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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____ to _____
---------------
Commission File Number: 1-9293
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 74821-5813
(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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No [ ]
The number of shares outstanding of the registrant's common stock as of
October 22, 2004 was 15,509,388.
PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended September 30, 2004
CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
a) Consolidated Balance Sheets
as of September 30, 2004 (Unaudited) and
December 31, 2003
b) Consolidated Statements of Income
(Unaudited) for the three months and nine months
ended September 30, 2004 and 2003
c) Consolidated Statements of Comprehensive Income
(Unaudited) for the three months and nine months
ended September 30, 2004 and 2003
d) Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended
September 30, 2004 and 2003
e) Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 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,
2004 2003
------------- --------------
Current assets: (Unaudited)
Cash and cash equivalents........................................................ $ 50,982 $ 21,459
Available-for-sale investments, at fair value.................................... 197 10,203
Membership fees receivable....................................................... 4,716 4,575
Inventories...................................................................... 1,357 857
Refundable income taxes.......................................................... 1,611 331
Deferred member and associate service costs...................................... 14,966 14,215
Deferred income taxes............................................................ 4,596 4,894
------------- --------------
Total current assets......................................................... 78,425 56,534
Available-for-sale investments, at fair value...................................... 17,035 15,711
Investments pledged................................................................ 4,352 4,253
Property and equipment, net........................................................ 47,621 47,004
Deferred member and associate service costs........................................ 2,434 2,375
Other assets....................................................................... 7,297 5,135
------------- --------------
Total assets............................................................... $ 157,164 $ 131,012
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.............................................................. $ 10,031 $ 9,289
Deferred revenue and fees........................................................ 23,737 23,763
Current portion of capital leases payable........................................ 808 19
Current portion of notes payable................................................. 18,036 18,953
Treasury stock tender offer payable.............................................. 25,495 -
Accounts payable and accrued expenses............................................ 12,664 16,380
------------- --------------
Total current liabilities...................................................... 90,771 68,404
Capital leases payable........................................................... 1,003 1,687
Notes payable.................................................................... 31,559 24,468
Deferred revenue and fees........................................................ 3,332 3,330
Deferred income taxes ........................................................... 2,440 2,104
Other non-current liabilities.................................................... 2,437 1,445
------------- --------------
Total liabilities............................................................ 131,542 101,438
------------- --------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 20,352 and
21,674 issued at September 30, 2004 and December 31, 2003, respectively........ 204 217
Retained earnings................................................................ 123,785 127,576
Accumulated other comprehensive income........................................... 661 809
Treasury stock, at cost; 4,852 shares held at
September 30, 2004 and December 31, 2003....................................... (99,028) (99,028)
------------- --------------
Total stockholders' equity................................................... 25,622 29,574
------------- --------------
Total liabilities and stockholders' equity................................. $ 157,164 $ 131,012
------------- --------------
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,
----------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -------------
Revenues:
Membership fees.................................................$ 89,317 $ 82,695 $ 264,187 $ 246,123
Associate services.............................................. 6,132 6,033 18,607 19,900
Other........................................................... 1,404 1,296 4,097 3,963
----------- ----------- ----------- -------------
96,853 90,024 286,891 269,986
----------- ----------- ----------- -------------
Costs and expenses:
Membership benefits............................................. 31,100 27,956 90,835 82,271
Commissions..................................................... 30,097 28,443 88,960 84,974
Associate services and direct marketing......................... 7,304 7,411 21,611 21,820
General and administrative...................................... 11,083 9,896 32,033 26,817
Other, net...................................................... 2,526 2,175 7,215 6,256
----------- ----------- ----------- -------------
82,110 75,881 240,654 222,138
----------- ----------- ----------- -------------
Income before income taxes........................................ 14,743 14,143 46,237 47,848
Provision for income taxes........................................ 5,086 4,705 15,952 16,333
----------- ----------- ----------- -------------
Net income........................................................$ 9,657 $ 9,438 $ 30,285 $ 31,515
----------- ----------- ----------- -------------
Basic earnings per common share...................................$ .59 $ .54 $ 1.83 $ 1.79
----------- ----------- ----------- -------------
Diluted earnings per common share.................................$ .58 $ .54 $ 1.82 $ 1.78
----------- ----------- ----------- -------------
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,
----------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -------------
Net income..................................................... $ 9,657 $ 9,438 $ 30,285 $ 31,515
----------- ----------- ----------- -------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... 119 15 78 144
----------- ----------- ----------- -------------
Unrealized gains (losses) on investments:
Unrealized holding gains arising during period............. (71) (197) (171) 236
Reclassification adjustment for realized losses (gains)
included in net income................................... (13) 35 (55) 57
----------- ----------- ----------- -------------
(84) (162) (226) 293
----------- ----------- ----------- -------------
Other comprehensive income, net of income taxes
of $(45) and $(87) for the three months and ($122) and $158
for the nine months ended September 30, 2004 and 2003,
respectively................................................. 35 (147) (148) 437
----------- ----------- ----------- -------------
Comprehensive income........................................... $ 9,860 $ 9,291 $ 30,137 $ 31,952
----------- ----------- ----------- -------------
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,
-------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income....................................................................... $ 30,285 $ 31,515
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes............................................ 756 133
Depreciation and amortization.................................................. 5,840 5,295
Tax benefit on exercise of stock options....................................... 214 91
Contribution of stock to ESOP.................................................. 231 221
----------- -----------
Cash provided by operating activities before changes in assets and liabilities 37,326 37,255
(Increase) decrease in Membership income receivable............................ (141) 604
(Increase) decrease in inventories............................................. (500) 265
Decrease in income tax receivable.............................................. - (553)
Increase in other current assets............................................... (1,280) -
(Increase) decrease in deferred member and associate service costs............. (810) 1,139
Increase in other assets....................................................... (2,162) (1,281)
Increase in accrued Membership benefits........................................ 742 268
Decrease in deferred revenue and fees.......................................... (24) (414)
(Decrease) increase in accounts payable and accrued expenses and other......... (2,646) 2,292
----------- -----------
Net cash provided by operating activities.................................... 30,505 39,575
----------- -----------
Cash flows from investing activities:
Additions to property and equipment............................................ (6,340) (20,045)
Purchases of investments - available for sale.................................. (7,919) (5,605)
Maturities and sales of investments - available for sale....................... 16,154 3,828
----------- -----------
Net cash provided by (used in) investing activities.......................... 1,895 (21,822)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options........................................ 1,442 844
Decrease in capital lease obligations.......................................... (12) (802)
Proceeds from issuance of debt................................................. 19,000 16,300
Repayments of debt............................................................. (12,826) (8,333)
Purchases of treasury stock.................................................... (10,481) (34,131)
----------- -----------
Net cash used in financing activities ....................................... (2,877) (26,122)
----------- -----------
Net increase (decrease) in cash and cash equivalents............................. 29,523 (8,369)
Cash and cash equivalents at beginning of period................................. 21,459 20,858
----------- -----------
Cash and cash equivalents at end of period....................................... $ 50,982 $ 12,489
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amount capitalized.............................. $ 1,127 $ 403
----------- -----------
Cash paid for income taxes..................................................... $ 16,000 $ 16,200
----------- -----------
Increase in treasury stock tender offer payable................................ $ 25,495 $ -
----------- -----------
Purchases of treasury stock.................................................... $ (25,495) $ -
----------- -----------
Non-cash activities - capital lease obligations incurred....................... $ - $ 1,375
----------- -----------
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 the Company's 2003 Annual Report on Form 10-K.
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries, as well as those of PPL Agency,
Inc. All significant intercompany balances and transactions have been eliminated
in consolidation.
In the opinion of management, the accompanying unaudited financial
statements as of September 30, 2004, and for the three and nine month periods
ended September 30, 2004 and 2003, reflect adjustments (which were normal and
recurring) which, in the opinion of management, are necessary for a fair
statement of the financial position and results of operations of the interim
periods presented. Results for the three and nine month periods ended September
30, 2004 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
management 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.
Stock-Based Compensation
The Company has a stock-based employee compensation plan. The Company
accounts for this plan under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board Statement ("FASB") No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Nine Months Ended
September 30, September 30,
--------- --------- --------- --------
2004 2003 2004 2003
--------- --------- --------- --------
Net income, as reported................................ $ 9,657 $ 9,438 $ 30,285 $ 31,515
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects............................. - (177) (441) (684)
--------- --------- --------- --------
Pro forma net income................................... $ 9,657 $ 9,261 $ 29,844 $ 30,831
--------- --------- --------- --------
Earnings per share:
Basic - as reported................................ $ .59 $ .54 $ 1.83 $ 1.79
Basic - pro forma.................................. $ .59 $ .53 $ 1.80 $ 1.75
Diluted - as reported.............................. $ .58 $ .54 $ 1.82 $ 1.78
Diluted - pro forma................................ $ .58 $ .53 $ 1.79 $ 1.75
Note 2 - Contingencies
The Company and various of its executive officers have been named as
defendants in a putative securities class action originally filed in the United
States District Court for the Western District of Oklahoma in early 2001 seeking
unspecified damages on the basis of allegations that the Company issued false
and misleading financial information, primarily related to the method the
Company used to account for commission advance receivables from sales
associates. On March 5, 2002, the Court granted the Company's motion to dismiss
the complaint, with prejudice, and entered a judgment in favor of the
defendants. Plaintiffs thereafter filed a motion requesting reconsideration of
the dismissal which was denied. The plaintiffs have appealed the judgment and
the order denying their motion to reconsider the judgment to the Tenth Circuit
Court of Appeals. In August 2002 the lead institutional plaintiff withdrew from
the case, leaving two individual plaintiffs as lead plaintiffs on behalf of the
putative class. As of December 31, 2003, the briefing in the appeal had been
completed. On January 14, 2004 oral argument was held in the appeal. The Company
is unable to predict when a decision will be made on this appeal, and the
ultimate outcome of the case is not determinable.
Beginning in the second quarter of 2001 multiple lawsuits were filed
against the Company, certain officers, employees, sales associates and other
defendants in various Alabama and 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.
During 2003, there were at one time as many as 30 separate lawsuits involving
approximately 285 plaintiffs in Alabama. As of October 26, 2004, as a result of
dismissals, summary judgments, or settlements for nominal amounts, the Company
was aware of approximately 17 separate lawsuits involving approximately 64
plaintiffs that have been filed in multiple counties in Alabama. As of October
26, 2004, the Company was aware of 17 separate lawsuits involving approximately
430 plaintiffs in multiple counties in Mississippi. Certain of the Mississippi
lawsuits also name the Company's former provider attorney in Mississippi as a
defendant. Proceedings in several of the eleven cases which name the Company's
provider attorney as a defendant had been stayed pending the Mississippi Supreme
Court's ruling on the Pre-Paid defendants' appeal of a trial court's granting of
a partial summary judgment that the action is not required to be submitted to
arbitration. On April 1, 2004, the Mississippi Supreme Court affirmed the trial
court's partial summary judgment that arbitration should not be had in one of
the cases on appeal. Pre-Paid asked the Mississippi Supreme Court to rehear that
issue but that motion was denied on June 3, 2004 and Pre-Paid sought certiorari
on that issue with the United States Supreme Court on September 1 and 8, 2004.
At this time, Pre-Paid is unable to predict whether or not the Court will grant
certiorari review of the issue. At least three complaints have been filed by the
law firm representing plaintiffs in eleven of the cases on behalf of certain of
the Mississippi plaintiffs and others with the Attorney General of Mississippi
in March 2002, December 2002 and August 2003. The Company has responded to the
Attorney General's requests for information with respect to these complaints,
and as of October 26, 2004, the Company was not aware of any further actions
being taken by the Attorney General. In Mississippi, the Company has filed
lawsuits in the United States District Court for the Southern and Northern
Districts of Mississippi in which the Company seeks to compel arbitration of the
various Mississippi claims under the Federal Arbitration Act and the terms of
the Company's Membership agreements. One of the federal courts has ordered
arbitration of a case involving 8 plaintiffs. These cases are all in various
stages of litigation, including trial settings in Alabama in November 2004, and
in Mississippi in February 2005, and seek varying amounts of actual and punitive
damages. The first trial in Mississippi on these cases resulted in a unanimous
jury verdict in the Company's favor, including other named defendants, on all
claims on October 19, 2004. While the amount of Membership fees paid by the
plaintiffs in the Mississippi cases is $500,000 or less, certain of the cases
seek damages of $90 million. Additional suits of a similar nature have been
threatened. The ultimate outcome of any particular case is not determinable.
On April 19, 2002, counsel in certain of the above-referenced Alabama suits
also filed a similar suit against the Company and certain of its officers in the
District Court of Creek County, Oklahoma on behalf of Jeff and Jana Weller
individually and doing business as Hi-Tech Auto making similar allegations
relating to the Company's Memberships and seeking unspecified damages on behalf
of a "nationwide" class. The Pre-Paid defendants' preliminary motions in this
case were denied, and on June 17, 2003, the Oklahoma Court of Civil Appeals
reversed the trial court's denial of the Pre-Paid defendants' motion to compel
arbitration, finding that the trial court erred when it denied Pre-Paid's motion
to compel arbitration pursuant to the terms of the valid Membership contracts,
and remanded the case to the trial court for further proceedings consistent with
that opinion. There have been no material developments in this case since the
June 17, 2003 Court of Appeals decision. The ultimate outcome of this case is
not determinable.
On June 29, 2001, an action was filed against the Company in the District
Court of Canadian County, Oklahoma. In 2002, the petition was amended to add
five additional named plaintiffs and to add and drop certain claims. This action
was originally a putative class action brought by Gina Kotwitz, later adding,
George Kotwitz, Rick Coker, Richard Starke, Jeff Turnipseed and Aaron Bouren, on
behalf of all sales associates of the Company. The amended petition seeks
injunctive and declaratory relief, with such other damages as the court deems
appropriate, for alleged violations of the Oklahoma Uniform Consumer Credit Code
in connection with the Company's commission advances, and seeks injunctive and
declaratory relief regarding the enforcement of certain contract provisions with
sales associates, including a request stated in June 2003 for the imposition of
a constructive trust as to earned commissions applied to the reduction of debit
balances and disgorgement of all earned renewal commissions applied to the
reduction of debit balances. On September 23, 2003 the court entered an order
dismissing the class action allegations upon the motion of the plaintiffs. The
order provides that the action will proceed only on an individual basis, and
that the hearing on plaintiffs' motion for class certification previously set
for February 2004 was cancelled. Oral argument on the Company's motion for
summary judgment was held on July 2, 2004 and the court has taken the motion
under advisement. The ultimate outcome of this case is not determinable.
On March 1, 2002, an action was filed in the United States District Court
for the Western District of Oklahoma by Caroline Sandler, Robert Schweikert, Sal
Corrente, Richard Jarvis and Vincent Jefferson against the Company and certain
executive officers. This action is a putative class action seeking unspecified
damages filed on behalf of all sales associates of the Company and alleges that
the marketing plan offered by the Company constitutes a security under the
Securities Act of 1933 and seeks remedies for failure to register the marketing
plan as a security and for violations of the anti-fraud provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934 in connection
with representations alleged to have been made in connection with the marketing
plan. The complaint also alleges violations of the Oklahoma Securities Act, the
Oklahoma Business Opportunities Sales Act, breach of contract, breach of duty of
good faith and fair dealing and unjust enrichment and violation of the Oklahoma
Consumer Protection Act and negligent supervision. This case is subject to the
Private Litigation Securities Reform Act. Pursuant to the Act, the Court has
approved the named plaintiffs and counsel and an amended complaint was filed in
August 2002. The Pre-Paid defendants filed motions to dismiss the complaint and
to strike the class action allegations on September 19, 2002, and discovery in
the action was stayed pending a ruling on the motion to dismiss. On July 24,
2003, the Court granted in part and denied in part the Pre-Paid defendants'
motion to dismiss. The claims asserted under the Securities Exchange Act of 1934
and the Oklahoma Securities Act were dismissed without prejudice. The motion was
denied as to the remaining claims. On September 8, 2004, the Court denied
plaintiffs motion for class certification. Plaintiffs have petitioned the Tenth
Circuit Court of Appeals for permission to appeal the class certification
ruling, and that matter has been fully briefed. At this time, the Company is
unable to predict when the determination of whether or not an interlocutory
appeal of the denial of class certification will be allowed. The ultimate
outcome of this case is not determinable.
On January 30, 2003, the Company announced that it had received a subpoena
from the office of the United States Attorney for the Southern District of New
York requesting information relating to trading activities in the Company's
stock in advance of the January 2003 announcement of recruiting and Membership
production results for the fourth quarter of 2002. The Company also received
notice from the Securities and Exchange Commission that it is conducting an
informal inquiry into the same subject and requesting that the Company
voluntarily provide certain information. The Company has and will continue to
respond to any such requests, the last of which occurred in July 2003. As of
October 26, 2004, the Company was not aware of any further inquiries in either
of these matters. The ultimate outcome of these matters is not determinable.
The Company is a defendant in various other legal proceedings that are
routine and incidental to its business. The Company will vigorously defend its
interests in all proceedings in which it is named as a defendant. The Company
also receives periodic complaints or requests for information from various state
and federal agencies relating to its business or the activities of its marketing
force. The Company promptly responds to any such matters and provides any
information requested.
While the ultimate outcome of these proceedings is not determinable, the
Company does not currently anticipate that these contingencies will result in
any material adverse effect to its 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 in the consolidated statements of income. The Company has established an
accrued liability it believes 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, 2004 was $3.0 million. The Company
believes it has 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 the Company's financial condition, operating results or cash flows
in particular quarterly or annual periods.
Note 3 - Treasury Stock Purchases
The Company announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of the Company's common
stock. The Board of Directors has increased such authorization from 500,000
shares to 10 million shares during subsequent board meetings. At September 30,
2004, the Company had purchased 9.0 million treasury shares under these
authorizations for a total consideration of $209.4 million, an average price of
$23.19 per share. The Company purchased and formally retired 1.0 million and 1.4
million shares of its common stock during the 2004 third quarter and nine month
period for $26.8 million and $36.0 million, or an average price of $25.98 and
$25.58, reducing its common stock by $10,309 and $14,064 and its retained
earnings by $26.8 million and $36.0 million, respectively. See Note 5 below. At
September 30, 2004 there was an accrued expense of $25.5 million, reflecting an
amount owed (and subsequently paid on October 5, 2004) to purchase 980,518
shares in a Dutch auction tender offer which expired on September 28, 2004.
Given the current interest rate environment, the nature of other investments
available and the Company's expected cash flows, management believes 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 are considered attractive
by management and at such times that management believes will not unduly impact
the Company's 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 year.
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 year. The weighted average number of common shares
is also increased by the number of dilutive potential common shares issuable on
the exercise of options less the number of common shares assumed to have been
purchased with the proceeds from the exercise of the options pursuant to the
treasury stock method; those purchases are assumed to have been made at the
average price of the common stock during the respective period.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Basic Earnings Per Share: 2004 2003 2004 2003
--------- --------- --------- ---------
Earnings:
Net income........................................................... $ 9,657 $ 9,438 $ 30,285 $ 31,515
--------- --------- --------- ---------
Shares:
Weighted average shares outstanding.................................. 16,481 17,335 16,572 17,654
--------- --------- --------- ---------
Diluted Earnings Per Share:
Earnings:
Net income........................................................... $ 9,657 $ 9,438 $ 30,285 $ 31,515
--------- --------- --------- ---------
Shares:
Weighted average shares outstanding.................................. 16,481 17,335 16,572 17,654
Assumed exercise of options.......................................... 100 70 105 51
--------- --------- --------- ---------
Weighted average number of shares, as adjusted....................... 16,581 17,405 16,677 17,705
--------- --------- --------- ---------
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. Options to purchase 553,000 shares and
753,000 shares for the three months and 593,000 shares and 809,000 shares for
the nine months ended September 30, 2004 and 2003, respectively, with an average
exercise price of $27.85, $28.19, $27.58, and $27.79, respectively, were
excluded from the calculation of diluted earnings per share for the respective
periods.
Note 5 - Notes Payable and Capital Leases
On June 11, 2002, the Company entered into two line of credit agreements
totaling $30 million with a commercial lender providing for a treasury stock
purchase line and a real estate line for funding of the Company's new corporate
office complex. The treasury stock line of credit provided for funding of up to
$10 million to finance treasury stock purchases and has been repaid. The real
estate line of $20 million was fully funded in December 2003 with interest at
the 30 day LIBOR Rate plus 2.25%, adjusted monthly, and repayments began in
December 2003 with monthly principal payments of $191,000 plus interest with a
balloon payment on September 30, 2008. The loan is primarily collateralized by a
first mortgage on the 87 acre construction site, the 170,000 square foot home
office complex, the Company's rights to receive Membership fees on a portion of
its Memberships and by a security interest covering all equipment. The interest
rate at September 30, 2004 was 3.92%. The real estate loan agreement provides
for financial covenants substantially the same as those described below for the
amended stock purchase loan.
During the 2003 third quarter, the Company arranged $25 million in
additional financing from a group of banks, consisting of Bank of Oklahoma,
Comerica Bank and First United Bank and Trust. The $25 million was fully funded
on November 30, 2003. The financing provided up to $25 million for treasury
stock purchases with scheduled monthly principal payments of $1.4 million
beginning December 31, 2003 through May 31, 2005 with interest at the 30 day
LIBOR Rate plus three percent, adjusted monthly. During August 2004, the Company
amended the terms of the loan agreement with these banks to increase the loan
amount to $31.5 million. The amended loan agreement provides for treasury stock
purchases of up to $31.5 million of which the Company has $5.9 million available
as of October 26, 2004. The Company fully funded the loan on September 30, 2004
which resulted in a net increase in credit of $19.0 million above the
outstanding balance of its existing treasury stock term loan of $12.5 million at
the time. Proceeds of this loan together with existing cash resources were used
to purchase treasury shares. The amortization of the amended loan has been
modified to provide for repayment over 24 months in equal monthly principal
payments beginning October 31, 2004 and ending September 30, 2006 with the same
interest rate of the 30 day LIBOR rate plus 3%. The interest rate at September
30, 2004 was 4.67%. The monthly principal payment will be $1.3 million compared
to the monthly payment on the prior loan of $1.4 million. The amended loan
agreement continues all of the covenants of the prior agreement with certain
modifications to permit additional stock purchases and/or dividends while the
loan is outstanding generally in an amount no greater than 50% of net income and
modifies the debt service coverage ratio definition slightly. Additionally $4.8
million (50% of 3rd quarter 2004 net income) is available for stock purchases
and/or dividends.
The loan is primarily collateralized by the Company's rights to receive
Membership fees on a portion of its Memberships and a pledge of the stock of its
subsidiaries. The definitive agreement contains covenants prohibiting the
Company from pledging assets, incurring additional indebtedness and selling
assets. In addition to customary events of default, an additional event of
default occurs if Harland C. Stonecipher ceases to be the chairman and Chief
Executive Officer of the Company for 90 days. Pre-payment of the loan is
permitted. The loan agreements contain the following financial covenants: (a)
the Company's quarterly Debt Coverage Ratio (as defined in the loan agreements)
shall not be less than 125%; (b) the Company's cancellation rate on contracts
less than or equal to twelve months old shall not exceed 45% on a trailing 12
month basis, calculated on a quarterly basis; (c) the Company shall maintain a
rolling twelve month average retention rate of Membership contracts in place for
greater than eighteen months of not less than 70%, calculated on a monthly
basis; (d) the Company shall not pay dividends or purchase treasury shares,
which during any fiscal quarter, on a combined basis, would exceed fifty percent
(50%) of the Company's cumulative net income for all previous fiscal quarters
beginning July 1, 2004 less any dividends or stock purchases in such previous
fiscal quarters, with provisions for carry forwards of unused availability; and,
(e) the Company's tangible net worth shall not fall below $10 million for the
period of time dating from September 30, 2004, $15 million beginning March 31,
2005 and $25 million beginning December 31, 2005.
A schedule of outstanding balances and future maturities as of September
30, 2004 follows:
Real estate loan................................... $ 18,095
Stock purchase loan................................ 31,500
----------------
Total notes payable................................ 49,595
Less: Current portion of notes payable............. (18,036)
----------------
Long term portion.................................. $ 31,559
----------------
Repayment Schedule commencing October 2004:
Year 1............................................. $ 18,036
Year 2............................................. 18,036
Year 3............................................. 2,285
Year 4............................................. 11,238
Year 5............................................. -
----------------
Total notes payable................................ $ 49,595
----------------
During 2003, the Company entered into a capital lease in the amount of $2.4
million to acquire new computer hardware to supplement its current information
technology platform and provide redundancy for its critical business systems.
The capital lease requires the Company to make annual payments of $792,000
beginning January 2003 through January 2005.
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
Operation in the Company's Form 10-K for the year ended December 31, 2003, which
describes, among other things, the Company's basic business model, critical
accounting policies, measures of Membership retention, and basic cash flow
characteristics of the Company's 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 2004 compared to the third quarter
of 2003 and the second quarter of 2004 and the nine months ended September 30,
2004 compared to the nine months ended September 30, 2003 (Amounts in 000's):
Three % % Three Three
Months Change Change Months Months
Three Months Ended September 30, 2004 Ended % of from from Ended % of Ended % of
compared to Sept. 30, Total Prior Sequential Sept. 30, Total June 30, Total
Three Months Ended September 30, 2003 2004 Revenue Year Period 2003 Revenue 2004 Revenue
- --------------------------------------- --------- --------- ------- ---------- --------- --------- --------- ---------
Revenues:
Membership fees.................... $89,317 92.2 8.0 1.4 $82,695 91.9 $88,120 92.3
Associate services................. 6,132 6.3 1.6 3.6 6,033 6.7 5,918 6.2
Other.............................. 1,404 1.5 8.3 0.9 1,296 1.4 1,391 1.5
--------- --------- ------- ---------- --------- --------- --------- ---------
96,853 100.0 7.6 1.5 90,024 100.0 95,429 100.0
--------- --------- ------- ---------- --------- --------- --------- ---------
Costs and expenses:
Membership benefits................ 31,100 32.1 11.3 2.1 27,956 31.1 30,449 31.9
Commissions........................ 30,097 31.1 5.8 1.7 28,443 31.6 29,591 31.0
Associate services and direct
marketing........................ 7,304 7.5 (1.4) 9.0 7,411 8.2 6,704 7.0
General and administrative......... 11,083 11.4 12.0 1.6 9,896 11.0 10,904 11.4
Other, net......................... 2,526 2.6 16.1 0.8 2,175 2.4 2,505 2.6
--------- --------- ------- ---------- --------- --------- --------- ---------
82,110 84.8 8.2 2.4 75,881 84.3 80,153 84.0
--------- --------- ------- ---------- --------- --------- --------- ---------
Income before income taxes........... 14,743 15.2 4.2 (3.5) 14,143 15.7 15,276 16.0
Provision for income taxes........... 5,086 5.3 8.1 (3.5) 4,705 5.2 5,270 5.5
--------- --------- ------- ---------- --------- --------- --------- ---------
Net income........................... $ 9,657 10.0 2.3 (3.5) $ 9,438 10.5 $10,006 10.5
--------- --------- ------- ---------- --------- --------- --------- ---------
Nine % Nine
Months Change Months
Nine Months Ended September 30, 2004 Ended % of from Ended % of
compared to Sept. 30, Total Prior Sept. 30, Total
Nine Months Ended September 30, 2003: 2004 Revenue Year 2003 Revenue
- -------------------------------------- --------- ------- ------- --------- -------
Revenues:
Membership fees.................... $264,187 92.1 7.3 $246,123 91.2
Associate services................. 18,607 6.5 (6.5) 19,900 7.4
Other.............................. 4,097 1.4 3.4 3,963 1.5
--------- ------- ------- --------- -------
286,891 100.0 6.3 269,986 100.0
--------- ------- ------- --------- -------
Costs and expenses:
Membership benefits................ 90,835 31.7 10.4 82,271 30.5
Commissions........................ 88,960 31.0 4.7 84,974 31.5
Associate services and direct
marketing.......................... 21,611 7.5 (1.0) 21,820 8.1
General and administrative......... 32,033 11.2 19.5 26,817 9.9
Other, net......................... 7,215 2.5 15.3 6,256 2.3
--------- ------- ------- --------- -------
240,654 83.9 8.3 222,138 82.3
--------- ------- ------- --------- -------
Income before income taxes........... 46,237 16.1 (3.4) 47,848 17.7
Provision for income taxes........... 15,952 5.6 (2.3) 16,333 6.1
--------- ------- ------- --------- -------
Net income........................... $30,285 10.6 (3.9) $31,515 11.7
--------- ------- ------- --------- -------
Three Months Ended
-----------------------------------
New Memberships: 9/30/2004 9/30/2003 6/30/2004
---------- ---------- ----------
New legal service membership sales.......................... 157,058 168,356 137,390
New "stand-alone" IDT membership sales...................... 4,906 - 5,443
---------- ---------- ----------
Total new membership sales......................... 161,964 168,356 142,833
---------- ---------- ----------
New "add-on" IDT membership sales........................... 87,136 - 77,802
Active Memberships:
Active legal service memberships at end of period........... 1,422,444 1,420,860 1,413,666
Active "stand-alone" IDT memberships at end of period (see
note below)................................................. 21,302 - 17,575
---------- ---------- ----------
Total active memberships at end of period.......... 1,443,746 1,420,860 1,431,241
---------- ---------- ----------
Active "add-on" IDT memberships at end of period (see note
below)...................................................... 247,370 - 201,713
New sales associates recruited.............................. 37,216 22,987 13,733
Average Membership fee in force............................. $271.77 $257.57 $269.17
(Note - reflects 3,642 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 the Company's membership base, while "stand alone" Identity
Theft Shield memberships are not attached to a legal plan membership and sell
for $12.95 per month.
Beginning June 28, 2004, and running through July 31, 2004, the Company
began a special promotion for single parents allowing single parents that
entered into a performance agreement with the Company whereby they committed to
attend training and hold private business receptions within a specified time
frame to become a Fast Start associate for $49 rather than $249 which was in
place for all other new associates. Beginning August 1, 2004, the cost to become
a Fast Start sales associate reverted back to $249 for all new associates unless
the new sales associate executed the performance agreement. The majority of new
sales associates that enrolled during the current quarter were either single
parents (at $49) or other associates who executed the performance agreement and
were allowed to join for $149, otherwise all new Fast Start sales associates
paid $249. The fee to become a new Fast Start sales associate was $149 during
the comparable period of 2003. The Company's recruiting and new Membership sales
improved in the third quarter of 2004 compared to the second quarter and the
Company expects to continue to make efforts to grow its Membership base.
Results of Operations - First nine months of 2004 compared to first nine
months of 2003
The Company reported net income of $30.3 million, or $1.82 per diluted
common share, for the nine months ended September 30, 2004, down 4% from net
income of $31.5 million, or $1.78 per diluted common share, for the comparable
period of the prior year due to the Company incurring after-tax losses of $7.8
million related to the Identity Theft Shield membership base in the 2004 nine
month period compared to none in the 2003 comparable period. These after-tax
losses are primarily created since the Company advances significant commissions
at the time a membership is sold and are expensed during the first month of the
membership. Since approximately 95% of membership fees are collected on a
monthly basis, a significant cash flow deficit and after-tax loss is created at
the time a membership is sold. This deficit and loss are reduced as monthly
membership fees are remitted and no additional commissions are paid on the
membership until all previous unearned advance commission balances have been
fully recovered. Diluted earnings per share increased 2% due to an approximate
6% decrease in the weighted average number of outstanding shares.
Membership fees totaled $264.2 million during 2004 compared to $246.1
million for 2003, an increase of 7%. 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 10% during the nine months ended
September 30, 2004 to 467,629 from 518,356 during the comparable period of 2003.
At September 30, 2004, there were 1,443,746 active Memberships in force compared
to 1,420,860 at September 30, 2003, an increase of 2%. Additionally, the average
annual fee per Membership has increased from $258 for all Memberships in force
at September 30, 2003 to $272 for all Memberships in force at September 30,
2004, as a result of a larger number of Legal Shield subscribers, increased
sales of the Company's business oriented Memberships and the introduction of the
Identity Theft Shield during the fourth quarter of 2003.
Associate services revenue decreased 7% from $19.9 million for the first
nine months of 2003 to $18.6 million during the comparable period of 2004
primarily as a result of approximately 13% fewer new associates recruited. Total
new associates enrolled during the first nine months of 2004 were 65,723
compared to 75,489 for the same period of 2003. As a result of the 13% lower
overall recruiting, associate fees decreased 8% from $11.8 million for the first
nine months of 2003 to $10.9 million during the comparable period of 2004.
Beginning June 28, 2004, and running through July 31, 2004, the Company began a
special promotion for single parents allowing single parents that entered into a
performance agreement with the Company whereby they committed to attend training
and hold private business receptions within a specified time frame to become a
Fast Start associate for $49 rather than $249 which was in place for all other
new associates. Beginning August 1, 2004, the cost to become a Fast Start sales
associate reverted back to $249 for all new associates unless the new sales
associate executed the performance agreement. The majority of new sales
associates that enrolled during the current quarter were either single parents
(at $49) or other associates who executed the performance agreement and were
allowed to join for $149, otherwise all new Fast Start sales associates paid
$249. The fee to become a new Fast Start sales associate was $149 during the
comparable period of 2003. Future revenues from associate services will depend
primarily on the number of new associates enrolled, the price charged for the
Fast Start program and the number who choose to participate in the Company's
eService program, but the Company expects that such revenues will continue to be
offset by the direct and indirect cost to the Company of training (including
training bonuses paid), providing associate services and other direct marketing
expenses.
Other revenue increased slightly to $4.1 million for the first nine months
of 2004 compared to $4.0 million for the comparable period of 2003.
Primarily as a result of the increase in Membership fees, total revenues
increased to $286.9 million for the nine months ended September 30, 2004 from
$270.0 million during the comparable period of 2003, an increase of 6%.
Membership benefits totaled $90.8 million for the nine months ended
September 30, 2004 compared to $82.3 million for the comparable period of 2003,
and represented 34% and 33% of Membership fees for the 2004 and 2003 periods,
respectively. This Membership benefit ratio (Membership benefits as a percentage
of Membership fees) should remain near current levels as substantially all
active Memberships provide for a capitated cost in the absence of any changes in
the capitated benefit level, which has not changed significantly since 1993.
However, the higher benefit ratio of the Identity Theft Shield Membership may
increase the blended benefit ratio if the Company continues to increase the
number of Identity Theft Shield Memberships in force.
Commissions to associates increased 5% to $89.0 million for the nine months
ended September 30, 2004 compared to $85.0 million for the comparable period of
2003, and represented 34% and 35% of Membership fees for such periods.
Commissions to associates are primarily dependent on the number of new
Memberships sold during a period. New Memberships sold during the nine months
ended September 30, 2004 totaled 467,629, a 10% decrease from the 518,356 sold
during the comparable period of 2003. Commissions to associates per new
Membership sold were $190 per Membership for the nine months ended September 30,
2004 compared to $164 for the comparable period of 2003. 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 the Company add
additional commissions to its compensation plan or reduce the amount of
chargebacks collected from its associates as it has from time to time, the
commission cost per new Membership will increase accordingly.
Associate services and direct marketing expenses decreased very slightly to
$21.6 million for the nine months ended September 30, 2004 from $21.8 million
for the comparable period of 2003. These expenses also include the costs of
providing associate services and marketing expenses.
General and administrative expenses during the nine months ended September
30, 2004 and 2003 were $32.0 million and $26.8 million, respectively, and
represented 12% and 11%, respectively, of Membership fees for each period. The
increases in general and administrative expense reflect higher levels of
expenses related to bank services charges, legal and professional fees, salaries
and benefits and franchise and other taxes. The Company should experience cost
efficiencies as a result of certain economies of scale in some areas but expects
such cost savings for the remainder of 2004 to be largely offset by higher
levels of expenses related to legal fees, expenses related to its new corporate
headquarters and increased compliance costs as a result of new requirements of
the Sarbanes-Oxley Act of 2002.
Other expenses, net, which include depreciation and amortization, interest
expense and premium taxes reduced by interest income, was $7.2 million for the
period ended September 30, 2004 compared to $6.3 million for the 2003 comparable
period. Depreciation increased to $5.8 million for the first nine months of 2004
from $5.3 million for the comparable period of 2003 primarily due to capital
expenditures during the last 12 months and interest expense increased to $1.4
million during the 2004 period from $15,000 during the comparable period of
2003. During the 2003 period, substantially all interest costs were capitalized
in connection with the construction of the Company's new corporate headquarters.
Premium taxes decreased from $2.0 million for the nine months ended September
30, 2003 to $1.3 million for the comparable period of 2004. The decrease in 2004
was due to a change in the tax structure of one of the states in which the
Company pays premium taxes. Interest income increased by approximately $94,000
for the first nine months of 2004 to $1.2 million from $1.1 million for the 2003
period due to an increase in balances of interest bearing assets.
The Company has recorded a provision for income taxes of $16.0 million
(34.5% of pretax income) for the first nine months of 2004 compared to $16.3
million (34.1% of pretax income) for the same period of 2003.
Results of Operations - Third quarter of 2004 compared to third quarter of 2003
Net income increased 2% for the third quarter of 2004 to $9.7 million from
$9.4 million for the prior year's third quarter even though the Company incurred
after-tax losses of $2.8 million related to the Identity Theft Shield membership
base in the 2004 third quarter period compared to none in the 2003 comparable
period. These after-tax losses occur for the reasons discussed above. Diluted
earnings per share increased 7% to 58 cents per share from 54 cents per share
for the prior year's comparable quarter due to an approximate 5 percent decrease
in the weighted average number of outstanding shares.
Membership fees totaled $89.3 million during the 2004 third quarter
compared to $82.7 million for 2003, an increase of 8%. 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 4% during the three months
ended September 30, 2004 to 161,964 from 168,356 during the comparable period of
2003. At September 30, 2004, there were 1,443,746 active Memberships in force
compared to 1,420,860 at September 30, 2003, an increase of 2%. Additionally,
the average annual fee per Membership has increased from $258 for all
Memberships in force at September 30, 2003 to $272 for all Memberships in force
at September 30, 2004, as a result of a larger number of Legal Shield
subscribers, increased sales of the Company's business oriented Memberships and
the introduction of the Identity Theft Shield during the fourth quarter of 2003.
Associate services revenue increased only 2% from $6.0 million for the
third three months of 2003 to $6.1 million during the comparable period of 2004
even though 62% more new associates were recruited. Total new associates
enrolled during the third quarter of 2004 were 37,216 compared to 22,987 for the
same period of 2003. Associate fees increased 2% from $3.6 million for the third
three months of 2003 to $3.7 million during the comparable period of 2004.
Beginning June 28, 2004, and running through July 31, 2004, the Company began a
special promotion for single parents allowing single parents that entered into a
performance agreement with the Company whereby they committed to attend training
and hold private business receptions within a specified time frame to become a
Fast Start associate for $49 rather than $249 which was in place for all other
new associates. Beginning August 1, 2004, the cost to become a Fast Start sales
associate reverted back to $249 for all new associates unless the new sales
associate executed the performance agreement. The majority of new sales
associates that enrolled during the current quarter were either single parents
(at $49) or other associates who executed the performance agreement and were
allowed to join for $149, otherwise all new Fast Start sales associates paid
$249. The fee to become a new Fast Start sales associate was $149 during the
comparable period of 2003. Future revenues from associate services will depend
primarily on the number of new associates enrolled, the price charged for the
Fast Start program and the number who choose to participate in the Company's
eService program, but the Company expects that such revenues will continue to be
offset by the direct and indirect cost to the Company of training providing
associate services and other direct marketing expenses.
Other revenue increased slightly to $1.4 million for the third quarter of
2004 compared to $1.3 million for the comparable period of 2003.
Primarily as a result of the increase in Membership fees, total revenues
increased to $96.9 million for the three months ended September 30, 2004 from
$90.0 million during the comparable period of 2003, an increase of 8%.
Membership benefits totaled $31.1 million for the three months ended
September 30, 2004 compared to $28.0 million for the comparable period of 2003,
and represented 35% and 34% of Membership fees for the 2004 and 2003 periods,
respectively. This Membership benefit ratio (Membership benefits as a percentage
of Membership fees) pertaining to legal service plans should remain near current
levels as substantially all active Memberships provide for a capitated cost in
the absence of any changes in the capitated benefit level, which has not changed
significantly since 1993. However, the higher benefit ratio of the Identity
Theft Shield Membership may increase the blended benefit ratio if the Company
continues to increase the number of Identity Theft Shield Memberships in force.
Commissions to associates increased 6% to $30.1 million for the three
months ended September 30, 2004 compared to $28.4 million for the comparable
period of 2003, and represented 34% of Membership fees for both periods.
Commissions to associates are primarily dependent on the number of new
memberships sold, including add-on membership sales, during a period. New
memberships sold during the three months ended September 30, 2004 totaled
161,964, a 4% decrease from the 168,356 sold during the comparable period of
2003. Commissions to associates per new membership sold were $186 per membership
for the three months ended September 30, 2004 compared to $169 for the
comparable period of 2003. 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 the Company add additional
commissions to its compensation plan or reduce the amount of chargebacks
collected from its associates as it has from time to time, the commission cost
per new Membership will increase accordingly.
Associate services and direct marketing expenses decreased to $7.3 million
for the three months ended September 30, 2004 from $7.4 million for the
comparable period of 2003. The Company offers the Player's Club incentive
program to provide additional incentives to its associates as a reward for
consistent, quality business. Associates can earn the right to receive
additional monthly bonuses by meeting monthly qualification requirements for the
entire calendar year and maintaining certain personal retention rates for the
Memberships sold during the calendar year. These expenses also include the costs
of providing associate services and marketing expenses.
General and administrative expenses during the three months ended September
30, 2004 and 2003 were $11.1 million and $9.9 million, respectively, and
represented 12% of Membership fees for both periods. The 2004 third quarter
reflects increased franchise and other taxes, professional fees, and increased
expenses related to licenses and fees and bank service charges due to the
increases in legal plans and Identity Theft Shield Memberships. The Company
should experience cost efficiencies as a result of certain economies of scale in
some areas but expects any such cost savings for the remainder of 2004 to be
largely offset by higher levels of expenses related to legal fees, expenses
related to its new corporate headquarters and increased compliance costs as a
result of new requirements of the Sarbanes-Oxley Act of 2002.
Other expenses, net, which include depreciation and amortization, interest
expense and premium taxes reduced by interest income, was $2.5 million for the
period ended September 30, 2004 compared to $2.2 million for the 2003 comparable
period. Depreciation increased to $1.9 million for the third quarter of 2004
from $1.8 million for the comparable period of 2003 primarily due to capital
expenditures during the last 12 months and interest expense increased to
$500,000 during the 2004 period from $7,000 during the comparable period of
2003. During the 2003 period, substantially all interest costs were capitalized
in connection with the construction of the Company's new corporate headquarters.
Premium taxes decreased from $683,000 for the three months ended September 30,
2003 to $441,000 for the comparable period of 2004 primarily due to one of the
states changing the type of taxes that the Company is required to pay instead of
premium taxes.
The Company has recorded a provision for income taxes of $5.1 million
(34.5% of pretax income) for the third quarter of 2004 and a provision of $4.7
million (33.3% of pretax income) for the 2003 comparable period.
Results of Operations - Third Quarter of 2004 compared to the Second
Quarter of 2004
Third quarter 2004 membership fees increased one percent to $89.3 million
from $88.1 million for the second quarter of 2004. Associate services revenues
increased during the 2004 third quarter by approximately $214,000 to $6.1
million from $5.9 million for the 2004 second quarter and associate services and
direct marketing expenses increased by $600,000 during the same period.
Membership benefits totaled $31.1 million in the third quarter of 2004 compared
to $30.4 million for the second quarter and represented 35% of membership fees
for both periods. Commissions to associates totaled $30.1 million in the third
quarter of 2004 compared to $29.6 million for the second quarter and represented
34% of membership fees for both periods. General and administrative expenses
increased during the 2004 third quarter to $11.1 million compared to $10.9
million for the second quarter of 2004 and represented 12.4% of membership fees
for both periods.
Liquidity and Capital Resources
General
Consolidated net cash provided from operating activities for the first nine
months of 2004 decreased 23 percent to $30.5 million from $39.6 million for the
2003 period, although cash provided from operating activities before changes in
working capital items remained unchanged at $37.3 million for both periods.
Approximate $10.3 million negative cash flow resulted from sales of Identity
Theft Shield ("IDT") memberships during the 2004 period. This negative cash flow
is created since the Company advances significant commissions at the time a
membership is sold. Since approximately 95% of membership fees are collected on
a monthly basis, a significant cash flow deficit loss is created at the time a
membership is sold. This deficit is reduced as monthly membership fees are
remitted and no additional commissions are paid on the membership until all
previous unearned advance commission balances have been fully recovered. The
decrease of $9.1 million resulted primarily from the decrease in net income of
$1.2 million (which includes the effect of the IDT negative cash flow), a net
increase in the change in other assets (both current and non-current) of $2.2
million, an increase in deferred member and associate service costs of $1.9
million and a net decrease in the change in accounts payable and accrued
expenses of $4.9 million.
Consolidated net cash provided by investing activities was $1.9 million for
the first nine months of 2004 compared to net cash used in investing activities
of $21.8 million for the comparable period of 2003. This $23.7 million increase
in cash provided by investing activities resulted from the $13.7 million
decrease in additions to property and equipment, an increase of $12.3 million in
maturities and sales of investments partially offset by a $2.3 million increase
in purchases of available-for-sale investments.
Net cash used in financing activities during the first nine months of 2004
was $2.9 million compared to $26.1 million for the comparable period of 2003.
This $23.2 million change was primarily comprised of the $23.7 million decrease
in purchases of treasury stock, a $2.7 million increase in debt proceeds
partially offset by an increase of $4.5 million in payments on debt obligations.
During the nine months ended September 30, 2004, the Company purchased and
formally retired 1.4 million shares of treasury stock (including the 980,518
shares acquired pursuant to the tender offer) reducing its common stock accounts
by $14,064 and retained earnings by $36.0 million. The Company had a
consolidated working capital deficit of $12.3 million at September 30, 2004, an
increase of $476,000 compared to a consolidated working capital deficit of $11.9
million at December 31, 2003. The increase was primarily due to a $21.8 million
increase in accounts payable and accrued expenses partially offset by the $19.5
million increase in cash and cash equivalents and available-for-sale
investments. The $12.3 million working capital deficit at September 30, 2004
would have been a $3.5 million working capital deficit 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 the
Company incurring other current liabilities. The Company does not expect any
difficulty in meeting its financial obligations in the short term or the long
term.
At September 30, 2004 the Company reported $68 million (including
approximately $19 million of loan proceeds related to the Company's tender offer
which had not yet been utilized) in cash and cash equivalents and unpledged
investments compared to $47.4 million at December 31, 2003. The Company's
investments consist of common stocks, investment grade (rated Baa or higher)
bonds primarily issued by corporations, the United States Treasury, federal
agencies, federally sponsored agencies and enterprises as well as
mortgage-backed securities and state and municipal tax-exempt bonds.
The Company generally advances significant commissions at the time a
Membership is sold. During the nine months ended September 30, 2004, the Company
advanced commissions, net of chargebacks, of $81.1 million on new Membership
sales compared to $83.7 million for the same period of 2003. 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, the Company typically derives significant positive cash flow from the
Membership over its remaining life.
The Company expenses advance commissions ratably over the first month of
the related Membership. As a result of this accounting policy, the Company's
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. The Company tracks its 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 its commission advance program. While not recorded as an asset,
unearned advance commission balances from associates as of September 30, 2004,
and related activity for the nine month period then ended, were:
(Amounts in 000's)
Beginning unearned advance commission payments (1)............................... $ 191,894
Advance commission payments, net................................................. 81,119
Earned commissions applied....................................................... (87,027)
Advance commission payment write-offs............................................ (2,075)
-------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 183,911
Estimated unrecoverable advance commission payments (1).......................... (27,514)
-------------
Ending unearned advance commission payments, net (1)............................. $ 156,397
-------------
(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 $33.5 million.
As such, at September 30, 2004 future commission payments and related expense
should be reduced as unearned advance commission payments of $123 million are
recovered. Commissions are earned by the associate as Membership premiums are
earned by the Company, usually on a monthly basis. For additional information
concerning these commission advances, see the Company's 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.
The Company believes that it has significant ability to finance expected
future growth in Membership sales based on its recurring cash flow and existing
amount of cash and cash equivalents and unpledged investments at September 30,
2004 of $68 million (including approximately $19 million of loan proceeds
related to the Company's tender offer which had not yet been utilized). The
Company expects 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 to the extent permitted by the terms of
the Company's amended stock purchase loan.
On June 11, 2002, the Company entered into two line of credit agreements
totaling $30 million with a commercial lender providing for a treasury stock
purchase line and a real estate line for funding of the Company's new corporate
office complex. The treasury stock line of credit provided for funding of up to
$10 million to finance treasury stock purchases and has been repaid. The real
estate line of $20 million was fully funded in December 2003 with interest at
the 30 day LIBOR Rate plus 2.25%, adjusted monthly, and repayments began in
December 2003 with monthly principal payments of $191,000 plus interest with a
balloon payment on September 30, 2008. The loan is primarily collateralized by a
first mortgage on the 87 acre construction site, the 170,000 square foot home
office complex, the Company's rights to receive Membership fees on a portion of
its Memberships and by a security interest covering all equipment. The interest
rate at September 30, 2004 was 3.92%. The real estate loan agreement provides
for financial covenants substantially the same as those described below for the
amended stock purchase loan.
During the 2003 third quarter, the Company arranged $25 million in
additional financing from a group of banks, consisting of Bank of Oklahoma,
Comerica Bank and First United Bank and Trust. The $25 million was fully funded
on November 30, 2003. The financing provided up to $25 million for treasury
stock purchases with scheduled monthly principal payments of $1.4 million
beginning December 31, 2003 through May 31, 2005 with interest at the 30 day
LIBOR Rate plus three percent, adjusted monthly. During August 2004, the company
amended the terms of the loan agreement with these banks to increase the loan
amount to $31.5 million. The amended loan agreement provides for treasury stock
purchases of up to $31.5 million of which the company has $5.9 million available
as of October 26, 2004. The Company fully funded the loan on September 30, 2004
which resulted in a net increase in credit of $19.0 million above the
outstanding balance of its existing treasury stock term loan of $12.5 million at
the time. Proceeds of this loan together with existing cash resources were used
to purchase treasury shares. The amortization of the amended loan has been
modified to provide for repayment over 24 months in equal monthly principal
payments beginning October 31, 2004 and ending September 30, 2006 with the same
interest rate of the 30 day LIBOR rate plus 3%. The interest rate at September
30, 2004 was 4.67%. The monthly principal payment will be $1.3 million compared
to the monthly payment on the prior loan of $1.4 million. The amended loan
agreement continues all of the covenants of the prior agreement with certain
modifications to permit additional stock purchases and/or dividends while the
loan is outstanding generally in an amount no greater than 50% of net income and
modifies the debt service coverage ratio definition slightly. Additionally $4.8
million (50% of 3rd quarter 2004 net income) is available for stock purchases
and/or dividends.
The loan is primarily collateralized by the Company's rights to receive
Membership fees on a portion of its Memberships and a pledge of the stock of its
subsidiaries. The definitive agreement contains covenants prohibiting the
Company from pledging assets, incurring additional indebtedness and selling
assets. In addition to customary events of default, an additional event of
default occurs if Harland C. Stonecipher ceases to be the chairman and Chief
Executive Officer of the Company for 90 days. Pre-payment of the loan is
permitted. The loan agreements contain the following financial covenants: (a)
the Company's quarterly Debt Coverage Ratio (as defined in the loan agreements)
shall not be less than 125%; (b) the Company's cancellation rate on contracts
less than or equal to twelve months old shall not exceed 45% on a trailing 12
month basis, calculated on a quarterly basis; (c) the Company shall maintain a
rolling twelve month average retention rate of Membership contracts in place for
greater than eighteen months of not less than 70%, calculated on a monthly
basis; (d) the Company shall not pay dividends or purchase treasury shares,
which during any fiscal quarter, on a combined basis, would exceed fifty percent
(50%) of the Company's cumulative net income for all previous fiscal quarters
beginning July 1, 2004 less any dividends or stock purchases in such previous
fiscal quarters, with provisions for carry forwards of unused availability; and,
(e) the Company's tangible net worth shall not fall below $10 million for the
period of time dating from September 30, 2004, $15 million beginning March 31,
2005 and $25 million beginning December 31, 2005.
Parent Company Funding and Dividends
Although the Company is the operating entity in many jurisdictions, the
Company's 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") and Pre-Paid Legal Services Inc. of Florida ("PPLSIF"). The
ability of PPLCI and PPLSIF to provide funds to the Company is subject to a
number of restrictions under various insurance laws in the jurisdictions in
which PPLCI and PPLSIF 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 PPLCI or PPLSIF, or any
of the Company's regulated subsidiaries, will be funded by the Company in the
form of capital contributions or surplus debentures. During February 2004, the
Company made a capital contribution to a wholly-owned subsidiary of PPLCI,
Pre-Paid Legal Services of Tennessee, Inc. in the amount of $600,000. At
September 30, 2004, PPLSIF did not have funds available for payment of
substantial dividends without the prior approval of the insurance commissioner.
At September 30, 2004 PPLCI had approximately $750,000 available for payment of
an ordinary dividend.
Contractual Obligations
There have been no material changes outside of the ordinary course of
business in the Company's contractual obligations from those disclosed in the
Company's annual report on Form 10-K for the year ended December 31, 2003, other
than as it relates to the amended treasury stock term loan as described above
which increased the amount of the Company's indebtedness by $19.0 million, but
reduced the Company's monthly payment obligation by $100,000 as a result of an
extension of the repayment period.
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 the Company's financial condition
or operating results. Many of these "critical accounting policies" are common in
the insurance and financial services industries; others are specific to the
Company's business and operations. The Company's 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 the Company's Annual Report on Form 10-K for the year ended
December 31, 2003. There were no significant changes in the application of
critical accounting policies or estimates during the first nine months of 2004.
The Company is not aware of any reasonably likely events or circumstances which
would result in different amounts being reported that would materially affect
its financial condition or results of operations.
Capital Plans
The Company recently completely a tender offer to repurchase 980,518 shares
of its Common Stock at a price of $26 per share. The Company continues to
evaluate possible additional share repurchases and expects to resume its open
market repurchase program in the near future as it has existing authorization
from the Board to purchase an additional 969,082 shares. The Company also
continues to evaluate additional sources of financing that may enable it to
accelerate the repurchase program at prices management believes are attractive.
The Company also continues to evaluate the possibility of paying a cash
dividend. Any decisions on additional share repurchases or dividends will be
based on the Company's financial condition, available resources and market
conditions, as well as compliance with the covenants in the Company's amended
treasury stock term loan which limit the Company's ability to repurchase shares
or pay cash dividends.
Forward-Looking Statements
All statements in this report concerning Pre-Paid Legal Services, Inc. (the
"Company") other than purely historical information, including but not limited
to, statements relating to the Company's future plans and objectives,
discussions with the staff of the SEC, 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 the Company's historical operating trends and financial condition as of
September 30, 2004 and other information currently available to management. The
Company cautions that the Forward-Looking Statements are subject to all the
risks and uncertainties incident to its business, including but not limited to
risks described below. Moreover, the Company 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. The Company assumes no
obligation to update the Forward-Looking Statements to reflect events or
circumstances occurring after the date of the statement.
Risk Factors
There are a number of risk factors that could affect our financial
condition or results of operations. See Note 2 - Contingencies and Part II, Item
1 - Legal Proceedings. Please refer to page 39 and 40 of the Company's 2003
Annual Report on Form 10-K for a description of other risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's consolidated balance sheets include a certain amount of
assets and liabilities whose fair values are subject to market risk. Due to the
Company's significant investment in fixed-maturity investments, interest rate
risk represents the largest market risk factor affecting the Company's
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, 2004, substantially all of the Company's investments
were in investment grade (rated Baa or higher) fixed-maturity investments,
interest-bearing money market accounts and a collateralized repurchase
agreement. The Company does 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 the Company's fixed-maturity investment
portfolio. It is assumed that the changes occur immediately and uniformly, with
no effect given to any steps that management 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 (dollars in 000's):
Hypothetical change in Estimated fair
interest rate after hypothetical
Fair Value (bp=basis points) change in interest rate
---------- ---------------------- -----------------------
Fixed-maturity investments at September 30, 2004 (1)........ $ 18,551 100 bp increase $ 17,502
200 bp increase 16,470
50 bp decrease 18,936
100 bp decrease 19,374
Fixed-maturity investments at December 31, 2003 (1)......... $ 27,052 100 bp increase $ 26,009
200 bp increase 24,977
50 bp decrease 27,451
100 bp decrease 27,904
- --------------------
(1) Excluding short-term investments with a fair value of $2.5 and $2.4 million
at September 30, 2004 and December 31, 2003, respectively.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at September 30, 2004 would reduce
the estimated fair value of the Company's fixed-maturity investments by
approximately $2.1 million at that date. At December 31, 2003, an
instantaneous 200 basis point increase in market interest rates would have
reduced the estimated fair value of the Company's fixed-maturity
investments by approximately $2.1 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 the Company does not believe
such risk is material.
The Company primarily manages its exposure to interest rate risk by
purchasing investments that can be readily liquidated should the interest rate
environment begin to significantly change.
Interest Rate Risk
The Company is exposed to market risk related to changes in interest rates.
As of September 30, 2004, the Company had $49.6 million in notes payable
outstanding at interest rates indexed to the 30 day LIBOR rate that exposes it
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 $496,000. As of September 30,
2004, the Company had not entered into any interest rate swap agreements with
respect to the term loans.
Foreign Currency Exchange Rate Risk
Although the Company is 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 the Company's revenues are derived
outside of the United States.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Principal Executive Officer and Principal Financial Officer
have reviewed and evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rule 240.13a-14(c)) as of
the end of the period covered by this report. Based on that evaluation, the
Principal Executive Officer and the Principal Financial Officer have concluded
that the Company's current disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms.
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 the Company's purchases of
stock in the open market during the third quarter of 2004.
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 2004............. 32,800 $ 23.25 32,800 967,200
August 2004........... 17,600 23.23 17,600 1,949,600
September 2004........ 980,518 26.12 980,518 969,082
--------------- ---------------- --------------------
Total................. 1,030,918 $ 25.98 1,030,918
--------------- ---------------- --------------------
- -----------
(1) The Company announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of the Company's
common stock in the open market. The Board of Directors has subsequently
from time to time increased such authorization from 500,000 shares to
10,000,000 shares. The most recent authorization was for 1,000,000
additional shares on August 9, 2004 and there has been no time limit set
for completion of the repurchase program. In addition, the Company
completed a tender offer for 980,518 shares in September 2004.
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 the Company's 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 4.1 of the Company's Report
on Form 8-K dated January 10, 1997)
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 Repor t on Form 10-K
for the year ended December 31, 2002)
*10.7 Stock Option Plan, as amended effective May 2000 (Incorporated by
reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2000)
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 Security Agreement dated June 11, 2002 between Bank of Oklahoma, N.A.and
the Company (Incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the six months ended June 30, 2002)
10.10 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)
*10.11 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)
10.12 Loan Agreement dated September 19, 2003 between Registrant and Bank of
Oklahoma, N.A., Comerica Bank and First United Bank & Trust (Incorporated
by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the
period ended September 30, 2003)
10.13 First Amendment to Loan Agreement dated August 26, 2004 among Pre-Paid
Legal Services, Inc., Bank of Oklahoma N.A., Comerica Bank and First
United Bank & Trust. (Incorporated by reference to Exhibit (b)(i) to the
Company's Schedule TO filed on August 27, 2004)
10.14 First Amendment to Security Agreement dated August 26,2004 among Pre-Paid
Legal Services, Inc., Bank of Oklahoma, N.A., Comerica Bank and First
United Bank & Trust (Incorporated by reference to Exhibit(b)(iii) to the
Company's Schedule TO filed on August 27, 2004)
10.15 First Amendment to Pledge Agreement dated August 26, 2004 among Pre-Paid
Legal Services, Inc., Bank of Oklahoma, N.A., Comerica Bank and First
United Bank & Trust (Incorporated by reference to Exhibit (b)(iv) to the
Company's Schedule TO filed on August 27, 2004)
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, filed under Exhibit 31 of Item 601 of Regulation S-K.
31.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under
Exhibit 31 of Item 601 of Regulation S-K.
32.1 Certification of Harland C. Stonecipher, Chairman,Chief Executive Officer
and President, Pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32
of Item 601 of Regulation S-K.
32.2 Certification of Steve Williamson, Chief Financial Officer,Pursuant to 18
U.S.C.Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K.
- --------------------
* 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.
Date: October 26, 2004 /s/ Harland C. Stonecipher
------------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: October 26, 2004 /s/ Randy Harp
------------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: October 26, 2004 /s/ Steve Williamson
------------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 31.1
CERTIFICATION
I, Harland C. Stonecipher, Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) 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) Omitted pursuant to Exchange Act Release 34-47986
(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 26, 2004 /s/ Harland C. Stonecipher
-----------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 31.2
CERTIFICATION
I, Steve Williamson, Chief Financial Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) 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) Omitted pursuant to Exchange Act Release 34-47986
(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 26, 2004 /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, 2004 (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 26, 2004 /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, 2004 (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 26, 2004 /s/ Steve Williamson
-------------------------------------------
Steve Williamson
Chief Financial Officer