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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 June 30, 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 74820-5813
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (580) 436-1234
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is 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
July 22, 2005 was 15,443,553.
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PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended June 30, 2005
CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
a) Consolidated Balance Sheets
as of June 30, 2005 (Unaudited) and December 31, 2004
b) Consolidated Statements of Income (Unaudited)
for the three months and six months ended June 30, 2005 and 2004
c) Consolidated Statements of Comprehensive Income (Unaudited)
for the three months and six months ended June 30, 2005 and 2004
d) Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
Signatures
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ITEM 1. FINANCIAL STATEMENTS
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
June 30, December 31,
2005 2004
------------- -------------
Current assets: (Unaudited)
Cash and cash equivalents........................................................ $ 22,275 $ 25,972
Available-for-sale investments, at fair value.................................... 169 804
Membership fees receivable....................................................... 4,884 4,961
Inventories...................................................................... 1,352 1,623
Refundable income taxes.......................................................... 732 1,241
Deferred member and associate service costs...................................... 16,765 15,420
Deferred income taxes............................................................ 5,084 4,829
------------- -------------
Total current assets......................................................... 51,261 54,850
Available-for-sale investments, at fair value...................................... 19,482 25,455
Investments pledged................................................................ 4,257 4,381
Property and equipment, net........................................................ 50,356 51,232
Deferred member and associate service costs........................................ 2,939 2,580
Other assets....................................................................... 8,528 7,566
------------- -------------
Total assets............................................................... $ 136,823 $ 146,064
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.............................................................. $ 11,243 $ 10,340
Deferred revenue and fees........................................................ 26,484 24,585
Current portion of capital leases payable........................................ 320 338
Current portion of notes payable................................................. 18,498 18,036
Common stock dividends payable................................................... - 7,796
Accounts payable and accrued expenses............................................ 14,621 15,451
------------- -------------
Total current liabilities...................................................... 71,166 76,546
Capital leases payable........................................................... 1,307 1,618
Notes payable.................................................................... 19,807 27,050
Deferred revenue and fees........................................................ 3,030 2,361
Deferred income taxes ........................................................... 3,691 4,248
Other non-current liabilities.................................................... 3,410 2,794
------------- -------------
Total liabilities............................................................ 102,411 114,617
------------- -------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 20,270 and
20,464 issued at June 30, 2005 and December 31, 2004, respectively............. 203 205
Retained earnings................................................................ 132,761 129,290
Accumulated other comprehensive income........................................... 476 980
Treasury stock, at cost; 4,852 shares held at
June 30, 2005 and December 31, 2004............................................ (99,028) (99,028)
------------- -------------
Total stockholders' equity................................................... 34,412 31,447
------------- -------------
Total liabilities and stockholders' equity................................. $ 136,823 $ 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 Six Months Ended
June 30, June 30,
---------------------- -----------------------
2005 2004 2005 2004
---------- ---------- --------- -----------
Revenues:
Membership fees............................................. $ 97,093 $ 88,120 $ 189,597 $ 174,870
Associate services.......................................... 7,175 5,918 14,217 12,475
Other....................................................... 1,351 1,391 2,700 2,693
---------- ---------- --------- -----------
105,619 95,429 206,514 190,038
---------- ---------- --------- -----------
Costs and expenses:
Membership benefits......................................... 33,710 30,449 66,431 59,735
Commissions................................................. 38,820 29,591 70,497 58,863
Associate services and direct marketing..................... 7,963 6,704 17,059 14,307
General and administrative.................................. 12,337 10,904 23,436 20,950
Other, net.................................................. 2,326 2,505 4,967 4,690
---------- ---------- --------- -----------
95,156 80,153 182,390 158,545
---------- ---------- --------- -----------
Income before income taxes.................................... 10,463 15,276 24,124 31,493
Provision for income taxes.................................... 3,610 5,270 8,323 10,865
---------- ---------- --------- -----------
Net income.................................................... $ 6,853 $ 10,006 $ 15,801 $ 20,628
---------- ---------- --------- -----------
Basic earnings per common share............................... $ .45 $ .61 $ 1.02 $ 1.24
---------- ---------- --------- -----------
Diluted earnings per common share............................. $ .44 $ .60 $ 1.00 $ 1.24
---------- ---------- --------- -----------
Dividends declared per common share........................... $ .30 $ - $ .30 $ -
---------- ---------- --------- -----------
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 Six Months Ended
June 30, June 30,
---------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- -----------
Net income..................................................... $ 6,853 $ 10,006 $ 15,801 $ 20,628
---------- ----------- ---------- -----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... (1) (21) (16) (41)
---------- ----------- ---------- -----------
Unrealized (losses) gains on investments:
Unrealized holding (losses) gains arising during period.... 163 (310) (497) (88)
Reclassification adjustment for realized losses (gains)
included in net income................................... 7 (12) 9 (54)
---------- ----------- ---------- -----------
170 (322) (488) (142)
---------- ----------- --------- -----------
Other comprehensive income (loss), net of income taxes of $110
and ($196) for the three months ended and ($311) and ($99) for
the six months ended June 30, 2005 and 2004,
respectively................................................. 169 (343) (504) (183)
---------- ----------- --------- -----------
Comprehensive income........................................... $ 7,022 $ 9,663 $ 15,297 $ 20,445
---------- ----------- ---------- -----------
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)
Six Months Ended
June 30,
------------------------
2005 2004
---------- -----------
Cash flows from operating activities:
Net income....................................................................... $ 15,801 $ 20,628
Adjustments to reconcile net income to net cash provided
by operating activities:
(Benefit) provision for deferred income taxes.................................. (549) 31
Depreciation and amortization.................................................. 3,695 3,904
Tax benefit on exercise of stock options....................................... 659 137
Contribution to ESOP........................................................... - 231
---------- -----------
Cash provided by operating activities before changes in assets and liabilities 19,606 24,931
Decrease (increase) in Membership income receivable............................ 77 (32)
Decrease (increase) in inventories............................................. 271 (429)
Decrease in income tax receivable.............................................. 509 331
(Increase) decrease in deferred member and associate service costs............. (1,704) 717
Increase in other assets....................................................... (962) (2,320)
Increase in accrued Membership benefits........................................ 903 480
Increase (decrease) in deferred revenue and fees............................... 2,568 (598)
Increase in other non-current liabilities...................................... 616 -
Decrease in accounts payable and accrued expenses and other.................... (846) (2,239)
---------- -----------
Net cash provided by operating activities.................................... 21,038 20,841
---------- -----------
Cash flows from investing activities:
Additions to property and equipment............................................ (2,819) (5,191)
Purchases of investments - available for sale.................................. (3,569) (6,661)
Maturities and sales of investments - available for sale....................... 9,550 5,067
---------- -----------
Net cash provided by (used in) investing activities.......................... 3,162 (6,785)
---------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options........................................ 3,246 681
Proceeds from issuance of debt................................................. 2,314 -
Decrease in capital lease obligations.......................................... (329) (7)
Common stock dividends paid.................................................... (12,412) -
Repayments of debt............................................................. (9,095) (9,477)
Purchases of treasury stock.................................................... (11,621) (9,195)
---------- -----------
Net cash used in financing activities ....................................... (27,897) (17,998)
---------- -----------
Net decrease in cash and cash equivalents........................................ (3,697) (3,942)
Cash and cash equivalents at beginning of period................................. 25,972 21,459
---------- -----------
Cash and cash equivalents at end of period....................................... $ 22,275 $ 17,517
---------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest......................................................... $ 1,212 $ 776
---------- -----------
Cash paid for income taxes..................................................... $ 7,615 $ 10,300
---------- -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Except for per share amounts, dollar amounts in tables are in thousands
unless otherwise indicated)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been omitted. The
accompanying consolidated financial statements and notes thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in our 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 June
30, 2005, and for the three month and six month periods ended June 30, 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 and six month periods ended June 30, 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 2005 periods.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2005 2004 2005 2004
--------- --------- -------- ----------
Net income, as reported................................... $ 6,853 $ 10,006 $ 15,801 $ 20,628
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects................ - - - (441)
--------- --------- -------- ----------
Pro forma net income...................................... $ 6,853 $ 10,006 $ 15,801 $ 20,187
--------- --------- -------- ----------
Earnings per share:
Basic - as reported................................... $ .45 $ .61 $ 1.02 $ 1.24
Basic - pro forma..................................... $ .45 $ .61 $ 1.02 $ 1.21
Diluted - as reported................................. $ .44 $ .60 $ 1.00 $ 1.24
Diluted - pro forma................................... $ .44 $ .60 $ 1.00 $ 1.21
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 July 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 July 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 July 22, 2005, we were
aware of 15 separate lawsuits involving approximately 425 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 July 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 September 2005, and in Mississippi in
November and December 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 and third trials in Mississippi resulted in
insubstantial plaintiffs' verdicts on February 15, 2005 and May 9, 2005
respectively. As of July 22, 2005, post trial motions are pending on both
plaintiffs' verdicts. On July 18, 2005 the Circuit Judge in the May 9, 2005
trial entered an order granting plaintiff's motion to reconsider the submission
of the issue of punitive damages to the jury, and set the case for trial on that
issue in November 2005. Pre-Paid is seeking post trial and appellate relief from
the final judgment in that case and the recent order. 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 (the claims of the other two plaintiffs
had been dismissed with prejudice upon our waiver of costs). The motion to
vacate and/or for new trial was denied and during further proceedings the claims
of the remaining three plaintiffs were dismissed with prejudice on June 30, 2005
upon our waiver of costs. This matter is therefore concluded and will not appear
on this note in the future.
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 June 30, 2005 was $2.7 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 June 30, 2005, we had
purchased 9.4 million treasury shares under these authorizations for a total
consideration of $222.5 million, an average price of $23.64 per share. We
purchased and formally retired 46,100 shares of our common stock during the 2005
second quarter for $1.7 million, or an average price of $35.87, reducing our
common stock by $461 and our retained earnings by $1.7 million. See Note 6
below. Given the current interest rate environment, the nature of other
investments available and our expected cash flows, we believe that purchasing
treasury shares enhances shareholder value and may seek alternative sources of
financing to continue or accelerate the program. Any additional treasury stock
purchases will be made at prices that we consider attractive and at such times
that we believe will not unduly impact our liquidity.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the 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 Six Months
Ended June 30, Ended June 30,
------------------ ------------------
Basic Earnings Per Share: 2005 2004 2005 2004
-------- --------- -------- ---------
Earnings:
Net income........................................................... $ 6,853 $ 10,006 $ 15,801 $ 20,628
-------- --------- -------- ---------
Shares:
Weighted average shares outstanding.................................. 15,397 16,485 15,480 16,619
-------- --------- -------- ---------
Diluted Earnings Per Share:
Earnings:
Net income........................................................... $ 6,853 $ 10,006 $ 15,801 $ 20,628
-------- --------- -------- ---------
Shares:
Weighted average shares outstanding.................................. 15,397 16,485 15,480 16,619
Assumed exercise of options.......................................... 273 73 275 73
-------- --------- -------- ---------
Weighted average number of shares, as adjusted....................... 15,670 16,558 15,755 16,692
-------- --------- -------- ---------
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 557,000 shares for
the three months and 597,000 shares for the six months ended June 30, 2004,
respectively, with an average exercise price of $27.84 and $27.57, respectively,
were excluded from the calculation of diluted earnings per share for the
respective periods. No options were excluded for the three months and six months
ended June 30, 2005.
Note 5 - Recent Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment"
("FAS No. 123R"). FAS No. 123R requires companies to recognize compensation
expense in an amount equal to the fair value of the share-based payment
(including share options, restricted share plans, performance-based awards,
share appreciation rights, and employee share purchase plans) issued to
employees. FAS No. 123R applies to all transactions involving issuance of equity
by a company in exchange for goods and services, including employee services.
Registrants were initially required to adopt FAS No. 123R as of the beginning of
the first interim period that begins after June 15, 2005. On April 14, 2005,
during our 2005 second quarter, the Securities and Exchange Commission adopted a
new rule that allows companies to implement FAS No. 123R at the beginning of
their next fiscal year, instead of the next reporting period that begins after
June 15, 2005. We will adopt FAS No. 123R at the beginning of our 2006 fiscal
year. We estimate the adoption of FAS No. 123R, using the modified prospective
method, which results in no restatement of the Company's previously issued
annual consolidated financial statements, will not have a material impact on the
consolidated financial position, results of operations or cash flows of the
Company.
Note 6 - 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 June 30, 2005 was
5.39%. 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 June 30, 2005 was 6.14%. The monthly principal
payment will be $1.3 million compared to the monthly payment on the prior loan
of $1.4 million. During May 2005 we amended the loan agreement further. The
second 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
65% (increased from 50%) of net income and lowered the debt service coverage
ratio from 125% to 110%.
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 110%; (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 sixty-five percent (65%) 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 June 30, 2005.
In April 2005, we entered into a loan with a commercial lender providing
for financing of our existing aircraft. The aircraft loan provided for funding
of $2.3 million at the 30 day LIBOR rate plus 2.25%, adjusted monthly, and
repayments began in May 2005 with monthly principal payments of $38,560 plus
interest with a balloon payment on April 30, 2010. The loan is primarily
collateralized by a first lien and security interest on the two corporate
aircraft. The interest rate at June 30, 2005 was 5.39%.
A schedule of outstanding balances as of June 30, 2005 is as follows:
Real estate line of credit......................... $ 16,381
Stock purchase line of credit...................... 19,688
Aircraft........................................... 2,236
--------------
Total notes payable................................ 38,305
Less: Current portion of notes payable............. (18,498)
--------------
Long term portion.................................. $ 19,807
--------------
A schedule of future maturities as of June 30, 2005 is as follows:
Repayment Schedule commencing July 2005:
Year 1............................................. $ 18,498
Year 2............................................. 6,686
Year 3............................................. 2,748
Year 4............................................. 9,987
Year 5............................................. 386
--------------
Total notes payable................................ $ 38,305
--------------
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 second quarter of 2005 compared to the second quarter of 2004 and the first
quarter of 2005 and for the six months ended June 30, 2005 compared to the
comparable period of 2004 (Amounts in 000's):
Three Months Ended June 30, 2005 Three % % Three Three
compared to Months Change Change Months Months
Three Months Ended June 30, 2004 Ended % of from from Ended % of Ended % of
and compared to June 30, Total Prior Sequential June 30, Total March 31, Total
Three Months Ended March 31, 2005 2005 Revenue Year Period 2004 Revenue 2005 Revenue
------------------------------------- ---------- ------- ----- -------- --------- -------- ---------- -------
Revenues:
Membership fees.................... $97,093 91.9 10.2 5.0 $ 88,120 92.3 $92,504 91.7
Associate services................. 7,175 6.8 21.2 1.9 5,918 6.2 7,042 7.0
Other.............................. 1,351 1.3 (2.9) .2 1,391 1.5 1,349 1.3
---------- ------- ----- -------- --------- -------- ---------- -------
105,619 100.0 10.7 4.7 95,429 100.0 100,895 100.0
---------- ------- ----- -------- --------- -------- ---------- -------
Costs and expenses:
Membership benefits................ 33,710 31.9 10.7 3.0 30,449 31.9 32,721 32.4
Commissions........................ 38,820 36.8 31.2 22.6 29,591 31.0 31,677 31.4
Associate services and direct
marketing........................ 7,963 7.5 18.8 (12.5) 6,704 7.0 9,096 9.0
General and administrative......... 12,337 11.7 13.1 11.2 10,904 11.4 11,099 11.0
Other, net......................... 2,326 2.2 (7.2) (11.9) 2,505 2.6 2,641 2.6
---------- ------- ----- -------- --------- -------- ---------- -------
95,156 90.1 18.7 9.1 80,153 84.0 87,234 86.5
---------- ------- ----- -------- --------- -------- ---------- -------
Income before income taxes........... 10,463 9.9 (31.5) (23.4) 15,276 16.0 13,661 13.5
Provision for income taxes........... 3,610 3.4 (31.5) (23.4) 5,270 5.5 4,713 4.7
---------- ------- ----- -------- --------- -------- ---------- -------
Net income........................... $ 6,853 6.5 (31.5) (23.4) $ 10,006 10.5 $ 8,948 8.9
---------- ------- ----- -------- --------- -------- ---------- -------
Six % Six
Months Change Months
Six Months Ended June 30, 2005 Ended % of from Ended % of
compared to June 30, Total Prior June 30, Total
Six Months Ended June 30, 2004: 2005 Revenue Year 2004 Revenue
------------------------------------- ---------- ------- ------- ---------- --------
Revenues:
Membership fees.................... $189,597 91.8 8.4 $174,870 92.0
Associate services................. 14,217 6.9 14.0 12,475 6.6
Other.............................. 2,700 1.3 .3 2,693 1.4
---------- ------- ------- ---------- --------
206,514 100.0 8.7 190,038 100.0
---------- ------- ------- ---------- --------
Costs and expenses:
Membership benefits................ 66,431 32.2 11.2 59,735 31.4
Commissions........................ 70,497 34.1 19.8 58,863 31.0
Associate services and direct
marketing.......................... 17,059 8.3 19.2 14,307 7.5
General and administrative......... 23,436 11.3 11.9 20,950 11.0
Other, net......................... 4,967 2.4 5.9 4,690 2.5
---------- ------- ------- ---------- --------
182,390 88.3 15.0 158,545 83.4
---------- ------- ------- ---------- --------
Income before income taxes........... 24,124 11.7 (23.4) 31,493 16.6
Provision for income taxes........... 8,323 4.0 (23.4) 10,865 5.7
---------- ------- ------- ---------- --------
Net income........................... $15,801 7.7 (23.4) $20,628 10.9
---------- ------- ------- ---------- --------
Three Months Ended
New Memberships: 6/30/2005 3/31/2005 6/30/2004
---------------- --------- --------- ---------
New legal service membership sales.......................... 174,202 173,348 137,390
New "stand-alone" IDT membership sales...................... 8,588 7,531 5,443
--------- --------- ---------
Total new membership sales.......................... 182,790 180,879 142,833
--------- --------- ---------
New "add-on" IDT membership sales........................... 116,723 103,777 77,802
Average Annual Membership fee............................... $341.81 $331.48 $324.41
Active Memberships:
Active legal service memberships at end of period........... 1,490,276 1,453,702 1,413,666
Active "stand-alone" IDT memberships at end of period (see
note below)............................................. 39,071 32,400 17,575
--------- --------- ---------
Total active memberships at end of period.......... 1,529,347 1,486,102 1,431,241
--------- --------- ---------
Active "add-on" IDT memberships at end of period (see note
below).................................................. 397,749 337,868 201,713
New Sales Associates:
New sales associates recruited.............................. 69,790 52,944 13,733
Average enrollment fee paid by new sales associates......... $51.45 $68.68 $229.54
Average Membership fee in force:
Average Annual Membership fee............................... $281.91 $277.54 $269.25
Note - reflects 5,345 net transfers from "add-on" status to "stand-alone" status
during the quarter
Identity Theft Shield ("IDT") memberships sold in conjunction with new
legal plan memberships or "added-on" to existing legal plan memberships sell for
$9.95 per month and are not counted as "new" memberships but do increase the
average premium and related direct expenses (membership benefits and
commissions) of our membership base, while "stand alone" Identity Theft Shield
memberships are not attached to a legal plan membership and sell for $12.95 per
month.
Recent Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment"
("FAS No. 123R"). FAS No. 123R requires companies to recognize compensation
expense in an amount equal to the fair value of the share-based payment
(including share options, restricted share plans, performance-based awards,
share appreciation rights, and employee share purchase plans) issued to
employees. FAS No. 123R applies to all transactions involving issuance of equity
by a company in exchange for goods and services, including employee services.
Registrants were initially required to adopt FAS No. 123R as of the beginning of
the first interim period that begins after June 15, 2005. On April 14, 2005,
during our 2005 second quarter, the Securities and Exchange Commission adopted a
new rule that allows companies to implement FAS No. 123R at the beginning of
their next fiscal year, instead of the next reporting period that begins after
June 15, 2005. We will adopt FAS No. 123R at the beginning of our 2006 fiscal
year. We estimate the adoption of FAS No. 123R, using the modified prospective
method, which results in no restatement of the Company's previously issued
annual consolidated financial statements, will not have a material impact on the
consolidated financial position, results of operations or cash flows of the
Company.
Results of Operations - Second Quarter of 2005 compared to
----------------------------------------------------------
Second Quarter of 2004
----------------------
Net income decreased 32% for the second quarter of 2005 to $6.9 million
from $10.0 million for the prior year's second quarter primarily due to an
increase in commission expense of $9.2 million caused by more new memberships
sold during the 2005 second quarter, an increase in Membership benefits expense
of $3.3 million and an increase in general and administrative expenses of $1.4
million partially offset by a $9.0 million increase in Membership fees. Diluted
earnings per share decreased 27% to 44 cents per share from 60 cents per share
for the prior year's comparable quarter due to the 32% decrease in net income
partially offset by an approximate 5% decrease in the weighted average number of
outstanding shares.
Membership fees totaled $97.1 million during the 2005 second quarter
compared to $88.1 million for 2004, an increase of 10%. 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 28% during the
three months ended June 30, 2005 to 182,790 from 142,833 during the comparable
period of 2004. At June 30, 2005, there were 1,529,347 active Memberships in
force compared to 1,431,241 at June 30, 2004, an increase of 7%. Additionally,
the average annual fee per Membership has increased from $269 for all
Memberships in force at June 30, 2004 to $282 for all Memberships in force at
June 30, 2005, primarily as a result of a larger number of Identity Theft Shield
memberships.
Associate services revenue increased 21% from $5.9 million for the second
three months of 2004 to $7.2 million during the comparable period of 2005 with a
408% increase in new associates recruited. Total new associates enrolled during
the second quarter of 2005 were 69,790 compared to 13,733 for the same period of
2004. Average enrollment fees paid by new sales associates during the 2005
second quarter was $51 compared to $230 for the comparable period of 2004 due to
specialized $49 enrollment programs aimed at varying market niches. We expect to
continue some form of reduced enrollment programs for the remainder of the year.
Associate fees decreased from $3.5 million for the second three months of 2004
to $3.3 million during the comparable period of 2005. 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. The eService
fees increased 32% to $2.5 million during the second quarter of 2005 compared to
$1.9 million for the comparable period of 2004.
Other revenue remained unchanged at $1.4 million for both the 2005 second
quarter and the comparable period of 2004.
Primarily as a result of the increase in Membership fees, total revenues
increased to $105.6 million for the three months ended June 30, 2005 from $95.4
million during the comparable period of 2004, an increase of 11%.
Membership benefits totaled $33.7 million for the three months ended June
30, 2005 compared to $30.4 million for the comparable period of 2004, and
represented 35% of Membership fees for both the 2005 and 2004 periods. 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 31% to $38.8 million for the three
months ended June 30, 2005 compared to $29.6 million for the comparable period
of 2004, and represented 40% and 34% of Membership fees for the respective
periods. Commissions to associates are primarily dependent on the number of new
memberships sold, including add-on membership sales, during a period. New
memberships sold during the three months ended June 30, 2005 totaled 182,790, a
28% increase from the 142,833 sold during the comparable period of 2004.
Commissions to associates per new membership sold were $212 per membership for
the three months ended June 30, 2005 compared to $207 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 our compensation plan
or reduce the amount of chargebacks collected from our associates as we have
from time to time, the commission cost per new Membership will increase
accordingly.
Associate services and direct marketing expenses increased to $8.0 million
for the three months ended June 30, 2005 from $6.7 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 June 30,
2005 and 2004 were $12.3 million and $10.9 million, respectively, and
represented 13% and 12% of Membership fees for the respective periods. The 2005
second quarter reflects increased accounting fees and consulting fees related to
our Sarbanes-Oxley compliance efforts and increased expenses related to bank
service charges due to the increases in legal plans and Identity Theft Shield
Memberships and increased employee costs. 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 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 $2.3 million for the
three months ended June 30, 2005 compared to $2.5 million for the 2004
comparable period. Depreciation decreased slightly to $1.8 million for the
second quarter of 2005 from $2.0 million for the comparable period of 2004.
Interest expense increased to $633,000 during the 2005 period from $406,000
during the comparable period of 2004 as a result of higher indebtedness and a
higher average interest rate. Premium taxes increased from $481,000 for the
three months ended June 30, 2004 to $499,000 for the comparable period of 2005,
primarily as a result of increases in Membership fees in certain jurisdictions
where we pay premium taxes. Interest income increased $39,000 to $378,000 for
the three months ended June 30, 2005 from $339,000 for the comparable period of
2004, primarily due to higher average interest rates.
We have recorded a provision for income taxes of $3.6 million and $5.3
million (34.5% of pretax income) for the second quarter of 2005 and 2004,
respectively.
Results of Operations - Second Quarter of 2005 compared to the First Quarter of
--------------------------------------------------------------------------------
2005
----
Second quarter 2005 membership fees increased 5% to $97.1 million from
$92.5 million for first quarter of 2005. Associate services revenues increased
slightly during the 2005 second quarter by approximately $133,000 to $7.2
million from $7.0 million for the 2005 first quarter and associate services and
direct marketing expenses decreased by $1.1 million during the same period.
Membership benefits totaled $33.7 million in the second quarter of 2005 compared
to $32.7 million for the first quarter and represented 35% of membership fees
for both periods. Commissions to associates totaled $38.8 million in the second
quarter of 2005 compared to $31.7 million for the first quarter and represented
40% and 34% of membership fees for the respective periods. General and
administrative expenses increased during the 2005 second quarter to $12.3
million compared to $11.1 million for the first quarter of 2005 and represented
13% and 12% of membership fees, respectively, for each period.
Results of Operations - First six months of 2005 compared to first six months of
--------------------------------------------------------------------------------
2004
----
Net income decreased 23% for the first half of 2005 to $15.8 million from
$20.6 million for the prior year's comparable period primarily due to an
increase in commission expense of $11.6 million caused by more new memberships
sold during the 2005 period, an increase in Membership benefits expense of $6.7
million and an increase in general and administrative expenses of $2.5 million
partially offset by a $14.7 million increase in Membership fees. Diluted
earnings per share decreased 19% to $1.00 per share from $1.24 per share for the
prior year's comparable six month period due to the 23% decrease in net income
partially offset by an approximate 6% decrease in the weighted average number of
outstanding shares.
Membership fees totaled $189.6 million during the first half of 2005
compared to $174.9 million for the comparable period of 2004, 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.
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 19% during the six months ended June
30, 2005 to 363,669 from 305,665 during the comparable period of 2004. At June
30, 2005, there were 1,529,347 active Memberships in force compared to 1,431,241
at June 30, 2004, an increase of 7%. Additionally, the average annual fee per
Membership has increased from $269 for all Memberships in force at June 30, 2004
to $282 for all Memberships in force at June 30, 2005, primarily as a result of
a larger number of Identity Theft Shield memberships.
Associate services revenue increased 14% from $12.5 million for the first
six months of 2004 to $14.2 million during the comparable period of 2005
primarily as a result of approximately 331% more new associates recruited offset
by a significantly lower enrollment fee. Total new associates enrolled during
the first six months of 2005 were 122,734 compared to 28,507 for the same period
of 2004. Although overall recruiting was 331% higher, associate fees decreased
6% from $3.5 million for the first six months of 2004 to $3.3 million during the
comparable period of 2005. We expect to continue some form of reduced enrollment
programs for the remainder of the year. 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 largely offset by the direct and indirect cost to the Company of
training (including training bonuses paid), providing associate services and
other direct marketing expenses. The eService fees increased 27% to $4.7 million
during the first half of 2005 compared to $3.7 million for the comparable period
of 2004.
Other revenue remained unchanged at $2.7 million for both the 2005 and 2004
six-month periods ending June 30.
Primarily as a result of the increase in Membership fees, total revenues
increased to $206.5 million for the six months ended June 30, 2005 from $190.0
million during the comparable period of 2004, an increase of 9%.
Membership benefits totaled $66.4 million for the six months ended June 30,
2005 compared to $59.7 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) 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 sell significant
numbers of Identity Theft Shield Memberships.
Commissions to associates increased 20% to $70.5 million for the six months
ended June 30, 2005 compared to $58.9 million for the comparable period of 2004,
and represented 37% and 34% 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 six months ended June 30, 2005 totaled
363,669, a 19% increase from the 305,665 sold during the comparable period of
2004. Commissions to associates per new membership sold were $194 per membership
for the six months ended June 30, 2005 compared to $193 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 and the amount of any charge-backs (recoupment of previous commission
advances) that are deducted from amounts that would otherwise be paid to the
various sales associates that are compensated for the membership sale. Should we
add additional commissions to our compensation plan or reduce the amount of
chargebacks collected from its associates as it has from time to time, the
commission cost per new Membership will increase accordingly.
Associate services and direct marketing expenses increased to $17.1 million
for the six months ended June 30, 2005 from $14.3 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 six months ended June 30,
2005 and 2004 were $23.4 million and $21.0 million, respectively, and
represented 12% of Membership fees for both periods. The increases in general
and administrative expense reflect higher levels of expenses related to
accounting fees and consulting fees related to our Sarbanes-Oxley compliance
efforts and increased expenses related to bank service charges due to the
increases in legal plans and Identity Theft Shield Memberships and increased
employee costs. 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
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 $5.0 million for the
six months ended June 30, 2005 compared to $4.7 million for the 2004 comparable
period. Depreciation decreased slightly to $3.7 million for the first half of
2005 from $3.9 million for the comparable period of 2004. Interest expense
increased to $1.2 million during the 2005 period from $868,000 during the
comparable period of 2004 as a result of higher indebtedness and a higher
average interest rate. Premium taxes increased from $851,000 for the six months
ended June 30, 2004 to $1.1 million for the comparable period of 2005, primarily
as a result of increases in Membership fees in certain jurisdictions where we
pay premium taxes. Interest income decreased $44,000 to $769,000 for the six
months ended June 30, 2005 from $813,000 for the comparable period of 2004,
primarily due to lower average balance of investments.
We have recorded a provision for income taxes of $8.3 million (34.5% of
pretax income) for the first six months of 2005 compared to $10.9 million (34.5%
of pretax income) for the same period of 2004.
Liquidity and Capital Resources
-------------------------------
General
Consolidated net cash provided from operating activities for the first six
months of 2005 remained relatively unchanged at $21.0 million compared to $20.8
million for the 2004 period, although cash provided from operating activities
before changes in working capital items decreased $5.3 million from $24.9
million to $19.6 million. The decrease of $5.3 million resulted primarily from
the decrease in net income of $4.8 million.
Consolidated net cash provided by investing activities was $3.1 million for
the first six months of 2005 compared to net cash used in investing activities
of $6.8 million for the comparable period of 2004. This $9.9 million change in
investing activities resulted from the $2.3 million decrease in additions to
property and equipment, a $3.1 million decrease in investment purchases and a
$4.5 million increase in the maturities and sales of investments.
Net cash used in financing activities during the first six months of 2005
was $27.9 million compared to $18.0 million for the comparable period of 2004.
This $9.9 million change was primarily comprised of the $12.4 million increase
in common stock dividends paid and the $2.4 million increase in purchases of
treasury stock partially offset by a $2.6 million increase in proceeds from
exercise of stock options and a $2.3 million increase in proceeds from issuance
of debt.
We purchased and formally retired 335,000 shares of our common stock during
the first half of 2005 for $11.6 million, or an average price of $34.69,
reducing our common stock by $3,350 and our retained earnings by $11.6 million.
We had a consolidated working capital deficit of $19.9 million at June 30, 2005,
a decrease of $1.8 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 and a $1.3 million increase
in deferred member and associate service costs partially offset by a $3.7
million decrease in cash and cash equivalents and a $2.8 million increase in
deferred revenue and fees. The $19.9 million working capital deficit at June 30,
2005 would have been a $10.2 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 June 30, 2005 we reported $41.9 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 six months ended June 30, 2005, we advanced commissions, net of
chargebacks, of $71.8 million on new Membership sales compared to $52.4 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 June 30, 2005, and related activity for the six month period
then ended, were:
(Amounts in 000's)
Beginning unearned advance commission payments (1)................ $ 183,060
Advance commission payments, net.................................. 71,761
Earned commissions applied........................................ (63,616)
Advance commission payment write-offs............................. (1,170)
-------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)............................ 190,035
Estimated unrecoverable advance commission payments (1)........... (29,957)
-------------
Ending unearned advance commission payments, net (1).............. $ 160,078
-------------
(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 $36.5 million.
As such, at June 30, 2005 future commission payments and related expense should
be reduced as unearned advance commission payments of $124 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 June 30, 2005 of $41.9
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 June 30, 2005 was
5.39%. 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 June 30, 2005 was 6.14%. The monthly principal
payment will be $1.3 million compared to the monthly payment on the prior loan
of $1.4 million. During May 2005 we amended the loan agreement further. The
second 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
65% (increased from 50%) of net income and lowered the debt service coverage
ratio from 125% to 110%.
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 110%; (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 sixty-five percent (65%) 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 June 30, 2005.
In April 2005, we entered into a loan with a commercial lender providing
for financing of our existing aircraft. The aircraft loan provided for funding
of $2.3 million at the 30 day LIBOR rate plus 2.25%, adjusted monthly, and
repayments began in May 2005 with monthly principal payments of $38,560 plus
interest with a balloon payment on April 30, 2010. The loan is primarily
collateralized by a first lien and security interest on the two corporate
aircraft. The interest rate at June 30, 2005 was 5.39%.
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 June 30, 2005, neither PPLCI nor PPLSIF had funds
available for payment of substantial dividends without the prior approval of the
insurance commissioner. In April 2005, PPLCI and another of our wholly owned
subsidiaries, Legal Service Plans of Virginia, Inc., paid ordinary dividends to
us of $4.1 million and $3.7 million, respectively.
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 six 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 587,182 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 June 30, 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 June 30, 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 bypothetical
Fair value (bp = basis points) change in interest rate
----------- ------------------- -----------------------
rate
Fixed-maturity investments at June 30, 2005 (1)........ $ 21,014 100 bp increase $ 19,778
200 bp increase 18,754
50 bp decrease 21,375
100 bp decrease 21,817
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 June
30, 2005 and December 31, 2004.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at June 30, 2005 would reduce the
estimated fair value of our fixed-maturity investments by approximately
$2.3 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
June 30, 2005, we had $38.3 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 $383,000. As of June 30, 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.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting
during the quarter ended June 30, 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. We have substantially completed the
documentation of application controls and controls on the commission expense
application. During the third quarter we began evaluation, testing and
remediation of a substantial number of the application controls. We expect to
complete our assessment of internal control over financial reporting during the
fourth quarter of 2005.
Nothing has come to the attention of management, as of July 25, 2005, 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 June 30, 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 second 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 (2)
---------------------- ------------- -------------- ------------------- ---------------------
April 2005............ 6,200 $ 34.40 6,200 627,082
May 2005.............. 161,162(1) 35.95 39,900 587,182
June 2005............. - - - 587,182
-------------- ---------------- --------------------
Total................. 167,362 $ 35.89 46,100
-------------- ---------------- --------------------
-------------
(1) Includes 121,262 shares previously owned by optionees which were
surrendered in conjunction with employee option exercises.
(2) 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
The 2005 Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held on May 23, 2005. Voting on Proposals 1 through 4 was
concluded at such meeting but voting on Proposal 5 was extended until June 22,
2005. The following matters were submitted to a vote of the Company's
shareholders at the Annual Meeting.
Proposal 1 - Election of Directors.
The results of the election for the director were as follows:
Abstentions and
Votes For Votes Withheld
---------- ---------------
Martin H. Belsky 13,421,902 89,008
Harland C. Stonecipher 13,441,043 69,867
The number of members of the Board of Directors is divided into three
classes equal in size, with the term of office of one class expiring each
year. The new terms of service of Mr. Stonecipher and Belsky will expire in
2008. The terms of the other four directors of the Company did not expire
at the Annual Meeting. The names of such other directors and the year of
expiration of their respective terms are as follows: John W. Hail - 2006;
Thomas W. Smith - 2006; Peter K. Grunebaum - 2007 and Orland G. Aldridge -
2007.
Proposal 2 - Ratify the selection of Grant Thornton LLP as our independent
registered public accounting firm.
Votes For Votes Against Abstentions
---------- ------------- -----------
13,456,118 43,353 11,439
Proposal 3 - Amend our Restated Certificate of Incorporation to authorize the
Board to effect a reverse stock split immediately followed by a forward
stock split to reduce number of odd-lot holders
Votes For Votes Against Abstentions
---------- ------------- -----------
10,999,101 71,833 14,679
Proposal 4 - Approve voting rights for control shares owned, or to be acquired,
directly or indirectly, by Thomas W. Smith and certain of his associates.
Votes For Votes Against Abstentions
--------- ------------- -----------
5,490,040 356,712 53,880
Proposal 5 - Amend our Restated Certificate of Incorporation to eliminate
certain anti-takeover provisions by repealing the previous Article Eighth
which requires the affirmative vote of 80% of the voting power of the
outstanding stock for certain transactions.
Votes For Votes Against Abstentions
---------- ------------- -----------
12,413,377 208,585 133,673
ITEM 6. EXHIBITS.
---------
(a) Exhibits:
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of the Company, as amended (Incorporated by
reference to Exhibit 3.1 of the Company's Report on Form 8-K dated June 27, 2005)
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.1 of the
Company's Report on Form 10-Q for the period ended June 30, 2003)
*10.1 Employment Agreement effective January 1, 1993 between the Company and Harland C. Stonecipher
(Incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1992)
*10.2 Agreements between Shirley Stonecipher, New York Life Insurance Company and the Company regarding
life insurance policy covering Harland C. Stonecipher (Incorporated by reference to Exhibit
10.21 of the Company's Annual Report on Form 10-K for the year ended December 31, 1985)
*10.3 Amendment dated January 1, 1993 to Split Dollar Agreement between Shirley Stonecipher and the
Company regarding life insurance policy covering Harland C. Stonecipher (Incorporated by reference
to Exhibit 10.3 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1992)
*10.4 Form of New Business Generation Agreement Between the Company and Harland C. Stonecipher (Incorporated
by reference to Exhibit 10.22 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1986)
*10.5 Amendment to New Business Generation Agreement between the Company and Harland C. Stonecipher
effective January, 1990 (Incorporated by reference to Exhibit 10.12 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1992)
*10.6 Amendment No. 2 to New Business Generation Agreement between the Company and Harland C. Stonecipher
effective January, 1990 (Incorporated by reference to Exhibit 10.13 of the Company's Annual Report
on Form 10-K for the year ended December 31, 2002)
10.7 Stock Option Plan, as amended effective May 2003 (Incorporated by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2004)
10.8 Loan agreement dated June 11, 2002 between Bank of Oklahoma, N.A. and the Company (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the six-months ended
June 30, 2002)
10.9 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)
10.20 Promissory Note dated April 30, 2005 between us and Bank of Oklahoma N.A. (Incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 8-K dated May 3, 2005)
10.21 Loan Agreement dated April 30, 2005 between us and Bank of Oklahoma, N.A. (Incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 8-K dated May 3, 2005)
10.22 Security Agreement dated April 30, 2005 between us and Bank of Oklahoma, N.A. (Incorporated by
reference to Exhibit 10.3 of the Company's Report on Form 8-K dated May 3, 2005)
10.23 Second Amendment to Loan Agreement dated May 6, 2005 among us, Bank of Oklahoma, N.A., Comerica
Bank and First United Bank & Trust. (Incorporated by reference to Exhibit 10.4 of the Company's
Report on Form 8-K dated May 3, 2005)
31.1 Certification of Harland C. Stonecipher, Chairman, Chief Executive Officer and President, Pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934, 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: July 25, 2005 /s/ Harland C. Stonecipher
--------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: July 25, 2005 /s/ Randy Harp
--------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: July 25, 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: July 25, 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: July 25, 2005 /s/ Steve Williamson
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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 June 30, 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: July 25, 2005 /s/ Harland C. Stonecipher
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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 June 30, 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: July 25, 2005 /s/ Steve Williamson
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Steve Williamson
Chief Financial Officer