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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____ to _____
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Commission File Number: 001-09293
PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Pre-Paid Way, Ada, Oklahoma 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
April 22, 2005 was 15,389,097.
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PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended March 31, 2005
CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
a) Consolidated Balance Sheets
as of March 31, 2005 (Unaudited) and
December 31, 2004
b) Consolidated Statements of Income (Unaudited)
for the three months ended March 31, 2005 and 2004
c) Consolidated Statements of Comprehensive Income
(Unaudited) for the three months ended March 31, 2005
and 2004
d) Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2005 and 2004
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
March 31, December 31,
2005 2004
------------ ------------
Current assets: (Unaudited)
Cash and cash equivalents........................................................ $ 19,583 $ 25,972
Available-for-sale investments, at fair value.................................... 8,142 804
Membership fees receivable....................................................... 4,157 4,961
Inventories...................................................................... 1,360 1,623
Refundable income taxes.......................................................... - 1,241
Deferred member and associate service costs...................................... 17,085 15,420
Deferred income taxes............................................................ 4,356 4,829
------------ ------------
Total current assets......................................................... 54,683 54,850
Available-for-sale investments, at fair value...................................... 18,897 25,455
Investments pledged................................................................ 4,372 4,381
Property and equipment, net........................................................ 50,467 51,232
Deferred member and associate service costs........................................ 2,743 2,580
Other assets....................................................................... 7,729 7,566
------------ ------------
Total assets............................................................... $ 138,891 $ 146,064
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.............................................................. $ 10,776 $ 10,340
Deferred revenue and fees........................................................ 24,961 24,585
Current portion of capital leases payable........................................ 339 338
Current portion of notes payable................................................. 18,036 18,036
Common stock dividends payable................................................... - 7,796
Accounts payable and accrued expenses............................................ 19,698 15,451
------------ ------------
Total current liabilities...................................................... 73,810 76,546
Capital leases payable........................................................... 1,612 1,618
Notes payable.................................................................... 22,541 27,050
Deferred revenue and fees........................................................ 2,914 2,361
Deferred income taxes ........................................................... 3,533 4,248
Other non-current liabilities.................................................... 3,160 2,794
------------ ------------
Total liabilities............................................................ 107,570 114,617
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 20,228 and
20,464 issued at March 31, 2005 and December 31, 2004, respectively............ 202 205
Retained earnings................................................................ 129,840 129,290
Accumulated other comprehensive income........................................... 307 980
Treasury stock, at cost; 4,852 shares held at
March 31, 2005 and December 31, 2004........................................... (99,028) (99,028)
------------ ------------
Total stockholders' equity................................................... 31,321 31,447
------------ ------------
Total liabilities and stockholders' equity................................. $ 138,891 $ 146,064
------------ ------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
---------------------
2005 2004
---------- ----------
Revenues:
Membership fees................................................ $ 92,504 $ 86,750
Associate services............................................. 7,042 6,557
Other.......................................................... 1,349 1,302
---------- ----------
100,895 94,609
---------- ----------
Costs and expenses:
Membership benefits............................................ 32,721 29,286
Commissions.................................................... 31,677 29,272
Associate services and direct marketing........................ 9,096 7,603
General and administrative..................................... 11,099 10,046
Other, net..................................................... 2,641 2,185
---------- ----------
87,234 78,392
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Income before income taxes....................................... 13,661 16,217
Provision for income taxes....................................... 4,713 . 5,595
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Net income....................................................... $ 8,948 $ 10,622
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Basic earnings per common share.................................. $ .57 $ .63
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Diluted earnings per common share................................ $ .57 $ .63
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
---------------------
2005 2004
---------- ----------
Net income..................................................... $ 8,948 $ 10,622
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Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... (15) (20)
---------- ----------
Unrealized (losses) gains on investments:
Unrealized holding (losses) gains arising during period.... (660) 222
Reclassification adjustment for realized losses (gains)
included in net income................................... 2 (42)
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(658) 180
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Other comprehensive income (loss), net of income taxes
of ($421) and $97 for the three months ended
March 31, 2005 and 2004, respectively........................ (673) 160
---------- ----------
Comprehensive income........................................... $ 8,275 $ 10,782
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The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
------------------------
2005 2004
---------- -----------
Cash flows from operating activities:
Net income....................................................................... $ 8,948 $ 10,622
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes............................................ 112 283
Depreciation and amortization.................................................. 1,869 1,948
Tax benefit on exercise of stock options....................................... 209 107
---------- -----------
Cash provided by operating activities before changes in assets and liabilities 11,138 12,960
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Decrease in Membership income receivable....................................... 804 86
Decrease (increase) in inventories............................................. 263 (397)
Decrease in income tax receivable.............................................. 1,241 331
Increase in deferred member and associate service costs........................ (1,828) (154)
Increase in other assets....................................................... (163) (1,877)
Increase in accrued Membership benefits........................................ 436 417
Increase (decrease) in deferred revenue and fees............................... 929 (391)
Increase in income taxes payable............................................... - 4,874
Increase in other non-current liabilities...................................... 366 -
Increase in accounts payable and accrued expenses and other.................... 4,232 1,119
---------- -----------
Net cash provided by operating activities.................................... 17,418 16,968
---------- -----------
Cash flows from investing activities:
Additions to property and equipment............................................ (1,104) (3,205)
Purchases of investments - available for sale.................................. (2,889) (3,030)
Maturities and sales of investments - available for sale....................... 1,106 1,585
---------- -----------
Net cash used in investing activities........................................ (2,887) (4,650)
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Cash flows from financing activities:
Proceeds from exercise of stock options........................................ 1,357 411
Decrease in capital lease obligations.......................................... (5) (4)
Common stock dividends paid.................................................... (7,796) -
Repayments of debt............................................................. (4,509) (4,738)
Purchases of treasury stock.................................................... (9,967) (9,195)
---------- -----------
Net cash used in financing activities ....................................... (20,920) (13,526)
---------- -----------
Net decrease in cash and cash equivalents........................................ (6,389) (1,208)
Cash and cash equivalents at beginning of period................................. 25,972 21,459
---------- -----------
Cash and cash equivalents at end of period....................................... $ 19,583 $ 20,251
---------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amount capitalized.............................. $ 594 $ 461
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Non-cash activities - capital lease obligations incurred....................... $ - $ 117
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The accompanying notes are an integral part of these financial statments.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Except for per share amounts, dollar amounts in tables are in thousands
unless otherwise indicated)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been omitted. The
accompanying consolidated financial statements and notes thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in our 2004 Annual Report on Form 10-K. Terms such as "we", "our" and
"us" are sometimes used as abbreviated references to Pre-Paid Legal Services,
Inc.
The consolidated financial statements include our financial statements and
our wholly owned subsidiaries, as well as those of PPL Agency, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
In our opinion, the accompanying unaudited financial statements as of March
31, 2005, and for the three month periods ended March 31, 2005 and 2004, reflect
adjustments (which were normal and recurring) which, in our opinion, are
necessary for a fair statement of our financial position and results of
operations of the interim periods presented. Results for the three month period
ended March 31, 2005 are not necessarily indicative of results expected for the
full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
We have a stock-based employee compensation plan and account 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
we 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. No stock options were issued
during the three months ended March 31, 2005.
Three Months Ended
March 31,
-----------------------
2005 2004
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Net income, as reported....................................................... $ 8,948 $ 10,622
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects...... - (441)
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Pro forma net income.......................................................... $ 8,948 $ 10,181
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Earnings per share:
Basic - as reported....................................................... $ .57 $ .63
Basic - pro forma......................................................... $ .57 $ .61
Diluted - as reported..................................................... $ .57 $ .63
Diluted - pro forma....................................................... $ .57 $ .61
Note 2 - Contingencies
We and various 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 we issued false and misleading
financial information, primarily related to the method we used to account for
commission advance receivables from sales associates. On March 5, 2002, the
Court granted our 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 and as of April 22, 2005, a decision was
pending. We are 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 us, 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 2004,
there were at one time as many as 30 separate lawsuits involving approximately
285 plaintiffs in Alabama. As of April 22, 2005, as a result of dismissals,
summary judgments, or settlements for nominal amounts, we were aware of
approximately 8 separate lawsuits involving approximately 11 plaintiffs that
have been filed in multiple counties in Alabama. As of April 22, 2005, we were
aware of 16 separate lawsuits involving approximately 426 plaintiffs in multiple
counties in Mississippi. Certain of the Mississippi lawsuits also name our
former provider attorney in Mississippi as a defendant. 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. We
have responded to the Attorney General's requests for information with respect
to these complaints, and as of April 22, 2005, we were not aware of any further
actions being taken by the Attorney General. In Mississippi, we filed lawsuits
in the United States District Court for the Southern and Northern Districts of
Mississippi in which we seek to compel arbitration of the various Mississippi
claims under the Federal Arbitration Act and the terms of our 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 June 2005, and in Mississippi in May
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 our favor,
including other named defendants, on all claims on October 19, 2004, while the
second trial in Mississippi resulted in an insubstantial plaintiffs' verdict on
February 15, 2005. Although 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 us and certain 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 our
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. On
December 3, 2004, the District Court ordered the plaintiffs to proceed with the
arbitration. The ultimate outcome of this case is not determinable.
On June 29, 2001, an action was filed against us 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 our sales associates. 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 our
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. On December 17, 2004 the District Court granted our motion for
summary judgment. On January 27, 2005 three of the five plaintiffs filed a
motion to vacate and/or for new trial. This motion is set for hearing on April
25, 2005. The claims of the remaining two plaintiffs have been dismissed with
prejudice. 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 us and certain executive
officers. This action is a putative class action seeking unspecified damages
filed on behalf of our sales associates and alleges that the marketing plan
offered by us 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 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 petitioned the Tenth Circuit Court of Appeals
for permission to appeal the class certification ruling, and the Tenth Circuit
Court of Appeals denied the petition for interlocutory appeal. The ultimate
outcome of this case is not determinable.
We are a defendant in various other legal proceedings that are routine and
incidental to our business. We will vigorously defend our interests in all
proceedings in which it is named as a defendant. We also receive periodic
complaints or requests for information from various state and federal agencies
relating to our business or the activities of our marketing force. We promptly
respond to any such matters and provide any information requested.
While the ultimate outcome of these proceedings is not determinable, we do
not currently anticipate that these contingencies will result in any material
adverse effect to our financial condition or results of operation, unless an
unexpected result occurs in one of the cases. The costs of the defense of these
various matters are reflected as a part of general and administrative expense in
the consolidated statements of income. We have established an accrued liability
we believe will be sufficient to cover estimated damages in connection with
various cases (exclusive of ongoing defense costs which are expensed as
incurred), which at March 31, 2005 was $3.0 million. We believe that we have
meritorious defenses in all pending cases and will vigorously defend against the
plaintiffs' claims. However, it is possible that an adverse outcome in certain
cases or increased litigation costs could have an adverse effect upon our
financial condition, operating results or cash flows in particular quarterly or
annual periods.
Note 3 - Treasury Stock Purchases
We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock. The
Board of Directors has increased such authorization from 500,000 shares to 10
million shares during subsequent board meetings. At March 31, 2005, we had
purchased 9.4 million treasury shares under these authorizations for a total
consideration of $220.8 million, an average price of $23.58 per share. We
purchased and formally retired 288,900 shares of our common stock during the
2005 first quarter for $10.0 million, or an average price of $34.50, reducing
our common stock by $289 and our retained earnings by $10.0 million. See Note 5
below. Given the current interest rate environment, the nature of other
investments available and our expected cash flows, we believe that purchasing
treasury shares enhances shareholder value and may seek alternative sources of
financing to continue or accelerate the program. Any additional treasury stock
purchases will be made at prices that we consider attractive and at such times
that we believe will not unduly impact our liquidity.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the 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 increased by the number of dilutive potential common shares issuable on the
exercise of options less the number of common shares assumed to have been
purchased with the proceeds from the exercise of the options pursuant to the
treasury stock method; those purchases are assumed to have been made at the
average price of the common stock during the respective period.
Three Months
Ended March 31,
------------------
Basic Earnings Per Share: 2005 2004
-------- ---------
Earnings:
Net income........................................................... $ 8,948 $ 10,622
-------- ---------
Shares:
Weighted average shares outstanding.................................. 15,563 16,751
-------- ---------
Diluted Earnings Per Share:
Earnings:
Net income........................................................... $ 8,948 $ 10,622
-------- ---------
Shares:
Weighted average shares outstanding.................................. 15,563 16,751
Assumed exercise of options.......................................... 271 74
-------- ---------
Weighted average number of shares, as adjusted....................... 15,834 16,825
-------- ---------
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 777,000 shares for
the three months ended March 31, 2004 with an average exercise price of $27.24
were excluded from the calculation of diluted earnings per share for such
period. No options were excluded for the three months ended March 31, 2005.
Note 5 - Notes Payable
On June 11, 2002, we 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 our 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, our
rights to receive Membership fees on a portion of our Memberships and by a
security interest covering all equipment. The interest rate at March 31, 2005
was 4.97%. 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, we arranged $25 million in additional
financing for treasury stock purchases 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 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,
we amended the terms of the loan agreement with these banks to increase the loan
amount to $31.5 million and allow for additional treasury stock purchases of up
to $31.5 million. We 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
our 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 interest at the 30 day LIBOR rate
plus 3%. The interest rate at March 31, 2005 was 5.72%. 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.
The loan is primarily collateralized by our rights to receive Membership
fees on a portion of our Memberships and a pledge of the stock of our
subsidiaries. The definitive agreement contains covenants prohibiting us 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 our chairman and Chief Executive Officer
for 90 days. Pre-payment of the loan is permitted. The loan agreements contain
the following financial covenants: (a) our quarterly Debt Coverage Ratio (as
defined in the loan agreements) shall not be less than 125%; (b) our
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) we
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 quarterly basis; (d) we shall not pay dividends or purchase
treasury shares, which during any fiscal quarter, on a combined basis, would
exceed fifty percent (50%) of our 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) our 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. We were in
compliance with the above covenants at March 31, 2005.
A schedule of outstanding balances as of March 31, 2005 is as follows:
Real estate line of credit......................... $ 16,952
Stock purchase line of credit...................... 23,625
---------------
Total notes payable................................ 40,577
Less: Current portion of notes payable............. (18,036)
---------------
Long term portion.................................. $ 22,541
---------------
A schedule of future maturities as of March 31, 2005 is as follows:
Repayment Schedule commencing April 2005:
Year 1............................................. $ 18,036
Year 2............................................. 10,161
Year 3............................................. 2,285
Year 4............................................. 10,095
---------------
Total notes payable................................ $ 40,577
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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 our Form 10-K for the year ended December 31, 2004, which
describes, among other things, our basic business model, critical accounting
policies, measures of Membership retention, and basic cash flow characteristics
of our business. The following tables set forth changes in the principal
categories of revenues and expenses and Membership and recruiting activity for
the first quarter of 2005 compared to the first quarter of 2004 and the fourth
quarter of 2004 (Amounts in 000's):
Three Months Ended March 31, 2005 Three % % Three Three
compared to Months Change Change Months Months
Three Months Ended March 31, 2004 Ended % of from from Ended % of Ended % of
and compared to March 31, Total Prior Sequential March Total Dec. 31, Total
Three Months Ended December 31, 2004 2005 Revenue Year Period 31, 2004 Revenue 2004 Revenue
- -------------------------------------- ---------- ------- ----- ---------- --------- -------- ---------- -------
Revenues:
Membership fees.................... $92,504 91.7 6.6 1.3 $ 86,750 91.7 $ 91,274 92.1
Associate services................. 7,042 7.0 7.4 11.9 6,557 6.9 6,294 6.4
Other.............................. 1,349 1.3 3.6 (8.7) 1,302 1.4 1,478 1.5
---------- ------- ----- ---------- --------- -------- ---------- -------
100,895 100.0 6.6 1.9 94,609 100.0 99,046 100.0
---------- ------- ----- ---------- --------- -------- ---------- -------
Costs and expenses:
Membership benefits................ 32,721 32.4 11.7 4.1 29,286 31.0 31,445 31.7
Commissions........................ 31,677 31.4 8.2 6.3 29,272 30.9 29,797 30.1
Associate services and direct
marketing........................ 9,096 9.0 19.6 17.9 7,603 8.0 7,714 7.8
General and administrative......... 11,099 11.0 10.5 (5.2) 10,046 10.6 11,709 11.8
Other, net......................... 2,641 2.6 20.9 11.8 2,185 2.3 2,363 2.4
---------- ------- ----- ---------- --------- -------- ---------- -------
87,234 86.5 11.3 5.1 78,392 82.9 83,028 83.8
---------- ------- ----- ---------- --------- -------- ---------- -------
Income before income taxes........... 13,661 13.5 (15.8) (14.7) 16,217 17.1 16,018 16.2
Provision for income taxes........... 4,713 4.7 (15.8) (14.7) 5,595 5.9 5,526 5.6
---------- ------- ----- ---------- --------- -------- ---------- -------
Net income........................... $ 8,948 8.8 (15.8) (14.7) $ 10,622 11.2 $ 10,492 10.6
---------- ------- ----- ---------- --------- -------- ---------- -------
Three Months Ended
------------------
New Memberships: 3/31/2005 12/31/2004 3/31/2004
--------- ---------- ---------
New legal service membership sales.......................... 173,348 149,759 156,135
New "stand-alone" IDT membership sales...................... 7,531 7,137 6,697
--------- ---------- ---------
Total new membership sales......................... 180,879 156,896 162,832
--------- ---------- ---------
New "add-on" IDT membership sales........................... 103,777 85,918 84,774
Active Memberships:
Active legal service memberships at end of period........... 1,453,702 1,424,707 1,417,553
Active "stand-alone" IDT memberships at end of period (see
note below)................................................. 32,400 26,993 12,071
--------- ---------- ---------
Total active memberships at end of period.......... 1,486,102 1,451,700 1,429,624
--------- ---------- ---------
Active "add-on" IDT memberships at end of period (see note
below)...................................................... 337,868 283,889 154,774
New sales associates recruited.............................. 52,944 41,829 14,774
Average enrollment fee paid by new sales associates......... $68.68 $89.71 $226.00
Average Annual Membership fee in force...................... $277.54 $274.02 $266.21
Identity Theft Shield ("IDT") memberships sold in conjunction with new
legal plan memberships or "added-on" to existing legal plan memberships sell for
$9.95 per month and are not counted as "new" memberships but do increase the
average premium and related direct expenses (membership benefits and
commissions) of our membership base, while "stand alone" Identity Theft Shield
memberships are not attached to a legal plan membership and sell for $12.95 per
month.
Results of Operations - First Quarter of 2005 compared to First Quarter of 2004
Net income decreased 16% for the first quarter of 2005 to $8.9 million from
$10.6 million for the prior year's first quarter primarily due to an increase in
commission expense of $2.4 million caused by more new memberships sold during
the 2005 first quarter and an increase in associate services and direct
marketing expenses of $1.4 million caused by a promotional entry fee during most
of the quarter. Diluted earnings per share decreased 10% to 57 cents per share
from 63 cents per share for the prior year's comparable quarter due the 16%
decrease in net income partially offset by an approximate 6 percent decrease in
the weighted average number of outstanding shares.
Membership fees totaled $92.5 million during the 2005 first quarter
compared to $86.8 million for 2004, 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 increased 11% during the three months
ended March 31, 2005 to 180,879 from 162,832 during the comparable period of
2004. At March 31, 2005, there were 1,486,102 active Memberships in force
compared to 1,429,624 at March 31, 2004, an increase of 4%. Additionally, the
average annual fee per Membership has increased from $266 for all Memberships in
force at March 31, 2004 to $278 for all Memberships in force at March 31, 2005,
as a result of a larger number of Legal Shield subscribers, increased sales of
our business oriented Memberships and increases in Identity Theft Shield
memberships.
Associate services revenue increased 7% from $6.6 million for the first
three months of 2004 to $7.0 million during the comparable period of 2005 with a
258% increase in new associates recruited. Total new associates enrolled during
the first quarter of 2005 were 52,944 compared to 14,774 for the same period of
2004. Associate fees increased 10% from $3.8 million for the first three months
of 2004 to $4.3 million during the comparable period of 2005. Average enrollment
fees paid by new sales associates during the 2005 first quarter was $69 compared
to $226 for the comparable period of 2004 due to specialized $49 enrollment
programs aimed at varying market niches. Future revenues from associate services
will depend primarily on the number of new associates enrolled, the average
enrollment fee paid and the number who choose to participate in our eService
program, but we expect that such revenues will continue to be offset by the
direct and indirect cost to us of training, providing associate services and
other direct marketing expenses.
Other revenue remained unchanged at $1.3 million for both the 2005 first
quarter and the comparable period of 2004.
Primarily as a result of the increase in Membership fees, total revenues
increased to $100.9 million for the three months ended March 31, 2005 from $94.6
million during the comparable period of 2004, an increase of 7%.
Membership benefits totaled $32.7 million for the three months ended March
31, 2005 compared to $29.3 million for the comparable period of 2004, and
represented 35% and 34% of Membership fees for the 2005 and 2004 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 we continue to
increase the number of Identity Theft Shield Memberships in force.
Commissions to associates increased 8% to $31.7 million for the three
months ended March 31, 2005 compared to $29.3 million for the comparable period
of 2004, 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 March 31, 2005 totaled 180,879, an 11% increase from the
162,832 sold during the comparable period of 2004. Commissions to associates per
new membership sold were $175 per membership for the three months ended March
31, 2005 compared to $180 for the comparable period of 2004. The average
commission per new membership sold varies depending on the compensation
structure that is in place at the time a new membership is sold, the amount of
the Membership fee and the amount of any charge-backs (recoupment of previous
commission advances) that are deducted from amounts that would otherwise be paid
to the various sales associates that are compensated for the membership sale.
Should we add additional commissions to its compensation plan or reduce the
amount of chargebacks collected from our associates as we have from time to
time, the commission cost per new Membership will increase accordingly.
Associate services and direct marketing expenses increased to $9.1 million
for the three months ended March 31, 2005 from $7.6 million for the comparable
period of 2004. The increase was primarily a result of increased costs for
incentive trips and bonuses and increased costs for materials sent to new
associates due to large increase in the number of new associates enrolled during
the quarter. We offer the Player's Club incentive program to provide additional
incentives to our associates as a reward for consistent, quality business.
Associates can earn the right to receive additional monthly bonuses by meeting
monthly qualification requirements for 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 March 31,
2005 and 2004 were $11.1 million and $10.0 million, respectively, and
represented 12% of Membership fees for both periods. The 2005 first quarter
reflects increased employee costs (including health care costs) and increased
expenses related to bank service charges due to the increases in legal plans and
Identity Theft Shield Memberships. We should experience cost efficiencies as a
result of certain economies of scale in some areas but expect any such cost
savings for the remainder of 2005 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 $2.6 million for the
three months ended March 31, 2005 compared to $2.2 million for the 2004
comparable period. Depreciation remained unchanged at $1.9 million for the first
quarter of 2005 and the comparable period of 2004. Interest expense increased to
$607,000 during the 2005 period from $462,000 during the comparable period of
2004 as a result of higher indebtedness and a higher average interest rate.
Premium taxes increased from $370,000 for the three months ended March 31, 2004
to $556,000 for the comparable period of 2005, primarily as a result of
increases in Membership fees in certain jurisdictions where we pay premium
taxes.
We have recorded a provision for income taxes of $4.7 million and $5.6
million (34.5% of pretax income) for the first quarter of 2005 and 2004,
respectively.
Results of Operations - First Quarter of 2005 compared to the Fourth
Quarter of 2004
First quarter 2005 membership fees increased 1% to $92.5 million from $91.3
million for the fourth quarter of 2004. Associate services revenues increased
during the 2005 first quarter by approximately $748,000 to $7.0 million from
$6.3 million for the 2004 fourth quarter and associate services and direct
marketing expenses increased by $1.4 million during the same period primarily as
a result of increased costs for incentive trips and bonuses and increased costs
for materials sent to new associates due to large increase in the number of new
associates enrolled during the quarter. Membership benefits totaled $32.7
million in the first quarter of 2005 compared to $31.4 million for the 2004
fourth quarter and represented 35% and 34%, respectively, of membership fees for
the two periods. Commissions to associates totaled $31.7 million in the 2005
first quarter compared to $29.8 million for the 2004 fourth quarter and
represented 34% and 33%, respectively, of membership fees for the two periods.
General and administrative expenses decreased during the 2005 first quarter to
$11.1 million compared to $11.7 million for the 2004 fourth quarter and
represented 12% and 13%, respectively, of membership fees for the two periods.
Liquidity and Capital Resources
General
Consolidated net cash provided from operating activities for the first
three months of 2005 increased 3% to $17.4 million from $17.0 million for the
2004 period, although cash provided from operating activities before changes in
working capital items decreased $1.8 million from $13.0 million to $11.1
million. The decrease of $1.8 million resulted primarily from the decrease in
net income of $1.7 million.
Consolidated net cash used in investing activities was $2.9 million for the
first three months of 2005 compared to $4.7 million for the comparable period of
2004. This $1.8 million decrease in cash used in investing activities resulted
primarily from the $2.1 million decrease in additions to property and equipment.
Net cash used in financing activities during the first three months of 2005
was $20.9 million compared to $13.5 million for the comparable period of 2004.
This $7.4 million change was primarily comprised of the $7.8 million increase in
common stock dividends paid.
We purchased and formally retired 288,900 shares of our common stock during
the 2005 first quarter for $10.0 million, or an average price of $34.50,
reducing our common stock by $289 and our retained earnings by $10.0 million. We
had a consolidated working capital deficit of $19.1 million at March 31, 2005, a
decrease of $2.6 million compared to a consolidated working capital deficit of
$21.7 million at December 31, 2004. The decrease was primarily due to a $7.8
million decrease in common stock dividends payable partially offset by a $4.2
million increase in accounts payable and accrued expenses. The $19.1 million
working capital deficit at March 31, 2005 would have been an $11.2 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 us incurring other current liabilities.
We do not expect any difficulty in meeting its financial obligations in the
short term or the long term.
At March 31, 2005 we reported $46.6 million in cash and cash equivalents
and unpledged investments compared to $52.2 million at December 31, 2004. Our
investments consist of common stocks, investment grade (rated Baa or higher)
bonds primarily issued by corporations, the United States Treasury, federal
agencies, federally sponsored agencies and enterprises as well as
mortgage-backed securities and state and municipal tax-exempt bonds.
We generally advance significant commissions at the time a Membership is
sold. During the three months ended March 31, 2005, we advanced commissions, net
of chargebacks, of $34.2 million on new Membership sales compared to $25.7
million for the same period of 2004. Since approximately 95% of Membership fees
are collected on a monthly basis, a significant cash flow deficit is created on
a per Membership basis at the time a Membership is sold. Since there are no
further commissions paid on a Membership during the advance period, we typically
derive significant positive cash flow from the Membership over its remaining
life.
We expense advance commissions ratably over the first month of the related
Membership. As a result of this accounting policy, our commission expenses are
all recognized over the first month of a Membership and there is no commission
expense recognized for the same Membership during the remainder of the advance
period. We track our unearned advance commission balances outstanding in order
to ensure the advance commissions are recovered before any renewal commissions
are paid and for internal purposes of analyzing its commission advance program.
While not recorded as an asset, unearned advance commission balances from
associates as of March 31, 2005, and related activity for the three month period
then ended, were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)........ $ 183,060
Advance commission payments, net.......................... 34,226
Earned commissions applied................................ (30,832)
Advance commission payment write-offs..................... (714)
------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1).................... 185,740
Estimated unrecoverable advance commission payments (1)... (29,145)
------------
Ending unearned advance commission payments, net (1)...... $ 156,595
(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 $35.0 million.
As such, at March 31, 2005 future commission payments and related expense should
be reduced as unearned advance commission payments of $121 million are
recovered. Commissions are earned by the associate as Membership premiums are
earned by us, usually on a monthly basis. For additional information concerning
these commission advances, see our Annual report on Form 10-K under the heading
Commissions to Associates in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
We believe that we have significant ability to finance expected future
growth in Membership sales based on our recurring cash flow and existing amount
of cash and cash equivalents and unpledged investments at March 31, 2005 of
$46.6 million. We expect to maintain cash and investment balances, including
pledged investments, on an on-going basis of approximately $20 to $30 million in
order to meet expected working capital needs and regulatory capital
requirements. Cash balances in excess of this amount would be used for
discretionary purposes such as additional treasury stock purchases to the extent
permitted by the terms of our amended stock purchase loan.
On June 11, 2002, we 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 our 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, our
rights to receive Membership fees on a portion of our Memberships and by a
security interest covering all equipment. The interest rate at March 31, 2005
was 4.97%. 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, we arranged $25 million in additional
financing for treasury stock purchases 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 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,
we amended the terms of the loan agreement with these banks to increase the loan
amount to $31.5 million and allow for additional treasury stock purchases of up
to $31.5 million. We 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
our 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 interest at the 30 day LIBOR rate
plus 3%. The interest rate at March 31, 2005 was 5.72%. 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.
The loan is primarily collateralized by our rights to receive Membership
fees on a portion of our Memberships and a pledge of the stock of our
subsidiaries. The definitive agreement contains covenants prohibiting us 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 our chairman and Chief Executive Officer
for 90 days. Pre-payment of the loan is permitted. The loan agreements contain
the following financial covenants: (a) our quarterly Debt Coverage Ratio (as
defined in the loan agreements) shall not be less than 125%; (b) our
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) we
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 quarterly basis; (d) we shall not pay dividends or purchase
treasury shares, which during any fiscal quarter, on a combined basis, would
exceed fifty percent (50%) of our 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) our 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. We were in
compliance with the above covenants at March 31, 2005.
Parent Company Funding and Dividends
Although we are the operating entity in many jurisdictions, our
subsidiaries serve as operating companies in various states that regulate
Memberships as insurance or specialized legal expense products. The most
significant of these wholly owned subsidiaries are Pre-Paid Legal Casualty, Inc.
("PPLCI") and Pre-Paid Legal Services Inc. of Florida ("PPLSIF"). The ability of
PPLCI and PPLSIF to provide funds to us 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 our regulated
subsidiaries, will be funded by us in the form of capital contributions or
surplus debentures. At March 31, 2005, PPLSIF did not have funds available for
payment of substantial dividends without the prior approval of the insurance
commissioner. At March 31, 2005, PPLCI had approximately $4.1 million available
for payment of an ordinary dividend which was paid to us in April 2005.
Additionally, another of our wholly owned subsidiaries, Legal Service Plans of
Virginia, Inc. paid a $3.7 million dividend to us in April 2005.
Contractual Obligations
There have been no material changes outside of the ordinary course of
business in our contractual obligations from those disclosed in our annual
report on Form 10-K for the year ended December 31, 2004.
Critical Accounting Policies
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. If these estimates or assumptions are
incorrect, there could be a material change in our financial condition or
operating results. Many of these "critical accounting policies" are common in
the insurance and financial services industries; others are specific to our
business and operations. Our critical accounting policies include estimates
relating to revenue recognition related to Membership and associate fees,
deferral of Membership and associate related costs, expense recognition related
to commissions to associates, accrual of incentive awards payable and accounting
for legal contingencies. Each of these accounting policies and the application
of critical accounting policies and estimates was discussed in our Annual Report
on Form 10-K for the year ended December 31, 2004. There were no significant
changes in the application of critical accounting policies or estimates during
the first three months of 2005. We are not aware of any reasonably likely events
or circumstances which would result in different amounts being reported that
would materially affect our financial condition or results of operations.
Capital and Dividend Plans
We continue to evaluate the desirability of possible additional share
repurchases and additional cash dividends. We declared a $0.30 per share on
April 4, 2005 and have previously announced that we will continue shares
repurchases, pay a dividend, or both, depending on our financial condition,
available resources and market conditions, as well as compliance with the
covenants in our amended treasury stock term loan which limit our ability to
repurchase shares or pay cash dividends. We expect to resume our open market
repurchase program in the near future as we have existing authorization from the
Board to purchase an additional 633,282 shares. We also continue to evaluate
additional sources of financing that may enable us to accelerate the repurchase
program at prices we believe are attractive.
Forward-Looking Statements
All statements in this report other than purely historical information,
including but not limited to, statements relating to our future plans and
objectives, expected operating results and the assumptions on which such
forward-looking statements are based, constitute "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and are based on our historical operating
trends and financial condition as of March 31, 2005 and other information
currently available to management. We caution that the Forward-Looking
Statements are subject to all the risks and uncertainties incident to our
business, including but not limited to risks described below. Moreover, we may
make acquisitions or dispositions of assets or businesses, enter into new
marketing arrangements or enter into financing transactions. None of these can
be predicted with certainty and, accordingly, are not taken into consideration
in any of the Forward-Looking Statements made herein. For all of the foregoing
reasons, actual results may vary materially from the Forward-Looking Statements.
We assume no obligation to update the Forward-Looking Statements to reflect
events or circumstances occurring after the date of the statement.
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 38 and 39 of our 2004 Annual Report
on Form 10-K for a description of other risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our consolidated balance sheets include a certain amount of assets and
liabilities whose fair values are subject to market risk. Due to our significant
investment in fixed-maturity investments, interest rate risk represents the
largest market risk factor affecting our consolidated financial position.
Increases and decreases in prevailing interest rates generally translate into
decreases and increases in fair values of those instruments. Additionally, fair
values of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment options, relative values of
alternative investments, liquidity of the instrument and other general market
conditions.
As of March 31, 2005, substantially all of our investments were in
investment grade (rated Baa or higher) fixed-maturity investments and
interest-bearing money market accounts including certificates of deposit. We do
not hold any investments classified as trading account assets or derivative
financial instruments.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on our fixed-maturity investment portfolio. It
is assumed that the changes occur immediately and uniformly, with no effect
given to any steps that we might take to counteract that change.
The hypothetical changes in market interest rates reflect what could be
deemed best and worst case scenarios. The fair values shown in the following
table are based on contractual maturities. Significant variations in market
interest rates could produce changes in the timing of repayments due to
prepayment options available. The fair value of such instruments could be
affected and, therefore, actual results might differ from those reflected in the
following table:
Hypothetical change Estimated fair value
(In 000's) in interest rate after hypothetical
Fair value (bp = basis points) change in interest rate
---------- ------------------- -----------------------
Fixed-maturity investments at March 31, 2005 (1)....... $ 28,401 100 bp increase $ 26,733
200 bp increase 25,303
50 bp decrease 28,957
100 bp decrease 29,603
Fixed-maturity investments at December 31, 2004 (1).... $ 27,023 100 bp increase $ 25,454
200 bp increase 24,024
50 bp decrease 27,605
100 bp decrease 28,288
- --------------------
(1) Excluding short-term investments with a fair value of $2.5 million at March
31, 2005 and December 31, 2004.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 2005 would reduce the
estimated fair value of our fixed-maturity investments by approximately
$3.1 million at that date. At December 31, 2004, an instantaneous 200 basis
point increase in market interest rates would have reduced the estimated
fair value of our fixed-maturity investments by approximately $3.0 million
at that date. The definitive extent of the interest rate risk is not
quantifiable or predictable due to the variability of future interest
rates, but we do not believe such risk is material.
We primarily manage our exposure to interest rate risk by purchasing
investments that can be readily liquidated should the interest rate environment
begin to significantly change.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates. As of
March 31, 2005, we had $40.6 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, interest expense would increase by
approximately $406,000. As of March 31, 2005, we had not entered into any
interest rate swap agreements with respect to the term loans or the floating
rate municipal bonds.
Foreign Currency Exchange Rate Risk
Although we are exposed to foreign currency exchange rate risk inherent in
revenues, net income and assets and liabilities denominated in Canadian dollars,
the potential change in foreign currency exchange rates is not a substantial
risk, as approximately 1% of our revenues are derived outside of the United
States.
ITEM 4. CONTROLS AND PROCEDURES
Our Principal Executive Officer and Principal Financial Officer have
reviewed and evaluated the effectiveness of our 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 our current
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit 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.
There were no changes in our internal control over financial reporting
during the quarter ended March 31, 2005 that have materially affected, or are
reasonably likely to materially affect our internal control over financial
reporting.
As previously disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2004, we concluded that we were unable to complete the
required management assessment of our internal control over financial reporting
as of December 31, 2004, primarily because the documentation and assessment of
our computer programs responsible for processing financially-significant
transactions had not been adequately documented as we had expected. Our
independent registered public accounting firm, Grant Thornton, issued a
"disclaimer" opinion, included in Item 8 of our Form 10-K, indicating that they
do not express an opinion as to management's assessment and as to the
effectiveness of our internal control over financial reporting as of December
31, 2004. This lack of documentation and our internal control over our
commission processes have been identified as material weaknesses in our internal
control over financial reporting.
In response, we have been aggressively engaged in a process to address
these weaknesses, which will include documentation and assessment of application
controls in general and documentation and implementation of additional controls
on the commission expense application. Because of the relative complexity of our
information technology systems, we currently expect that the application-based
control documentation process could take up to several months. When completed
later in 2005, which we currently expect to be in the third quarter, management
expects to evaluate, test, remediate and complete its assessment of internal
control over financial reporting.
Nothing has come to the attention of management which would cause us to
believe that the material weaknesses described above have resulted in any
material inaccuracies or errors in our financial statements as of March 31, 2005
or any prior period. However, it is possible during the completion of additional
documentation, evaluation and testing we will identify one or more errors,
significant deficiencies or material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 2 of the Notes to Consolidated Financial Statements included in
Part I, Item 1 of this report for information with respect to legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of stock in
the open market during the first quarter of 2005.
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)
- ---------------------- ------------ -------------- ------------------- -------------------
January 2005.......... - $ - - 922,182
February 2005......... 110,800 33.37 110,800 811,382
March 2005............ 178,100 35.20 178,100 633,282
------------- ---------------- -------------------
Total................. 288,900 $ 34.50 288,900
------------- ---------------- -------------------
- -----------
(1) We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock
in the open market. The Board of Directors has subsequently from time to
time increased such authorization from 500,000 shares to 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, we 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 our ability to repurchase shares and pay dividends.
ITEM 6. EXHIBITS.
(a) Exhibits:
Exhibit No. Description
----------- ------------
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (Incorporated by reference to Exhibit 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 Reporton Form 10-K for
the year ended December 31, 2002)
10.7 Stock Option Plan, as amended effective May 2003 (Incorporated by
reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2004)
10.8 Loan agreement dated June 11, 2002 between Bank of Oklahoma, N.A. and the
Company (Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the six-months ended June 30, 2002)
10.9 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)
10.16 Aircraft purchase agreement dated December 9, 2004 by and between S&S
Aviation, LLC and the Company (Incorporated by reference to Exhibit 10.13
of the Company's Report on Form 10-K for the year ended December 31,
2004)
10.17 Aircraft purchase agreement dated December 9, 2004 by and between Harland
C. Stonecipher and/or Shirley A. Stonecipher and Stonecipher Aviation,
LLC and the Company (Incorporated by reference to Exhibit 10.14 of
the Company's Report on Form 10-K for the year ended December 31, 2004)
10.18 Assignment and Assumption of Lease dated December 20, 2004 between
Harland C. and Shirley Stonecipher and the Company (Incorporated by
reference to Exhibit 10.15 of the Company's Report on Form 10-K for the
year ended December 31, 2004)
*10.19 Amended Deferred Compensation Plan effective January 1, 2005
(Incorporated by reference to Exhibit 10.16 of the Company's Report on
Form 10-K for the year ended December 31, 2004)
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: April 26, 2005 /s/ Harland C. Stonecipher
-----------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: April 26, 2005 /s/ Randy Harp
-----------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: April 26, 2005 /s/ Steve Williamson
-----------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 31.1
CERTIFICATION
I, Harland C. Stonecipher, Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 26, 2005 /s/ Harland C. Stonecipher
-----------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 31.2
CERTIFICATION
I, Steve Williamson, Chief Financial Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 26, 2005 /s/ Steve Williamson
-----------------------------------------
Steve Williamson
Chief Financial Officer
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2005 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 26, 2005 /s/ Harland C. Stonecipher
-----------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2005 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 26, 2005 /s/ Steve Williamson
-----------------------------------------
Steve Williamson
Chief Financial Officer