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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended March 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period From _____ to _____
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Commission File Number: 001-09293
PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Pre-Paid Way, Ada, Oklahoma 74820-5813
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (580) 436-1234
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer | | Accelerated filer |X| Non-accelerated file | |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes | | No |X|
The number of shares outstanding of the registrant's common stock (excluding
4,852,179 shares held in treasury) as of April 21, 2006 was 15,055,981.
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PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended March 31, 2006
CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
a) Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and
December 31, 2005
b) Consolidated Statements of Income (Unaudited) for the three
months ended March 31, 2006 and 2005
c) Consolidated Statements of Comprehensive Income (Unaudited) for
the three months ended March 31, 2006 and 2005
d) Consolidated Statements of Cash Flows (Unaudited) for the three
months ended March 31, 2006 and 2005
e) Notes to Consolidated Financial Statements (Unaudited)
Item 1A. Risk Factors
Item 2. Management's Discussion and Analysis of Financial Condition And
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
March 31, December 31,
2006 2005
------------ ------------
Current assets: (Unaudited)
Cash and cash equivalents............................................................ $ 19,202 $ 33,957
Available-for-sale investments, at fair value........................................ 9,006 6,742
Membership fees receivable........................................................... 4,953 5,395
Inventories.......................................................................... 1,442 1,717
Deferred member and associate service costs.......................................... 17,219 16,210
Deferred income taxes................................................................ 4,740 4,894
Other assets......................................................................... 6,186 5,236
------------ ------------
Total current assets............................................................. 62,748 74,151
------------ ------------
Available-for-sale investments, at fair value.......................................... 22,067 19,213
Investments pledged.................................................................... 4,289 4,307
Property and equipment, net............................................................ 59,532 58,947
Deferred member and associate service costs............................................ 2,973 3,003
Other assets........................................................................... 5,423 5,244
------------ ------------
Total assets................................................................... $ 157,032 $ 164,865
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.................................................................. $ 11,819 $ 11,638
Deferred revenue and fees............................................................ 26,902 26,287
Current portion of capital leases payable............................................ 320 321
Current portion of notes payable..................................................... 11,312 15,250
Common stock dividends payable....................................................... - 4,643
Income taxes payable................................................................. 6,348 1,738
Accounts payable and accrued expenses................................................ 16,394 17,357
------------ ------------
Total current liabilities.......................................................... 73,095 77,234
Capital leases payable............................................................... 1,292 1,296
Notes payable........................................................................ 22,361 23,220
Deferred revenue and fees............................................................ 2,973 3,007
Deferred income taxes................................................................ 4,520 4,782
Other non-current liabilities........................................................ 4,226 3,932
------------ ------------
Total liabilities................................................................ 108,467 113,471
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 19,900 and
20,326 issued at March 31, 2006 and December 31, 2005, respectively................ 199 203
Retained earnings.................................................................... 147,279 149,832
Accumulated other comprehensive income............................................... 115 387
Treasury stock, at cost; 4,852 shares held at March 31, 2006 and
December 31, 2005, respectively.................................................... (99,028) (99,028)
------------ ------------
Total stockholders' equity....................................................... 48,565 51,394
------------ ------------
Total liabilities and stockholders' equity..................................... $ 157,032 $ 164,865
------------ ------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
----------------------
2006 2005
---------- ----------
Revenues:
Membership fees............................................. $ 101,740 $ 92,504
Associate services.......................................... 6,963 7,042
Other....................................................... 1,257 1,349
---------- ----------
109,960 100,895
---------- ----------
Costs and expenses:
Membership benefits......................................... 35,628 32,721
Commissions................................................. 31,885 31,677
Associate services and direct marketing..................... 7,302 9,096
General and administrative.................................. 12,467 11,099
Other, net.................................................. 2,723 2,641
---------- ----------
90,005 87,234
---------- ----------
Income before income taxes.................................... 19,955 13,661
Provision for income taxes.................................... 6,884 4,713
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Net income.................................................... $ 13,071 $ 8,948
---------- ----------
Basic earnings per common share............................... $ .85 $ .57
---------- ----------
Diluted earnings per common share............................. $ .84 $ .57
---------- ----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
2006 2005
---------- ----------
Net income..................................................... $ 13,071 $ 8,948
Other comprehensive loss, net of tax:
Foreign currency translation adjustment...................... (41) (15)
---------- ----------
Unrealized losses on investments:
Unrealized holding losses arising during period............ (204) (660)
Reclassification adjustment for realized losses (gains)
included in net income................................... (27) 2
---------- ----------
(231) (658)
---------- ----------
Other comprehensive loss, net of income taxes of ($148) and
$421) for the three months ended March 31, 2006 and 2005,
respectively................................................. (272) (673)
---------- ----------
Comprehensive income........................................... $ 12,799 $ 8,275
---------- ----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
---------------------------
2006 2005
----------- -------------
Cash flows from operating activities:
Net income....................................................................... $ 13,071 $ 8,948
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes............................................ (108) 112
Depreciation and amortization.................................................. 2,043 1,869
----------- -------------
Cash provided by operating activities before changes in assets and
liabilities................................................................ 15,006 10,929
Decrease in Membership income receivable....................................... 442 804
Decrease in inventories........................................................ 275 263
Decrease in income tax receivable.............................................. - 1,241
Increase in deferred member and associate service costs........................ (979) (1,828)
Increase in other assets....................................................... (1,129) (163)
Increase in accrued Membership benefits........................................ 181 436
Increase in deferred revenue and fees.......................................... 581 929
Increase in other non-current liabilities...................................... 294 366
Increase in income taxes payable............................................... 4,610 3,064
(Decrease) increase in accounts payable and accrued expenses and other......... (1,004) 1,168
----------- -------------
Net cash provided by operating activities........................................ 18,277 17,209
----------- -------------
Cash flows from investing activities:
Additions to property and equipment............................................ (2,628) (1,104)
Purchases of investments - available for sale.................................. (6,935) (2,889)
Maturities and sales of investments - available for sale....................... 1,604 1,106
----------- -------------
Net cash used in investing activities........................................ (7,959) (2,887)
----------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options........................................ 365 1,357
Tax benefit on exercise of stock options....................................... 172 209
Decrease in capital lease obligations.......................................... (5) (5)
Common stock dividends paid.................................................... (4,643) (7,796)
Repayments of debt............................................................. (4,797) (4,509)
Purchases of treasury stock.................................................... (16,165) (9,967)
----------- -------------
Net cash used in financing activities ....................................... (25,073) (20,711)
----------- -------------
Net decrease in cash and cash equivalents........................................ (14,755) (6,389)
Cash and cash equivalents at beginning of period................................. 33,957 25,972
----------- -------------
Cash and cash equivalents at end of period....................................... $ 19,202 $ 19,583
----------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amount capitalized.............................. $ 666 $ 594
----------- -------------
Cash paid for income taxes..................................................... $ 2,059 $ -
----------- -------------
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 2005 Annual Report on Form 10-K. Terms such as "we", "our" and
"us" are sometimes used as abbreviated references to Pre-Paid Legal Services,
Inc.
In our opinion, the accompanying unaudited financial statements as of March
31, 2006, and for the three month periods ended March 31, 2006 and 2005, reflect
adjustments (which were normal and recurring) which, in our opinion, are
necessary for a fair statement of our financial position and results of
operations of the interim periods presented. Results for the three month period
ended March 31, 2006 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.
Reclassifications
Certain amounts in the prior periods presented have been reclassified to
conform to the current period financial statement presentation. These
reclassifications have no effect on previously reported net income.
Note 2 - Contingencies
We and various executive officers have been named as defendants in a
putative securities class action originally filed in the United States District
Court for the Western District of Oklahoma in early 2001 seeking unspecified
damages on the basis of allegations that we issued false and misleading
financial information, primarily related to the method we used to account for
commission advance receivables from sales associates. On March 5, 2002, the
Court granted our motion to dismiss the complaint, with prejudice, and entered a
judgment in favor of the defendants. Plaintiffs thereafter filed a motion
requesting reconsideration of the dismissal which was denied. The plaintiffs
have appealed the judgment and the order denying their motion to reconsider the
judgment to the Tenth Circuit Court of Appeals. In August 2002 the lead
institutional plaintiff withdrew from the case, leaving two individual
plaintiffs as lead plaintiffs on behalf of the putative class. As of December
31, 2003, the briefing in the appeal had been completed. On January 14, 2004
oral argument was held in the appeal and as of April 21, 2006, a decision was
pending. We are unable to predict when a decision will be made on this appeal,
and the ultimate outcome of the case is not determinable.
Beginning in the second quarter of 2001 multiple lawsuits were filed
against us, certain officers, employees, sales associates and other defendants
in various Alabama and Mississippi state courts by current or former members
seeking actual and punitive damages for alleged breach of contract, fraud and
various other claims in connection with the sale of Memberships. During 2004,
there were at one time as many as 30 separate lawsuits involving approximately
285 plaintiffs in Alabama. As of April 21, 2006, as a result of dismissals,
summary judgments, or settlements for nominal amounts, there were no lawsuits
remaining in Alabama. The Alabama matters are therefore concluded and will not
appear in this note in the future. As of April 21, 2006, we were aware of 11
separate lawsuits involving approximately 400 plaintiffs in multiple counties in
Mississippi. Certain of the Mississippi lawsuits also name our former provider
attorney in Mississippi as a defendant. 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 Mississippi in August 2006, and seek varying amounts
of actual and punitive damages. We have tried three separate lawsuits in
Mississippi. 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. On August 16, 2005 the Circuit Judge in the February 15,
2005 trial overturned the jury's finding of fraud and fraudulent
misrepresentation on the grounds that the evidence was insufficient to support
those claims and reduced the damages awarded by the jury to a total of $525 for
four plaintiffs. 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 trial on that issue was held in
November 2005. The trial on that issue resulted in punitive damage verdicts
against us and against our chief executive officer in the collective total
amount of $9.9 million. As of April 21, 2006, our motions for post judgment
relief are pending with the trial court. Pre-Paid will seek appellate relief in
that case. 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. 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. On October 16, 2005 plaintiff Jana Weller died, and on December 20,
2005 we filed a Suggestion of Death Upon the Record with respect thereto. On
April 17, 2006 we filed a motion to dismiss the case based on the failure of
timely substitution of the parties and failure to prosecute. The ultimate
outcome of this case is not determinable.
On October 3, 2005 we received a Civil Investigative Demand from the
Commissioner of Consumer Protection of the State of Connecticut requesting
information relating to our memberships and commissions to associates in
Connecticut. As of April 21, 2006, we were in the process of responding to the
request. The ultimate outcome of this matter is not determinable.
On March 27, 2006 we received a complaint filed by a former provider
attorney law firm in Davidson County, Tennessee seeking compensatory and
punitive damages on the basis of allegations of breach of contract. The ultimate
outcome of this matter is not determinable.
Canadian taxing authorities are challenging portions of our commission and
general and administrative deductions for tax years 1999 - 2002 and have tax
assessments which aggregate $5.7 million. The Canadian taxing authorities
contend commission deductions should be matched with the membership revenue as
received, we contend these commissions are deductible when paid. Under Canadian
tax laws, our commission payments are treated as a prepaid expense. We base our
deduction of commission on the fact that all the services (the sale of the
membership) have been performed by the sales associate at the time of sale and,
therefore, this prepaid expense (the commission payments) is deductible when
paid. Also, the commission payment is taxable to the sales associate when paid
and each year we issue a T4 (Canadian 1099 equivalent) to sales associates for
the total commission payments made during that year. In addition, Canadian
taxing authorities have challenged our allocation of general and administrative
expenses to Canadian operations. We contend the allocation of general and
administrative expenses, based on the percentage of Canadian new memberships
written and the Canadian percentage memberships in force, is reasonable. At
March 31, 2006 we have accrued $472,000 for this assessment.
We are a defendant in various other legal proceedings that are routine and
incidental to our business. We will vigorously defend our interests in all
proceedings in which we are named as a defendant. We also receive periodic
complaints or requests for information from various state and federal agencies
relating to our business or the activities of our marketing force. We promptly
respond to any such matters and provide any information requested.
While the ultimate outcome of these proceedings is not determinable, we do
not currently anticipate that these contingencies will result in any material
adverse effect to our financial condition or results of operation, unless an
unexpected result occurs in one of the cases. The costs of the defense of these
various matters are reflected as a part of general and administrative expense,
or Membership benefits if fees relate to Membership issues, in the consolidated
statements of income. We have established an accrued liability we believe will
be sufficient to cover estimated damages in connection with various cases
(exclusive of ongoing defense costs which are expensed as incurred), which at
March 31, 2006 was $2.5 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 11
million shares during subsequent board meetings. At March 31, 2006, we had
purchased 9.9 million treasury shares under these authorizations for a total
consideration of $238.7 million, an average price of $24.20 per share. We
purchased and formally retired 448,426 shares of our common stock during the
2006 first quarter for $16.2 million, or an average price of $36.05 per share,
reducing our common stock by $4,484 and our retained earnings by $16.2 million.
See Note 6 below. Given the current interest rate environment, the nature of
other investments available and our expected cash flows, we believe that
purchasing treasury shares enhances shareholder value and may seek alternative
sources of financing to continue or accelerate the program. Any additional
treasury stock purchases will be made at prices that we consider attractive and
at such times that we believe will not unduly impact our liquidity.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
respective period. Diluted earnings per common share are computed by dividing
net income by the weighted average number of shares of common stock and dilutive
potential common shares outstanding during the respective period. The weighted
average number of common shares is increased by the number of dilutive potential
common shares issuable on the exercise of options less the number of common
shares assumed to have been purchased with the proceeds from the exercise of the
options pursuant to the treasury stock method; those purchases are assumed to
have been made at the average price of the common stock during the respective
period.
Three Months
Ended March 31,
------------------
Basic Earnings Per Share: 2006 2005
--------- --------
Earnings:
Net income........................................................... $ 13,071 $ 8,948
--------- --------
Shares:
Weighted average shares outstanding.................................. 15,430 15,563
--------- --------
Diluted Earnings Per Share:
Earnings:
Net income........................................................... $ 13,071 $ 8,948
--------- --------
Shares:
-------
Weighted average shares outstanding.................................. 15,430 15,563
Assumed exercise of options.......................................... 142 271
--------- --------
Weighted average number of shares, as adjusted....................... 15,572 15,834
--------- --------
Shares issued pursuant to option exercises........................... 22 55
--------- --------
Options to purchase shares of common stock are excluded from the
calculation of diluted earnings per share when their inclusion would have an
anti-dilutive effect on the calculation. No options were excluded for the three
months ended March 31, 2006 and 2005.
Note 5 - Recently Issued Accounting Pronouncements
In November 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") FAS 115-1 and FAS 124-1 "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
This FSP addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the measurement
of an impairment loss. This FSP also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The adoption of this FSP January 1, 2006 did
not have a material effect on our consolidated financial position and results of
operations.
In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20, and FASB Statement No. 3"
("SFAS 154"). SFAS 154 replaces APB Opinion No. 20, "Accounting Changes," and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements," and changes the requirements for the accounting for and reporting
of a change in accounting principle. This statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 31, 2005.
Note 6 - Notes Payable
Our real estate loan 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 $190,000 plus interest
with a balloon payment on September 30, 2008. The interest rate at March 31,
2006 was 6.89%. The loan is primarily collateralized by a first mortgage on the
87 acre home office complex, 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 real estate loan agreement
provides for financial covenants substantially the same as those described below
for the stock purchase loan.
Our $31.5 million stock purchase loan was fully funded in September 2004
with interest at the 30 day LIBOR rate plus 3%, adjusted monthly, and repayments
began in October 2004 with 24 monthly principal payments of $1.3 million ending
September 30, 2006. The interest rate at March 31, 2006 was 7.64%. 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 monthly 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. At March 31, 2006, we were restricted from paying
dividends or purchasing treasury shares in excess of $12.5 million pursuant to
these covenants. We were in compliance with the above covenants at March 31,
2006.
Our $11.5 million aircraft loan was fully funded in November 2005 with
interest payable monthly at the 30 day LIBOR rate plus 1.75%, adjusted monthly,
and requires monthly principal installments of $96,000 which began December 31,
2005 with the remaining balance payable in a final installment due November 30,
2012. The interest rate at March 31, 2006 was 6.39%. The loan is primarily
collateralized by the aircraft purchased. In addition to customary events of
default, if Harland C. Stonecipher ceases to be our Chief Executive Officer for
a period of 90 consecutive days an event of default will occur.
A schedule of outstanding balances as of March 31, 2006 is as follows:
Real estate loan........................... $ 14,667
Stock purchase loan........................ 7,875
Aircraft................................... 11,131
----------
Total notes payable........................ 33,673
Less: Current portion of notes payable..... (11,312)
----------
Long term portion.......................... $ 22,361
----------
A schedule of future maturities as of March 31, 2006 is as follows:
Repayment Schedule commencing
April 2006:
-------------------------------------------
Year 1..................................... $ 11,312
Year 2..................................... 3,437
Year 3..................................... 11,247
Year 4..................................... 1,152
Year 5..................................... 1,152
Thereafter................................. 5,373
Total notes payable........................ -----------
$ 33,673
-----------
Note 7 - Share-based Compensation
During the three months ended March 31, 2006, the stock option activity
under our stock option plans was as follows:
Weighted
Average
Remaining
Weighted Contractual Aggregate
Average Number of Term Intrinsic
Price Shares (In Years) Value
------------ ------------ ----------- ------------
Outstanding, January 1, 2006............... $ 20.94 507,167
Granted.................................. - -
Cancelled................................ 20.24 (783)
Exercised................................ 20.35 (27,378)
------------ ------------
Outstanding, March 31, 2006................ $ 20.98 479,006 1.31 $ 7,442
------------ ------------ ----------- ------------
Options exercisable as of March 31, 2006... $ 20.98 479,006 1.31 $ 7,442
------------ ------------ ----------- ------------
Other information pertaining to option activity during the three month
periods ended March 31, 2006 and 2005 was as follows:
March 31,2006 March 31, 2005
-------------- ---------------
Weighted average grant-date fair value of stock options granted.. Not applicable Not applicable
Total fair value of stock options vested......................... Not applicable $ 192
Total intrinsic value of stock options exercised................. $ 156 $ 526
Under our stock option plan, 1,346,252 shares of our Common Stock are
available for issuance. Options outstanding and exercisable were granted at a
stock option price which was not less than the fair market value of our Common
Stock on the date the option was granted and no option has a term in excess of
ten years. Additionally, options vested and became exercisable either on the
grant date or up to five years from the option grant date.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123R, Share-Based Payment ("SFAS No. 123R" or the "Statement"). This Statement
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), and supersedes Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25") and its related implementation
guidance. On January 1, 2006, we adopted the provisions of SFAS No. 123R using
the modified prospective method. SFAS No. 123R focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. The Statement requires entities to recognize compensation
expense for awards of equity instruments to employees based on the grant-date
fair value of those awards (with limited exceptions). SFAS No. 123R also
requires the benefits of tax deductions in excess of recognized compensation
expense to be reported as financing cash flows, rather than as an operating cash
flow as prescribed under the prior accounting rules. This requirement reduces
net operating cash flows and increases net financing cash flows in periods after
adoption. Total cash flow remains unchanged from what would have been reported
under prior accounting rules.
Prior to the adoption of SFAS No. 123R, we followed the intrinsic value
method in accordance with APB No. 25 to account for our employee stock options.
Accordingly, no compensation expense was recognized in connection with the
issuance of stock options under any of our stock option plans for periods ended
prior to January 1, 2006. The adoption of SFAS No. 123R primarily resulted in a
change in our method of recognizing the fair value of share-based compensation.
Our adoption of SFAS No. 123R did not result in our recording compensation
expense for employee stock options, since all options had vested, no
modifications were made to existing options and no new options were granted.
We do not expect to grant any employee options and therefore recognize any
share-based payments' expense from the issuance of employee stock options in
2006. The options outstanding at December 31, 2005 did not and will not impact
2006 consolidated results of operations and financial position since all
option-holders were fully vested in such options at December 31, 2005.
We used the modified prospective method at the date of adoption and
therefore results for the 2005 first quarter have not been restated. Had
compensation expense for employee stock options granted under our stock option
plans been determined based on fair value at the grant date consistent with SFAS
No. 123, our net income and earnings per share for the 2005 first quarter would
have been the pro forma amounts indicated below and were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Risk free interest rate 1.31%
Expected volatility 38.56%
Dividend yield 0.0%
Weighted average expected life 5.92 years
Quarter Ended
March 31, 2005
------------------
Net Income:
As reported................................................................... $ 8,948
Deduct:
Total share-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects:
Stock option plans............................................................ (117)
------------------
Pro forma net income................................................................... $ 8,831
------------------
Basic Earnings Per Common Share:
As reported................................................................... $ .57
------------------
Pro forma..................................................................... $ .57
------------------
Diluted Earnings Per Common Share:
As reported................................................................... $ .57
------------------
Pro forma..................................................................... $ .56
------------------
ITEM 1A. 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 14 and 15 of our 2005 Annual Report
on Form 10-K for a description of other risk factors. There has not been any
material changes in the risk factors disclosed in the Annual Report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
--------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Form 10-K for the year ended December 31, 2005, which
describes, among other things, our basic business model, critical accounting
policies, measures of Membership retention, and basic cash flow characteristics
of our business. The following tables set forth changes in the principal
categories of revenues and expenses and Membership and recruiting activity for
the first quarter of 2006 compared to the first quarter of 2005 and the fourth
quarter of 2005 (Table amounts in 000's). The sum of the percentages in the
tables may not total due to rounding.:
Three Months Ended March 31, 2006 Three % % Three Three
compared to Months Change Change Months Months
Three Months Ended March 31, 2005 Ended % of from from Ended % of Ended % of
and compared to March 31, Total Prior Sequential March 31, Total Dec 31, Total
Three Months Ended December 31, 2005 2006 Revenue Year Period 2005 Revenue 2005 Revenue
-------------------------------------- ---------- ------- ------- ---------- --------- -------- --------- --------
Revenues:
Membership fees.................... $101,740 92.5 10.0 1.1 $92,504 91.7 $100,649 92.1
Associate services................. 6,963 6.3 (1.1) (6.0) 7,042 7.0 7,411 6.8
Other.............................. 1,257 1.1 (6.8) 2.7 1,349 1.3 1,224 1.1
---------- ------- ----- ----- --------- -------- ---------- -------
109,960 100.0 9.0 .6 100,895 100.0 109,284 100.0
---------- ------- ----- ----- --------- -------- ---------- -------
Costs and expenses:
Membership benefits................ 35,628 32.4 8.9 (.5) 32,721 32.4 35,800 32.8
Commissions........................ 31,885 29.0 .7 (5.6) 31,677 31.4 33,760 30.9
Associate services and direct
marketing........................ 7,302 6.6 (19.7) 27.9 9,096 9.0 5,707 5.2
General and administrative......... 12,467 11.3 12.3 (8.1) 11,099 11.0 13,564 12.4
Other, net......................... 2,723 2.5 3.1 (12.1) 2,641 2.6 3,099 2.8
---------- ------- ------ ------ --------- -------- ---------- -------
90,005 81.9 3.2 (2.1) 87,234 86.5 91,930 84.1
---------- ------- ----- ----- --------- -------- ---------- -------
Income before income taxes........... 19,955 18.1 46.1 15.0 13,661 13.5 17,354 15.9
Provision for income taxes........... 6,884 6.3 46.1 15.0 4,713 4.7 5,987 5.5
Net income........................... ---------- ------- ----- ------ --------- -------- ---------- -------
$13,071 11.9 46.1 15.0 $ 8,948 8.9 $11,367 10.4
---------- ------- ----- ----- --------- -------- ---------- -------
Three Months Ended
New Memberships: 3/31/2006 12/31/2005 3/31/2005
---------------- --------- ---------- ---------
New legal service membership sales....................... 158,426 147,764 173,348
New "stand-alone" IDT membership sales................... 6,800 9,430 7,531
---------- ---------- ----------
Total new membership sales...................... 165,226 157,194 180,879
---------- ---------- ----------
New "add-on" IDT membership sales........................ 100,405 102,052 103,777
Average Annual Membership fee............................ $327.43 $325.34 $323.43
Active Memberships:
-------------------
Active legal service memberships at end of period........ 1,488,308 1,490,847 1,453,702
Active "stand-alone" IDT memberships at end of period
(see note below)..................................... 54,453 51,942 32,400
---------- ---------- ----------
Total active memberships at end of period....... 1,542,761 1,542,789 1,486,102
---------- ---------- ----------
Active "add-on" IDT memberships at end of period
(see note below)..................................... 485,246 461,094 337,868
New Sales Associates:
---------------------
New sales associates recruited........................... 49,776 52,168 52,944
Average enrollment fee paid by new sales associates...... $49.82 $49.90 $68.68
Average Membership fee in force:
--------------------------------
Average Annual Membership fee............................ $288.92 $286.60 $277.54
Note - reflects 6,414 net transfers from "add-on" status to "stand-alone" status
during the quarter ended March 31, 2006.
Identity Theft Shield ("IDT") memberships sold in conjunction with new
legal plan memberships or "added-on" to existing legal plan memberships sell for
$9.95 per month and are not counted as "new" memberships but do increase the
average premium and related direct expenses (membership benefits and
commissions) of our membership base, while "stand alone" Identity Theft Shield
memberships are not attached to a legal plan membership and sell for $12.95 per
month.
Recently Issued Accounting Pronouncements
In November 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") FAS 115-1 and FAS 124-1 "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
This FSP addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the measurement
of an impairment loss. This FSP also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The adoption of this FSP January 1, 2006 did
not have a material effect on our consolidated financial position and results of
operations.
In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20, and FASB Statement No. 3"
("SFAS 154"). SFAS 154 replaces APB Opinion No. 20, "Accounting Changes," and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements," and changes the requirements for the accounting for and reporting
of a change in accounting principle. This statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 31, 2005.
Results of Operations - First Quarter of 2006 compared to First Quarter of 2005
-------------------------------------------------------------------------------
Net income increased 46% for the first quarter of 2006 to $13.1 million
from $8.9 million for the prior year's first quarter primarily due to an
increase in membership fees of $9.2 million and a decrease in associate services
and direct marketing expense of $1.8 million and lower commissions as a
percentage of membership revenues (31% vs. 34%). Diluted earnings per share
increased 47% to 84 cents per share from 57 cents per share for the prior year's
comparable quarter due to the 46% increase in net income and an approximate 2%
decrease in the weighted average number of outstanding shares.
Membership fees totaled $101.7 million during the 2006 first quarter
compared to $92.5 million for 2005, 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 decreased 8.6% during the
three months ended March 31, 2006 to 165,226 from 180,879 during the comparable
period of 2005. At March 31, 2006, there were 1,542,761 active Memberships in
force compared to 1,486,102 at March 31, 2005, an increase of 4%. Additionally,
the average annual fee per Membership has increased from $278 for all
Memberships in force at March 31, 2005 to $289 for all Memberships in force at
March 31, 2006, primarily as a result of a larger number of Identity Theft
Shield memberships.
Associate services revenue decreased by approximately $79,000 from the
first quarter of 2005 compared to the comparable period of 2006 with a 6%
decrease in new associates recruited. Total new associates enrolled during the
first quarter of 2006 were 49,776 compared to 52,944 for the same period of
2005. Average enrollment fees paid by new sales associates during the 2006 first
quarter were $50 compared to $69 for the comparable period of 2005 due to
specialized reduced rate $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 $4.2 million for the first quarter of
2005 to $2.7 million during the comparable period of 2006. 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 48% to $3.2 million during the first quarter of 2006 compared to
$2.1 million for the comparable period of 2005.
Other revenue decreased $92,000 from $1.3 million for the 2005 first
quarter to $1.3 million for the 2006 first quarter.
Primarily as a result of the increase in Membership fees, total revenues
increased to $110.0 million for the three months ended March 31, 2006 from
$100.9 million during the comparable period of 2005, an increase of 9%.
Membership benefits totaled $35.6 million for the three months ended March
31, 2006 compared to $32.7 million for the comparable period of 2005, and
represented 35% of Membership fees for both 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 1% to $31.9 million for the three
months ended March 31, 2006 compared to $31.7 million for the comparable period
of 2005, and represented 31% 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 March 31, 2006 totaled 165,226, a
9% decrease from the 180,879 sold during the comparable period of 2005.
Commissions to associates per new membership sold were $193 per membership for
the three months ended March 31, 2006 compared to $175 for the comparable period
of 2005. 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 decreased to $7.3 million
for the three months ended March 31, 2006 from $9.1 million for the comparable
period of 2005. The decrease was primarily a result of decreased costs for
incentive trips and bonuses and decreased costs for materials sent to new
associates due to the reduction in the number of new associates enrolled during
the quarter. We offer the Player's Club incentive program to provide additional
incentives to our associates as a reward for consistent, quality business.
Associates can earn the right to receive additional monthly bonuses by meeting
monthly qualification requirements for the entire calendar year and maintaining
certain personal retention rates for the Memberships sold during the calendar
year. These expenses also include the costs of providing associate services and
marketing expenses.
General and administrative expenses during the three months ended March 31,
2006 and 2005 were $12.5 million and $11.1 million, respectively, and
represented 12% of Membership fees for both periods. The 2006 first quarter
reflects increased state tax expense due to the lack of net operating
loss-carry-forwards used in the prior periods.
Other expenses, net, which include depreciation and amortization, interest
expense and premium taxes reduced by interest income, was $2.7 million for the
three months ended March 31, 2006 compared to $2.6 million for the 2005
comparable period. Depreciation increased slightly to $2.0 million for the first
quarter of 2006 from $1.9 million for the comparable period of 2005. Interest
expense increased to $678,000 during the 2006 period from $607,000 during the
comparable period of 2005 as a result of higher average interest rate. Premium
taxes decreased from $556,000 for the three months ended March 31, 2005 to
$389,000 for the comparable period of 2006, primarily as a result of a change in
regulatory requirements in certain jurisdictions where we pay premium taxes.
Interest income decreased $4,000 to $387,000 for the three months ended March
31, 2006 from $391,000 for the comparable period of 2005, primarily due to less
cash invested due to the stock repurchase program.
We have recorded a provision for income taxes of $6.9 million and $4.7
million (34.5% of pretax income) for both periods.
Results of Operations - First Quarter of 2006 compared to Fourth Quarter of 2005
--------------------------------------------------------------------------------
First quarter 2006 membership fees increased 1% to $101.7 million from
$100.6 million for the fourth quarter of 2005. Associate services revenues
decreased during the 2006 first quarter by approximately $448,000 to $7.0
million from $7.4 million for the 2005 fourth quarter and associate services and
direct marketing expenses increased by $1.6 million during the same period.
Membership benefits totaled $35.6 million in the first quarter of 2006 compared
to $35.8 million for the 2005 fourth quarter and represented 35% and 36%,
respectively, of membership fees for the two periods. Commissions to associates
totaled $31.9 million in the 2006 first quarter compared to $33.8 million for
the 2005 fourth quarter and represented 31% and 34%, respectively, of membership
fees for the two periods. General and administrative expenses decreased during
the 2006 first quarter to $12.5 million compared to $13.6 million for the 2005
fourth quarter and represented 12% and 13%, respectively, of membership fees for
the two periods.
Liquidity and Capital Resources
-------------------------------
General
Consolidated net cash provided from operating activities for the first
three months of 2006 increased $1.0 million to $18.4 million from $17.4 million
for the 2005 period, although cash provided from operating activities before
changes in working capital items increased $4.0 million from $11.1 million to
$15.1 million. The increase of $4.0 million resulted primarily from the increase
in net income of $4.1 million.
Consolidated net cash used in investing activities was $8.0 million for the
first three months of 2006 compared to $2.9 million for the comparable period of
2005. This $5.1 million change in investing activities resulted from a $4.0
million increase in investment purchases and a $1.5 million increase in
additions to property and equipment, partially offset by the $498,000 increase
in the maturities and sales of investments.
Net cash used in financing activities during the first three months of 2006
was $25.2 million compared to $20.9 million for the comparable period of 2005.
This $4.3 million change was primarily comprised of the $1.0 million decrease in
proceeds from exercise of stock options; the $3.2 million decrease in common
stock dividends paid offset by the $6.2 million increase in purchases of
treasury stock.
We purchased and formally retired 448,426 shares of our common stock during
the 2006 first quarter for $16.2 million, or an average price of $36.05 per
share, reducing our common stock by $4,484 and our retained earnings by $16.2
million. We had a consolidated working capital deficit of $10.3 million at March
31, 2006, an increase of $7.3 million compared to a consolidated working capital
deficit of $3.1 million at December 31, 2005. The increase was primarily due to
a $14.8 million decrease in cash and cash equivalents and an increase in income
taxes payable of $4.6 million partially offset by an increase of $2.3 million in
the current portion of available-for-sale investments, a decrease of $3.9
million in the current portion of notes payable, a decrease in common stock
dividends payable of $4.6 million and a $1.0 million increase in deferred member
and associate service costs. The $10.3 million working capital deficit at March
31, 2006 would have been a $664,000 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
our financial obligations in the short term or the long term.
At March 31, 2006 we reported $50.3 million in cash and cash equivalents
and unpledged investments compared to $59.9 million at December 31, 2005. Our
investments consist of common stocks, investment grade (rated Baa or higher)
bonds primarily issued by corporations, the United States Treasury, federal
agencies, federally sponsored agencies and enterprises as well as
mortgage-backed securities and state and municipal tax-exempt bonds.
We generally advance significant commissions at the time a Membership is
sold. During the three months ended March 31, 2006, we advanced commissions, net
of chargebacks, of $31.2 million on new Membership sales compared to $34.2
million for the same period of 2005. Since approximately 95% of Membership fees
are collected on a monthly basis, a significant cash flow deficit is created on
a per Membership basis at the time a Membership is sold. Since there are no
further commissions paid on a Membership during the advance period, we typically
derive significant positive cash flow from the Membership over its remaining
life.
We expense advance commissions ratably over the first month of the related
Membership. As a result of this accounting policy, our commission expenses are
all recognized over the first month of a Membership and there is no commission
expense recognized for the same Membership during the remainder of the advance
period. We track our unearned advance commission balances outstanding in order
to ensure the advance commissions are recovered before any renewal commissions
are paid and for internal purposes of analyzing our commission advance program.
While not recorded as an asset, unearned advance commission balances from
associates as of March 31, 2006, and related activity for the three month period
then ended, were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)............................... $ 195,792
Advance commission payments, net................................................. 31,153
Earned commissions applied....................................................... (31,800)
Advance commission payment write-offs............................................ (932)
-------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 194,213
Estimated unrecoverable advance commission payments (1).......................... (35,676)
Ending unearned advance commission payments, net (1)............................. -------------
$ 158,537
-------------
(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 $41.9 million.
As such, at March 31, 2006 future commission payments and related expense should
be reduced as unearned advance commission payments of $117 million are
recovered. Commissions are earned by the associate as Membership premiums are
earned by us, usually on a monthly basis. For additional information concerning
these commission advances, see our Annual report on Form 10-K under the heading
Commissions to Associates in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
We believe that we have significant ability to finance expected future
growth in Membership sales based on our recurring cash flow and existing amount
of cash and cash equivalents and unpledged investments at March 31, 2006 of
$50.3 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.
Our real estate loan 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 $190,000 plus interest
with a balloon payment on September 30, 2008. The interest rate at March 31,
2006 was 6.89%. The loan is primarily collateralized by a first mortgage on the
87 acre home office complex, 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 real estate loan agreement
provides for financial covenants substantially the same as those described below
for the stock purchase loan.
Our $31.5 million stock purchase loan was fully funded in September 2004
with interest at the 30 day LIBOR rate plus 3%, adjusted monthly, and repayments
began in October 2004 with 24 monthly principal payments of $1.3 million ending
September 30, 2006. The interest rate at March 31, 2006 was 7.64%. 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 monthly 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. At March 31, 2006, we were restricted from paying
dividends or purchasing treasury shares in excess of $12.5 million pursuant to
these covenants. We were in compliance with the above covenants at March 31,
2006.
Our $11.5 million aircraft loan was fully funded in November 2005 with
interest payable monthly at the 30 day LIBOR rate plus 1.75%, adjusted monthly,
and requires monthly principal installments of $96,000 which began December 31,
2005 with the remaining balance payable in a final installment due November 30,
2012. The interest rate at March 31, 2006 was 6.39%. The loan is primarily
collateralized by the aircraft purchased. In addition to customary events of
default, if Harland C. Stonecipher ceases to be our Chief Executive Officer for
a period of 90 consecutive days an event of default will occur.
Parent Company Funding and Dividends
Although we are the operating entity in many jurisdictions, our
subsidiaries serve as operating companies in various states that regulate
Memberships as insurance or specialized legal expense products. The most
significant of these wholly owned subsidiaries are Pre-Paid Legal Casualty, Inc.
("PPLCI") and Pre-Paid Legal Services Inc. of Florida ("PPLSIF"). The ability of
PPLCI and PPLSIF to provide funds to us is subject to a number of restrictions
under various insurance laws in the jurisdictions in which PPLCI and PPLSIF
conduct business, including limitations on the amount of dividends and
management fees that may be paid and requirements to maintain specified levels
of capital and reserves. In addition PPLCI will be required to maintain its
stockholders' equity at levels sufficient to satisfy various state or provincial
regulatory requirements, the most restrictive of which is currently $3 million.
Additional capital requirements of PPLCI or PPLSIF, or any of our regulated
subsidiaries, will be funded by us in the form of capital contributions or
surplus debentures. At March 31, 2006, PPLSIF did not have funds available for
payment of substantial dividends without the prior approval of the insurance
commissioner. At March 31, 2006 PPLCI had approximately $7.4 million available
for payment of an ordinary dividend which was paid to us in April 2006.
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, 2005.
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, 2005. There were no significant
changes in the application of critical accounting policies or estimates during
the first three months of 2006. 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 dividends of $0.50 per
share during 2004 and $0.60 per share during 2005 and have previously announced
that we will continue share repurchases, pay a dividend, or both, depending on
our financial condition, available resources and market conditions, as well as
compliance with 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 1,137,656 shares. We also
continue to evaluate additional sources of financing that may enable us to
accelerate the repurchase program at prices we believe are attractive.
Forward-Looking Statements
-------------------------
All statements in this report other than purely historical information,
including but not limited to, statements relating to our future plans and
objectives, expected operating results and the assumptions on which such
forward-looking statements are based, constitute "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and are based on our historical operating
trends and financial condition as of March 31, 2006 and other information
currently available to management. We caution that the Forward-Looking
Statements are subject to all the risks and uncertainties incident to our
business, including but not limited to risks described in Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2005. Moreover, we may make
acquisitions or dispositions of assets or businesses, enter into new marketing
arrangements or enter into financing transactions. None of these can be
predicted with certainty and, accordingly, are not taken into consideration in
any of the Forward-Looking Statements made herein. For all of the foregoing
reasons, actual results may vary materially from the Forward-Looking Statements.
We assume no obligation to update the Forward-Looking Statements to reflect
events or circumstances occurring after the date of the statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
Our consolidated balance sheets include a certain amount of assets and
liabilities whose fair values are subject to market risk. Due to our significant
investment in fixed-maturity investments, interest rate risk represents the
largest market risk factor affecting our consolidated financial position.
Increases and decreases in prevailing interest rates generally translate into
decreases and increases in fair values of those instruments. Additionally, fair
values of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment options, relative values of
alternative investments, liquidity of the instrument and other general market
conditions.
As of March 31, 2006, 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:
Estimated fair value
(In 000's) in interest rate hypothetical change
Fair Value (bp = basis points) in interest rate
---------- ------------------- --------------------
Fixed-maturity investments at March 31, 2006 (1)....... $ 32,684 100 bp increase $ 30,653
200 bp increase 28,840
50 bp decrease 33,786
100 bp decrease 34,887
Fixed-maturity investments at December 31, 2005 (1).... $ 27,541 100 bp increase $ 26,129
200 bp increase 24,809
50 bp decrease 27,723
100 bp decrease 28,613
-------------------
(1) Excluding short-term investments with a fair value of $2.6 million at March
31, 2006 and December 31, 2005.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 2006 would reduce the
estimated fair value of our fixed-maturity investments by approximately
$3.8 million at that date. At December 31, 2005, an instantaneous 200 basis
point increase in market interest rates would have reduced the estimated
fair value of our fixed-maturity investments by approximately $2.7 million
at that date. The definitive extent of the interest rate risk is not
quantifiable or predictable due to the variability of future interest
rates, but we do not believe such risk is material.
We primarily manage our exposure to interest rate risk by purchasing
investments that can be readily liquidated should the interest rate environment
begin to significantly change.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates. As of
March 31, 2006, we had $33.7 million in notes payable outstanding at interest
rates indexed to the 30 day LIBOR rate that exposes us to the risk of increased
interest costs if interest rates rise. Assuming a 100 basis point increase in
interest rates on the floating rate debt, annual interest expense would increase
by approximately $337,000. As of March 31, 2006, we had not entered into any
interest rate swap agreements with respect to the term loans or our floating
rate municipal bonds.
Foreign Currency Exchange Rate Risk
Although we are exposed to foreign currency exchange rate risk inherent in
revenues, net income and assets and liabilities denominated in Canadian dollars,
the potential change in foreign currency exchange rates is not a substantial
risk, as approximately 1% of our revenues are derived outside of the United
States.
ITEM 4. CONTROLS AND PROCEDURES
----------------------------------
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of March 31, 2006, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the
quarter ended March 31, 2006, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
------------------
See Note 2 of the Notes to Consolidated Financial Statements included in
Part I, Item 1 of this report for information with respect to legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
------------------------------------------------------------
Issuer Purchases of Equity Securities
The following table provides information about our purchases of stock in
the open market during the first quarter of 2006.
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Total Number Part of Publicly Be Purchased Under
of Shares Average Price Announced Plans or the Plans or
Period Purchased Paid per Share Programs Programs (1)
---------------------- --------------- ---------------- -------------------- ---------------------
January 2006.......... - $ - - 586,082
February 2006......... 42,171 36.91 42,171 543,911
March 2006............ 406,255 35.96 406,255 137,656
--------------- ---------------- --------------------
Totals................ 448,426 $ 36.05 448,426
--------------- ---------------- --------------------
(1) We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock
in the open market. The Board of Directors has subsequently from time to
time increased such authorization from 500,000 shares to 11,000,000 shares.
The most recent authorization was for 1,000,000 additional shares on April
13, 2006 and there has been no time limit set for completion of the
repurchase program. In addition, we completed a tender offer for 980,518
shares in September 2004.
See Part I, Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operation-Liquidity and Capital Resources" for a description of
loan covenants that limit our ability to repurchase shares and pay dividends.
ITEM 6. EXHIBITS.
---------
(a) Exhibits:
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (Incorporated by reference to Exhibit 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 Amendmentto 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, LC 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)
10.24 Purchase Agreement dated August 19, 2005 between us and Learjet, Inc.,
with Addendum. (Incorporated by reference to Exhibit 10.1 of the
Company's Report on Form 8-K dated August 19, 2005)
31.1 Certification of Harland C. Stonecipher, Chairman, Chief Executive
Officer and President, Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934
31.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1 Certification of Harland C. Stonecipher, Chairman, Chief Executive
Officer and President, Pursuant to 18 U.S.C. Section 1350
32.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant to
18 U.S.C. Section 1350
--------------------
* Constitutes a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
-----------------------------
(Registrant)
Date: April 24, 2006 /s/ Harland C. Stonecipher
----------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: April 24, 2006 /s/ Randy Harp
----------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: April 24, 2006 /s/ Steve Williamson
----------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 31.1
CERTIFICATION
-------------
I, Harland C. Stonecipher, Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: April 24, 2006 /s/ Harland C. Stonecipher
-----------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 31.2
CERTIFICATION
-------------
I, Steve Williamson, Chief Financial Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13 (a)-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 24, 2006 /s/ Steve Williamson
----------------------------------------
Steve Williamson
Chief Financial Officer
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 24, 2006 /s/ Harland C. Stonecipher
----------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive
Officer and President
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 24, 2006 /s/ Steve Williamson
----------------------------------------
Steve Williamson
Chief Financial Officer