compensation
expense for awards of equity instruments to employees based on the grant-date
fair value of those awards (with limited exceptions). SFAS No. 123R also
requires the benefits of tax deductions in excess of recognized compensation
expense to be reported as financing cash flows, rather than as an operating cash
flow as prescribed under the prior accounting rules. This requirement reduces
net operating cash flows and increases net financing cash flows in periods after
adoption. Total cash flow remains unchanged from what would have been reported
under prior accounting rules.
Prior to the adoption of SFAS No. 123R, we followed the intrinsic value
method in accordance with APB No. 25 to account for our employee stock options.
Accordingly, no compensation expense was recognized in connection with the
issuance of stock options under any of our stock option plans for periods ended
prior to January 1, 2006. The adoption of SFAS No. 123R primarily resulted in a
change in our method of recognizing the fair value of share-based compensation.
Our adoption of SFAS No. 123R did not result in our recording compensation
expense for employee stock options, since all options had vested, no
modifications were made to existing options and no new options were granted.
We do not expect to grant any additional employee options or modify any
existing options and therefore recognize any share-based payments' expense from
the issuance of employee stock options in 2007. The options outstanding at
December 31, 2005 did not and will not impact 2006 or 2007 consolidated results
of operations and financial position since all option-holders were fully vested
in such options at December 31, 2005.
ITEM 1A. RISK FACTORS
--------------------------
There are a number of risk factors that could affect our financial
condition or results of operations. See Note 2 in Part 1, Item 1 - Contingencies
and Part II, Item 1 - Legal Proceedings. Please refer to page 14 and 15 of our
2006 Annual Report on Form 10-K for a description of other risk factors. There
has not been any material changes in the risk factors disclosed in the Annual
Report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
--------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Form 10-K for the year ended December 31, 2006, which
describes, among other things, our basic business model, critical accounting
policies, measures of Membership retention, and basic cash flow characteristics
of our business. The following tables set forth changes in the principal
categories of revenues and expenses and Membership and recruiting activity for
the third quarter of 2007 compared to the third quarter of 2006 and the second
quarter of 2007 (Table amounts in 000's). The sum of the percentages in the
tables may not total due to rounding.
Three Months Ended September 30, 2007 Three % % Three Three
compared to Months Change Change Months Months
Three Months Ended September 30, 2006 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, 2007 2007 Revenue Year Period 2006 Revenue 2007 Revenue
-------------------------------------- --------- --------- -------- ---------- --------- --------- ---------- ----------
Revenues:
Membership fees.................... $107,713 93.8 4.0 0.7 $103,592 93.2 $106,936 93.8
Associate services................. 6,032 5.3 -5.3 1.1 6,368 5.7 5,968 5.2
Other.............................. 1,132 1.0 -8.3 -2.1 1,234 1.1 1,156 1.0
--------- --------- -------- ---------- --------- --------- ---------- ----------
114,877 100.0 3.3 0.7 111,194 100.0 114,060 100.0
--------- --------- -------- ---------- --------- --------- ---------- ----------
Costs and expenses:
Membership benefits................ 37,475 32.6 2.5 1.5 36,578 32.9 36,927 32.4
Commissions........................ 33,646 29.3 7.2 -1.7 31,393 28.2 34,243 30.0
Associate services and direct 8,902 24.6 33.2 7,144 6.4 6,682 5.9
marketing........................ 7.7
General and administrative......... 13,717 11.9 12.2 2.5 12,229 11.0 13,383 11.7
Other, net......................... 3,584 3.1 22.2 8.8 2,932 2.6 3,293 2.9
--------- --------- -------- ---------- --------- --------- ---------- ----------
97,324 84.7 7.8 3.0 90,276 81.2 94,528 82.9
--------- --------- -------- ---------- --------- --------- ---------- ----------
Income before income taxes........... 17,553 15.3 -16.1 -10.1 20,918 18.8 19,532 17.1
Provision for income taxes........... 5,980 5.2 -20.4 -5.9 7,512 6.8 6,353 5.6
--------- --------- -------- ---------- --------- --------- ---------- ----------
Net income........................... $11,573 10.1 -13.7 -12.2 $13,406 12.1 $13,179 11.6
--------- --------- -------- ---------- --------- --------- ---------- ----------
Three Months Ended
New Memberships: 9/30/2007 6/30/2007 9/30/2006
---------------- ---------- ---------- ----------
New legal service membership sales.......................................... 145,530 138,083 148,311
New "stand-alone" IDT membership sales...................................... 8,771 8,082 7,047
---------- ---------- ----------
Total new membership sales......................................... 154,301 146,165 155,358
---------- ---------- ----------
New "add-on" IDT membership sales........................................... 100,888 92,382 102,341
Average Annual Membership fee............................................... $325.98 $326.04 $334.70
Active Memberships:
Active legal service memberships at end of period........................... 1,496,319 1,484,414 1,484,456
Active "stand-alone" IDT memberships at end of period (see note below)...... 78,237 75,156 60,816
---------- ---------- ----------
Total active memberships at end of period.......................... 1,574,556 1,559,570 1,545,272
---------- ---------- ----------
Active "add-on" IDT memberships at end of period (see note below)........... 616,919 587,550 529,983
New Sales Associates:
New sales associates recruited.............................................. 43,555 38,175 42,395
Average enrollment fee paid by new sales associates......................... $40.74 $44.65 $49.74
Average Membership fee in force:
Average Annual Membership fee............................................... $297.52 $295.98 $292.60
Note - reflects 5,506 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 2007 compared to Third Quarter of 2006
-------------------------------------------------------------------------------
Net income decreased 14% for the third quarter of 2007 to $11.6 million
from $13.4 million for the prior year's third quarter primarily due to higher
commission payments and higher associate services and direct marketing expenses.
Diluted earnings per share decreased 5% to 88 cents per share from 93 cents per
share for the prior year's comparable quarter, lower than the net income
decrease, due to an approximate 9% decrease in the weighted average number of
diluted shares outstanding.
Membership fees totaled $107.7 million during the 2007 third quarter
compared to $103.6 million for 2006, an increase of 4%. Membership fees and
their impact on total revenues in any period are determined directly by the
number of active Memberships in force during any such period and the monthly
amount of such Memberships. The active Memberships in force are determined by
both the number of new Memberships sold in any period together with the renewal
rate of existing Memberships. New Membership sales decreased 1% during the three
months ended September 30, 2007 to 154,301 from 155,358 during the comparable
period of 2006. At September 30, 2007, there were 1,574,556 active Memberships
in force compared to 1,545,272 at September 30, 2006, an increase of 2%.
Additionally, the average annual fee per Membership has increased from $293 for
all Memberships in force at September 30, 2006 to $298 for all Memberships in
force at September 30, 2007, primarily as a result of a larger number of
Identity Theft Shield memberships.
Associate services revenue decreased by approximately $336,000 to $6
million, primarily due to decreases in associate enrollment fees during the
third quarter of 2007 when compared to the 2006 quarter. New associates enrolled
were 43,555 during the 2007 period compared to 42,395 for the same period of
2006, and average enrollment fees paid by new sales associates decreased from
$50 during the 2006 period to $41 during the 2007 quarter due to the lower
average enrollment fee paid by new sales associates in the 2007 third quarter.
We don't expect any significant increases in the average enrollment fee for the
remainder of the year. The eService fees increased to $3.2 million during the
third quarter of 2007 compared to $3.1 million for the comparable period of
2006. Future revenues from associate services will depend primarily on the
number of new associates enrolled, the average enrollment fee charged 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 8% from $1.2 million for the 2006 period to $1.1
million for the 2007 period.
Total revenues increased 3% to $114.9 million for the three months ended
September 30, 2007 from $111.2 million during the comparable period of 2006 due
to the $4.1 million increase in Membership fees partially offset by the $336,000
decline in associate services revenue.
Membership benefits totaled $37.5 million for the three months ended
September 30, 2007 compared to $36.6 million for the comparable period of 2006,
and represented 35% of Membership fees for both periods. This Membership benefit
ratio (Membership benefits as a percentage of Membership fees) should be
relatively stable or slightly reduced going forward as substantially all active
Memberships provide for a capitated cost and we have reduced the capitated cost
of the Identity Theft plan benefits effective April 1, 2007.
Commissions to associates increased 7% to $33.6 million for the three
months ended September 30, 2007 compared to $31.4 million for the comparable
period of 2006, and represented 31% and 30%, respectively, of Membership fees
for the two periods. Commissions to associates are primarily dependent on the
number of new memberships sold, including add-on membership sales, during a
period. Commissions to associates per new membership sold were $218 per
membership for the three months ended September 30, 2007 compared to $202 for
the comparable period of 2006. The average commission per new membership sold
varies depending on the compensation structure that is in place at the time a
new membership is sold, the amount of the Membership fee and the amount of any
charge-backs (recoupment of previous commission advances) that are deducted from
amounts that would otherwise be paid to the various sales associates that are
compensated for the membership sale. Should we add additional commissions to our
compensation plan or reduce the amount of chargebacks collected from our
associates as we have from time to time, the commission cost per new Membership
will increase accordingly.
Associate services and direct marketing expenses increased to $8.9 million
for the three months ended September 30, 2007 from $7.1 million for the
comparable period of 2006. The increase was primarily a result of increased
costs for incentive trips and bonuses. We offer the Player's Club incentive
program to provide additional incentives to our associates as a reward for
consistent, quality business. Associates can earn the right to receive
additional monthly bonuses by meeting monthly qualification requirements for 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, 2007 and 2006 were $13.7 million and $12.2 million, respectively, and
represented 13% and 12%, respectively, of Membership fees for the two periods.
The increases in general and administrative expenses were primarily due to
increased advertising costs (which are expensed when the advertisement occurs),
bank service charges, telecommunication expenses, utilities and real estate and
other taxes.
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, were $3.6 million for the three months ended September 30, 2007 compared
to $2.9 million for the 2006 comparable period. Depreciation expense was $2.1
million for both periods. Interest expense decreased to $1.7 million during the
2007 period from $2.1 million during the comparable period of 2006 as a result
of reduced debt levels. Premium taxes increased from $486,000 for the three
months ended September 30, 2006 to $494,000 for the comparable period of 2007.
Interest income decreased $430,000 to $675,000 for the three months ended
September 30, 2007 from $1.1 million for the comparable period of 2006, due to a
decrease in average cash and investment balances.
We have recorded a provision for income taxes of $6.0 million (34.1% of
pretax income) and $7.5 million (35.9% of pretax income) for the three months
ended September 30, 2007 and 2006, respectively. The decrease in the tax rate is
primarily due to an increase in non taxable interest income and tax credits.
Results of Operations - Third Quarter of 2007 compared to Second Quarter of 2007
--------------------------------------------------------------------------------
Third quarter 2007 membership fees increased 1% to $107.7 million from
$106.9 million for the second quarter of 2007. Associate services revenues
increased slightly during the 2007 third quarter by approximately $64,000 to
$6.0 million and associate services and direct marketing expenses increased by
$2.2 million during the same period. Membership benefits totaled $37.5 million
in the third quarter of 2007 compared to $36.9 million for the 2007 second
quarter and represented 35% of membership fees for both periods. Commissions to
associates totaled $33.6 million in the 2007 third quarter compared to $34.2
million for the 2007 second quarter and represented 31% and 32%, respectively,
of membership fees for the two periods. General and administrative expenses
increased slightly during the 2007 third quarter to $13.7 million compared to
$13.4 million for the 2007 second quarter and represented 13% of membership fees
for both periods.
Results of Operations - First Nine Months of 2007 compared to First Nine Months
--------------------------------------------------------------------------------
of 2006
-------
Membership revenues increased 3% the first nine months of 2007 to a record
$318.5 million compared to $308.4 million for the first nine months of 2006. Net
income increased 2% for the first nine months of 2007 to $39.5 million from
$38.6 million for the prior year's comparable period primarily due to the
increase of $10 million in membership fees partially offset by a reduction of
associate service fees of $1.1 million, an increase in Membership benefits
expense of $2.5 million, general and administrative expenses of $2.1 million, an
increase in commissions of $2.4 million and an increase in interest expense of
$1.6 million. Diluted earnings per share increased 15% to $2.96 per share from
$2.58 per share for the prior year's comparable nine month period due to the 2%
increase in net income and an approximate 11% decrease in the weighted average
number of diluted shares outstanding.
Membership fees and their impact on total revenues in any period are
determined directly by the number of active Memberships in force during any such
period. The active Memberships in force are determined by both the number of new
Memberships sold in any period together with the renewal rate of existing
Memberships. New Membership sales decreased 2% during the nine months ended
September 30, 2007 to 461,996 from 473,088 during the comparable period of 2006.
At September 30, 2007, there were 1,574,556 active Memberships in force compared
to 1,545,272 at September 30, 2006, an increase of 2%. Additionally, the average
annual fee per Membership has increased from $293 for all Memberships in force
at September 30, 2006 to $298 for all Memberships in force at September 30,
2007, primarily as a result of a larger number of Identity Theft Shield
memberships.
Associate services revenue decreased 5% from $20.2 million for the first
nine months of 2006 to $19.1 million during the comparable period of 2007
primarily due to a decrease in associate enrollment fees and eServices fees.
Total new associates enrolled during the first nine months of 2007 were 112,773
compared to 137,688 for the same period of 2006 and average enrollment fees paid
by new sales associates increased from $50 during the 2006 period to $59 during
the 2007 nine month period. As noted above the average enrollment fee for the
third quarter of 2007 was $41. We don't expect any significant increases in the
average enrollment fee for the remainder of the year. The eService fees
decreased to $9.2 million during the first nine months of 2007 compared to $9.6
million for the comparable period of 2006. Future revenues from associate
services will depend primarily on the number of new associates enrolled, the
average enrollment fee charged and the number who choose to participate in the
Company's eService program, but the Company expects that such revenues will
continue to be offset by the direct and indirect cost to the Company of training
(including training bonuses paid), providing associate services and other direct
marketing expenses
Other revenue decreased $331,000 from $3.8 million for the nine month
period ending September 2006 to $3.4 million for the same period of 2007.
Primarily as a result of the increase in Membership fees, total revenues
increased to $341.0 million for the nine months ended September 30, 2007 from
$332.3 million during the comparable period of 2006 an increase of 3%.
Membership benefits totaled $111.2 million for the nine months ended
September 30, 2007 compared to $108.7 million for the comparable period of 2006,
and represented 35% of Membership fees for both periods. This Membership benefit
ratio (Membership benefits as a percentage of Membership fees) should be
relatively stable or slightly reduced going forward as substantially all active
Memberships provide for a capitated cost and we have reduced the capitated cost
of the Identity Theft plan benefits effective April 1, 2007.
Commissions to associates increased 2% to $98.4 million for the nine months
ended September 30, 2007 compared to $96.0 million for the comparable period of
2006, and represented 31% of Membership fees for both periods. Commissions to
associates are primarily dependent on the number of new memberships sold during
a period. Commissions to associates per new membership sold were $213 per
membership for the nine months ended September 30, 2007 compared to $203 for the
comparable period of 2006. The average commission per new membership sold varies
depending on the compensation structure that is in place at the time a new
membership is sold and the amount of any charge-backs (recoupment of previous
commission advances) that are deducted from amounts that would otherwise be paid
to the various sales associates that are compensated for the membership sale.
Should we add additional commissions to our compensation plan or reduce the
amount of chargebacks collected from its associates as it has from time to time,
the commission cost per new Membership will increase accordingly.
Associate services and direct marketing expenses remained constant at $22.0
million for both periods and include the costs of providing associate services
and marketing expenses, including our incentive programs. 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.
General and administrative expenses during the nine months ended September
30, 2007 and 2006 were $39.8 million and $37.7 million, respectively, and
represented 13% and 12%, respectively, of Membership fees for such periods. The
increases in general and administrative expenses were primarily due to increased
legal fees, advertising (which are expensed when the advertisement occurs) and
promotion costs, printing expenses and property and other taxes partially offset
by decreased postage and shipping costs.
Other expenses, net, which include depreciation and amortization,
litigation accruals, interest expense and premium taxes reduced by interest
income, was $10.6 million for the nine months ended September 30, 2007 compared
to $8.6 million for the 2006 comparable period. Depreciation increased to $6.4
million for the first nine months of 2007 from $6.1 million for the comparable
period of 2006. Interest expense increased to $5.3 million during the 2007
period from $3.7 million during the comparable period of 2006 primarily as a
result of higher indebtedness. Premium taxes increased from $1.4 million for the
nine months ended September 30, 2006 to $1.5 million for the comparable period
of 2007. Interest income increased $626,000 to $2.6 million for the nine months
ended September 30, 2007 from $1.9 million for the comparable period of 2006,
primarily due to increased cash and investment balances.
We have recorded a provision for income taxes of $19.5 million (33.1% of
pretax income) for the first nine months of 2007 compared to $20.8 million
(35.0% of pretax income) for the same period of 2006. The decrease in the tax
rate is primarily due to an increase in non taxable interest income and tax
credits.
Liquidity and Capital Resources
General
Net cash flow provided by operating activities was $47.4 million for the
nine months ended September 30, 2007 compared to $38.6 million for the same
period in 2006. This $8.8 million increase was primarily the result of a $10
million increase in cash receipts from our members, partially offset by
increases in cash paid to our providers for the delivery of benefits, to our
associates for commissions and to our employees and vendors for operational
expenses. The increase of $8.8 million resulted primarily from the increase in
net income of $913,000, the $1.0 million change in the increase in other assets,
the change in the decrease of income taxes payable of $1.7 million and the $5.6
million change in the increase in accounts payable and accrued expenses and
other offset by a $1.2 million change in the provision for deferred income
taxes.
Consolidated net cash provided by investing activities was $26.5 million
for the first nine months of 2007 compared to net cash used of $43.4 million for
the comparable period of 2006. This $69.9 million change in investing activities
resulted from a $4.5 million decrease in additions to property and equipment and
a $164.9 million increase in the maturities and sales of investments partially
offset by a $99.6 million increase in investment purchases.
Net cash used in financing activities during the first nine months of 2007
was $56.9 million compared to net cash provided of $5.2 million for the
comparable period of 2006. This $62.1 million change was primarily comprised of
the $75.4 million decrease in debt proceeds partially offset by the $4.6 million
decrease in common stock dividends paid, the $3.7 million decreases in debt
repayments and the $5.3 million decrease in purchases of treasury stock.
We purchased and formally retired 872,077 shares of our common stock during
the first nine months of 2007 for $43.6 million, or an average price of $49.95
per share, reducing our common stock by $8,721 and our retained earnings by
$43.6 million. We had positive working capital of $6.5 million at September 30,
2007, a decrease of $11.3 million compared to working capital of $17.9 million
at December 31, 2006. The decrease was primarily due to a decrease in the
current portion of available-for-sale investments of $29.0 million, an increase
of $1.4 million in deferred revenue and fees and a $1.4 million increase in
accounts payable and accrued expenses partially offset by a $17.0 million
increase in cash and cash equivalents part. The $6.5 million positive working
capital at September 30, 2007 would have been a $17.7 million positive working
capital excluding the current portion of deferred revenue and fees in excess of
the current portion of deferred member and associate service costs. These
amounts will be eliminated by the passage of time without the utilization of
other current assets or us incurring other current liabilities. We do not expect
any difficulty in meeting our financial obligations in the next 12 months.
At September 30, 2007 we reported $68.8 million in cash and cash
equivalents and unpledged investments compared to $81.8 million at December 31,
2006. The balance of cash and cash equivalents will vary depending on our level
of investment in auction rate certificates and other short term investments that
are carried in the current portion of available-for-sales investments. Our
investments consist of common stocks, investment grade (rated Baa or higher)
bonds primarily issued by corporations, the United States Treasury, federal
agencies, federally sponsored agencies and enterprises, auction rate
certificates and state and municipal tax-exempt bonds.
We generally advance significant commissions at the time a Membership is
sold. During the nine months ended September 30, 2007, we advanced commissions,
net of chargebacks, of $96.0 million on new Membership sales compared to $94.4
million for the same period of 2006. Since approximately 95% of Membership fees
are collected on a monthly basis, a significant cash flow deficit is created on
a per Membership basis at the time a Membership is sold. Since there are no
further commissions paid on a Membership during the advance period, we typically
derive significant positive cash flow from the Membership over its remaining
life.
We expense advance commissions ratably over the first month of the related
Membership. As a result of this accounting policy, our commission expenses are
all recognized over the first month of a Membership and there is no commission
expense recognized for the same Membership during the remainder of the advance
period. We track our unearned advance commission balances outstanding in order
to ensure the advance commissions are recovered before any renewal commissions
are paid and for internal purposes of analyzing our commission advance program.
While not recorded as an asset, unearned advance commission balances from
associates as of September 30, 2007, and related activity for the nine month
period then ended, were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)............................... $ 188,647
Advance commission payments, net................................................. 96,047
Earned commissions applied....................................................... (94,755)
Advance commission payment write-offs............................................ (2,723)
-----------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 187,216
Estimated unrecoverable advance commission payments (1).......................... (42,540)
-----------
Ending unearned advance commission payments, net (1)............................. $ 144,676
-----------
(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 $54.5 million.
As such, at September 30, 2007 future commission payments and related expense
should be reduced as unearned advance commission payments of $90.2 million are
recovered. Commissions are earned by the associate as Membership premiums are
earned by us, usually on a monthly basis. For additional information concerning
these commission advances, see our Annual report on Form 10-K under the heading
Commissions to Associates in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
We believe that we have significant ability to finance any future growth in
Membership sales based on our recurring cash flow and existing amount of cash
and cash equivalents and unpledged investments at September 30, 2007 of $68.8
million. We expect to maintain cash and investment balances, including pledged
investments, on an on-going basis of approximately $20 to $30 million in order
to meet expected working capital needs and regulatory capital requirements. Cash
balances in excess of this amount would be used for discretionary purposes such
as additional treasury stock purchases subject to limitations in the Term
Facility.
Notes Payable
See Note 6 - Notes Payable in Item 1 above.
Parent Company Funding and Dividends
Although we are the operating entity in many jurisdictions, our
subsidiaries serve as operating companies in various states that regulate
Memberships as insurance or specialized legal expense products. The most
significant of these wholly owned subsidiaries are Pre-Paid Legal Casualty, Inc.
("PPLCI"), Pre-Paid Legal Services Inc. of Florida ("PPLSIF") and Legal Service
Plans of Virginia, Inc. ("LSPV"). The ability of these entities to provide funds
to us is subject to a number of restrictions under various insurance laws in the
jurisdictions in which they conduct business, including limitations on the
amount of dividends and management fees that may be paid and requirements to
maintain specified levels of capital and reserves. In addition PPLCI will be
required to maintain its stockholders' equity at levels sufficient to satisfy
various state or provincial regulatory requirements, the most restrictive of
which is currently $3 million. Additional capital requirements of these
entities, or any of our regulated subsidiaries, will be funded by us in the form
of capital contributions or surplus debentures. At September 30, 2007, none of
these entities had funds available for payment of substantial dividends without
the prior approval of the insurance commissioner. We received a $1.6 million
dividend from LSPV during March 2007 and a $7.4 million dividend from PPLCI
during April 2007.
Contractual Obligations
Other than the changes to our debt agreements described above (See Note 6 -
Notes Payable in Item 1), there have been no material changes outside of the
ordinary course of business in our contractual obligations from those disclosed
in our Annual Report on Form 10-K for the year ended December 31, 2006.
Critical Accounting Policies
----------------------------
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. If these estimates or assumptions are
incorrect, there could be a material change in our financial condition or
operating results. Many of these "critical accounting policies" are common in
the insurance and financial services industries; others are specific to our
business and operations. Our critical accounting policies include estimates
relating to revenue recognition related to Membership and associate fees,
deferral of Membership and associate related costs, expense recognition related
to commissions to associates, accrual of incentive awards payable and accounting
for legal contingencies. Each of these accounting policies and the application
of critical accounting policies and estimates was discussed in our Annual Report
on Form 10-K for the year ended December 31, 2006. There were no significant
changes in the application of critical accounting policies or estimates during
the first nine months of 2007. We are not aware of any reasonably likely events
or circumstances which would result in different amounts being reported that
would materially affect our financial condition or results of operations.
Capital and Dividend Plans
--------------------------
We continue to evaluate the desirability of additional share repurchases
and additional cash dividends. We declared dividends of $0.50 per share during
2004 and $0.60 per share during 2005 and have previously announced that we will
continue share repurchases, pay a dividend, or both, depending on our financial
condition, available resources and market conditions, as well as compliance with
our various loan covenants which limit our ability to repurchase shares or pay
cash dividends. We expect to continue our open market repurchase program when we
can acquire shares at prices we believe are attractive as we have existing
authorization from the Board to purchase an additional 754,518 shares. Based on
recent increases in our common stock market price, we may reduce or defer
further stock repurchases.
Forward-Looking Statements
All statements in this report other than purely historical information,
including but not limited to, statements relating to our future plans and
objectives, expected operating results and the assumptions on which such
forward-looking statements are based, constitute "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and are based on our historical operating
trends and financial condition as of September 30, 2007 and other information
currently available to management. We caution that the Forward-Looking
Statements are subject to all the risks and uncertainties incident to our
business, including but not limited to risks described in Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2006. Moreover, we may make
acquisitions or dispositions of assets or businesses, enter into new marketing
arrangements or enter into financing transactions. None of these can be
predicted with certainty and, accordingly, are not taken into consideration in
any of the Forward-Looking Statements made herein. For all of the foregoing
reasons, actual results may vary materially from the Forward-Looking Statements.
We assume no obligation to update the Forward-Looking Statements to reflect
events or circumstances occurring after the date of the statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
Interest Rate Risk
Our consolidated balance sheets include a certain amount of assets and
liabilities whose fair values are subject to market risk. Due to our significant
investment in fixed-maturity investments, interest rate risk represents the
largest market risk factor affecting our consolidated financial position.
Increases and decreases in prevailing interest rates generally translate into
decreases and increases in fair values of those instruments. Additionally, fair
values of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment options, relative values of
alternative investments, liquidity of the instrument and other general market
conditions.
As of September 30, 2007, substantially all of our investments consist of
common stocks, investment grade (rated Baa or higher) bonds primarily issued by
corporations, the United States Treasury, federal agencies, federally sponsored
agencies and enterprises, auction rate certificates and state and municipal
tax-exempt bonds. We do not hold any investments classified as trading account
assets or derivative financial instruments.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on our fixed-maturity investment portfolio. It
is assumed that the changes occur immediately and uniformly, with no effect
given to any steps that we might take to counteract that change.
The hypothetical changes in market interest rates reflect what could be
deemed best and worst case scenarios. The fair values shown in the following
table are based on contractual maturities. Significant variations in market
interest rates could produce changes in the timing of repayments due to
prepayment options available. The fair value of such instruments could be
affected and, therefore, actual results might differ from those reflected in the
following table:
Hypothetical change Estimated fair value
(In 000's) in interest rate after hypothetical
Fair value (bp = basis points) change in interest rate
---------- -------------------- -----------------------
Fixed-maturity investments at September 30, 2007 (1)... $ 28,251 100 bp increase $ 23,861
200 bp increase 26,231
50 bp decrease 28,779
100 bp decrease 29,306
Fixed-maturity investments at December 31, 2006 (1).... $ 31,420 100 bp increase $ 30,170
200 bp increase 28,975
50 bp decrease 31,965
100 bp decrease 32,568
-------------------
(1) Excluding short-term investments with a fair value of $15.8 million
(Certificates of deposit, auction rate securities and EURO deposits) at
September 30, 2007 and $42.4 million at December 31, 2006.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at September 30, 2007 would reduce
the estimated fair value of our fixed-maturity investments by approximately
$2.0 million at that date. At December 31, 2006, an instantaneous 200 basis
point increase in market interest rates would have reduced the estimated
fair value of our fixed-maturity investments by approximately $2.7 million
at that date. The definitive extent of the interest rate risk is not
quantifiable or predictable due to the variability of future interest
rates, but we do not believe such risk is material.
We primarily manage our exposure to investment interest rate risk by
purchasing investments that can be readily liquidated should the interest rate
environment begin to significantly change.
As of September 30, 2007, we had $78.3 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 $783,000. As of September 30, 2007, we had not
entered into any interest rate swap agreements with respect to the term loans or
our floating rate municipal bonds.
Foreign Currency Exchange Rate Risk
Although we are exposed to foreign currency exchange rate risk inherent in
revenues, net income and assets and liabilities denominated in Canadian dollars,
the potential change in foreign currency exchange rates is not a substantial
risk, as approximately 1% of our revenues are derived outside of the United
States. 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, 2007 and have a cumulative
positive foreign currency translation adjustment balance of $1.5 million at
September 30, 2007. 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, 2007, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the
quarter ended September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
---------------------------
See Note 2 of the Notes to Consolidated Financial Statements included in
Part I, Item 1 of this report for information with respect to legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
---------------------------------------------------------------------
Issuer Purchases of Equity Securities
The following table provides information about our purchases of stock in
the open market during the third quarter of 2007.
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 2007............. 65,202 $ 59.46 65,202 1,046,755
August 2007........... 199,758 47.93 199,758 846,997
September 2007........ 92,479 54.84 92,479 754,518
Total................. --------------- ---------------- --------------------
357,439 $ 51.82 357,439
--------------- ---------------- --------------------
-----------
(1) We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock
in the open market. The Board of Directors has subsequently from time to
time increased such authorization from 500,000 shares to 13 million shares.
The most recent authorization was for 1 million additional shares on March
7, 2007 and there has been no time limit set for completion of the
repurchase program.
See Part I, Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operation-Liquidity and Capital Resources" for a
description of loan covenants that limit our ability to repurchase shares and
pay dividends.
ITEM 6. EXHIBITS.
------------------
(a) Exhibits:
Exhibit No. Description
------------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company, as amended (Incorporated by
reference to Exhibit 3.1 of the Company's Report on Form 8-K dated June 27, 2005)
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.1 of the Company's
Report on Form 10-Q for the period ended June 30, 2003)
*10.1 Employment Agreement effective January 1, 1993 between the Company and Harland C. Stonecipher
(Incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1992)
*10.2 Agreements between Shirley Stonecipher, New York Life Insurance Company and the Company regarding
life insurance policy covering Harland C. Stonecipher (Incorporated by reference to Exhibit 10.21 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1985)
*10.3 Amendment dated January 1, 1993 to Split Dollar Agreement between Shirley Stonecipher and the Company
regarding life insurance policy covering Harland C. Stonecipher (Incorporated by reference to Exhibit
10.3 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1992)
*10.4 Form of New Business Generation Agreement Between the Company and Harland C. Stonecipher(Incorporated
by reference to Exhibit 10.22 of the Company's Annual Report on Form 10-K for the year ended December
31, 1986)
*10.5 Amendment to New Business Generation Agreement between the Company and Harland C. Stonecipher
effective January, 1990 (Incorporated by reference to Exhibit 10.12 of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1992)
*10.6 Amendment No. 2 to New Business Generation Agreement between the Company and Harland C. Stonecipher
effective January, 1990 (Incorporated by reference to Exhibit 10.13 of the Company's Annual Report
on Form 10-K for the year ended December 31, 2002)
*10.7 Stock Option Plan, as amended effective May 2003 (Incorporated by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2004)
10.8 Loan agreement dated June 11, 2002 between Bank of Oklahoma, N.A. and the Company (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the six-months ended
June 30, 2002)
10.9 Form of Mortgage dated July 23, 2002 between Bank of Oklahoma, N.A. and the Company (Incorporated
by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the six months
ended June 30, 2002)
*10.10 Deferred compensation plan effective November 6, 2002 (Incorporated by reference to Exhibit 10.14
of the Company's Annual Report on Form 10-K for the year ended December 31, 2002)
*10.11 Amended Deferred Compensation Plan effective January 1, 2005 (Incorporated by reference to Exhibit
10.16 of the Company's Report on Form 10-K for the year ended December 31, 2004)
10.12 Purchase Agreement dated August 19, 2005 between us and Learjet, Inc., with Addendum.
(Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K dated August 19,
2005)
10.13 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)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 Term Loan Agreement dated September 28, 2007 between Pre-Paid Legal Services, Inc. and Wells Fargo
Equipment Finance, LLC (Incorporated by reference to Exhibit 10.1 of the Company's of the Company's
Current Report on Form 8-K filed October 2, 2007)
10.20 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)
31.1 Certification of Harland C. Stonecipher, Chairman, Chief Executive Officer and President, Pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
32.1 Certification of Harland C. Stonecipher, Chairman, Chief Executive Officer and President, Pursuant
to 18 U.S.C. Section 1350
32.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350
--------------------
* Constitutes a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
(Registrant)
Date: October 23, 2007 /s/ Harland C. Stonecipher
---------------------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: October 23, 2007 /s/ Randy Harp
---------------------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: October 23, 2007 /s/ Steve Williamson
---------------------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 31.1
CERTIFICATION
-------------
I, Harland C. Stonecipher, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 23, 2007 /s/ Harland C. Stonecipher
---------------------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 31.2
CERTIFICATION
-------------
I, Steve Williamson, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 23, 2007 /s/ Steve Williamson
---------------------------------------------------
Steve Williamson
Chief Financial Officer
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2007 (the "Report")
fully complies with the requirements of Section 13(a) or 15(d), as applicable,
of the Securities Exchange Act of 1934 and that the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: October 23, 2007 /s/ Harland C. Stonecipher
---------------------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2007 (the "Report")
fully complies with the requirements of Section 13(a) or 15(d), as applicable,
of the Securities Exchange Act of 1934 and that the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: October 23, 2007 /s/ Steve Williamson
---------------------------------------------------
Steve Williamson
Chief Financial Officer