UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
Amendment No. 2
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(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _____________ to ____________
Commission File Number: 1-9293
PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Pre-Paid Way
Ada, Oklahoma 74820
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (580) 436-1234
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered under Section 12 (g) of the Exchange Act: None
Indicate by check mark if registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes [ ] No |X|
Indicate by check mark if registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No |X|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
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|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked prices of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. As of June 30, 2006 -$323,799,000
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: As of February 16, 2007 there
were 13,622,131 shares of Common Stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of our definitive proxy statement for its 2007 annual meeting of
shareholders are incorporated into Part III of this Form 10-K by reference.
EXPLANATORY NOTE
This Amendment No. 2 to Form 10-K is being filed solely to correct the form of
the opinion of Grant Thornton on the financial statements of the Employee Stock
Ownership Plan ("ESOP") included in Exhibit 99.1 to conform to the standards of
the Public Company Accounting Oversight Board (United States). There are no
changes in the Company's or ESOP's previously reported financial condition,
results of operations or cash flows. For convenience of reference, we are filing
Exhibit 99.1 in its entirety. We are also filing a currently dated accountant's
consent.
Pursuant to the rules of the SEC, currently dated certifications from our CEO
and CFO required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are
filed herewith.
The undersigned registrant hereby amends the following items, financial
statements, exhibits of other portions of its Annual Report on Form 10-K
pursuant to Section 13 of the Securities and Exchange Act of 1934 for the fiscal
year ended December 31, 2006, as set forth below and in the pages attached
hereto.
Part IV, Item 15 - "Exhibits, Financial Statement Schedules" is amended (i)
to include as Exhibit 99.1 the attached financial information relating to The
Employee Stock Option Ownership and Thrift Plan ("Plan"), as required by Form
11-K, for the fiscal year of the Plan ended December 31, 2006, which is filed as
an exhibit pursuant to Rule 15d-21 under the Securities Exchange Act of 1934,
and (ii) to include as Exhibit 23.2 the consent of Grant Thornton LLP,
respectively relating to the use of their reports which are included as part of
Exhibit 99.1.
The full text of Item 15 and the Exhibit Index, as amended, referred to
therein are as set forth below.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
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(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Consolidated Financial Statements
and Consolidated Financial Statement Schedule set forth on page 41 of
this report.
(2) Exhibits: For a list of the documents filed as exhibits to this
report, see the Exhibit Index following the signatures to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: February 5, 2008 By: /s/ Randy Harp
------------------------------------------
Randy Harp
Chief Operating Officer
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of our Annual
Report on Form 10-K for the year ended December 31, 2004)
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.1 of our 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 our 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 our 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 our 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 our 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 our 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 our 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 our 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 our 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 our 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 our 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 our 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 our Report on Form 10-Q for the period ended
September 30, 2003)
10.13 Aircraft purchase agreement dated December 9, 2004 by and between S&S Aviation, LLC and the Company
(Incorporated by reference to Exhibit 10.13 of our Annual Report on Form 10-K for the year ended
December 31, 2004)
10.14 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 our
Annual Report on Form 10-K for the year ended December 31, 2004)
10.15 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 our Annual Report on Form 10-K for the year ended
December 31, 2004)
*10.16 Amended Deferred Compensation Plan effective January 1, 2005 (Incorporated by reference to Exhibit 10.16 of our
Annual Report on Form 10-K for the year ended December 31, 2004)
21.1 List of Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
23.2** Consent of Grant Thornton LLP relating to report concerning plan financial information included as part of
Exhibit 99.1
31.1** Certification of Harland C. Stonecipher, Chairman and Chief Executive Officer, 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 and Chief Executive Officer, 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
99.1** Financial information relating to the Pre-Paid Legal Services, Inc. Employee Stock Ownership and Thrift Plan,
as required by Form 11-K for the fiscal year of the plan ended December 31, 2006
--------------------
* Constitutes a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
** Filed herewith. All other Exhibits have been previously filed.
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated June 26, 2007, accompanying the financial
statements and supplemental schedules of the Pre-Paid Legal Services, Inc.
Employee Stock Ownership and Thrift Plan for the year ended December 31, 2006,
included in this Amendment No. 2 on Form 10-K/A of Pre-Paid Legal Services, Inc.
for the year ended December 31, 2006. We hereby consent to the incorporation by
reference of said report in the Registration Statement of Pre-Paid Legal
Services, Inc. on Form S-8 (File No. 33-82144, effective July 28, 1994).
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 5, 2008
EXHIBIT 31.1
CERTIFICATION
I, Harland C. Stonecipher, Chief Executive Officer of the registrant, certify
that:
1. I have reviewed this annual report on Form 10-K 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 and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-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;
5. The registrant's other certifying officer 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;
(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.
Dated: February 5, 2008 /s/ Harland C. Stonecipher
---------------------------
Harland C. Stonecipher
Chief Executive Officer
EXHIBIT 31.2
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CERTIFICATION
I, Steve Williamson, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this annual report on Form 10-K 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 and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-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;
5. The registrant's other certifying officer 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;
(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.
Dated: February 5, 2008 /s/ Steve Williamson
---------------------------
Steve Williamson
Chief Financial Officer
Exhibit 32.1
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CERTIFICATION PURSUANT TO 18 U.S.C. ss. 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 Annual
Report on Form 10-K for the year ended December 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: February 5, 2008 /s/ Harland C. Stonecipher
-----------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive Officer and
President
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. ss. 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 Annual
Report on Form 10-K for the year ended December 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: February 5, 2008 /s/ Steve Williamson
------------------------------
Steve Williamson
Chief Financial Officer
EXHIBIT 99.1
Financial information relating to the Pre-Paid Legal Services, Inc.
Employee Stock Ownership and Thrift Plan, as required by Form 11-K
for the fiscal year of the plan ended December 31, 2005
C O N T E N T S
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
NOTES TO FINANCIAL STATEMENTS
SUPPLEMENTAL SCHEDULES
SCHEDULE H, LINE 4i--ASSETS HELD FOR INVESTMENT PURPOSES
SCHEDULE H, LINE 4j--REPORTABLE TRANSACTIONS
Report of Independent Registered Public Accounting Firm
Trustee and Participants
Pre-Paid Legal Services, Inc. Employee Stock Ownership and Thrift Plan
We have audited the accompanying statements of net assets available for benefits
of Pre-Paid Legal Services, Inc. Employee Stock Ownership and Thrift Plan as of
December 31, 2006 and 2005, and the related statements of changes in net assets
available for benefits for the years then ended. These financial statements are
the responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Plan is not required to have,
nor were we engaged to perform an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Plan's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of Pre-Paid Legal
Services, Inc. Employee Stock Ownership and Thrift Plan as of December 31, 2006
and 2005, and the changes in net assets available for benefits for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets held
for investment purposes and reportable transactions are presented for the
purpose of additional analysis and are not a required part of the basic
financial statements but are supplemental information required by the Department
of Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. These supplemental schedules are the
responsibility of the Plan's management. Such supplemental schedules have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
June 26, 2007
Pre-Paid Legal Services, Inc. Employee Stock Ownership
and Thrift Plan
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31,
2006 2005
---------------- ----------------
ASSETS
Investments, at fair value
Pre-Paid Legal Services, Inc. common stock $ 7,988,233 $ 7,133,196
Participant-directed mutual funds 3,109,596 2,641,412
Common collective trust funds 485,693 441,938
Money market funds 706 9,361
Participant notes 169,900 116,782
Receivables
Employer contributions 471,497 445,055
Dividends receivable - 55,933
Cash and cash equivalents 22,266 839
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Total assets 12,247,891 10,844,516
LIABILITIES
Accounts payable 21,624 9,568
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NET ASSETS AVAILABLE FOR BENEFITS AT FAIR VALUE 12,226,267 10,834,948
Adjustment from fair value to contract value for interest in collective trust
relating to fully benefit-responsive investment contracts 12,784 1,127
----------- -----------
NET ASSETS AVAILABLE FOR BENEFITS $12,239,051 $10,836,075
----------- -----------
The accompanying notes are an integral part of these statements.
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
Year ended December 31,
2006 2005
-------------- --------------
Additions to net assets attributed to
Employer contributions $ 471,497 $ 445,055
Participant contributions 646,334 617,242
Interest and dividend income 167,056 220,393
Net appreciation in fair value of investments 495,567 271,037
----------- -----------
Total additions 1,780,454 1,553,727
Deductions from net assets attributed to
Benefits paid to participants 376,478 254,177
Administrative fees 1,000 1,200
----------- -----------
NET INCREASE IN NET ASSETS 1,402,976 1,298,350
Net assets available for benefits at beginning of year 10,836,075 9,537,725
----------- -----------
Net assets available for benefits at end of year $12,239,051 $10,836,075
----------- -----------
The accompanying notes are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE A - DESCRIPTION OF PLAN
The Pre-Paid Legal Services, Inc. Employee Stock Ownership and Thrift Plan
(the "Plan") was established on January 1, 1988 for the benefit of the
employees of Pre-Paid Legal Services, Inc. and its subsidiaries (the
"Company"). The Plan is administered by a committee (the "Committee") of
three employees appointed by the Company. The Committee also served as the
Plan's Trustee and Invest-ment Manager until November 1, 2004 when the
Company amended and restated the Plan to provide for appointment by the
Committee of outside entities to assume the duties of both the Investment
Manager and Trustee. The 401(k) Company was appointed Investment Manager.
Effective November 1, 2004, the Employer and Nationwide Trust Company, FSB
("Nationwide") entered into a Trust Agreement whereby Nationwide became
Plan Trustee.
The following brief description of the provisions of the Plan is provided
for general information purposes only. Participants should refer to the
Plan agreement for more complete information.
Under the terms of the Plan, the Trustee may acquire, hold and dispose of
all cash and investments, including common and preferred stock of the
Company in accordance with the Committee's written investment policy.
Participants may direct the investment of 25% of their Elective Deferral
accounts to any one or more of the investment funds designated by the
Committee as permissible under the written investment policy. Participants
who have attained the age of 55 have the right to make an election to
direct the investment of up to 100% of their deferred compensation account
and the vested portion of their Company Contribution Account in one or more
of those permissible funds.
Each participant or beneficiary shall have the sole right to vote shares of
Company common stock allocated to such participant's account. The right to
vote such shares shall be exercised by directing the Committee as to the
manner in which the shares shall be voted.
The Plan is a defined contribution plan covering certain employees of the
Company and employees of affiliated companies which are included in the
Company's consolidated tax return. The Plan year-end is December 31. All
employees at least 21 years of age are eligible to enroll in the Plan on
the first day of the month following the date the employee completes one
year of service (1,000 hours) within 12 consecutive months of his/her
employment date.
The Company may make discretionary contributions to the Plan for each Plan
year. The contributions may vary from year to year and are determined by
written action of the Board of Directors of the Company. Contributions may
be made only out of the Company's consolidated net profits before federal
and state income taxes from the current or a preceding year. The Company's
contribution may be paid to the Trustee either in cash, qualified employer
securities or in other property.
The Discretionary Matching Company Contribution is an amount determined, in
the sole discretion of the Company and added to amounts forfeited by other
participants, to match the following percentages of participants' deferred
compensation contributions (up to a maximum of 6%) for the Plan year. The
Discretionary Matching Company Contribution is allocated at the end of each
Plan year to each participant's Company Contribution Account based on the
following percentages:
Years of service
on first day of Matching
Plan year percentages
---------------- ------------
0-3 50%
4-5 75%
6 or more 100%
A participant may elect to defer a portion of his compensation in the form
of a contribution to his deferred compensation account under the Plan.
Participants contribute to the Plan on a pre-tax basis only. Subject to the
limitations contained in the Plan, a participant may elect to defer any
portion of his compensation. However, a participant may never defer more
than the lesser of the Internal Revenue Service limitation ($15,000 and
$14,000 in 2006 and 2005, respectively) in any Plan year or a percentage of
compensation greater than the maximum percentage of compensation determined
annually by the Committee.
Separate accounts are maintained for each participant in the Plan. When an
election is made by the participant to defer part of his compensation, an
Employee Deferred Compensation Account is established. Each participant
will also have a Company Contribution Account consisting of discretionary
matching contributions made by the Company and a proportionate share of
forfeitures.
All amounts in the participant's accounts are placed in a trust fund and
invested by the Trustee. The Trustee must invest the trust fund solely in
the interest of and for the exclusive purpose of providing benefits to the
participants and their beneficiaries while minimizing the expenses of
administering the Plan. Under the terms of the Plan, all Company
contributions and up to 75% of the participant's contributions may be
invested in common stock of the Company or in preferred stock convertible
into common stock of the Company at a conversion price which, as of the
date of acquisition by the Plan, is reasonable. Such securities are termed
qualified employer securities. Effective January 1, 2007, the Plan was
amended to allow the participants to direct the Trustee as to the
investment of their contributions including the portion, if any, to be
invested in employer securities.
A participant will be entitled to the full amount credited to his Company
Contribution Account at the normal retirement date or upon permanent
disability or death. If a participant terminates employment for any reason
after he has completed at least one year of service, he will be entitled to
receive a portion or all of his account, depending on his years of service.
The percentage of the Company Contribution Account to which a participant
is entitled and the percentage forfeited if a participant leaves the
Company for reasons other than retirement, permanent disability or death
prior to becoming fully vested is computed according to the following
formula:
Vested Forfeited
Years of service percentage percentage
------------------ ---------- ----------
Less than 1 0% 100%
1 but less than 2 20% 80%
2 but less than 3 40% 60%
3 but less than 4 60% 40%
4 but less than 5 80% 20%
5 or more 100% 0%
A participant will always be fully vested in his Employee Deferred
Compensation Account, regardless of his years of service.
Upon termination of a participant's employment with the Company, the
nonvested portion of the Company contribution is forfeited. Forfeitures are
used to reduce future Company contributions. At December 31, 2006,
forfeited nonvested accounts totaled approximately $7,000.
The Company may amend the Plan at any time to conform to the Internal
Revenue Code, Treasury Regulations and Rulings thereunder. The Company has
the right to terminate the Plan at any time upon prior written notice to
the Trustee and may direct the Trustee to liquidate the shares of
participants in the trust fund. Upon termination or permanent suspension of
contributions, the accounts of all participants affected thereby shall
become nonforfeitable and shall be distributed.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
The following is a summary of the Plan's significant accounting policies.
1. Basis of Accounting
The Plan's financial statements are prepared on the accrual basis of
accounting in conformity with accounting principles generally accepted in
the United States of America.
2. Cash and Cash Equivalents
Cash and cash equivalents consist of the Plan's linked cash and money fund
accounts at a national brokerage firm which may not be federally insured.
The Plan has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risks on cash and cash equivalents.
Money fund amounts have a unit value of $1 and balances are immediately
accessible by the Plan.
3. Investments
Investments are presented at fair value as measured by market prices in
active markets, including national securities exchanges. The cost of
Company common stock sold is determined on the basis of average cost.
Actual cost is used as a basis for sales of all other investments.
Investment transactions are recorded on a trade-date basis. The Plan's
interest in the collective trust is valued based on information reported by
the investment advisor using the audited financial statements of the
collective trust at year-end. Dividends are recorded on the ex-dividend
date.
The Plan presents in the statements of changes in net assets available for
benefits, the net appreciation (depreciation) in the fair value of its
investments, which consists of the realized gains or losses and the
unrealized appreciation (depreciation) on those investments.
4. Participant Notes
Participant notes are approved by the Committee and cannot be made for an
amount less than $1,040 or exceed the lesser of $50,000 reduced by the
excess of the highest outstanding balance of loans during the one-year
period ending on the day before the loan is made or one-half of the
participant's vested balance. The notes are secured by the participants'
vested interest in the Plan, bear interest and are repayable based upon
rates and terms set forth in the Loan Policy. Participant notes are valued
at cost which approximates fair value.
5. Noncash Contributions
Contributions of Company common stock are recorded at fair value as
determined by the market price of Company common stock on the New York
Stock Exchange for the day when the company match is contributed.
6. Expenses
The Company elected to pay substantially all of the Plan's administration
expenses in 2006 and 2005 although it is not obligated to do so. Any
expenses not paid by the Company are to be paid by the Plan and totaled
$1,000 for 2006 and $1,200 for 2005.
7. Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of net assets available for benefits and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of changes in net assets available for benefits during the
reporting period. Actual results could differ from those estimates.
Investment securities, in general, are exposed to various risks, such as
interest rate, credit and overall market volatility. Due to the level of
risk associated with certain investment securities, it is reasonably
possible that changes in the values of investment securities will occur in
the near term and that such changes could materially affect the amounts
reported in the statements of net assets available for benefits.
As described in Financial Accounting Standards Board Staff Position, FSP
AAG INV-1 and SOP 94-4-1, Reporting on Fully Benefit-Responsive Investment
Contracts Held by Certain Investments Companies Subject to the AICPA
Investment Company Guide and Defined-Contribution Health and Welfare and
Pension Plans (the "FSP"), investment contracts held by a
defined-contribution plan are required to be reported at fair value.
However, contract value is the relevant measure attribute for that portion
of the net assets available for benefits of a defined-contribution plan
attributable to a fully-benefit responsive investment contracts because
contract value is the amount participants would receive if they were to
initiate permitted transactions under the terms of the Plan. The Plan
invests in investment contracts through a collective trust. As required by
the FSP, the Statement of Net Assets Available for Benefits presents the
fair value of the investment in the collective trust as well as the
adjustment of the investment in the collective trust from fair value to
contract value relating to the investment contracts. The Statement of
Changes in Net Assets Available for Benefits is prepared on a contract
value basis.
NOTE C - INVESTMENTS
The following presents investments that represent 5% or more of the Plan's
net assets:
2006 2005
-------------- --------------
Non-participant directed investments
Common stock - Pre-Paid Legal Services, Inc. (204,146
and 186,684 shares, respectively) $7,988,233 $7,133,196
Participant directed investments
Washington Mutual Investors Fund/R4 (23,673 and 21,333 units, respectively) 823,105 656,435
Growth Fund of America/R4 (19,015 and 17,655 units, respectively) 621,037 541,644
NOTE C - INVESTMENTS - CONTINUED
The following table presents the net appreciation (depreciation) (including
gains and losses on investments bought and sold, as well as held during the
year) by type of investment for the years ended December 31:
2006 2005
------------ ------------
Corporate common stock - Pre-Paid Legal Services, Inc. $283,977 $152,055
Mutual funds 211,590 118,982
-------- --------
$495,567 $271,037
-------- --------
NOTE D - NONPARTICIPANT-DIRECTED INVESTMENTS
Information regarding the Plan's nonparticipant-directed investment in the
Company's common stock at December 31, 2006 and 2005 is included in Note C
above. Significant components of the changes in net assets relating to
nonparticipant-directed investments (including activity in the Plan's cash
and cash equivalents) is as follows for the years ended December 31:
2006 2005
------------ --------------
Net investment gain and interest income $ 303,301 $ 171,003
Contributions
Employer 445,055 341,550
Employee 492,191 445,464
Benefits paid to participants (377,478) (254,177)
Transfers from participant-directed investments, net 19,323 8,442
--------- ---------
$ 882,392 $ 712,282
--------- ---------
NOTE E - TAX STATUS
A favorable determination letter dated November 16, 2005 was received from
the Internal Revenue Service indicating that the Plan, as amended through
November 1, 2004, qualifies under section 401(a) of the Internal Revenue
Code and is exempt from federal income taxes under section 501(a) of the
Code. The Plan has been further amended since receiving the determination
letter. However, the Company and the Committee believe that the Plan is
currently designed and operated in compliance with the applicable
requirements of the Internal Revenue Code. Therefore, the Company and the
Committee believe that the Plan continues to be qualified and no provision
for income taxes has been included in the Plan's financial statements.
NOTE F - DISTRIBUTIONS
Former participants may request distribution of their accounts in the form
of Company common stock or cash. Former participants who have elected to
diversify all or a portion of their Plan accounts into mutual fund
investments will receive a distribution of mutual fund shares or cash.
Distributions made in 2006 consisted of cash of $376,478. Distributions
made in 2005 consisted of cash of $254,177.
Former participants who terminated employment during 2006 and had not yet
received distribution of their account at December 31, 2006 will receive
distribution in 2007. The balance due former participants at December 31,
2006 included cash of $8,065.
SUPPLEMENTAL SCHEDULES
Pre-Paid Legal Services, Inc. Employee Stock Ownership
and Thrift Plan
SCHEDULE H, LINE 4i--SCHEDULE OF ASSETS (HELD AT END OF YEAR)
December 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Identity of issuer, borrower, Description of investment including maturity date,
lessor or similar party rate of interest, collateral, par or maturity value Cost Current Value
----------------------- ---------------------------------------------------- ---- -------------
*Pre-paid Legal Services, Inc. Common Stock Common Stock, 204,146.000 shares/units $3,801,207 $ 7,988,233
Federated Capital Reserve Money Market Funds, 705.660 shares/units ** 706
SEI Stable Asset Common Collective Trust Fund, 498,477.430 shares/units ** 485,693
American Balanced Fund/R4 Mutual Funds, 11,772.412 shares/units ** 223,675
Bond Fund of America/R4 Mutual Funds, 42,104.057 shares/units ** 560,826
EuroPacific Growth Fund/R4 Mutual Funds 11,303.371 shares/units ** 519,729
Growth Fund of America/R4 Mutual Funds 19,015.224 shares/units ** 621,037
Vanguard Small Cap Growth Index Fund Mutual Funds 5,332.986 shares/units ** 97,807
Vanguard Small Cap Value Index/Inv Mutual Funds 15,449.630 shares/units ** 263,417
Washington Mutual Investors Fund/R4 Mutual Funds 23,672.846 shares/units ** 823,105
*Participant Loans Participant loans, maturity dates various thru 06/2018;
interest rates vary between 6.75% and 10.25% 169,900
-----------
Total Investments $11,754,128
-----------
*Party-in-interest
**Cost not required for participant-directed
investments
Pre-Paid Legal Services, Inc. Employee Stock Ownership
and Thrift Plan
SCHEDULE H, LINE 4j--REPORTABLE TRANSACTIONS
Year ended December 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Expense Current value
Purchase Selling Lease incurred with Cost of of assent on Net gain
Identity of party involved Description of asset price price rental transaction asset transaction date (loss)
------------------------------ -------------------------- -------- ------- ------ ------------ ------- ----------------- --------
*Pre-Paid Legal Services, Inc. Common stock, 57 purchases $750,170 $ - $ - $ - $750,170 $750,170 $ -
* Party in interest