10-K 1 prepaid_10k.htm ANNUAL REPORT prepaid_10k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(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, 2010
      
o   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 incorporation or (I.R.S. Employer Identification No.)
organization)  
   
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:
 
Title of each class Name of each exchange on 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  o  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  o  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  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o  No  o
 
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 7.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o        Accelerated filer  x Non-accelerated filer  o Smaller reporting Company  o
      (do not check if a smaller  
      reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes  o  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, 2010: $238,067,000.
 
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 11, 2011, there were 9,764,194shares of Common Stock, par value $.01 per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE.
 
Portions of our definitive proxy statement for our 2011 annual meeting of shareholders are incorporated into Part III of this Form 10–K by reference.
 



 
 

PRE-PAID LEGAL SERVICES, INC.
FORM 10-K
For the Year Ended December 31, 2010
TABLE OF CONTENTS
 
PART I                 Page 
    MERGER ANNOUNCEMENT   1
ITEM 1.   BUSINESS    
           General   2
           Industry Overview   2
           Description of Memberships   3
           Specialty Legal Service Plans   7
           Provider Law Firms   8
           Identity Theft Shield Provider   12
           Marketing   13
           Operations   16
           Quality Control   17
           Competition   17
           Regulation   17
           Employees   20
           Foreign Operations   20
           Availability of Information   20
ITEM 1A.   RISK FACTORS   20
ITEM 1B.   UNRESOLVED STAFF COMMENTS   24
ITEM 2.   PROPERTIES   24
ITEM 3.   LEGAL PROCEEDINGS   25
ITEM 4.   (Removed and Reserved)   26
PART II        
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS    
    AND ISSUER PURCHASES OF EQUITY SECURITIES    
           Market Price of and Dividends on the Common Stock   27
           Recent Sales of Unregistered Securities   27
           Issuer Purchases of Equity Securities   28
           Shareholder Return Performance Graph   28
ITEM 6.   SELECTED FINANCIAL DATA   29
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND    
    RESULTS OF OPERATIONS    
           Overview of our Financial Model   31
           Critical Accounting Policies   32
           Other General Matters   38
           Measures of Member Retention   39
           Results of Operations    
                  Comparison of 2010 to 2009   42
                  Comparison of 2009 to 2008   43
           Liquidity and Capital Resources   45
           Forward Looking Statements   48
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   48
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   50
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND    
    FINANCIAL DISCLOSURE   78
ITEM 9A.   CONTROLS AND PROCEDURES   78
ITEM 9B.   OTHER INFORMATION   78
PART III   (Information required by Part III is incorporated by reference from our definitive    
    proxy statement for our 2011 annual meeting of shareholders.)    
PART IV        
ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES   79
SIGNATURES   80


 

PRE-PAID LEGAL SERVICES, INC.
 
FORM 10-K
 
FOR THE YEAR ENDED DECEMBER 31, 2010
 
PART I
 
MERGER ANNOUNCEMENT
 
     On January 30, 2011, Pre-Paid Legal Services, Inc. (“Pre-Paid” or the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement) with MidOcean PPL Holdings Corp., a Delaware corporation (“Parent”), and PPL Acquisition Corp., an Oklahoma corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are beneficially owned by MidOcean Partners III, L.P., and affiliated investment funds. The Merger Agreement was unanimously approved by the Company’s Board of Directors acting upon the unanimous recommendation of the special committee of the Board formed in September 2010 for the purpose of evaluating strategic alternatives for the Company.
 
     At the effective time of the Merger, each share of Common Stock, par value $0.01 per share, of the Company (“Company Common Stock”) issued and outstanding immediately prior to the effective time (other than shares owned by (i) the Company or any of its subsidiaries, (ii) Parent or any of its subsidiaries or (iii) shareholders who have perfected and not withdrawn a demand for appraisal rights under Oklahoma law) will be automatically cancelled and converted into the right to receive $66.50 in cash without interest. The Merger is expected to close on or before July 31, 2011.
 
     Consummation of the Merger is subject to customary conditions, including, without limitation, (i) the approval by the holders of a majority of the outstanding shares of Company Common Stock entitled to vote on the Merger, (ii) the expiration or early termination of the waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the absence of any law, injunction, judgment or ruling that restrains or prohibits the consummation of the Merger and (iv) the approval of Oklahoma and Florida insurance regulatory authorities.
 
Additional Information and Where to Find It
 
     In connection with the merger, Pre-Paid prepared and filed a preliminary proxy statement with the Securities and Exchange Commission (the “SEC”). When completed, a definitive proxy statement and a form of proxy will be mailed to Pre-Paid's shareholders. BEFORE MAKING ANY VOTING DECISION, PRE-PAID'S SHAREHOLDERS ARE URGED TO READ THE PROXY STATEMENT REGARDING THE MERGER CAREFULLY AND IN ITS ENTIRETY BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED MERGER. Pre-Paid's shareholders will be able to obtain, without charge, a copy of the proxy statement (when available) and other relevant documents filed with the SEC from the SEC's website at www.sec.gov. Pre-Paid's shareholders will also be able to obtain, without charge, a copy of the proxy statement and other relevant documents (when available) by directing a request by mail or telephone to Pre-Paid, Attn: Randy Harp, One Pre-Paid Way, Ada, Oklahoma 74820-5813, telephone: (580) 436-1234, or from the investor relations section of the Company's website, http://www.prepaidlegal.com/newCorp2/investor/investor_home.html.
 
Participants in Solicitation
 
     Pre-Paid and its directors and executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies from Pre-Paid's shareholders with respect to the special meeting of shareholders that will be held to consider the merger. Information about Pre-Paid's directors and executive officers and their ownership of the Company's common stock is set forth in the proxy statement related to the merger transaction, which was filed with the SEC on February 23, 2011. Shareholders may obtain additional information regarding the interests of the participants in the solicitation by reading the proxy statement and other relevant documents regarding the merger, when filed with the SEC.
 
1
 

 

ITEM 1. BUSINESS.
 
General
 
     We were one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. Our predecessor commenced business in 1972 and began offering legal expense reimbursement services as a “motor service club” under Oklahoma law. In 1976, we were formed and acquired our predecessor in a stock exchange. We began offering Memberships independent of the motor service club product by adding a legal consultation and advice service, and in 1979, we implemented a legal expense benefit that provided for partial payment of legal fees in connection with the defense of certain civil and criminal actions. Our life events legal plans (referred to as “Memberships”) currently provide for a variety of legal services. In most states and provinces, standard plan benefits include preventive legal services, motor vehicle legal defense services, trial defense services, IRS audit services and a 25% discount off legal services not specifically covered by the Membership for an average monthly Membership fee of approximately $21. Additionally, in 49 states, the District of Columbia (“D.C.”) and 4 Canadian provinces, the Legal Shield rider can be added to the standard plan for only $1 per month and provides members with 24-hour access to a toll-free number for attorney assistance if the member is arrested or detained. We also offer our Identity Theft Shield (“IDT”) to new and existing members at $9.95 per month if added to a legal service Membership (“add-on IDT”) or IDT may be purchased separately for $12.95 per month (“stand-alone IDT”). The identity theft related benefits include a credit report and related instructional guide, a credit score and related instructional guide, credit report monitoring with daily online and monthly offline notification of any changes in credit information and comprehensive identity theft restoration services. Also, benefits for minors are available for an additional $1 per month and monitoring from all three major credit repositories (tri-bureau monitoring) is available for an additional $3 per month.
 
     Life events legal plan benefits are generally provided through a network of independent provider law firms, typically one firm per state or province and IDT plan benefits are provided by Kroll Background America, Inc., a subsidiary of Kroll Inc. (“Kroll”). Members have direct, toll-free access to Kroll or their provider law firm rather than having to call for a referral. At December 31, 2010, we had 1,473,237 Memberships in force with members in all 50 states, D.C. and the Canadian provinces of Ontario, British Columbia, Alberta and Manitoba. Approximately 90% of such Memberships were in 29 states and provinces.
 
Industry Overview
 
     Legal service plans, while used in Europe for more than one hundred years and representing more than a $4 billion European industry, were first developed in the United States in the late 1960s. Since that time, there has been substantial growth in the number of Americans entitled to receive various forms of legal services through legal service plans. The National Resource Center for Consumers of Legal Services (“NRC”) previously provided market information for different types of legal service plans and estimates of number of users. However, the NRC is no longer in existence and we are unaware of any current comparable information sources. In the last NRC report in 2002, the NRC estimated there were 164 million Americans without any type of legal service plan. We believe the legal service plan industry continues to evolve and market acceptance of legal service plans, as indicated by the continuing growth in the number of individuals covered by plans, is increasing.
 
 

 

     “Public Perceptions of Lawyers: Consumer Research Findings, April 2002” prepared on behalf of the American Bar Association concluded nearly seven in ten households had some occasion during the past year that might have led them to hire a lawyer. This report further suggested, “for the consumer, legal services are among the most difficult services to buy. The prospect of doing so is rife with uncertainty and potential risk,” and further concluded, “the challenge (and opportunity) for the legal profession is to make lawyers more accessible and less threatening to consumers who might need them.”
 
     The American Bar Association’s web site also reflects the legal profession’s support of the legal service plan concept by saying “The ABA has long supported prepaid legal services plans as a way to increase access to the justice system for low- and middle-income Americans. These plans allow individuals and families to address legal issues before they become significant problems, reducing demands on already overburdened court systems and instilling confidence in our justice system. The ABA web site points out that:
  • Group legal plans are important to maintaining confidence in our justice system and the rule of law.
     
  • Group legal plans efficiently and inexpensively provide preventative legal services to low and middle income Americans.
     
  • Group legal services help ease the burden on overtaxed government programs.
     
  • Group legal plans enhance productivity by allowing employees to focus on their jobs, not their legal troubles.
     Legal service plans are offered through various organizations and marketing methods and contain a wide variety of benefits. Free plans include those sponsored by labor unions, elder hotlines, the American Association of Retired Persons and the National Education Association and employee assistance plans that are also automatic enrollment plans without direct cost to participants designed to provide limited telephonic access to attorneys for members of employee groups. There are also employer paid plans pursuant to which more comprehensive benefits are offered by the employer as a fringe benefit. Finally, there are individual enrollment plans, other employment based plans, including voluntary payroll deduction plans, and miscellaneous plans. These plans typically have more comprehensive benefits, higher utilization, involve higher costs to participants, and are offered on an individual enrollment or voluntary basis. This is the market segment in which we compete.
 
     According to the latest estimates of the census bureaus of the United States and Canada, the two geographic areas in which we operate, the number of households in the combined area exceeds 141 million. Since we have always disclosed our members in terms of Memberships and individuals covered by the Membership include the individual who purchases the Membership together with his or her spouse and never-married children living at home up to age 21 or up to age 23 if the children are full time college students, we believe that our market share should be viewed as a percentage of households. Historically, we have described and suggested to our independent sales associates that their primary market focus should be the “middle” eighty percent of such households rather than the upper and lower ten percent segments based on our belief that the upper ten percent may already have access to legal services and the lower ten percent may not be able to afford the cost of a legal service plan. As a percentage of this defined “middle” market of approximately 113 million households, we currently have an approximate 1.3% share of the estimated market based on our existing 1.5 million active Memberships and, over the last 30 years, an additional 7% of households have previously purchased, but no longer own, Memberships. We routinely remarket to previous members and reinstated approximately 90,000, 95,000 and 82,000 Memberships during 2010, 2009 and 2008, respectively.
 
Description of Memberships
 
     The Memberships we sell generally allow members to access legal services through a network of independent law firms (“provider law firms”) under contract with us. Provider law firms are paid a monthly fixed fee on a capitated basis to render services to plan members residing within the state or province in which the provider law firm attorneys are licensed to practice. Because the fixed fee payments by us to benefit providers do not vary based on the type and amount of benefits utilized by the member, this capitated arrangement provides significant advantages to us in managing claims risk since we know the percentage of Membership fees that will be paid to the benefit providers to deliver the Membership benefits and the timing of such payments. At December 31, 2010, Memberships subject to the capitated provider law firm arrangement comprised more than 99% of our active Memberships. The remaining Memberships, less than 1%, were primarily sold prior to 1987 and allow members to locate their own lawyer (“open panel”) to provide legal services available under the Membership with the member’s lawyer being reimbursed for services rendered based on usual, reasonable and customary fees, or are in states where there is no provider law firm in place and our referral attorney network described below is utilized.
 
 

 

     Membership benefits utilization 
     During 2010, our provider law firms processed more than 2.2 million requests for service, an average of 1.6 per Member. A request for service represents a member’s request for assistance on a specific legal matter. These requests usually include multiple telephone consultation(s) and often include document review(s), letter(s) written or telephone call(s) made to third parties on the members’ behalf, preparation of last will(s) and testament(s) and other legal assistance as described below. Although not all of our provider law firms maintain specific records of how often the legal engagement leads to additional fees being paid by members to the provider law firm, provider law firms representing approximately 99% of our Membership base reported that on average, less than 1% of these requests for service resulted in additional fees being paid by the member to the provider law firm.
 
     Family Legal Plan 
     The Family Legal Plan we currently market in most jurisdictions consists of five basic benefit groups that provide coverage for a broad range of preventive and litigation-related legal expenses. The Family Legal Plan accounted for approximately 74% and 72%, respectively, of our Membership fees in 2010 and 2009 not including the add-on identity theft shield benefit that is often added to the family legal plans. When combined, the family legal plans and the add-on identity theft shield benefit accounted for approximately 92% of our Membership fees in both years. In addition to the Family Legal Plan, we market other specialized legal services products specifically related to employment in certain professions described below.
 
     In 11 states, certain of our plans are available in the Spanish language. For the Spanish language plans, the provider law firms have both bilingual staff and lawyers and we have bilingual staff for customer service, attorney resources and marketing service functions. We will continue to evaluate making our plans available in additional languages in markets where there is both sufficient demand and qualified staff and attorneys available.
 
     In exchange for a fixed monthly, semi-annual or annual payment, members are entitled to specified legal services. Those individuals covered by the Membership include the individual who purchases the Membership along with his or her spouse and never married children living at home up to age 21 or up to age 23 if the children are full time college students. Also included are children up to age 18 for whom the member is legal guardian and any dependent child, regardless of age, who is mentally or physically disabled. Each Membership, other than the Business Owners’ Legal Solutions Plan, is guaranteed renewable, except in the case of fraud or nonpayment of Membership fees. Historically, we have not raised rates to existing members. If new benefits become available, existing members may choose the newer, more comprehensive plan at a higher rate or keep their existing Memberships. Memberships are automatically renewed at the end of each Membership period unless the member cancels prior to the renewal date or fails to make payment on a timely basis.
 
 

 

     The basic legal service plan Membership is sold as a package consisting of five separate benefit groups. Memberships range in cost from $14.95 to $25.00 per month depending in part on the schedule of benefits, which may vary from state or province in compliance with regulatory requirements. Benefits for domestic matters, bankruptcy and drug and alcohol related matters are limited in most Memberships.
 
     Preventive Legal Services. These benefits generally offer unlimited toll-free access to a member’s provider law firm for advice and consultation on any legal matter. These benefits also include letters and phone calls on the member’s behalf, review of personal contracts and documents, each up to 10 pages in length, last will and testament preparation for the member and annual will reviews at no additional cost. In almost every case, additional wills for spouse and other covered members may be prepared at a cost of $20 or less.
 
     Motor Vehicle Legal Protection. These benefits offer legal assistance for matters resulting from the operation of a licensed motor vehicle. Members have assistance available to them at no additional cost for: (a) defense in the court of original jurisdiction of moving traffic violations deemed meritorious, (b) defense in the court of original jurisdiction of any charge of manslaughter, involuntary manslaughter, vehicular homicide or negligent homicide as the result of a licensed motor vehicle accident, (c) up to 2.5 hours of assistance per incident for collection of minor property damages (up to $2,000) sustained by the member’s licensed motor vehicle in an accident, (d) up to 2.5 hours of assistance per incident for collection of personal injury damages (up to $2,000) sustained by the member or covered family member while driving, riding or being struck as a pedestrian by a motor vehicle, and (e) up to 2.5 hours of assistance per incident in connection with an action, including an appeal, for the maintenance or reinstatement of a member’s driver’s license which has been canceled, suspended, or revoked. No coverage under this benefit of the basic legal service plan is offered to members for pre-existing conditions, drug or alcohol related matters, or for commercial vehicles over two axles or operation without a valid license.
 
     Trial Defense. These benefits offer assistance to the member and the member’s spouse through an increasing schedule of benefits based on Membership year. Up to 60 hours are available for the defense of civil or job-related criminal charges by the provider law firm in the first Membership year. The criminal action must be within the scope and responsibility of employment activities of the member or spouse. Up to 2.5 hours of assistance are available prior to trial, and the balance is available for actual trial services. The schedule of benefits under this benefit area increases by 60 hours each Membership year to: 120 hours in the second Membership year, 3 hours of which are available for pre-trial services; 180 hours in the third Membership year, 3.5 hours of which are available for pre-trial services; 240 hours in the fourth Membership year, 4 hours of which are available for pre-trial services, to the maximum limit of 300 hours in the fifth Membership year, 4.5 hours of which are available for pre-trial services. This benefit excludes domestic matters, bankruptcy, deliberate criminal acts, alcohol or drug-related matters, business matters, and pre-existing conditions.
 
     In addition to the pre-trial benefits of the basic legal plan described above, there are additional pre-trial hours available as an option, or add-on, to the basic plan. These optional benefits cost $9.00 per month and add 15 hours of pre-trial services during the first year of the Membership increasing 5 additional hours each Membership year to the maximum limit of 35 hours in the fifth Membership year and increases total pre-trial and trial defense hours available pursuant to the expanded Membership to 75 hours during the first Membership year to 335 hours in the fifth Membership year. These pre-trial hours are in addition to those hours already provided by the basic plan so that the member, in the first year of the Membership, has a combined total of 17.5 pre-trial hours available escalating to a combined total of 39.5 pre-trial hours in the fifth Membership year. There were approximately 438,000 subscribers of this benefit at December 31, 2010 compared to 479,000 at December 31, 2009.
 
 

 

     IRS Audit Protection Services. This benefit offers up to 50 hours of legal assistance per year in the event the member, spouse or dependent children receive written notification of an Internal Revenue Service (“IRS”) audit or are summoned in writing to appear before the IRS concerning a tax return. The 50 hours of assistance are available in the following circumstances: (a) up to 1 hour for initial consultation, (b) up to 2.5 hours for representation in connection with the audit if settlement with the IRS is not reached within 30 days, and (c) the remaining 46.5 hours of actual trial time if settlement is not achieved prior to litigation. Coverage is limited to audit notification received regarding the tax return for years during which the Membership is effective. Representation for charges of fraud or income tax evasion, business and corporate tax returns and certain other matters are excluded from this benefit.
 
     With pre-trial benefits limited to 2.5 hours to 4.5 hours based on the Membership year for trial defense (without the pre-trial option described) and 3.5 hours for the IRS audit benefit, these benefits do not ensure complete pre-trial coverage. In order to receive additional pre-trial IRS audit or trial defense benefits, a matter must actually proceed to trial. The costs of pre-trial preparation that exceed the benefits under the Membership are the responsibility of the member. Provider law firms under the closed panel Membership have agreed to provide to members any additional pre-trial services beyond those stipulated in the Membership at a 25% discount from the provider law firm’s customary and usual hourly rate. Retainer fees for these additional services may be required.
 
     Preferred Member Discount for All Other Services. Provider law firms have agreed to provide to members any legal services beyond those stipulated in the Membership at a fee discounted 25% from the provider law firm’s customary and usual hourly rate. This “customary and usual hourly rate” is a fixed single hourly rate for each provider firm that is generally an average of the firm’s various hourly rates for its attorneys which typically vary based on experience and expertise.
 
     Legal Shield Benefit 
    
In 49 states, D.C. and four Canadian provinces, the Legal Shield plan can be added to the standard or expanded Family Legal Plan for $1 per month and provides members with 24-hour access to a toll-free number for provider law firm assistance if the member is arrested or detained. The Legal Shield member, if detained, can present their Legal Shield card to the officer that has detained them to make it clear that they have access to legal representation and that they are requesting to contact a lawyer immediately. The benefits of the Legal Shield plan are subject to conditions imposed by the detaining authority, which may not allow for the provider law firm to communicate with the member on an immediate basis. The Legal Shield benefit was introduced in 1999. There were approximately 1,059,000 Legal Shield subscribers at December 31, 2010 compared to approximately 1,110,000 at December 31, 2009.
 
     Identity Theft Shield Benefit 
    
Through a joint marketing agreement with Kroll our independent sales associates market Kroll’s identity theft benefits in 50 states and four Canadian provinces. By adding the Identity Theft Shield to their existing family Membership, members have toll free access to the identity theft specialists at Kroll. This benefit can be added to a legal service Membership for $9.95 per month or purchased separately for $12.95 per month. Also, benefits for minors are available for an additional $1 per month and monitoring from all three major credit repositories (tri-bureau monitoring) is available for an additional $3 per month. The identity theft related benefits include a credit report provided through Experian and related instructional guide, a credit score calculated by an independent scoring service and related instructional guide, credit report monitoring through Experian with daily online and monthly offline notification of any changes in credit information and comprehensive identity theft restoration services. Beginning in the first quarter of 2009, our Identity Theft membership were offered as an on-line service where new members can authenticate their membership by logging on to the Internet and get an immediate credit report delivered via the web making the method of requesting and receiving the credit report more streamlined and efficient. There were approximately 760,000 and 804,000 subscribers at December 31, 2010 and 2009, respectively, comprised of 668,000 and 711,000 subscribers that have added the benefit to an underlying legal plan and 92,000 and 93,000 subscribers with a stand-alone identity theft plan.
 
 

 

     Canadian Family Plan 
    
The Family Legal Plan is currently marketed in the Canadian provinces of Ontario, British Columbia, Alberta and Manitoba. We began operations in Ontario and British Columbia during 1999 and Alberta and Manitoba in 2001. Benefits of the Canadian plan include expanded preventive benefits including assistance with Canadian Government agencies, warranty assistance and small claims court assistance as well as the preferred member discount. Canadian Membership fees collected during 2010 were approximately $9.5 million (including foreign currency translation adjustments) in U.S. dollars compared to $7.9 million collected in 2009 and $8.2 million collected in 2008.
 
Specialty Legal Service Plans
 
     In addition to the Family Legal Plan described above, we also offer other specialty or niche legal service plans. These specialty plans usually contain many of the Family Legal Plan benefits adjusted as necessary to meet specific industry or prospective member requirements. In addition to those specialty plans described below, we will continue to evaluate and develop other such plans as the need and market allow.
 
     Business Owners’ Legal Solutions Plan 
    
The Business Owners’ Legal Solutions plan was developed during 1995 and provides business oriented legal service benefits for small businesses with 99 or fewer employees. This plan was developed and test marketed in selected geographical areas and more widely marketed beginning in 1996 at a monthly rate of $69.00. This plan provides for-profit small businesses with legal consultation and correspondence benefits, contract and document reviews, debt collection assistance and reduced rates for any non-covered areas. During 1997, the coverage offered pursuant to this plan was expanded to include trial defense benefits and membership in GoSmallBiz.com, an unrelated Internet based service provider. Through GoSmallBiz.com, members may receive unlimited business consultations from business consultants and have access to timely small business articles, educational software, Internet tools and more. This expanded plan is currently marketed at a monthly rate ranging from $69 to $150 ($175 in Canada) depending on the number of employees and provides business oriented legal service benefits for any for-profit business with 99 or fewer employees. This plan is available in 44 states, D.C. and four Canadian provinces and represented approximately 5.0%, 5.2% and 5.4% of our Membership fees collected during 2010, 2009 and 2008, respectively.
 
     Commercial Driver Legal Plan 
    
The Commercial Driver Legal Plan (“CDLP”) is designed specifically for the professional truck driver and offers a variety of driving-related benefits, including coverage for moving and non-moving violations. This plan provides coverage by a provider law firm for persons who drive a commercial vehicle. This legal service plan is currently offered in 44 states and D.C. In certain states, the Commercial Driver Legal Plan is underwritten by the Road America Motor Club, an unrelated motor service club. During 2010, this plan accounted for approximately 0.7% of Membership fees collected compared to approximately 0.7% and 0.8% of Membership fees during 2009 and 2008. The Plan underwritten by the Road America Motor Club is available at the monthly rate of $35.95 or at a group rate of $32.95. Basic plans underwritten by us are available at the monthly rate of $32.95 or at a group rate of $29.95. Benefits include the motor vehicle related benefits described above, defense of Department of Transportation violations and the 25% discounted rate for transportation related services beyond plan scope, such as defense of non-moving violations. The Road America Motor Club underwritten plan includes bail and arrest bonds and services for family vehicles. Also available is our Super CDLP plan which includes all the benefits of the basic CDLP plan together with some of the family plan benefits and discounts and is available at a monthly rate of $44.95, or a group rate of $39.95.
 
 

 

     Home-Based Business Rider 
     The Home-Based Business plan was designed to provide small business owners access to commonly needed legal services. It can be added to the Expanded Family Legal Plan in approved states. To qualify, the business and residence address must be the same with three or fewer employees and be a for-profit business that is not publicly traded. Benefits under this plan include unlimited business telephone consultation, review of three business contracts per month, three business and debt collection letters per month and discounted trial defense rates. This plan also includes Membership in GoSmallBiz.com. This plan is available in 38 states, D.C. and three Canadian provinces and represented approximately 1.9% of our Membership fees collected during 2010, 2009 and 2008.
 
     Comprehensive Group Legal Services Plan 
    
In late 1999, we introduced the Comprehensive Group plan, designed for the large group employee benefit market. This plan, available in 38 states and D.C., provides all the benefits of the Family Legal Plan as well as mortgage document preparation, assistance with uncontested legal situations such as adoptions, name changes, separations and divorces. Additional benefits include the preparation of health care power of attorney and living wills or directives to physicians. Although sales of this plan during the last three years (2,761 Memberships, 2,735 Memberships and 2,599 Memberships during 2010, 2009 and 2008, respectively) are not significant compared to our total Membership sales, we still believe this plan improves our competitive position in the large group market. We continue to emphasize group marketing to employee groups of less than 50 rather than larger groups where there is more competition, price negotiation and typically a longer sales cycle.
 
     Other than additional benefits such as the Legal Shield and Identity Theft Shield benefits described above, the basic structure and design of the Membership benefits has not significantly changed over the last several years. The consistency in plan design and delivery provides us consistent, accurate data about plan utilization that enables us to manage our benefit costs through the capitated payment structure to provider firms. We frequently evaluate and consider other plan benefits that may include other services complimentary to the basic legal service plan.
 
Provider Law Firms
 
     Our Memberships generally allow members to access legal services through a network of independent provider law firms under contract with us generally referred to as “provider law firms.” Provider law firms are paid a fixed fee on a per capita basis to render services to plan members residing within the state or province as provided by the contract. Because the fixed fee payments by us to provider law firms in connection with the Memberships do not vary based on the type and amount of benefits utilized by the member, this arrangement provides significant advantages to us in managing our cost of benefits. Pursuant to these provider law firm arrangements and due to the volume of revenue directed to these firms, we have the ability to more effectively monitor the customer service aspects of the legal services provided, the financial leverage to help ensure a customer friendly emphasis by the provider law firms and access to larger, more diversified law firms. Through our members, we are typically the largest client base of our provider law firms.
 
     Provider law firms are selected to serve members based on a number of factors, including recommendations from provider law firms and other lawyers in the area in which the candidate provider law firm is located and in neighboring states, our investigation of bar association standing and client references, evaluation of the education, experience and areas of practice of lawyers within the firm, on-site evaluations by our management, and interviews with lawyers in the firm who would be responsible for providing services. Most importantly, these candidate law firms are evaluated on the firm’s customer service philosophy.
 
 

 

     All of our provider law firms, representing more than 99% of our legal service members, are connected to us via high-speed digital links to our management information systems, thereby providing real-time monitoring capability. This online connection offers the provider law firm access to specially designed software developed by us for administration of legal services by the firm. These systems provide statistical reports of each law firm’s activity and performance and allow virtually all of the members served by provider law firms to be monitored on a near real-time basis. The online statistical reporting allows quality control monitoring of over 15 separate service delivery benchmarks. In addition, we regularly conduct extensive random surveys of members who have used the legal services of a provider law firm. We survey members in each state every 60 days, compile the results of such surveys and provide the provider law firms with copies of each survey and the overall summary of the results. If a member indicates on a survey the service did not meet their expectation, the member is contacted as soon as possible to resolve the issue.
 
     Each month, provider law firms are presented with a comprehensive report of ratings related to our online monitoring, member assistance requests, member survey evaluations, telephone reports and other information developed in connection with member service monitoring. If a problem is detected, we recommend immediate remedial actions to the provider law firms to eliminate service deficiencies. In the event the deficiencies of a provider law firm are not eliminated through discussions and additional training with us, such deficiencies may result in the termination of the provider law firm. We are in constant communication with our provider law firms and meet with them frequently for additional training, to encourage increased communications with us and to share suggestions relating to the timely and effective delivery of services to our members.
 
     Each attorney member of the provider law firm rendering services must have at least two years of experience as a lawyer, unless we waive this requirement due to special circumstances such as instances when the lawyer demonstrates significant legal experience acquired in an academic, judicial or similar capacity other than as a lawyer. Initially, we provide customer service training to the provider law firms and their support staff through on-site training that allows us to observe the individual lawyers of provider law firms as they directly assist the members. Additionally, we provide initial orientation and training for new staff and new attorneys joining the firm via weekly conference calls. We provide monthly “WOW, Service from the Heart Customer Service Training” on a continuous basis.
 
 

 

     Agreements with provider law firms: (a) generally permit termination of the agreement by either party upon 60 days prior written notice, (b) permit us to terminate the Agreement for cause immediately upon written notice, (c) require the firm to maintain a minimum amount of malpractice insurance on each of its attorneys, in an amount not less than $100,000, (d) preclude us from interference with the lawyer-client relationship, (e) provide for periodic review of services provided, (f) provide for protection of our proprietary information and (g) require the firm to indemnify us against liabilities resulting from legal services rendered by the firm. We are precluded from contracting with other law firms to provide the same service in the same geographic area, except in situations where the designated law firm has a conflict of interest, we enroll a group of 500 or more members, or when the agreement is terminated by either party. Provider law firms are precluded from contracting with other prepaid legal service companies without our approval. Provider law firms receive a fixed monthly payment for each member who are residents in the service area and are responsible for providing the Membership benefits without additional remuneration. If a provider law firm delivers legal services to an open panel member, the law firm is reimbursed for services rendered according to the contract benefits of the open panel Membership. As of December 31, 2010, provider law firms averaged approximately 45 employees each and on average are relatively evenly split between support staff and lawyers.
 
     The following table reflects the composition of our provider law firm network by state/province, together with each firm's Memberships and attorneys as of December 31, 2010 and year 2010 requests for service by state/province. As reflected in the table below, the average number of requests for service per member during 2010 was 1.6.
 
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                    Requests
                Memberships   for
State/Province       Provider Firm       Memberships       Attorneys       per attorney       Service
Alabama   The Anderson Law Firm, LLC   17,232   8   2,154   20,463
Alaska   No designated provider law firm - services                
    provided by referral attorneys   2            
Alberta   Nickerson, Roberts, Holinski & Mercer   4,595   12   383   4,651
Arizona   Davis Miles, PLLC   38,189   42   909   74,367
Arkansas   Lisle Rutledge, P.A.   13,743   7   1,963   19,629
British Columbia   Watson, Goepel & Maledy   4,630   35   132   9,294
California   Parker Stanbury   204,198   62   3,294   412,422
Colorado   Riggs, Abney, Neal, Turpen, Orbison & Lewis   33,664   32   1,052   49,618
Connecticut   Willinger, Willinger & Bucci, P.C.   7,957   12   663   12,809
Delaware   Mattleman, Weinroth & Miller   4,181   4   1,045   5,859
Florida   DeBeaubien, Knight, Simmons, Mantzaris & Neal   51,442   45   1,143   82,622
Florida   Glantz Law Firm   38,675   30   1,289   77,985
Georgia   Deming, Parker, Hoffman, Campbell & Daly   57,657   46   1,253   112,974
Hawaii   Bervar & Jones   12,009   8   1,501   21,196
Idaho   The Huntley Law Firm, PLLC   8,134   8   1,017   11,153
Illinois   Evans, Loewenstein, Shimanovsky & Moscardini, Ltd.   40,746   22   1,852   76,866
Indiana   O'Koon Hintermeister, PLLC   22,355   13   1,720   34,851
Iowa   McEnroe, Gotsdiner, Brewer, Steinbach & Henrichsen, P.C.   5,521   5   1,104   4,657
Kansas   Riling, Burkhead & Nitcher   13,210   12   1,101   14,686
Kentucky   O'Koon Hintermeister, PLLC   9,106   6   1,518   13,133
Louisiana   Provosty, Sadler, deLaunay, Fiorenza & Sobel   20,956   22   953   22,191
Maine   Robinson, Kriger & McCallum   3,918   13   301   5,088
Manitoba   Tapper Cuddy   1,760   27   65   2,574
Maryland/D.C.   Weinstock, Friedman & Friedman, P.A.   40,088   39   1,028   67,034
Massachusetts   Framme Law Firm   2,828   3   943   4,758
Michigan   Powers, Chapman, DeAgostino, Meyers & Milia   40,521   21   1,930   69,722
Minnesota   Wagner, Falconer & Judd, LTD   18,554   21   884   27,322
Mississippi   Nixon, Ray & Framme, PLLC   9,640   4   2,410   12,169
Missouri   Dubail Judge   21,981   16   1,374   26,757
Montana   Rimel & Mrkich, PLLP   4,530   2   2,265   4,489
N. Carolina   Merritt, Flebotte, Wilson, Webb & Caruso   55,928   25   2,237   86,148
N. Dakota   Wagner, Falconer & Judd, LTD   482   1   482   545
Nebraska   Morrow, Poppe, Watermeier & Lonowski, P.C.   2,511   7   359   3,228
Nevada   Dempsey, Roberts & Smith   16,199   14   1,157   33,248
New Hampshire   Framme Law Firm   3,220   3   1,073   5,318
New Jersey   Mattleman, Weinroth & Miller   28,454   21   1,355   36,059
New Mexico   Davis Miles, PLLC   17,533   9   1,948   25,541
New York   Feldman, Kramer & Monaco, P.C.   46,356   46   1,008   69,753
Ohio   Maguire & Schneider, LLP   39,403   26   1,516   63,157
Oklahoma   Riggs, Abney, Neal, Turpen, Orbison & Lewis   39,530   76   520   37,032
Ontario   Mills & Mills   17,584   25   703   27,885
Oregon   Kivel & Howard, LLP   21,792   14   1,557   33,748
Pennsylvania   Welch, Gold & Siegel, P.C.   31,813   20   1,591   47,301
Rhode Island   Framme Law Firm   1,046   1   1,046   1,834
S. Carolina   Merritt, Flebotte, Wilson, Webb & Caruso   20,463   13   1,574   33,734
S. Dakota   Demersseman Jensen   2,358   6   393   1,740
Tennessee   Merritt, Flebotte, Wilson, Webb & Caruso   22,242   12   1,854   29,725
Texas   Ross & Matthews, P.C.   132,074   97   1,362   170,016
Utah   Smart, Schofield, Shorter & Lunceford   13,328   14   952   21,831
Vermont   Framme Law Firm   481   1   481   636
Virginia   Framme Law Firm   37,135   17   2,184   49,517
W. Virginia   Caldwell & Riffee   4,192   3   1,397   2,870
Washington   Lombino - Martino, PS   42,501   28   1,518   81,180
Wisconsin   Wagner, Falconer & Judd, LTD   10,812   19   569   18,368
Wyoming   Smart, Schofield, Shorter & Lunceford   1,751   2   876   1,774
    Total Closed Panel Memberships   1,361,210   1,077   1,264 Avg.   2,183,527
    “Stand-alone” IDT Memberships   91,809            
    Open Panel Memberships   9,425            
    Commercial Driver Legal Plan Memberships   10,793            
    Total Memberships   1,473,237            
                     
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     We have had occasional disputes with provider law firms, some of which have resulted in litigation. The toll-free telephone lines utilized and paid for by the provider law firms are owned by us so that in the event of a termination, the members’ calls can be rerouted very quickly. Nonetheless, we believe that our relations with provider law firms are generally very good. At the end of 2010 and 2009, we had provider law firms representing 49 states and four provinces, compared to 47 states and four provinces at the end of 2008. During the last three calendar years, our relationship with one provider law firm was terminated by the provider law firm or us. As of December 31, 2010, provider law firms representing 35 states have been under contract with us for more than eight years with the average tenure of all provider law firms being approximately 12 years.
 
     There are occasions when members need to be referred by the provider law firm or PPL to an attorney outside the provider law firm. These instances are for geographic reasons, expertise reasons or if the matter is a conflict of interest for the provider law firm. We have an extensive database of referral lawyers developed for PPL and the provider law firms to access when members need services to be coordinated outside the provider law firm. Lawyers with whom members have experienced verified service problems, or are otherwise inappropriate for the referral system, are removed from our database of referral lawyers.
 
     We design our plans for the convenience of our member. The provider law firms primarily deliver consultation benefits via the telephone while document reviews and letters are primarily delivered by fax, email and mail, and thus, the member does not normally need to travel to any law firm to receive the majority of their benefits. They can utilize their benefits from the comfort of their home or office and not take time off from work.
 
     The provider law firms provide and/or coordinate all benefits for our members. After the provider law firm has provided telephone consultation benefits and possible document review and letters, if appropriate, the provider law firm will provide further benefits or coordinate a referral to a local attorney if that is necessary. We have a database of referral attorneys covering North America should a member need a local attorney. The provider law firm coordinates these referrals based on the member's legal needs and the location of the courts.
 
     Members’ benefits carry over to the local attorneys when referred, based on the specific legal matter being referred and the specific benefit applicable to the member. Some referrals are free to the member by way of the specific plan benefit and the referral attorney is paid by the provider law firm. Other referrals are provided under the 25% discount benefit of the plan, where the member pays the discounted fee to the local attorney.
 
     Referrals are made on a case-by-case basis, depending on the specific legal matter and the applicable benefits. The majority of referrals are based on geography of where the member lives, in conjunction with the legal venue and/or the location of the court. Occasionally a member is referred because of expertise that is required on a particular issue.
 
Identity Theft Shield Benefits Provider
 
     Kroll Inc. is the world’s leading risk consulting company. For more than 30 years, Kroll has helped companies, government agencies and individuals reduce their exposure to risk and capitalize on business opportunities. Kroll is an operating unit of Altegrity, Inc., the holding company for USIS, Kroll, HireRight and Explore Information Services. Headquartered in Falls Church, Va., Altegrity has approximately 11,000 employees in 30 countries. Kroll can scrutinize accounting practices and financial documents; gather and filter electronic evidence for attorneys; recover lost or damaged data from computers and servers; conduct in-depth investigations; protect individuals, and enhance security systems and procedures. Kroll’s clients include many of the world’s largest and most prestigious corporations, law firms, academic institutions, non-profit organizations, sovereign governments, government agencies, and high net-worth individuals, entertainers and celebrities. Kroll’s seasoned professionals were handpicked and recruited from leading management consulting companies, top law firms, international auditing companies, multinational corporations, special operations forces, law enforcement and intelligence agencies. Kroll also maintains a network of highly trained specialists in cities throughout the world who can respond to global needs 24 hours a day, seven days a week. Over the last four years, Kroll has developed a unique solution for victims of identity theft and this service is now available to our members through the Identity Theft Shield benefit. Similar to the provider law firms, Kroll is paid a fixed fee on a monthly per capita basis to render services to IDT members.
 
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Marketing
 
     Multi-Level Marketing
     We market Memberships through a multi-level marketing program that encourages individuals to sell Memberships and allows individuals to recruit and develop their own sales organizations. Commissions are paid only when a Membership is sold. No commissions are paid based solely on recruitment. When a Membership is sold, commissions are paid to the associate making the sale, and to other associates (on average, eight others at December 31, 2010, 2009 and 2008) who are in the line of associates who directly or indirectly recruited the selling associate. We provide training materials, organize area-training meetings and designate personnel at the home office specially trained to answer questions and inquiries from associates. We offer various communication avenues to our sales associates to keep such associates informed of any changes in the marketing of our Memberships. The primary communication vehicles we utilize to keep our sales associates informed include extensive use of conference calls and e-mail, an interactive voice-mail service, The Connection monthly magazine, an interactive voice response system and our website, prepaidlegal.com.
 
     Multi-level marketing is primarily used for marketing based on personal sales since it encourages individual or group face-to-face meetings with prospective members and has the potential of attracting a large number of sales personnel within a short period of time. Our marketing efforts towards individuals typically target the middle income family or individual and seek to educate potential members concerning the benefits of having ready access to legal counsel for a variety of everyday legal problems. Memberships with individuals or families sold by the multi-level sales force constituted 73% of our Memberships in force at December 31, 2010, compared to 73% at December 31, 2009 and 74% at December 31, 2008. Although other means of payment are available, approximately 73% of fees on Memberships purchased by individuals or families are paid on a monthly basis by means of automatic bank draft or credit card.
 
     Group marketing
     Our marketing efforts towards employee groups, principally on a payroll deduction payment basis, are designed to permit our sales associates to reach more potential members with each sales presentation and strive to capitalize on, among other things, what we perceive to be a growing interest among employers in the value of providing legal and identity theft service plans to their employees. Memberships sold through employee groups constituted approximately 27% of total Memberships in force at December 31, 2010 and 2009, compared to 26% at December 31, 2008. Most employee group Memberships are sold to school systems, governmental entities and businesses. We emphasize group marketing to employee groups of less than 50 rather than larger groups where there is more competition, price negotiation and typically a longer sales cycle. No group accounted for more than 1% of our consolidated revenues from Memberships during 2010, 2009 or 2008. Substantially all group Memberships are paid on a monthly basis. We are active in legislative lobbying efforts to enhance our ability to market to public employee groups and to encourage Congress to reenact legislation to permit legal service plans to qualify for pre-tax payments under tax qualified employee cafeteria plans.
 
     Affirmative Defense Response System
     We developed the Affirmative Defense Response System (“ADRS”) to provide businesses and their employees a way to minimize their risk in regard to identity theft by encouraging businesses to take proactive measures to protect non-public information. Once our sales associates meet the program requirements and have been through the required training, they can begin to offer businesses template forms they can work from to begin their security program. We encourage businesses to host mandatory employee meetings and training sessions on identity theft and privacy compliance including reviewing the employer’s privacy policy with employees. At such meetings, our associates will provide the employees of the business an opportunity to purchase our legal service and identity theft plans. Since our Identity Theft Shield provides identity restoration benefits and our legal plans provide help on related issues, we believe the majority of the time in restoring an employee’s identity is covered by our plan and therefore is not done on company time or at company expense. We believe our suite of services including our legal plan, the Legal Shield and the Identity Theft Shield provide employees assistance in every phase of identity theft – before, during and after the crime occurs. We developed ADRS to enhance our group marketing efforts and we intend to continue to utilize this program in 2011.
 
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     General
     Sales associates are generally engaged as independent contractors, are provided with training materials and are given the opportunity to participate in our training programs. Sales associates are required to complete a specified training program prior to marketing our Memberships to employee groups. All advertising and solicitation materials used by sales associates must be approved by us prior to use. At December 31, 2010, we had 438,007 “vested” sales associates compared to 477,208 and 425,018 “vested” sales associates at December 31, 2009 and 2008, respectively. A sales associate is considered to be “vested” if he or she has met our vesting requirements. However, a substantial number of vested associates do not continue to market the Membership, as they are not required to do so in order to continue to be vested. In order to meet the vesting requirements and be eligible to receive commissions, sales associates must have an active Associate Agreement. In order to keep an active Agreement; sales associates must (1) maintain an active personal legal services membership or (2) make three personal membership sales per calendar quarter. If a sales associate fails to do either, his or her Associate Agreement will be placed in a pre-cancel status for one quarter (“quarterly vesting probationary period”). During this period, the Associate must either (1) reinstate their personal legal services membership or (2) make six personal membership sales. If these requirements are not met, the Associate will go into a dropped status at the end of the probationary period. Upon the date the Associate Agreement is dropped, the Associate loses all down line, level, counters and qualifications and forfeits any pending advanced commission, earnings and bonuses.
 
     During 2010, we had 82,620 sales associates who personally sold at least one Membership, of which 46,117 (56%) made first time sales. During 2009 and 2008 we had 95,303 and 81,731 sales associates producing at least one Membership sale, respectively, of which 56,736 (59%) and 43,674 (53%), respectively, made first time sales. During 2010, we had 6,806 sales associates who personally sold more than ten Memberships compared to 7,448 and 6,996 in 2009 and 2008, respectively. A substantial number of our sales associates market our Memberships on a part-time basis only. For the year 2010, new sales associates enrolled decreased 26% to 138,442 with an average enrollment fee of $75 from the 186,064 enrolled in 2009 with an average enrollment fee of $87.
 
     The following table recaps, on a quarterly basis for the last two fiscal years, total vested sales associates that made new Membership sales and those that did not as well as those that own a Membership and those that do not own a Membership, by their respective levels of sales:
 
    Assocs Without A Membership   (3)        
    (1)   (2)   Assocs Selling   (4)    
    Assocs Selling   Assocs Selling   With a   Assocs Not   (5)
Qtr/Year       3 or more       Less than 3       Membership       Selling       Total Assocs
Q1/09   60   179   22,805   389,135   412,179
Q2/09   85   227   23,676   377,062   401,050
Q3/09   158   678   38,615   408,733   448,184
Q4/09   273   1,012   38,097   437,826   477,208
Q1/10   153   380   29,833   443,254   473,620
Q2/10   139   314   28,897   429,535   458,885
Q3/10   164   275   27,575   425,789   453,803
Q4/10   166   280   24,854   412,707   438,007
____________________
 
(1)       Represents sales associates that do not own a Membership that have sold 3 or more new Memberships during the quarter indicated.
 
(2)   Represents sales associates that do not own a Membership that have sold less than 3 new Memberships during the quarter indicated.
     
(3)   Represents sales associates who owned a Membership and sold at least 1 new Membership during the quarter indicated.
 
(4)   Represents sales associates who owned a Membership or were in their quarterly vesting probationary period but did not sell at least 1 new Membership during the quarter indicated.
 
(5)   Represents the total vested associates (including those associates in their quarterly vesting probationary period) during the quarter indicated.

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     We derive revenues from our multi-level marketing sales force, including one-time enrollment fee from each new sales associate for which we provide initial marketing supplies and enrollment services to the associate. Amounts collected from sales associates are intended primarily to offset our costs incurred in recruiting and training and providing materials to sales associates and are not intended to generate profits from such activities. Other revenues from sales associates represent the sale of marketing supplies and promotional materials and include fees related to our eService program for associates. The eService program provides subscribers Internet based back office support such as reports, on-line documents, tools, a personal e-mail account and multiple personalized web sites with video presentations.
 
     We continually review our compensation plan for the multi-level marketing force to assure that the various financial incentives in the plan encourage our desired goals. We offer various incentive programs from time to time and frequently adjust the program to maintain appropriate incentives and to improve Membership production and retention.
 
     We hold our International Convention once a year, typically in the spring, and a Leadership Summit, typically in the fall, and routinely host more than 10,000 of our sales associates at these events. These events are intended to provide additional training, corporate updates, new announcements, motivation and associate recognition. Additionally, we offer the Player’s Club incentive program providing additional incentives to our associates as a reward for consistent, quality business. Associates can earn the right to attend an annual incentive trip by meeting certain qualification requirements and maintaining certain personal retention rates. Associates can also earn the right to receive additional monthly bonuses by meeting the monthly qualification requirements for twelve consecutive months and maintaining certain personal retention rates for the Memberships sold during that twelve-month period.
 
     Regional Vice Presidents
     Prior to January 1, 2007, we had a group of approximately 115 employees that served as Regional Vice Presidents (“RVPs”) and were responsible for associate activity in given geographic regions and had the ability to appoint independent contractors as Area Coordinators within the RVP’s region. Effective January 1, 2007, we dramatically revamped this program by reducing the number of RVPs from approximately 115 to 15; eliminated the employee relationship of the RVPs so that all are independent contractors; significantly increased both the size of their regions and the commission override percentages that can be earned by the RVPs; put in place additional bonus compensation available based on growth in their assigned regions; replaced the previous large number of Area Coordinators with substantially fewer Regional Managers appointed by the RVPs; created commission overrides than can be earned by the Regional Managers in their regions and created a new class of appointees, Certified Meeting Coordinators that are appointed by the Regional Managers. Additionally, we have significantly increased the frequency of communications between the RVPs and us and the frequency and the amount of reporting both from and to, the RVPs. At December 31, 2010, we had 35 RVPs assigned.
 
     The RVP/Regional Manager/Certified Meeting Coordinator program provides a basis to effectively monitor current sales activity, further educate and motivate the sales force and otherwise enhance the relationships between the associates and us. New products, incentives and initiatives will be channeled through the RVPs.
 
15
 

 

     Pre-Paid Legal Benefits Association
     The PPL Benefits Association (“PPLBA”) was founded in 1999 with the intent of providing sales associates the opportunity to have access, at their own expense, to health insurance and life insurance benefits. Membership in the Association allows a sales associate to become eligible to enroll in numerous benefit programs, as well as take advantage of attractive affinity agreements. Membership in this Association is open to sales associates that reach a certain level within our marketing programs who also maintain an active personal legal services Membership. The PPLBA is a separate association not owned or controlled by us and is governed by an 8 member Board of Directors, including four officer positions. None of the officers or directors of the PPLBA serve in any such capacity with us. The PPLBA employs a Director of Associate Benefits paid by the Association. Affinity programs available to members of the PPLBA include credit cards, long-distance, wireless services, vehicle purchasing services, mortgage and real estate assistance and a travel club. As determined by its Board of Directors, some of the revenue generated by the PPLBA through commissions from vendors of the benefits and affinity programs or contributed to the Association by us may be used to make open-market purchases of our stock for use in stock bonus awards to Association members based on criteria established from time to time by the Board of Directors of the PPLBA. Since inception and through December 31, 2010, approximately 47,300 shares were purchased by the PPLBA for awards to its members, including approximately 1,400 and 1,900 shares of stock to Association members for 2009 and 2008. No share purchases were made for 2010.
 
     Cooperative Marketing
     We have in the past, and may in the future, develop marketing strategies pursuant to which we seek arrangements with insurance and service companies that have established sales forces. Under such arrangements, the agents or sales force of the cooperative marketing partner market our Memberships along with the products already marketed by the partner’s agents or sales force. Such arrangements allow the cooperative marketing partner to enhance its existing customer relationships and distribution channels by adding our product to the marketing partner’s existing range of products and services, while we are able to gain broader Membership distribution and access to established customer bases.
 
     We have a cooperative marketing agreement with Atlanta-based Primerica Financial Services (“PFS”). PFS is one of the largest financial services marketing organizations in North America with more than 100,000 personal financial analysts across the U.S. and Canada. Although these Memberships were sold by PFS representatives, we have a direct billing and service relationship with the members. The PFS cooperative marketing agreement resulted in approximately 20,000 new Membership sales during 2010 compared to 18,000 and 24,000, respectively for 2009 and 2008.
 
     We have had limited success with cooperative marketing arrangements in the past and are unable to predict with certainty what success we will achieve, if any, under our existing or future cooperative marketing arrangements.
 
Operations
 
     Our corporate operations involve Membership application processing, member-related customer service, and various associate-related services including commission payments, receipt of Membership fees, related general ledger accounting, human resources, internal audit and managing and monitoring the provider law firm relationships.
 
     We utilize a management information system to control operations costs and monitor benefit utilization. Among other functions, the system evaluates benefit claims, monitors member use of benefits and monitors marketing/sales data and financial reporting records. Our dominant concerns in the architecture of private networks and web systems include security, scalability, and capacity to accommodate peak traffic and business continuity in the event of a disaster. We believe our management information system has substantial capacity to accommodate increases in business data before substantial upgrades will be required. We believe this excess capacity will enable us to experience a significant increase in the number of members serviced with less than a commensurate increase of administrative costs.
 
16
 

 

     We have built a strong Internet presence to strengthen the services provided to both members and associates. Our Internet site, at www.prepaidlegal.com, welcomes the multifaceted needs of our members, sales force, investors and prospects. It has also reduced costs associated with communicating critical information to the associate sales force.
 
     Our operations also include departments specifically responsible for marketing support and regulatory and licensing compliance. We have an internal production staff that is responsible for the development of new audio and video sales materials.
 
Quality Control
 
     In addition to our quality control efforts for provider law firms described above, we also closely monitor the performance of our home office personnel, especially those who have telephone contact with members or sales associates. We record home office employee telephone calls with our members and sales associates to assure that our policies are being followed and to gather data about recurring problems that may be avoided through modifications in policies. We also use such recorded calls for training and recognition purposes.
 
Competition
 
     We compete in a variety of market segments in the legal service plan industry, including, among others, individual enrollment plans, employee benefit plans and certain specialty segments. Our competitors with a national presence would include Hyatt Legal Plans (a MetLife company), ARAG® North America and Legal Services Plan of America (a GE Money company, formerly the Signature Group). Most of these concentrate their marketing to larger employer groups and offer open panel plans.
 
     There are many entities offering some level of benefits related to identity theft, credit monitoring, etc. Most of the credit repositories offer some type of fee based services to the public as well as many financial institutions and independent companies such as LifeLock. Most of these entities are focused on credit monitoring rather than identity theft restoration. We believe our identity theft restoration product is unique due to the combination of our identity theft restoration partner (Kroll) and our provider law firms.
 
     If a greater number of companies seek to enter the legal service plan market or offer more comprehensive identity theft solutions, we will experience increased competition in the marketing of our Memberships. However, we believe our competitive position is enhanced by our actuarial database, the combination of our existing network of provider attorney law firms and Kroll and our ability to tailor products to suit various types of distribution channels or target markets. We believe that no other competitor has the ability to monitor the customer service aspect of the delivery of legal services to the same extent we do. Finally, we have intentionally concentrated our group marketing to small employer groups. Serious competition is most likely from companies with significant financial resources and advanced marketing techniques.
 
Regulation
 
     We are regulated by or required to file with or obtain approval of State Insurance Departments, Secretaries of State, State Bar Associations and State Attorney General Offices depending on individual state opinions of regulatory responsibility for legal expense plans. We are also required to file with similar government agencies in Canada. While some states or provinces regulate legal expense plans as insurance or specialized legal expense products, others regulate them as services.
 
     As of December 31, 2010, the regulatory environment for us and our wholly owned subsidiaries is reflected in the table below. The most significant of these subsidiaries are Pre-Paid Legal Casualty, Inc. (“PPLCI”), Pre-Paid Legal Services, Inc. of Florida (“PPLSIF”) and Legal Service Plans of Virginia, Inc. (“LSPV”). Of our total Memberships in force as of December 31, 2010, 40% were in jurisdictions that subject us or one of our subsidiaries to insurance or specialized legal expense plan regulation (27% in our subsidiaries). We are actively working with regulators in the various states in which our subsidiaries are regulated as insurance to explore other regulatory alternatives to eliminate some of the agent licensing or financial and marketing regulation that is prevalent in the insurance industry.
 
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    Number of
Regulatory Environment:       Jurisdictions
No special regulatory classification and no required licensing for sales associates   33
Insurance company classification with required licensing for sales associates   13
Insurance company classification but no required licensing for sales associates   3
Other (non-insurance company) regulatory classification with required licensing    
for sales associates   3
No special regulatory classification but required licensing for sales associates   1
Required reporting to insurance department but no licensing of sales associates   1
No legal plan offered – only Identity Theft Shield available for sale   1
Total jurisdictions (50 states, District of Columbia and 4 Canadian provinces)   55
     

     We sell Memberships in the Canadian provinces of Ontario, British Columbia, Alberta and Manitoba. The Memberships we currently market in such provinces do not constitute an insurance product and therefore are exempt from insurance regulation.
 
     In states with no special licensing or regulatory requirements, we commence operations only when advised by the appropriate regulatory authority that proposed operations do not constitute conduct of the business of insurance. There is no assurance that Memberships will be exempt from insurance regulation even in states or provinces with no specific regulations. In these situations, we or one of our subsidiaries would be required to qualify as an insurance company in order to conduct business.
 
     PPLCI serves as the operating company in most states where Memberships are determined to be an insurance product. PPLCI is organized as a casualty insurance company under Oklahoma law and as such is subject to regulation and oversight by various state insurance agencies where it conducts business. These agencies regulate PPLCI’s forms, rates, trade practices, allowable investments and licensing of agents and sales associates. These agencies also prescribe various reports, require regular evaluations by regulatory authorities, and set forth-minimum capital and reserve requirements. Our insurance subsidiaries are routinely evaluated and examined by representatives from the various regulatory authorities in the normal course of business. Such examinations have not and are not expected to adversely affect our operations or financial condition in any material way. We believe that all of our subsidiaries meet any required capital and reserve requirements. Dividends paid by PPLCI are restricted under Oklahoma law to available surplus funds derived from realized net profits.
 
     We are required to register and file reports with the Oklahoma Insurance Commissioner as a member of a holding company system under the Oklahoma Insurance Holding Company System Regulatory Act. Transactions between PPLCI and us or any other subsidiary must be at arm’s-length with consideration for the adequacy of PPLCI’s surplus, and may require prior approval of the Oklahoma Insurance Commissioner. Payment of any extraordinary dividend by PPLCI to us requires approval of the Oklahoma Insurance Commissioner. The payment of dividends by PPLCI is restricted under the Oklahoma Insurance Code to available surplus funds derived from realized net profits and requires the approval of the Oklahoma Insurance Commissioner for any dividend representing more than the greater of 10% of such accumulated available surplus or the previous years’ net profits. Additionally, in one of its operating states, PPLCI must meet a premium to surplus ratio of 3:1. PPLCI also computes an analysis of its capital under a risk based capital formula prescribed by statutory accounting regulations and must maintain sufficient capital above amounts otherwise required by the various state insurance departments to meet the adjusted capital requirements. Dividends by LSPV have a similar restriction pursuant to requirements to meet risk based capital levels. During 2010, PPLCI declared and after obtaining all necessary regulatory approvals, paid extraordinary dividends to us of $8.7 million compared to the $6.7 million and $14.9 million paid to us during 2009 and 2008, respectively. Any change in our control, defined as acquisition by any method of more than 10% of our outstanding voting stock, including rights to acquire such stock by conversion of preferred stock, exercise of warrants or otherwise, requires approval of the Oklahoma Insurance Commissioner. Holding company laws in some states in which PPLCI operates provide for comparable registration and regulation of us.
 
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     Certain states have enacted special licensing or regulatory requirements designed to apply only to companies offering legal service products. These states most often follow regulations similar to those regulating casualty insurance providers. Thus, the operating company may be expected to comply with specific minimum capitalization and unimpaired surplus requirements; seek approval of forms, Memberships and marketing materials; adhere to required levels of claims reserves, and seek approval of premium rates and agent licensing. These laws may also restrict the amount of dividends paid to us by such subsidiaries. PPLSIF is subject to restrictions of this type under the laws of the State of Florida, including restrictions with respect to payment of dividends to us. At January 1, 2011, none of PPLCI, PPLSIF or LSPV had funds available for payment of substantial dividends without the prior approval of the insurance commissioner. LSPV declared and paid us a $1.9 million dividend during 2010 compared to $1.8 million during 2009 and $4.1 million during 2008.
 
     As the legal plan industry continues to mature, additional legislation may be enacted that would affect us and our subsidiaries. We cannot predict with any accuracy if such legislation would be adopted or its ultimate effect on operations, but expect to continue to work closely with regulatory authorities to minimize any undesirable impact and, as noted above, to reduce regulatory cost and burden where possible.
 
     Our operations are further impacted by the American Bar Association Model Rules of Professional Conduct (“Model Rules”) and the American Bar Association Code of Professional Responsibility (“ABA Code”) as adopted by various states. Arrangements for payments to a lawyer by an entity providing legal services to its members are permissible under both the Model Rules and the ABA Code, so long as the arrangement prohibits the entity from regulating or influencing the lawyer’s professional judgment. The ABA Code prohibits lawyer participation in closed panel legal service programs in certain circumstances. Our agreements with provider law firms comply with both the Model Rules and the ABA Code. We rely on the lawyers serving as the designated provider law firms for the closed panel benefits to determine whether their participation would violate any ethical guidelines applicable to them. We and our subsidiaries comply with filing requirements of state bar associations or other applicable regulatory authorities.
 
     We are also required to comply with state, provincial and federal laws governing our multi-level marketing approach. These laws generally relate to unfair or deceptive trade practices, lotteries, business opportunities and securities. The U.S. Federal Trade Commission has proposed business opportunity regulations which may have an effect upon our method of operating in the United States, but such regulations are in the early stages of development and it is not possible to gauge the potential impact or the effective date at this time. We have experienced no material problems with marketing compliance. In jurisdictions that require associates to be licensed, we receive all applications for licenses from the associates and forward them to the appropriate regulatory authority. We maintain records of all associates licensed, including effective and expiration dates of licenses and all states in which an associate is licensed. We do not accept new Membership sale applications from any unlicensed associate in such jurisdictions.
 
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Employees
 
     At December 31, 2010 we employed 680 individuals, exclusive of independent agents and sales associates who are not employees. None of our employees are represented by a union. We consider our employee relations generally to be very good.
 
Foreign Operations
 
     We have operations in the Canadian provinces of Ontario, British Columbia, Alberta and Manitoba and derived aggregate revenues, including Membership fees and revenues from associate services, from Canada of $10.0 million in U.S. dollars during 2010 compared to $8.7 million and $8.7 million in 2009 and 2008, respectively. In addition, we incur expenses in Canada in relation to these revenues. As reflected in the attached Consolidated Statements of Comprehensive Income, we have recorded negative foreign currency translation adjustments of $223,000, net of taxes, during 2010 but have a cumulative positive foreign currency translation adjustment balance of $887,000, net of taxes, at December 31, 2010. These amounts are subject to dramatic change in conjunction with the relative values of the Canadian and U.S. dollars.
 
Availability of Information
 
     We file periodic reports and proxy statements with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N. E., Washington, D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We file our reports with the SEC electronically. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of this site is http://www.sec.gov.
 
     Our Internet address is www.prepaidlegal.com. We make available on our website free of charge copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably possible after we electronically file such material with, or furnish it to, the SEC.
 
ITEM 1A. RISK FACTORS
 
     Our financial position, results of operations and cash flows are subject to various risks, many of which are not exclusively within our control that may cause actual performance to differ materially from historical or projected future performance. Information contained within this Form 10-K should be carefully considered by investors in light of the risk factors described below. In addition to factors discussed elsewhere in this report, the following are some of the important factors that could affect our financial condition or results of operations:
 
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     We have entered into a definitive merger agreement with MidOcean Partners. 
     
We announced that we entered into a definitive merger agreement on January 30, 2011, with MidOcean PPL Holdings Corp. (“Parent”) and PPL Acquisition Corp., both newly created entities formed by MidOcean Partners, a New York based private equity firm (“MidOcean”). The merger agreement provides that Parent will acquire all of our outstanding shares for a cash payment of $66.50 per share, or approximately $650 million in the aggregate. The closing of the transaction is subject to certain terms and conditions customary for transactions of this type, including receipt of shareholder and regulatory approvals. We currently anticipate consummating the transaction on or before July 31, 2011. Upon completion of the transaction, we will become a privately held company and our common stock will no longer be traded on the NYSE. There can be no assurance that the merger will occur, or will occur on the timetable contemplated hereby. For example, the merger may not occur, or may not occur on the timetable currently contemplated, as a result of a variety of factors, including the failure to obtain shareholder or regulatory approval, Parents failure to obtain sufficient financing to complete the merger, litigation relating to the merger or the failure of one or more of the closing conditions set forth in the merger agreement. If the merger agreement is not adopted by our shareholders, or if the merger is not completed for any other reason, our shareholders will not receive any payment for their shares pursuant to the merger agreement. Instead, upon the termination of the merger agreement, the Company will remain as a public company and our common stock will continue to be registered under the Exchange Act and listed and traded on the NYSE, although the price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the merger will be consummated. Under specified circumstances, we may be required to pay MidOcean a termination fee or certain of MidOcean’s expenses or MidOcean may be required to pay us a termination fee, as described in the merger agreement. In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the merger, and many of these fees and costs are payable by us regardless of whether or not the merger is consummated.
 
     The announcement and pendency of the merger could cause disruptions in our business. For example, uncertainty concerning potential changes to us and our business could adversely affect our relationships with our associates, members and provider law firms. In addition, key personnel may depart for a variety of reasons, including perceived uncertainty as to the effect of the merger on their employment. The pendency of the merger could also divert the time and attention of our management from our ongoing business operations. These disruptions may increase over time until the closing of the merger.

     Also, pending the closing of the merger, the merger agreement restricts us from engaging in certain actions without Parents consent, which could prevent us from pursuing opportunities that may arise prior to the closing of the merger.
 
     Our future results may be adversely affected if Membership persistency or renewal rates are lower than our historical experience.
     
We have over 25 years of actual historical experience to measure the expected retention of new members. These retention rates could be adversely affected by the quality of services delivered by provider law firms, the existence of competitive products or services, our ability to provide administrative services to members or other factors. If our Membership persistency or renewal rates are less than we have historically experienced, our cash flow, earnings and growth rates could be adversely affected.
 
     We may not be able to grow Memberships and revenues at the same rate as we have historically experienced.
     
Our year end active Memberships decreased 4.8% from December 31, 2009 to December 31, 2010, decreased 0.7% during 2009 and decreased 1.1% during 2008. Changes in net income for the same three years were 22%, (8%) and 18%, respectively. In years prior to 2004, we were able to grow Memberships more significantly. Our ability to grow Memberships and revenues is substantially dependent upon our ability to expand or enhance the productivity of our sales force, develop additional legal expense products, develop alternative marketing methods or expand geographically. There is no assurance that we will be able to achieve increases in Membership and revenue growth comparable to our historical growth rates.
 
     We are dependent upon the continued active participation of our principal executive officer. 
     
Until the merger closes, if it closes, our success depends substantially on the continued active participation of our founder and chairman, Harland C. Stonecipher. Although our management includes other individuals with significant experience in our business, the loss of the services of Mr. Stonecipher could have a material adverse effect on our financial condition and results of operations.
 
     There is litigation pending that may have a material adverse effect on us if adversely determined. 
     
See “Item 3. Legal Proceedings.” Any of the legal proceedings described in Item 3 could have a material adverse effect on our financial condition and results of operations.
 
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     We may have compromises of our information security.
     We collect and store certain personal information that our members and sales associates provide to purchase products or services, enroll in certain programs, register on our web site, or otherwise communicate and interact with us. We also gather and retain information about our employees, members and sales associates in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information such as member and sales associate credit card numbers. We cannot provide assurance that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of the algorithms or systems that we use to protect customer transaction data. Despite these instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. A breach of our security system resulting in member, sales associate or employee personal information being obtained by unauthorized persons could adversely affect our reputation, disrupt our operations and expose us to claims from employees, members, sales associates, financial institutions, payment card associations and other persons, which could have a material adverse effect on our business, financial condition and results of operations. We may not comply with requirements placed on us by payment card associations or other financial processors. In addition, our online operations at www.prepaidlegal.com depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments.
 
     During a downturn in the economy, consumer purchases of discretionary items may be affected, which could materially harm our sales, retention rates, profitability and financial condition.
     
Although we believe our products and services can greatly assist our members during these challenging economic times, consumer spending is generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and such decline may impact sales and retention of our products should potential members have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and sharply falling home prices, among other things.
 
     We are in a regulated industry and regulations could have an adverse effect on our ability to conduct our business. 
     
We are regulated by or required to file with or obtain approval of State Insurance Departments, State Bar Associations and State Attorney General’s Offices, depending on individual state positions regarding regulatory responsibility for legal service plans. Regulation of our activities is inconsistent among the various states in which we do business with some states regulating legal service plans as insurance or specialized legal service products and others regulating such plans as services. Such disparate regulation requires us to structure our Memberships and operations differently in certain states in accordance with the applicable laws and regulations. Our multi-level marketing strategy is also subject to U.S. federal, Canadian provincial and U.S. state regulation under laws relating to consumer protection, pyramid sales, business opportunity, lotteries and multi-level marketing. Although we believe in their current proposed state they would not apply to our business, the U.S. Federal Trade Commission (“FTC”) has proposed business opportunity regulations which could, if applied broadly, have an effect upon our method of operating in the United States, but such regulations are in the early stages of development and it is not possible to gauge the potential impact or the effective date at this time. Changes in the regulatory environment for our business could increase the compliance costs we incur in order to conduct our business or limit the jurisdictions in which we are able to conduct business. See Item 3, Legal Proceedings for further information pertaining to current inquiries by the SEC.
 
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     The business in which we operate is competitive. 
     
There are a number of existing and potential competitors that have the ability to offer competing products that could adversely affect our ability to grow. In addition, we may face competition from a growing number of Internet based legal sites with the potential to offer legal and related services at competitive prices. Increased competition could have a material adverse effect on our financial condition and results of operations. See “Description of Business – Competition.”
 
     We are dependent upon the success of our marketing force. 
     
Our principal method of product distribution is through multi-level marketing. The success of a multi-level marketing force is highly dependent upon our ability to offer a commission and organizational structure and sales training and incentive program that enable sales associates to recruit and develop other sales associates to create an organization. There are a number of other products and services that use multi-level marketing as a distribution method and we must compete with these organizations to recruit, maintain and grow our multi-level marketing force. In order to do so, we may be required to increase our marketing costs through increases in commissions, sales incentives or other features, all of which could adversely affect our future earnings. In addition, the level of confidence of the sales associates in our ability to perform is an important factor in maintaining and growing a multi-level marketing force. Adverse financial developments concerning us, including negative publicity or common stock price declines, could adversely affect our ability to maintain the confidence of our sales force.
 
     Our stock price may be affected by short sellers of our stock. 
     
As of January 14, 2011, the New York Stock Exchange reported that approximately 1.4 million shares of our stock were sold short, which constitutes approximately 15% of our outstanding shares and 29% of shares held by non-affiliates. During 2010, the number of shares sold short typically represented one of the largest short interest positions of any New York Stock Exchange listed company in terms of the number of average trading days it would take to cover the short positions. Short sellers expect to make a profit if our shares decline in value. We have been the subject of a negative publicity campaign from several known sources of information who support short sellers. The existence of this short interest position may contribute to volatility in our stock price.
 
     We have not been able to significantly increase our employee group Membership sales. 
     
Our success in growing Membership sales is dependent in part on our ability to market to employee groups. At December 31, 2010 and 2009, group memberships represented 27% of total Memberships compared to 26% at December 31, 2008. Adverse publicity about us may affect our ability to market successfully to employee groups, particularly larger groups. There is no assurance that we will be able to increase our group business.
 
     We have repurchased more than half our outstanding shares over the past ten years. 
     
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 16 million shares through subsequent board actions. At December 31, 2010, we had purchased 15.4 million treasury shares under these authorizations in both open market and non-open market transactions for a total consideration of $472.0 million, an average price of $30.67 per share. The repurchase program of $472.0 million combined with $17.1 million in dividends has resulted in our returning $489.1 million to shareholders since April 1999 and represents more than 100% of our net earnings during the same timeframe. We have reduced the number of shares outstanding by approximately 58% from 23.6 million at March 31, 1999 to 9.8 million outstanding at year-end. Our stock price, earnings per share and cash flow would have been different had we invested these funds differently. Additionally, due to these repurchases, the lower number of shares outstanding could favorably affect our stock price assuming our net income remained unchanged resulting in higher earnings per share. Conversely, these repurchases may have contributed to lower average trading volume potentially leading to reduced interest in our stock by large institution investors that typically make larger investments. Any future treasury stock purchases could have a similar impact on our stock price, earnings per share and cash flow. Under the terms of the Merger Agreement, we are prohibited from repurchasing any shares without Parents consent.
 
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2. PROPERTIES.
 
     Our executive and administrative offices and our subsidiaries are located at One Pre-Paid Way, Ada, Oklahoma. The office complex, owned by us, contains approximately 170,000 square feet of office space and was constructed on approximately 87 acres contributed to us by the City of Ada in 2001 as part of an economic development incentive package. Construction was completed in 2004 at a cost of approximately $34.1 million, including $706,000 in capitalized interest costs, and was funded from existing resources and proceeds from a $20 million line of credit.
 
     Our headquarters contains two long bars of open office area designed to serve as podiums, which stretch east from the northern and southern edges of the tower. Two and three stories high respectively, the podiums house the call centers and Information Technology departments. Only 60 feet across, they are designed to ensure that employees are never more than thirty feet from a source of daylight. Shared corporate services -- including a 650-seat auditorium, dining hall, exercise facility, and a connecting corridor containing a company history gallery -- are located at the east end of the bars, creating a central courtyard. The courtyard features a reflecting pool and a 12-foot bronze sculpture of our logo, the Lady of Justice, a universal symbol of justice. The building’s main entrance welcomes our frequent visitors, celebrates our history, and is designed to convey the tradition of civic judicial buildings. Although we substantially occupy our current facility, the building is designed to expand over time without negatively affecting the site layout or the building concept and we emphasized the use of modular furnishings to provide enhanced flexibility. We placed importance on the goal of providing each employee with an excellent work environment.
 
     Additionally, we fully utilize another distribution facility located about two miles from our new offices and containing approximately 17,000 square feet of office and warehouse and shipping space. Our previous headquarters of approximately 40,000 square feet and two other buildings containing approximately 18,600 combined square feet located adjacent to the distribution facility are now primarily used as disaster recovery, or business continuity, sites as well as storage locations.
 
     During January 2006, we acquired an additional 40,000 square foot building in Duncan, Oklahoma for $1 million. We completely refurbished the space at an additional cost of $3.4 million, resulting in total capitalized cost of $4.4 million, which was funded from existing resources. We moved from space previously leased to the completely refurbished and redesigned space with redundant infrastructure components in July 2006 and currently have approximately 80 customer service representatives in the facility but have the capacity to accommodate 350 employees.
 
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     In addition to the property described above that we own, we opened an additional Customer Care facility in Antlers, Oklahoma during March 2000, in building space provided by the City of Antlers. In conjunction with a rural economic development program coordinated by the City of Antlers, a new facility was built at no cost to us that can accommodate approximately 100 customer service representatives. We leased the facilities from the City of Antlers upon completion of the construction in November 2002 and currently have approximately 50 customer service representatives in the facility.
 
ITEM 3. LEGAL PROCEEDINGS.
 
     On March 27, 2006, we received a complaint filed by Blackburn & McCune PLLC, a former provider attorney law firm, in the Second Circuit Court of Davidson County, Tennessee seeking compensatory and punitive damages on the basis of allegations of breach of contract and fraud. On May 15, 2006, the trial court dismissed plaintiff’s complaint in its entirety. Plaintiff amended the complaint to allege fraud and breach of fiduciary duty on June 12, 2006 and filed a notice of appeal on June 13, 2006. On August 24, 2007, the Court of Appeals reversed the ruling of the trial court and remanded the suit to the trial court for further proceedings. On June 24, 2009, the trial court granted our motion for summary judgment and dismissed plaintiff's action against us in its entirety. Plaintiff appealed the summary judgment, and on June 30, 2010 the appeals court reversed the dismissal in part and affirmed it in part, remanding the case to the trial court on the two surviving claims of the plaintiffs. The ultimate outcome of this matter is not determinable but we will vigorously defend our interests in this matter.
 
     We are the subject of an informal inquiry by the SEC. This inquiry is a fact-finding inquiry and does not mean that the SEC has reached any conclusions. On October 5, 2009, we received a subpoena from the Division of Enforcement of the SEC. The subpoena required us to produce a variety of documents pertaining to our treasury stock repurchase program; our ADRS program and other marketing practices; membership statistical information; segment reporting; the FTC contingency disclosure; and other operational practices. On April 13, 2010 we received an additional subpoena requesting information relating to certain membership information, member complaints about provider law firms, our efforts to achieve compliance with the payment card industry requirements, the resignation of Harland C. Stonecipher as Chief Executive Officer and the resignation of Tom Smith as a director. On July 9, 2010 we received an additional subpoena requesting information related to prior subpoenas and our production of documents to the SEC. Since that time, we continue to respond to requests to clarify prior productions. We continue to cooperate with the staff of the SEC and expect to continue to do so. We are not able to predict what the outcome of this inquiry may be or when it will be resolved.
 
     On February 8, 2011, a putative shareholder class action complaint was filed in the Oklahoma District Court of Oklahoma County by Andrew D. McMullan and James E. McCurdy, individually and on behalf of all others similarly situated, against us and each member of our board of directors. The complaint generally alleges that the directors breached their fiduciary duties to the shareholders by agreeing to sell the Company pursuant to an unfair process and at an unfair price. The complaint alleges that the directors breached their fiduciary duties of care, loyalty, candor, good faith and independence and have acted to put their personal interests ahead of the interests of our shareholders. The complaint also alleges that we aided and abetted such breaches. The complaint seeks injunctive relief, rescission of any barriers to the maximization of shareholder value and attorneys’ fees. The ultimate outcome of this matter is not determinable but we will vigorously defend our interests in this matter.
 
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     On February 11, 2011, a putative shareholder class action complaint was filed in the Oklahoma District Court of Pontotoc County by Czar Fredrik D. Reyes, individually and on behalf of all others similarly situated, against us, each member of our board of directors, and MidOcean PPL Holdings Corp., and PPL Acquisition Corp. The complaint generally alleges that our directors breached their fiduciary duties to the shareholders by agreeing to sell the Company pursuant to an unfair process and at an unfair price. The complaint alleges that the directors breached their fiduciary duties of loyalty, due care, independence, good faith and fair dealing, and that Pre-Paid and MidOcean have aided and abetted such breaches. The complaint also alleges that we agreed to onerous and preclusive deal protection devices as part of the merger, including a no solicitation provision. The complaint seeks injunctive relief, damages and costs of the action, including attorneys’ fees. The ultimate outcome of this matter is not determinable but we will vigorously defend our interests in this matter.
 
     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 proceedings 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 believe that we have meritorious defenses in all pending cases and will vigorously defend against the claims and have not established an accrued liability for any estimated damages in connection with these various cases. 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.
 
     Canadian taxing authorities challenged portions of our commission and general and administrative deductions for tax years 1999 - 2002 and had tax assessments that aggregate $5.7 million. During 2007, we reached a settlement with Canadian taxing authorities regarding the general and administrative deductions that allowed us to claim a deduction on the Canadian tax return for over 70% of these items. This settlement offer allowed us to amend our U.S. federal tax returns and deduct the remaining 30% of these items. The Canadian and U.S. tax returns were amended to reflect the changes in our general and administrative expense and credits/refunds for the associated taxes, penalty and interest. During October 2010, we reached a settlement with Canadian taxing authorities which allows a deduction for substantially all commissions paid during years 1999 – 2002 in those tax years. We believe this settlement provides a basis for the full deduction of commissions when paid for tax years 2003 forward. During December 2010 we received $3.5 million from Canada Revenue Agency and as of December 31, 2010 we have $1.2 million receivable recorded in other current assets on the balance sheet for amounts due from the Ontario Ministry of Revenue for previously paid tax, penalty and interest for tax years 1999 through 2002. As a result of this settlement we recorded interest income of $846,000, reversed previously accrued interest expense of $191,000 and reversed previously accrued penalty of $13,000.
 
ITEM 4. (REMOVED AND RESERVED)
 
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PART II
 
ITEM 5. 
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market Price of and Dividends on the Common Stock
 
     At February 11, 2011, there were 1,551 holders of record (including brokerage firms and other nominees) of our common stock, which is listed on the New York Stock Exchange under the symbol “PPD.” The following table sets forth, for the periods indicated, the range of high and low sales prices for the common stock, as reported by the New York Stock Exchange.
 
  High       Low
2011:          
       1st Quarter (through February 11)  $ 66.84    $ 59.33
2010:          
       4th Quarter $ 66.65   $ 54.02
       3rd Quarter   68.66     44.05
       2nd Quarter   52.89     34.00
       1st Quarter   43.69     37.00
2009:          
       4th Quarter $ 53.05   $ 30.68
       3rd Quarter   52.92     41.83
       2nd Quarter   45.22     28.17
       1st Quarter   38.23     26.45

     No dividends on our common stock were declared in 2010, 2009 or 2008. It is anticipated that earnings generated from our operations will be used to finance our growth, to continue to purchase shares of our stock and possibly pay cash dividends. Our ability to pay dividends is dependent in part on our ability to derive dividends from our subsidiaries. The payment of dividends by PPLCI is restricted under the Oklahoma Insurance Code to available surplus funds derived from realized net profits and requires the approval of the Oklahoma Insurance Commissioner for any dividend representing more than the greater of 10% of such accumulated available surplus or the previous years’ net profits. Additionally, in one of its operating states, PPLCI must meet a premium to surplus ratio of 3:1. PPLCI also computes an analysis of its capital under a risk based capital formula prescribed by statutory accounting regulations and must maintain sufficient capital above amounts otherwise required by the various state insurance departments to meet the adjusted capital requirements. Dividends by LSPV have a similar restriction pursuant to requirements to meet risk based capital levels. The following table reflects subsidiary dividends during the last three years:
 
                      Expected
    Dividends Paid   Dividends
Regulated Subsidiary       2010       2009       2008       1/1/2011
Pre-Paid Legal Casualty, Inc.    $ 8.7 million    $ 6.7 million    $ 14.9 million    $
Legal Service Plans of Virginia     1.9 million     1.8 million     4.1 million    

     At December 31, 2010, the amount of restricted net assets of consolidated subsidiaries was $25.1 million, representing amounts that may not be paid to us as dividends either under the applicable regulations or without regulatory approval.
 
     Under the terms of the Merger Agreement, we are prohibited from declaring or paying any dividends without Parents consent.
 
Recent Sales of Unregistered Securities
 
None.
 
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Issuer Purchases of Equity Securities
 
     The following table provides information about our purchases of stock during the fourth quarter of 2010.
 
              Total Number of   Maximum
              Shares   Number of
              Purchased as   Shares that May
              Part of Publicly   Yet Be
    Total Number of         Announced   Purchased
    Shares   Average Price   Plans or   Under the Plans
Period       Purchased       Paid per Share       Programs       or Programs (1)
October 2010   3,220    $ 58.62   3,220   610,402
November 2010           610,402
December 2010           610,402
Total   3,220    $ 58.62   3,220    
____________________                  
   
(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. On occasion we purchase shares from related parties but transactions between the company and all related parties constitute less than one tenth of one percent of total share transactions since the company began its share repurchase program. The Board of Directors has subsequently from time to time increased such authorization from 500,000 shares to 16 million shares. The most recent authorization was for 1 million additional shares on November 30, 2009. There has been no time limit set for completion of the repurchase program. Under the terms of the Merger Agreement, we are prohibited from declaring or paying any dividends without Parents consent.
 
Shareholder Return Performance Graph
 
     The following graph compares the cumulative total shareholder returns of our Common Stock during the five years ended December 31, 2010 with the cumulative total shareholder returns of the Russell 2000 Index and the Morningstar Personal Services index. The comparison assumes an investment of $100 on January 1, 2006 in each of our Common Stock, the Russell 2000 Index and Morningstar’s Personal Services index and that any dividends were reinvested.
 
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  12/31/2005       12/31/2006       12/31/2007       12/31/2008       12/31/2009       12/31/2010
Pre-Paid Legal Services, Inc.  $ 100.00    $ 102.41    $ 144.86    $ 97.59    $ 107.51    $ 157.68
Russell 2000 Index $ 100.00   $ 118.37   $ 116.51   $ 77.15   $ 98.11   $ 124.46
Morningstar Group Index $ 100.00   $ 110.22   $ 112.72   $ 73.03   $ 88.55   $ 87.00

ITEM 6. SELECTED FINANCIAL DATA.
 
     The following table sets forth selected financial and statistical data for us as of the dates and for the periods indicated. This information is not necessarily indicative of our future performance. The following information should be read in conjunction with our Consolidated Financial Statements and Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operation included elsewhere herein.
 
  Year Ended December 31,
  2010       2009       2008       2007       2006
Income Statement Data: (In thousands, except ratio, per share and Membership amounts)
       Revenues:                            
              Membership fees  $ 424,090    $ 426,429    $ 436,778    $ 427,428    $ 412,200
              Associate services   26,543     28,352     23,534     25,112     26,857
              Other   3,303     3,696     4,177     4,549     4,967
                     Total revenues   453,936     458,477     464,489     457,089     444,024
       Costs and expenses:                            
              Membership benefits   141,578     145,128     150,318     148,792     145,771
              Commissions   114,224     130,601     126,758     130,593     126,762
              Associate services and direct marketing   26,788     31,921     23,582     28,875     29,493
              General and administrative expenses   51,708     51,594     53,021     50,474     50,078
              Other, net   7,885     8,558     13,413     13,841     12,232
                     Total costs and expenses   342,183     367,802     367,092     372,575     364,336
Income before income taxes   111,753     90,675     97,397     84,514     79,688
Provision for income taxes   44,337     35,537     37,225     33,312     27,890

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  Year Ended December 31,
  2010       2009       2008       2007       2006
Income Statement Data: (In thousands, except ratio, per share and Membership amounts)
Net income  $ 67,416      $ 55,138      $ 60,172      $ 51,202      $ 51,798  
Basic earnings per common share $ 6.80     $ 5.05     $ 5.05     $ 3.89     $ 3.54  
Diluted earnings per common share $ 6.80     $ 5.04     $ 5.04     $ 3.88     $ 3.51  
Dividends declared per common share $     $     $     $     $  
Weighted avg. no. of common shares outstanding                                      
       – basic   9,907       10,918       11,916       13,151       14,642  
Weighted avg. no. of common shares outstanding                                      
       – diluted   9,921       10,932       11,934       13,197       14,739  
Membership Benefits Cost and Statistical Data:                                      
       Membership benefits ratio (1)   33.4%       34.0%       34.4%       34.8%       35.4%  
       Commissions ratio (1)   26.9%       30.6%       29.0%       30.6%       30.8%  
       General and administrative expense ratio (1)   12.2%       12.1%       12.1%       11.8%       12.1%  
       Commission cost per new Membership sold $ 227     $ 230     $ 229     $ 213     $ 207  
       New Memberships and stand-alone IDT plans sold   502,982       568,095       552,327       612,096       612,726  
       Period end Memberships & stand-alone IDT plans                                      
              in force   1,473,237       1,547,585       1,559,154       1,575,802       1,538,740  
       New add-on IDT memberships sold   287,345       348,607       344,869       381,419       389,157  
       Period end add-on IDT memberships in force   668,646       711,131       680,862       631,910       540,253  
       Average annual Membership fee $ 302     $ 303     $ 301     $ 298     $ 293  
Cash Flow Data:                                      
Net cash provided by operating activities   74,072       67,794       64,317       67,178       54,385  
Net cash (used in) provided by investing activities   (2,670 )     6,822       (4,411 )     30,064       (52,613 )
Net cash used in financing activities   (56,538 )     (68,240 )     (58,319 )     (84,332 )     (23,698 )
Balance Sheet Data:                                      
       Total assets $ 165,319     $ 157,988     $ 162,843     $ 167,632     $ 188,547  
       Total long-term obligations   18,698       36,556       53,708       70,623       87,230  
       Total liabilities   73,960       119,661       131,036       149,793       157,687  
       Stockholders’ equity   91,359       38,327       31,807       17,839       30,860  
Income Statement Data:                                      
       Depreciation and amortization expense $ 7,650     $ 8,187     $ 8,756     $ 8,532     $ 8,260  
       Interest expense   549       1,173       4,221       6,678       5,726  
____________________
 
(1)        The Membership benefits ratio, the commissions ratio and the general and administrative expense ratio represent those costs as a percentage of Membership fees. These ratios do not measure total profitability because they do not take into account all revenues and expenses.
 
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Overview of Our Financial Model
 
     We are in one line of business - the marketing of legal expense and other complimentary plans through a multi-level marketing force to individuals and a direct sales force to employee groups. Our principal revenues are derived from Membership fees, and to a much lesser extent, revenues from marketing associates. Our principal expenses are commissions, Membership benefits, associate services and direct marketing costs and general and administrative expense. The following table reflects the changes in these categories of revenues and expenses in the last three years (dollar amounts in 000’s):
 
            %             %             %
            Change             Change             Change
        % of   from         % of   from         % of   from
        Total   Prior         Total   Prior         Total   Prior
Revenues: 2010      Revenue      Year      2009      Revenue      Year      2008      Revenue      Year
       Membership fees  $ 424,090   93.4   (0.5 )    $ 426,429   93.0   (2.4 )    $ 436,778   94.0   2.2  
       Associate services   26,543   5.8   (6.4 )     28,352   6.2   20.5       23,534   5.1   (6.3 )
       Other   3,303   0.7   (10.6 )     3,696   0.8   (11.5 )     4,177   0.9   (8.2 )
    453,936   100.0   (1.0 )     458,477   100.0   (1.3 )     464,489   100.0   1.6  
Costs and expenses:                                              
       Membership benefits   141,578   31.2   (2.4 )     145,128   31.6   (3.5 )     150,318   32.4   1.0  
       Commissions   114,224   25.2   (12.5 )     130,601   28.5   3.0       126,758   27.3   (2.9 )
       Associate services and                                              
              direct marketing   26,788   5.9   (16.1 )     31,921   7.0   35.4       23,582   5.1   (18.3 )
       General and                                              
              administrative   51,708   11.4   0.2       51,594   11.2   (2.7 )     53,021   11.4   5.0  
       Other, net   7,885   1.7   (7.9 )     8,558   1.9   (36.2 )     13,413   2.9   (3.1 )
    342,183   75.4   (7.0 )     367,802   80.2   0.2       367,092   79.1   (1.5 )
Provision for income taxes   44,337   9.8   24.8       35,537   7.8   (4.5 )     37,225   8.0   11.7  
Net income $ 67,416   14.9   22.3     $ 55,138   12.0   (8.4 )   $ 60,172   12.9   17.5  
                                               
     The following table reflects certain data concerning our Membership sales and associate recruiting:
 
        %         %      
        Change         Change      
        from         from      
        Prior         Prior      
New Memberships: 2010       Year       2009       Year       2008
New legal service Membership sales   480,814   (11.1 )     541,138   3.8       521,522
New “stand-alone” IDT Membership sales   22,168   (17.8 )     26,957   (12.5 )     30,805
Total new Membership sales   502,982   (11.5 )     568,095   2.9       552,327
New “add-on” IDT Membership sales   287,345   (17.6 )     348,607   1.1       344,869
Average annual Membership fee  $ 324.90   (0.7 )    $ 322.77   (0.5 )    $ 324.52
Active Memberships:                            
Active legal service memberships at end of period   1,381,428   (5.0 )     1,454,661   (1.0 )     1,469,315
Active “stand-alone” IDT memberships at end of period   91,809   (1.2 )     92,924   3.4       89,839
Total active memberships at end of period   1,473,237   (4.8 )     1,547,585   (0.7 )     1,559,154
Active “add-on” IDT memberships at end of period   668,646   (6.0 )     711,131   4.4       680,862
New Sales Associates:                            
New sales associates recruited   138,442   (25.6 )     186,064   52.2       122,255
Average enrollment fee paid by new sales associates $ 74.57    (14.7 )   $ 87.41   22.2     $ 71.53
Average Membership fee in force:                            
Average Annual Membership fee $ 302.10   (0.1 )   $ 302.51   0.6     $ 300.80

     The number of active Memberships in force and the average monthly fee will directly determine Membership fees and their impact on total revenues during any period. The two most important variables affecting the number of active Memberships during a period are the number of new Memberships written during the period combined with the retention characteristics of both new and existing Memberships. See “Measures of Member Retention” below for a discussion of our Membership retention. Associate services revenues are a function of the number of new sales associates enrolled and the price of entry during the period, the number of associates subscribing to our eService offering and the amount of sales tools purchased by the sales force.
 
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     Membership benefits expense is primarily determined by the number of active Memberships and the per capita contractual rate that exists between us and our benefits providers. During the last five years, it has been and is expected to continue to be a relatively consistent percentage of Membership revenues of approximately 34%-35%. Commissions paid to associates are primarily dependent on the number and price of new Memberships sold during a period and any special incentives that may be in place during the period. We expense advance commissions ratably over the first month of the related Membership. The level of commission expense in relation to Membership revenues varies depending on the level of new Memberships written and is expected to be higher when we experience increases in new Membership sales. During the last five years this percentage has ranged from approximately 29% to 36% of Membership revenues. Associate services and direct marketing expenses are directly impacted by the number of new associates enrolled during a period due to the cost of materials provided to such new associates, the number of associates subscribing to our eService offering, the amount of sales tools purchased by the sales force as well as the number of those associates who successfully meet the incentive award program qualifications. General and administrative expenses are expected to trend up in terms of dollars, but remain relatively constant as a percent of Membership fees. During the past five years, general and administrative expenses have ranged from 12% to 13% of Membership fees.
 
     The primary benchmarks monitored by us throughout the various periods include the number of active Memberships and their related retention characteristics, the number of new Memberships written and the number of new associates enrolled.
 
     Our Membership fees declined during 2009, the first such decline in 17 years, and then declined again during 2010. Even in each of the previous 16 years before 2009, the rate of growth has not been one we find acceptable. We believe however, that our current product design, pricing parameters and business model are generally appropriate and we have no immediate plans to change these fundamental sectors. Instead of making changes to our basic product and business model, we believe changes must be made to our marketing methods to increase the exposure of our products and business opportunity. We will consider an increased focus on benefit brokers, independent insurance agents and small businesses as well as considering additional methods of distribution such as an increased focus on Internet based marketing efforts. We will also consider increased incentives such as enhancements to our basic commission structure as well as increased use of performance bonuses. Should we implement additional commissions or bonuses, our marketing related expenses will be increased which may be partially or fully offset by increased Membership fees. Our focus during 2011 will be on improved training of our associates, enhancing the quality of sales tools provided to new and existing associates, providing incentives for associates to write consistent, quality business and continued emphasis on improving the basic retention characteristics of our Memberships.
 
Critical Accounting Policies
 
     Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. 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 and accounting for legal contingencies.
 
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     Revenue recognition - Membership and Associate Fees 
    
Our principal revenues are derived from Membership fees, most of which are collected on a monthly basis. Memberships are generally guaranteed renewable and non-cancelable except for fraud, non-payment of Membership fees or upon written request. Membership fees are recognized in income ratably over the related service period in accordance with Membership terms, which generally require the holder of the Membership to remit fees on an annual, semi-annual or monthly basis. Approximately 95% of members remit their Membership fees on a monthly basis. The majority of our Memberships that pay us via credit card or automatic bank draft pay us in advance. At December 31, 2010, approximately 70% of our legal service Memberships and our IDT Memberships were paid in advance and, therefore, those payments are deferred and recognized over their respective periods. At December 31, 2010, the deferred revenue associated with the Membership fees was $19.5 million, which is classified as a current liability.
 
     We also charge new members, who are not part of an employee group, a $10 enrollment fee. This enrollment fee and related incremental direct and origination costs are deferred and recognized in income over the estimated life of a Membership in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 605, Revenue Recognition. At December 31, 2010, the deferred revenue associated with the Membership enrollment fees was $4.6 million, of which $2.6 million was classified as a current liability. We compute the expected Membership life using more than 25 years of actuarial data as explained in more detail in “Measures of Membership Retention” below. At December 31, 2010, we computed the expected Membership life to be approximately three years, which is unchanged from year-end 2009. If the expected Membership life were to change significantly, which we do not expect in the short term, the deferred Membership enrollment fee and related costs would be recognized over a longer or shorter period.
 
     We derive revenues from services provided to our marketing sales force including a one-time non-refundable enrollment fee from each new sales associate for which we provide initial sales and marketing supplies and enrollment services to the associate. Average enrollment fees paid by new sales associates were $75, $87 and $72 for 2010, 2009 and 2008, respectively. Revenue from, and costs of, the initial sales and marketing supplies (approximately $15) are recognized when the materials are delivered to the associates. The remaining revenues and related incremental direct and origination costs are deferred and recognized over the estimated average active service period of associates, which at December 31, 2010 is estimated to be approximately five months, which is unchanged from year-end 2009. At December 31, 2010, the deferred revenue associated with sales associate enrollment fees was $1.5 million, which is classified as a current liability. We estimate the active service period of an associate periodically based on the average number of months an associate produces new Memberships including those associates that fail to write any Memberships. If the active service period of associates changes significantly, which we do not expect in the short term, the deferred revenue and related costs would be recognized over the new estimated active service period.
 
     Member and Associate Costs 
    
Deferred costs represent the incremental direct and origination costs we incur in enrolling new Members and new associates related to the deferred revenue discussed above, and that portion of payments made to provider law firms ($6.4 million deferred at December 31, 2010 which is classified as a current asset) and associates related to deferred Membership revenue. Deferred costs for enrolling new members include the cost of the Membership kit and salary and benefit costs for employees who process Membership enrollments, and were $4.6 million at December 31, 2010, of which $2.6 million is classified in current assets. Deferred costs for enrolling new associates include training and success bonuses paid to individuals involved in recruiting the associate and salary and benefit costs of employees who process associate enrollments, and were $492,000 at December 31, 2010, and are classified as a current asset. Such costs are deferred to the extent of the lesser of actual costs incurred or the amount of the related fee charged for such services. Deferred costs are amortized to expense over the same period as the related deferred revenue as discussed above. Deferred costs that will be recognized within one year of the balance sheet date are classified as current and all remaining deferred costs are considered noncurrent. Associate related costs are reflected as associate services and direct marketing, and are expensed as incurred if not related to the deferred revenue discussed above. These costs include providing materials and services to associates, associate introduction kits, associate incentive programs, group marketing and marketing services departments (including costs of related travel, marketing events, leadership summits and international sales convention).
 
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     Commissions to Associates 
     Prior to March 1, 1995, our commission program provided for advance commission payments to associates of approximately 70% of first year Membership fees on new Membership sales and commissions were earned by the associate at a rate of approximately 16% in all subsequent years. Beginning with new Memberships written after March 1, 1995, we implemented a level commission schedule of approximately 27% per annum with up to a three-year advance commission payment. Effective March 1, 2002, and in order to offer additional incentives for increased Membership retention rates, we returned to a differential commission structure with rates of approximately 80% of first year Membership fees on new Memberships written and variable renewal commission rates ranging from five to 25% per annum based on the first 12 month Membership retention rate of the associate’s personal sales and those of his organization. Beginning in August 2003, we allowed the associate to choose between the level commission structure and up to a three-year commission advance or the differential commission structure with a one-year commission advance.
 
     Prior to January 1997, we advanced commissions at the time of sale of all new Memberships. In January 1997, we implemented a policy whereby the associate received only earned commissions on the first three sales unless the associate met specified criteria. For all sales beginning with the fourth Membership or all sales made by an associate who met the specified criteria, advance commission payments were made at the time of sale of a new Membership. Beginning April 1, 2007, we began advancing commissions at the time of sale of all new Memberships. The amount of cash potentially advanced upon the sale of a new Membership, prior to the recoupment of any charge-backs (described below), represents an amount equal to up to one-year commission earnings. Although the average number of marketing associates receiving an advance commission payment on a new Membership is nine, the overall initial advance may be paid to approximately 30 different individuals, each at a different level within the overall commission structure. The commission advance immediately increases an associate’s unearned advance commission balance to us.
 
     Although prior to March 1, 2002, we advanced our sales associates up to three years commission when a Membership was sold and subsequent to March 1, 2002, up to one year commission, the average commission advance paid to our sales associates as a group is actually less than the maximum amount possible because some associates choose to receive less than a full advance and we pay less than a full advance on some of our specialty products. In addition, we may from time to time place associates on a less than full advance basis if there are problems with the quality of the business being submitted or other performance problems with an associate. Additionally, we do not advance commissions on certain categories of group business that have historically demonstrated below average retention characteristics. In addition, any residual commissions due an associate (defined as commission on an individual Membership after the advance has been earned) are retained to reduce any remaining unearned commission advance balances prior to being paid to that sales associate. For those associates that have made at least 10 personal sales, opened at least one group and personally write 15% or more of their organizational business, 15% of their commissions are set aside in individual reserve balance accounts, further reducing the amount of advance commissions. The average commission advance paid as a percentage of the maximum advance possible pursuant to our commission structures was approximately 87%, 88% and 88% during 2010, 2009 and 2008, respectively. The commission cost per new Membership sold has decreased over the prior year by 1.2% for 2010 and increased over the prior year by 0.2% and 8% for 2009 and 2008, respectively, and varies depending on the compensation structure that is in place at the time a new Membership is sold, the monthly Membership fee of the Membership sold and the amount of any charge-backs (recoupment of previous commission advances) that are deducted from amounts that would otherwise be paid to the various sales associates that are compensated for the Membership sale. Should we add additional products, such as the Identity Theft Shield described above or add additional commissions to our compensation plan or reduce the amount of chargebacks collected from our associates, the commission cost per new Membership will increase accordingly.
 
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     We expense advance commissions ratably over the first month of the related Membership. At December 31, 2010, advance commissions deferred were $4.8 million and included as a current asset. 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 for the following years ended December 31 were:
 
        2010       2009       2008
    (Amounts in 000’s)
Beginning unearned advance commission balances (1)    $ 178,663      $ 174,371      $ 184,531  
Advance commissions, net of chargebacks and other     113,584       132,764       120,908  
Earned commissions applied     (113,080 )     (124,244 )     (127,496 )
Advance commission write-offs     (7,000 )     (4,228 )     (3,572 )
Ending unearned advance commission balances                        
       before estimated unrecoverable balances (1)     172,167       178,663       174,371  
Estimated unrecoverable advance commission balances (1)     (52,296 )     (47,192 )     (44,526 )
Ending unearned advance commission balances, net (1)   $ 119,871     $ 131,471     $ 129,845  
 
____________________
 
(1)        These amounts do not represent fair value, as they do not take into consideration timing of estimated recoveries.
 
     The ending unearned advance commission balances, net, above includes net unearned advance commission balances of non-vested associates of $77 million, $68 million and $62 million at December 31, 2010, 2009 and 2008, respectively. As such, at December 31, 2010 future commissions and related expense will be reduced as unearned advance commission balances of $43 million are recovered. Commissions are earned by the associate as Membership fees are earned by us, usually on a monthly basis. We reduce unearned advance commission balances or remit payments to associates, as appropriate, when commissions are earned. Should a Membership lapse before the advances have been recovered for each commission level, we, except as described below, generate an immediate “charge-back” to the applicable sales associate to recapture up to 50% of any unearned advance on Memberships written prior to March 1, 2002, and 100% on any Memberships written thereafter. Beginning in August 2003, we allowed the associate to choose between the level commission structure and up to three-year commission advance and up to 50% chargebacks or the differential commission structure with a one-year commission advance and up to 100% chargebacks. This charge-back is deducted from any future advances that would otherwise be payable to the associate for additional new Memberships. In order to encourage additional Membership sales, we waived chargebacks for associates that met certain criteria in December 2002 and March 2003, which effectively increased our commission expense. Any remaining unearned advance commission balance may be recovered by withholding future residual earned commissions due to an active associate on active Memberships. Additionally, even though a commission advance may have been fully recovered on a particular Membership, no additional commission earnings from any Membership are paid to an associate until all previous advances on all Memberships, both active and lapsed, have been recovered. We also have reduced chargebacks from 100% to 50% for certain senior marketing associates who have demonstrated the ability to maintain certain levels of sales over specified periods and maintain certain Membership retention levels. We may adjust chargebacks from time to time in the future in order to encourage certain production incentives.
 
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     We have the contractual right to require associates to repay unearned advance commission balances from sources other than earned commissions including cash (a) from all associates either (i) upon termination of the associate relationship, which includes but is not limited to when an associate becomes non-vested or (ii) when it is ascertained that earned commissions are insufficient to repay the unearned advance commission payments and (b) upon demand, from agencies or associates who are parties to the associate agreements signed between October 1989 and July 1992 or July 1992 to August 1998, respectively. The sources, other than earned commissions, that may be available to recover associate unearned advance commission balances are potentially subject to limitation based on applicable state laws relating to creditors’ rights generally. Historically, we have not demanded repayments of the unearned advance commission balances from associates, including terminated associates, because collection efforts would likely increase costs and have the potential to disrupt our relationships with our sales associates. This business decision by us has a significant effect on our cash flow by electing to defer collection of advance payments of which approximately $52.3 million were not expected to be collected from future commissions at December 31, 2010. However, we regularly review the unearned advance commission balance status of associates and will exercise our right to require associates to repay advances when management believes that such action is appropriate.
 
     Non-vested associates are those that are no longer “vested” because they fail to meet our established vesting requirements by selling at least three new Memberships per quarter or retaining a personal Membership. Non-vested associates lose their right to any further commissions earned on Memberships previously sold at the time they become non-vested. As a result, we have no continuing obligation to individually account to these associates as we do to active associates and are entitled to retain all commission earnings that would be otherwise payable to these terminated associates. We do continue to reduce the unearned advance commission balances for commissions earned on active Memberships previously sold by those associates. Substantially all individual non-vested associate unearned advance commission balances were less than $1,000 and the average balance was $360 at December 31, 2010.
 
     Although the advance commissions are expensed ratably over the first month of the related Membership, we assess, at the end of each quarter, on an associate-by-associate basis, the recoverability of each associate’s unearned advanced commission balance by estimating the associate’s future commissions to be earned on active Memberships. Each active Membership is assumed to lapse in accordance with our estimated future lapse rate, which is based on our actual historical Membership retention experience as applied to each active Membership’s year of origin. The lapse rate is based on our more than 25-year history of Membership retention rates, which is updated quarterly to reflect actual experience. We also closely review current data for any trends that would affect the historical lapse rate. The sum of all expected future commissions to be earned for each associate is then compared to that associate’s unearned advance commission balance. We estimate unrecoverable advance commission balances when expected future commissions to be earned on active Memberships (aggregated on an associate-by-associate basis) are less than the unearned advance commission balance. If an associate with an outstanding unearned advance commission balance has no active Memberships, the unearned advance commission balance is written off but has no financial statement impact as advance commissions are expensed ratably over the first month of the related Memberships. Refer to “Measures of Member Retention – Expected Membership Life, Expected Remaining Membership Life” for a description of the method used by us to estimate future commission earnings.
 
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     Further, our analysis of the recoverability of unearned advance commission balances is also based on the assumption that the associate does not write any new Memberships. We believe that this assessment methodology is highly conservative since our actual experience is that many associates do continue to sell new Memberships and we, through our chargeback rights, gain an additional source to recover unearned advance commission balances.
 
     Changes in our estimates with respect to recoverability of unearned commissions could occur if the underlying Membership persistency changes from historical levels. Should Membership persistency decrease, the unearned commissions would be recovered over a longer period and the amount not recovered would most likely increase, although any increase in uncollectible unearned commissions would not have any immediate expense impact since the commission advances are expensed in the month they are incurred. Holding all other factors constant, the decline in persistency would also lead to lower Membership fees, less net income and less cash flow from operations. Conversely, should persistency increase, the unearned commissions would be recovered more quickly, the amount unrecovered would decrease and, holding all other factors constant, we would enjoy higher Membership fees, more net income and more cash flow from operations.
 
     Incentive awards accrual 
    
Associates can earn the right to attend an annual incentive trip by meeting monthly qualification requirements for the entire calendar year and maintaining certain personal retention rates for the Memberships sold during the calendar year. Associates can also earn the right to receive additional monthly bonuses by meeting the monthly qualification requirements for twelve consecutive months and maintaining certain personal retention rates for the Memberships sold during that twelve-month period. The incentive awards accrual at any date is estimated based on an evaluation of the existing associates that have met the monthly qualifications, any changes to the monthly qualification requirements, the estimated cost for each incentive earned and the number of associates that have historically met the personal retention rates. At December 31, 2010, the accrued amount payable was $2.5 million. Changes to any of these assumptions would directly affect the amount accrued but we do not expect any of the significant trends affecting this account to change significantly in the near term.
 
     Legal Contingencies 
    
We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Given the inherent unpredictability of litigation, it is difficult to estimate the impact of litigation on our financial condition or results of operation. The FASB ASC Section 450, Contingencies, requires that an estimated loss from a loss contingency be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. 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 believe that we have meritorious defenses in all pending cases and will vigorously defend against the claims and have not established an accrued liability for any estimated damages in connection with these various cases. 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. See “Legal Proceedings.”
 
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Other General Matters
 
     Operating Ratios 
    
Three principal operating measures monitored by us in addition to measures of Membership retention are the Membership benefits ratio, commission ratio and the general and administrative expense ratio. The Membership benefits ratio, the commissions ratio and the general and administrative expense ratio represent those costs as a percentage of Membership fees. We strive to maintain these ratios as low as possible while at the same time providing adequate incentive compensation to our sales associates and provider law firms. These ratios do not measure total profitability because they do not take into account all revenues and expenses.
 
     Cash Flow Considerations Relating to Sales of Memberships 
    
We generally advance significant commissions at the time a Membership is sold. Since approximately 95% of Membership fees are collected on a monthly basis, a significant cash flow deficit is created at the time a Membership is sold. This deficit is reduced as monthly Membership fees are remitted and no additional commissions are paid on the Membership until all previous unearned advance commission balances have been fully recovered. Since the cash advanced at the time of sale of a new Membership may be recovered over a multi-year period, cash flow from operations may be adversely affected depending on the number of new Memberships written in relation to the existing active base of Memberships and the composition of new or existing sales associates producing such Memberships.
 
     Investment Policy 
    
Our investment policy is to some degree controlled by certain insurance regulations, which, coupled with management’s own investment philosophy, results in a conservative investment portfolio that is not risk oriented. Our investment purchases consist of investment grade bonds primarily issued by corporations, the United States Treasury, and state and municipal tax-exempt bonds, certificates of deposit and auction rate securities. We are required to pledge investments to various state insurance departments as a condition to obtaining authority to do business in certain states.
 
     Recently Issued Accounting Pronouncements 
    
Information regarding recently issued accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.
 
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Measures of Member Retention
 
     One of the major factors affecting our profitability and cash flow is our ability to retain a Membership, and therefore continue to receive fees, once it has been sold. We monitor our overall Membership persistency rate, as well as the retention rates with respect to Memberships sold by individual associates and agents and retention rates with respect to Memberships by year of issue, geographic region, utilization characteristics and payment method, and other sub groupings.
 
Terminology
 
     The following terms are used in describing the various measures of retention:
  • Membership life is a period that commences on the day of initial enrollment of a member and continues until the individual’s Membership eventually terminates or lapses(the terms terminate or lapse may be used interchangeably here).
     
  • Membership age means the time since the Membership has been in effect.
     
  • Lapse rate means the percentage of Memberships of a specified group of Memberships that lapse in a specified time period.
     
  • Retention rate is the complement of a lapse rate, and means the percentage of Memberships of a specified group that remain in force at the end of a specified time period.
     
  • Persistency and retention are used in a general context to mean the tendency for Memberships to continue to remain in force, while the term persistency rate is a specific measure that is defined below.
     
  • Lapse rates, retention rates, persistency rates, and expected Membership life may be referred to as measures of Membership retention.
     
  • Expected Membership life means the average number of years a new Membership is expected to remain in force.
     
  • Blended rate when used in reference to any measure of member retention means a rate computed across a mix of Memberships of various Membership ages.
     
  • Expected remaining Membership life means the number of additional years that an existing member is expected to continue to renew from a specific point in time based on the Membership life.
     Variations in Membership Retention by Sub-Groups, Impact on Aggregate Numbers
    
Companywide measures of Membership retention include data relating to members who can potentially be further sorted by identifiable sub-groupings. For example, Memberships may be subdivided into those owned by members who are or are not sales associates, to those who are or are not members of group plans, etc.
 
     Measures of Membership retention of different sub-groups may vary. For example, our experience indicates that first year retention rate of Memberships owned by members who have accessed the services of the provider law firms historically have higher retention rates than those who have not. They also likely have a better understanding and appreciation of the benefits of the Membership, which may have contributed in fact to their decision to keep their Membership active.
 
     All aggregate measures of Membership retention or expected life may be impacted by shifts in the underlying enrollment mix of sub-groups that have different retention rates. A shift in mix alone could, over time, cause an increase in reported aggregate retention measures and expected member life, even if the retention rates within each sub-group do not change. It is important to note that all blended rates discussed here may reflect the impact of such shifts in enrollment mixes. The following table presents new Memberships produced, Memberships canceled and ending active Memberships for members who are sales associates, and the respective percentage, and members who are not sales associates.
 
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    Non-               Non-                   Non-            
Year       Assocs       Assocs       Total       Assoc %       Assocs       Assocs       Total       Assoc %       Assocs       Assocs       Total       Assoc %
2005   480,437   220,290   700,727   31.4   (496,710 )   (112,928 )   (609,638 )   18.5   1,132,296   410,493   1,542,789   26.6
2006   477,937   134,789   612,726   22.0   (466,561 )   (150,214 )   (616,775 )   24.4   1,143,672   395,068   1,538,740   25.7
2007   498,072   114,024   612,096   18.6   (456,704 )   (118,330 )   (575,034 )   20.6   1,185,040   390,762   1,575,802   24.8
2008   457,000   95,327   552,327   17.3   (499,894 )   (69,081 )   (568,975 )   12.1   1,142,146   417,008   1,559,154   26.7
2009   423,433   144,662   568,095   25.5   (477,395 )   (102,269 )   (579,664 )   17.7   1,088,184   459,401   1,547,585   29.7
2010   387,047   115,935   502,982   23.0   (419,331 )   (157,999 )   (577,330 )   27.4   1,055,900   417,337   1,473,237   28.3

     Variations in Retention over Life of a Membership, Impact on Aggregate Measures 
     Measures of member retention also vary significantly by the Membership age. Historically, we have observed that Memberships in their first year have a significantly higher lapse rate than Memberships in their second year, and so on. The following chart shows the historical observed lapse rates and corresponding yearly retention rates as a function of Membership age. For example, 49.6% of all new Memberships lapse during the first year, leaving 50.4% still in force at the end of the first year. More tenured Memberships have significantly lower lapse rates. For example, by year seven, lapse rates are 10.7% and annual retention is 89.3%. The following table shows as of December 31, 2010 and 2009 our blended retention rate and lapse rates based on our historical experience for the last 25 years.
 
Membership Retention versus Membership Age
As of December 31, 2010       As of December 31, 2009
Yearly               Yearly        
Lapse   Yearly   End of Year   Membership   Lapse   Yearly   End of Year
Rate             Retention             Memberships             Year             Rate             Retention             Memberships
            100.0   0               100.0
49.6 %   50.4 %   50.4   1   49.3 %   50.7 %   50.7
31.9 %   68.1 %   34.3   2   32.2 %   67.8 %   34.4
24.2 %   75.8 %   26.0   3   24.0 %   76.0 %   26.1
19.2 %   80.8 %   21.0   4   18.8 %   81.2 %   21.2
15.5 %   84.5 %   17.8   5   14.7 %   85.3 %   18.1
12.4 %   87.6 %   15.6   6   12.6 %   87.4 %   15.8
10.7 %   89.3 %   13.9   7   10.5 %   89.5 %   14.1

     Membership Persistency 
     Our Membership persistency rate is a specific computation that measures the number of Memberships in force at the end of a year as a percentage of the total of (i) Memberships in force at the beginning of such year, plus (ii) new Memberships sold during such year. From 1981 through the year ended December 31, 2010, our annual Membership persistency rates, using the foregoing method, have averaged approximately 72.0%.
 
    Beginning   New       Ending    
Year       Memberships       Memberships       Total       Memberships       Persistency
2006   1,542,789   612,726   2,155,515   1,538,740   71.4 %
2007   1,538,740   612,096   2,150,836   1,575,802   73.3 %
2008   1,575,802   552,327   2,128,129   1,559,154   73.3 %
2009   1,559,154   568,095   2,127,249   1,547,585   72.8 %
2010   1,547,858   502,982   2,050,840   1,473,237   71.8 %

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     Our overall Membership persistency rate varies based on, among other factors, the relative age of total Memberships in force, and shifts in the mix of members enrolled. Our overall Membership persistency rate could become lower when the Memberships in force include a higher proportion of newer Memberships, as will happen following periods of rapid growth. Our overall Membership persistency rate could also become lower when the new enrollments include a higher proportion of non-associate members.
 
     Unless offset by other factors, these factors could result in a decline in our overall Membership persistency rate as determined by the formula described above, but does not necessarily indicate that the new Memberships written are less persistent.
 
     Expected Membership Life
    
Using historical data through 2010 for all past Members enrolled, the expected Membership life can be computed to be approximately three years. This number represents the average number of years a new Membership can be expected to remain in force. Although about half of all new Memberships may lapse in the first year, the expected Membership life is much longer due to the contribution of higher annual retention rates in subsequent years.
 
     Since our experience is that the retention rate of a given generation of new Memberships improves with Membership age, the expected remaining Membership life of a Membership also increases with Membership age. For example, while a new Membership may have an expected Membership life of three years, the expected remaining Membership life of a Membership that reaches its first year anniversary is approximately 4.8 years.
 
     Since the actual population of Memberships in force at any time is a distribution of ages from zero to more than 25 years, the expected remaining Membership life of the entire population at large exceeds five years per Membership. As of December 31, 2010, based on the historical data described above, the current expected remaining Membership life of the actual population is approximately 7 years per Membership. This measure is used by us to estimate the future revenues expected from Memberships currently in place.
 
     Expected Membership life measures are based on more than 25 years of historical Membership retention data, unlike the Membership persistency rate described above which is computed from, and determined by, the most recent one-year period only. Both or these measures however include data from Memberships of all Membership ages and hence are referred to as “blended” measures.
 
     Actions that May Impact Retention in the Future 
    
The potential impact on our future profitability and cash flow due to future changes in Membership retention can be significant. While blended retention rates have not changed dramatically over the past five years, we have implemented several initiatives aimed at improving the retention rate of both new and existing Memberships. Such initiatives include an optional revised compensation structure featuring variable renewal commission rates ranging from five to 25% per annum based on the 12 month Membership retention rate of the associate’s personal sales and those of his organization and implementation of a “non-taken” administrative fee to sales associates of $35 for any Membership application that is processed but for which a payment is never received. We will continue to refine the communication process with our members with a view towards both increasing the overall amount of communication from us to our members as well as more specific target messaging to members encourage Membership utilization.
 
     During 2006, we began providing an additional service focused on Membership retention, Member Advantage Services, to our associates for a one-time fee of $5.95 per Membership. This service consists of several out-bound calls, emails and letters by our employees during the first year of the Membership as well as out-bound calls to the member any time the Membership moves into pre-cancel status throughout the life of the Membership. We verify the Membership data in our files on the very first call and make any necessary changes immediately as well as fully explain the Membership benefits and answer any questions the member may have, essentially reselling the Membership. We provide Provider law firm contact information and make sure the member understands how to contact their Provider. We encourage our members to immediately begin the process of having their will prepared and help the member begin the credit monitoring process for Identity Theft Shield members. We believe that such efforts may ultimately increase the utilization by members and therefore lead to higher retention rates. We intend to continue to develop programs and initiatives designed to improve retention. At December 31, 2010, approximately 716,000 Memberships were part of our Member Advantage Services.
 
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Results of Operations
 
       Comparison of 2010 to 2009
 
       Net income for 2010 increased 22% to $67.4 million from $55.1 million for 2009. Diluted earnings per share for 2010 increased 35% to $6.80 per share from $5.04 per share for the prior year due to the increased net income of 22% and an approximate 9% decrease in the weighted average number of outstanding shares.
 
     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 average annual fee. 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 11% during 2010 to 502,982 from 568,095 during 2009. At December 31, 2010, there were 1,473,237 active Memberships in force compared to 1,547,585 at December 31, 2009, a decrease of 5%. The average annual fee per Membership has decreased from $303 for all Memberships in force at December 31, 2009 to $302 for all Memberships in force at December 31, 2010, a 1% decrease, primarily because of a decrease in the memberships in force. These changes resulted in a decrease in Membership fees of less than 1% for 2010 to $424.1 million from $426.4 million for 2009.
 
     Associate services revenue decreased 7% from $28.4 million for 2009 to $26.5 million during 2010 primarily because of fewer associates recruited and lower average associate fee paid. The eService fees totaled $13.8 million during 2010 compared to $11.0 million for 2009, an increase of 25%. We recognized revenue from associate fees of approximately $11.3 million during 2010 compared to $15.9 million during 2009, a decrease of 29%. New associates typically pay a fee ranging from $49 to $249, depending on special promotions we implement from time to time. New enrollments of sales associates decreased 26% during 2010 to 138,442 from 186,064 for 2009 and the average associate fee paid during 2010 was $75 compared to $87 for 2009, a decrease of 14% due to lower average enrollment fees charged to new associates. Future revenues from associate services will depend primarily on the number of new associates enrolled, the price charged for new associates and the number who choose to participate in our eService program, but we expect that such revenues will continue to be largely offset by the direct and indirect cost to us of training, providing associate services and other direct marketing expenses.
 
     Other revenue decreased 11%, from $3.7 million to $3.3 million primarily due to the decrease in revenue recognized from Membership enrollment fees.
 
     Primarily because of the decrease in Membership fees, total revenues decreased to $453.9 million for 2010 from $458.5 million during 2009, a decrease of 1%.
 
     Membership benefits, which primarily represent payments to provider law firms and Kroll, totaled $141.6 million for 2010 compared to $145.1 million for 2009 and represented 33% and 34% of Membership fees, respectively. This Membership benefit ratio (Membership benefits as a percentage of Membership fees) should be relatively consistent going forward as substantially all active Memberships provide for a capitated cost and we have reduced the capitated cost of the Identity Theft plan benefits effective April 1, 2007 with reductions effective beginning January 1, 2008, 2009 and 2010.
 
     Commissions to associates decreased 13% from $130.6 million for 2009 to $114.2 million for 2010, and represented 31% and 27% of Membership fees, respectively. Commissions to associates are primarily dependent on the number of new Memberships sold during a period and the average fee of those Memberships. New Memberships sold during 2010 totaled 502,982, an 11% decrease from the 568,095 sold during 2009, and the “add-on” IDT Membership sales,
which are not included in these totals, decreased 18% to 287,345 for 2010 from 348,607 for 2009. New Membership fees written during 2010 decreased less than 1% with commissions to associates decreasing 13%.
 
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     Associate services and direct marketing expenses decreased $5.1 million to $26.8 million for 2010 from $31.9 million for 2009. We had a $329,000 decrease in direct marketing and marketing services costs, a $3.5 million decrease in training fees and bonuses, a $584,000 decrease in Player’s Club costs and a $252,000 decrease in the cost of associate kits. Training fees and bonuses are affected by the number of new sales associates that successfully meet the qualification criteria established by us, i.e. more training bonuses will be paid when a higher number of new sales associates meet such criteria. These expenses include the costs of providing associate services and marketing expenses as discussed under Member and Associate Costs.
 
     General and administrative expenses during 2010 and 2009 were $51.7 million and $51.6 million, respectively, and represented 12% of Membership fees for such years. The $100,000 decrease in general and administrative expenses was due to decreases in employee expenses, telecommunication fees, bank service charges and legal fees, partially offset by increases in our consulting costs during 2010.
 
     Other expenses, net, which includes depreciation and amortization, litigation accruals, premium taxes and interest expense reduced by interest income, decreased 8% to $7.9 million for 2010 from $8.6 million for 2009. Depreciation and amortization decreased to $7.7 million for 2010 from $8.2 million for 2009, foreign currency gains were $157,000 for 2010, litigation settlements and change in litigation accrual was $15,000 for 2010 compared to ($450,000) during 2009. Premium taxes were $1.8 million for 2010 and 2009. Interest expense decreased to $549,000 for 2010 compared to $1.2 million for the prior year. Interest income decreased to $1.9 million for 2010 from $2.1 million for 2009.
 
     The provision for income taxes increased during 2010 to $44.3 million compared to $35.5 million for 2009, representing 39.7% and 39.2%, respectively, of income before income taxes. The 2010 and 2009 provisions include state income taxes of $5.4 million and $4.2 million, respectively, net of federal benefits, representing 4.8% and 4.7%, respectively, of income before income taxes.
 
Comparison of 2009 to 2008
 
     Net income for 2009 decreased 8% to $55.1 million from $60.2 million for 2008. Diluted earnings per share for 2009 remained constant at $5.04 per share due to decreased net income of 8% and an approximate 8% decrease in the weighted average number of outstanding shares.
 
     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 average annual fee. The active Memberships in force are determined by both the number of new Memberships sold in any period together with the renewal rate of existing Memberships. New Membership sales increased 3% during 2009 to 568,095 from 552,327 during 2008. At December 31, 2009, there were 1,547,585 active Memberships in force compared to 1,559,154 at December 31, 2008, a decrease of 1%. However, the average annual fee per Membership has increased from $301 for all Memberships in force at December 31, 2008 to $303 for all Memberships in force at December 31, 2009, a 1% increase, primarily because of an increase in the percentage of members with our Identity Theft Shield Membership. These changes resulted in a 2% decrease in Membership fees for 2009 to $426.4 million from $436.8 million for 2008 marking the first decline in Membership fees in 17 years.
 
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     Associate services revenue increased 20% from $23.5 million for 2008 to $28.4 million during 2009 primarily because of more associates recruited due to increased bonuses and incentives. The eService fees totaled $11.0 million during 2009 compared to $12.1 million for 2008, a decrease of 9%. We recognized revenue from associate fees of approximately $15.9 million during 2009 compared to $9.2 million during 2008, an increase of 73%. New enrollments of sales associates increased 52% during 2009 to 186,064 from 122,255 for 2008 and the average associate fee paid during 2009 was $87 compared to $72 for 2008, an increase of 22% due to higher average enrollment fees charged to new associates.
 
     Other revenue decreased 12%, from $4.2 million to $3.7 million primarily due to the decrease in revenue recognized from Membership enrollment fees.
 
     Primarily because of the decrease in Membership fees, total revenues decreased to $458.5 million for 2009 from $464.5 million during 2008, a decrease of 1%.
 
     Membership benefits, which primarily represent payments to provider law firms and Kroll, totaled $145.1 million for 2009 compared to $150.3 million for 2008 and represented 34% of Membership fees for both years.
 
     Commissions to associates increased 3% from $126.8 million for 2008 to $130.6 million for 2009, and represented 29% and 31% of Membership fees, respectively. Commissions to associates are primarily dependent on the number of new Memberships sold during a period and the average fee of those Memberships. New Memberships sold during 2009 totaled 568,095, a 3% increase from the 552,327 sold during 2008, and the “add-on” IDT Membership sales, which are not included in these totals, increased 1% to 348,607 for 2009 from 344,869 for 2008. New Membership fees written during 2009 increased 2% with commissions to associates increasing 3%.
 
     Associate services and direct marketing expenses increased $8.3 million to $31.9 million for 2009 from $23.6 million for 2008. We had a $754,000 decrease in direct marketing and marketing services costs, a $7.6 million increase in training fees and bonuses, a $123,000 increase in Player’s Club costs and a $1.1 million increase in the cost of associate kits. Training fees and bonuses are affected by the number of new sales associates that successfully meet the qualification criteria established by us, i.e. more training bonuses will be paid when a higher number of new sales associates meet such criteria. These expenses include the costs of providing associate services and marketing expenses as discussed under Member and Associate Costs.
 
     General and administrative expenses during 2009 and 2008 were $51.6 million and $53.0 million, respectively, and represented 12% of Membership fees for such years. The $1.4 million decrease in general and administrative expenses was due to decreases in advertising, telecommunication fees, employee expenses, and legal fees, partially offset by increases in our bank service charges and consulting costs during 2009.
 
     Other expenses, net, which includes depreciation and amortization, litigation accruals, premium taxes and interest expense reduced by interest income, decreased 36% to $8.6 million for 2009 from $13.4 million for 2008. Depreciation and amortization decreased to $8.2 million for 2009 from $8.8 million for 2008. Litigation settlements and change in litigation accrual was ($450,000) for 2009 compared to $906,000 during 2008. Premium taxes were $1.8 million for 2009 and 2008. Interest expense decreased to $1.2 million for 2009 compared to $4.2 million for the prior year. Interest income decreased to $2.1 million for 2009 from $2.2 million for 2008.
 
     The provision for income taxes decreased during 2009 to $35.5 million compared to $37.2 million for 2008, representing 39.2% and 38.2%, respectively, of income before income taxes. The 2009 and 2008 provisions include state income taxes of $4.2 million and $3.8 million, respectively, net of federal benefits, representing 4.7% and 4.0%, respectively, of income before income taxes.
 
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Liquidity and Capital Resources
 
     The number of active Memberships in force and the average monthly fee will directly determine Membership fees collected and their contribution to cash flow from operations during any period. Cash receipts from associate services are directly impacted by the number of new sales associates enrolled and the price of entry during the period, the number of associates subscribing to our eService offering and the amount of sales tools purchased by the sales force.
 
     The cash outlay related to Membership benefits is directly impacted by the number of active Memberships and the contractual rate that exists between us and our benefits providers. Commissions paid to associates are primarily dependent on the number and price of new Memberships sold during a period and any special incentives that may be in place during the period. Cash requirements related to associate services and direct marketing activities are directly impacted by the number of new associates enrolled during a period due to the cost of materials provided to such new associates, the number of associates subscribing to our eService offering, the amount of sales tools purchased by the sales force as well as the number of those associates who successfully meet the incentive award program qualifications.
 
     Membership revenues are more than sufficient to fund the cash requirements for membership benefits (at approximately 33%-34% of Membership revenues), commissions (ranging from 27% to 31% of Membership revenues) and general and administrative expense (at approximately 12% to 13% of Membership revenues). Due to relatively flat or declining production of new Memberships, the related commission expense has been relatively flat or declining resulting in increased cash flow. We have generated significant cash flow from operations of approximately $74 million, $68 million and $64 million in 2010, 2009 and 2008, respectively, which has been used to provide for future growth in Memberships, to repay our debt and make necessary capital expenditures and as discussed below, we have used a significant portion of our cash flow to repurchase shares of our stock and retire debt. Cash flow from operations could be reduced if we experienced significant growth in new members because of the negative cash flow characteristics of our commission advance policies discussed above.
 
     Because of our ability to generate cash flow from operations, including in periods of Membership growth, we have not historically been dependent on, and do not expect to need in the future, external sources of financing from the sale of securities or from bank borrowings to fund our basic business operations. However, as described below, during the last three years, we incurred debt for limited and specific purposes to permit us to purchase equipment and to accelerate our treasury stock purchase program.
 
     General
    
Consolidated net cash provided by operating activities was $74.1 million, $67.8 million and $64.3 million for 2010, 2009 and 2008, respectively. Net cash provided by operating activities increased approximately $6.3 million primarily due to decreased membership sales which resulted in decreased commission advances to our associates, a $489,000 reduction in interest payments due to lower debt levels and lower interest rates, $1.7 million decrease in associate activities, partially offset by a $5.0 million increase in income tax payments. Decreased Member activities resulted in a $3.6 million decrease in cash received from our members due to a lower number of Memberships in force during the year which was offset by a $3.1 million decrease in payments to our Membership benefit providers, a $6.1 million decrease in commission payments to our associates. Associate activities decreased by $1.7 million due to a $6.9 million decrease in associate fees collected due to the decrease in new recruits driven in part by reduced bonuses and other incentives offset by a $2.8 million increase in eService fees collected and a $5.2 million decrease in associate services cost primarily due to the decreases in bonuses and incentive payments.
 
45
 

 

     Net cash (used in) provided by investing activities was $(2.7) million, $6.8 million and $(4.4) million for 2010, 2009 and 2008, respectively. Capital expenditures were $2.6 million, $3.4 million and $5.3 million during 2010, 2009 and 2008, respectively. Purchases of available-for-sale investments exceeded sales and maturities of such investments by $94,000 during 2010 and sales and maturities of available-for-sale investments exceeded the purchases of such investments by $10.2 million and $843,000 during 2009 and 2008.
 
     Net cash used in financing activities was $56.5 million, $68.2 million and $58.3 million for 2010, 2009 and 2008, respectively. This $11.7 million change during 2010 was primarily comprised of a $36.6 million decrease in purchases of treasury stock, a $19.9 million increase in the repayment of debt and a $5.0 million decrease in proceeds from issuance of debt.
 
     We had excess consolidated working capital of $27.7 million at December 31, 2010, an increase of $38.5 million compared to a consolidated working capital deficit of $10.8 million at December 31, 2009. The increase was primarily due to the $23.2 million decrease the current portion of notes payable, the $14.9 million increase in cash and cash equivalents, a $5.5 million decrease in accounts payable and accrued expenses partially offset by a $3.8 million increase in income taxes payable, a $1.8 million decrease in deferred member and associate service costs and a $1.8 million decrease in other assets. The $27.7 million excess working capital at December 31, 2010 would have been $41.2 million in excess working capital excluding the $13.5 million of 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. Additionally, at the current rate of cash flow provided by operations ($74.1 million during 2010), we do not expect any difficulty in meeting our financial obligations in the short term or the long term.
 
     We generally advance significant commissions to associates at the time a Membership is sold. We expense these advances ratably over the first month of the related Membership. During 2010, we paid advance commissions to associates of $113.6 million on new Membership sales compared to $132.8 million for 2009. 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. See Commissions to Associates above for additional information on advance commissions.
 
     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 16 million shares during subsequent board meetings. The most recent authorization was for 1 million additional shares on November 30, 2009. At December 31, 2010, we had purchased 15.4 million treasury shares under these authorizations for $489.1 million, an average price of $30.67 per share, including $14.1 million of purchases in 2010. Due to the merger agreement previously described, we are prohibited from making further share repurchases without Parents consent unless and until the merger agreement is terminated.
 
     We believe that we have the ability to finance the next twelve months of operations and anticipated capital expenditures based on our existing amount of cash and cash equivalents and unpledged investments at December 31, 2010 of $71.0 million. We believe our long-term liquidity needs will be met by our ability to generate cash flow from operations and our existing cash and cash equivalent balances. We expect to maintain minimum cash and cash equivalents and investment balances on an on-going basis of approximately $20 million to $30 million in order to meet expected working capital needs and regulatory capital requirements. Balances in excess of this amount would be used for discretionary purposes.
 
46
 

 

     Notes Payable
    
During 2006, we received $80 million of senior, secured financing (the “Senior Loan”) from Wells Fargo Foothill, Inc. (“Wells Fargo”) consisting of a $75 million five year term loan facility (the “Term Facility”) and a $5 million five year revolving credit facility (the “Revolving Facility”). After payment of an origination fee of 1%, lender costs and retirement of $15.3 million of existing bank indebtedness, the net proceeds of the Term Facility we received were $58.8 million and were used to purchase treasury stock. During the 2010 fourth quarter, we fully retired all outstanding borrowings under both facilities without penalty and expensed $15,000 reflecting the unamortized debt origination costs at the time of debt retirement.
 
     Our $20 million real estate loan was fully funded in 2002 to finance our new headquarters building in Ada, Oklahoma and had a final maturity of August 2011. This loan, with interest at the 30-day LIBOR rate plus 150 basis points adjusted monthly, was secured by a mortgage on our headquarters and was fully retired during the 2010 fourth quarter without penalty.
 
     During 2007, we entered into a term loan agreement with Wells Fargo Equipment Finance, Inc. to refinance $9.6 million indebtedness related to our aircraft. This loan, with interest at the 30-day LIBOR rate plus 89 basis points adjusted monthly, was secured by a mortgage on the aircraft and engines. This loan was fully retired during the 2010 fourth quarter without penalty.
 
     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 PPLCI, PPLSIF and LSPV. The ability of these subsidiaries to provide funds to us is subject to a number of restrictions under various insurance laws in the jurisdictions in which they 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. The payment of dividends by PPLCI is restricted under the Oklahoma Insurance Code to available surplus funds derived from realized net profits and requires the approval of the Oklahoma Insurance Commissioner for any dividend representing more than the greater of 10% of such accumulated available surplus or the previous years’ net profits. Additionally, in one of its operating states, PPLCI must meet a premium to surplus ratio of 3:1. PPLCI also computes an analysis of its capital under a risk based capital formula prescribed by statutory accounting regulations and must maintain sufficient capital above amounts otherwise required by the various state insurance departments to meet the adjusted capital requirements. Dividends by LSPV have a similar restriction pursuant to requirements to meet risk based capital levels. Additional capital requirements of PPLCI, PPLSIF or LSPV, or any of our regulated subsidiaries, will be funded by us in the form of capital contributions or surplus debentures. At January 1, 2011, none of PPLCI, PPLSIF or LSPV had funds available for payment of substantial dividends without the prior approval of the insurance commissioner. At December 31, 2010, the amount of restricted net assets of consolidated subsidiaries was $25.1 million, representing amounts that may not be paid to us as dividends either under the applicable regulations or without regulatory approval.
 
47
 

 

     Contractual Obligations
     The following table reflects our contractual obligations as of December 31, 2010.
 
    Payments Due by Period (In Thousands)
          Less               More
           than 1   1-3   3-5   than
Contractual Obligations   Total      year      years      years      5 years
Purchase obligations(1)   $ 13,165    $ 5,132   $ 8,033   $   $
Deferred compensation plan     11,441         416     33     10,992
Capital leases     885     81     162     162     480
Operating leases     513     140     139     54     180
Total(2)   $  26,004   $  5,353   $  8,750   $  249   $  11,652
____________________                              

(1)        Includes contractual commitments pursuant to executory contracts for products and services such as voice and data services and contractual obligations related to future Company events such as hotel room blocks, meeting space and food and beverage guarantees. We expect to receive proceeds from such future events and reimbursement from provider law firms for certain voice and data services that will partially offset these obligations.
 
(2)   Does not include commitments for attorney provider payments, commissions, etc. which are expected to remain in existence for several years but as to which our obligations vary directly either based on Membership revenues or new Memberships sold and are not readily estimable. Capital lease obligation above does not include any interest.
 
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 December 31, 2010 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 herein. For 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
     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.
 
48
 

 

     As of December 31, 2010, our investments consisted of the following:
 
Description      Fair Value
Obligations of state and political subdivisions   $ 22,594
Certificates of deposit     4,274
Corporate obligations     421
Auction Rate Securities     300
U. S. Government obligations     85
Total investments   $ 27,674
       
     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 management might take to counteract that change.
 
     The hypothetical changes in market interest rates reflect what could be deemed best and worst case scenarios. The fair values shown in the following table are based on contractual maturities. Significant variations in market interest rates could produce changes in the timing of repayments due to prepayment options available. The fair value of such instruments could be affected and, therefore, actual results might differ from those reflected in the following table:
 
              Estimated fair
          Hypothetical   value after
        change in interest   hypothetical
          rate   change in interest
    Fair value      (bp = basis points)      rate
    (Dollars in thousands)
Fixed-maturity investments at December 31, 2010(1)   $ 23,100   100 bp increase   $ 21,933
          200 bp increase     21,021
          50 bp decrease     23,662
          100 bp decrease     24,242
Fixed-maturity investments at December 31, 2009(1)   $ 22,500   100 bp increase   $ 21,406
          200 bp increase     20,375
          50 bp decrease     23,017
          100 bp decrease     23,551
____________________

(1)        Excluding short-term investments in certificates of deposit and auction rate certificates with a fair value of $4.6 million at December 31, 2010 and short-term investments in certificates of deposit with a fair value of $5.2 million at December 31, 2009.
     
   
     The table above illustrates, for example, that an instantaneous 200 basis point increase in market interest rates at December 31, 2010 would reduce the estimated fair value of our fixed-maturity investments by approximately $2.7 million at that date. At December 31, 2009, and based on the fair value of fixed-maturity investments of $22.5 million, an instantaneous 200 basis point increase in market interest rates would have reduced the estimated fair value of our fixed-maturity investments by approximately $2.1 million at that date. The definitive extent of the interest rate risk is not quantifiable or predictable due to the variability of future interest rates, but we do not believe such risk is material.
 
     Interest Rate Risk
     We are exposed to market risk related to changes in interest rates. 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.
 
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     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 2% of our revenues are derived outside of the United States. As reflected in the attached Consolidated Statements of Comprehensive Income, we have recorded negative foreign currency translation adjustments of $223,000 during 2010 but have a cumulative positive foreign currency translation adjustment balance of $887,000 at December 31, 2010. These amounts are subject to change dynamically in conjunction with the relative values of the Canadian and U.S. dollars.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
PRE-PAID LEGAL SERVICES, INC. AND SUBSIDIARIES
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
  Page
Reports of Independent Registered Public Accounting Firm 51
   
Management’s Annual Report on Internal Control over Financial Reporting 53
   
Consolidated Financial Statements  
Consolidated Balance Sheets – December 31, 2010 and 2009 54
Consolidated Statements of Income - For the years ended December 31, 2010, 2009 and 2008 55
Consolidated Statements of Cash Flows – For the years ended December 31, 2010, 2009 and 2008 56
Consolidated Statements of Changes In Stockholders’ Equity and Other Comprehensive  
       Income – For the years ended December 31, 2010, 2009 and 2008 57
Notes to Consolidated Financial Statements 58
    
Financial Statement Schedules  
Schedule I - Condensed Financial Information of the Registrant 81

(All other schedules have been omitted since the required information is not applicable or because
the information is included in the consolidated financial statements or the notes thereto.)
 
50
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Stockholders
Pre-Paid Legal Services, Inc.
 
We have audited Pre-Paid Legal Services, Inc.’s (an Oklahoma corporation) and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pre-Paid Legal Services, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on Pre-Paid Legal Services, Inc.’s internal control over financial reporting based on our audit.
 
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Pre-Paid Legal Services, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pre-Paid Legal Services, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, cash flows and changes in stockholders’ equity and other comprehensive income for each of the three years in the period ended December 31, 2010 and our report dated February 28, 2011 expressed an unqualified opinion.
 
/s/ GRANT THORNTON LLP
 
Oklahoma City, Oklahoma
February 28, 2011
 
51
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Stockholders
Pre-Paid Legal Services, Inc.
 
We have audited the accompanying consolidated balance sheets of Pre-Paid Legal Services, Inc. (an Oklahoma corporation) and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of income, cash flows and changes in stockholders’ equity and other comprehensive income for each of the three years in the period ended December 31, 2010. Our audits of the basic financial statements included Financial Statement Schedule I as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pre-Paid Legal Services, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pre-Paid Legal Services, Inc.’s and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ GRANT THORNTON LLP
  
Oklahoma City, Oklahoma
February 28, 2011
 
52
 

 

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, our management has conducted an assessment, including testing, using the criteria in Internal Control–Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed 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. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
 
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
     Based on the assessment, our management has concluded that we maintained effective internal control over financial reporting as of December 31, 2010, based on criteria in Internal Control–Integrated Framework issued by COSO. The effectiveness of our internal control over financial reporting as of December 31, 2010, has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which is included herein.
 
     Our management, including our Chief Executive Officers and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
 
53
 

 

PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts and shares in 000’s, except par values)
 
  December 31,
  2010      2009
ASSETS
Current assets:              
       Cash and cash equivalents $ 47,768     $ 32,904  
       Available-for-sale investments, at fair value   2,812       2,959  
       Membership fees receivable   6,268       6,286  
       Inventories   1,197       1,266  
       Refundable income taxes         1,330  
       Deferred member and associate service costs   14,297       16,074  
       Deferred income taxes   6,319       5,370  
       Other assets   4,299       6,123  
              Total current assets   82,960       72,312  
Available-for-sale investments, at fair value   20,401       20,529  
Investments pledged   4,461       4,212  
Property and equipment, net   44,026       49,100  
Deferred member and associate service costs   2,040       2,065  
Cash value of life insurance policies   10,162       8,263  
Other assets   1,269       1,507  
                     Total assets $ 165,319     $ 157,988  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:              
       Membership benefits payable $ 11,226     $ 11,987  
       Deferred revenue and fees   27,766       28,383  
       Current portion of capital leases payable   27       245  
       Current portion of notes payable         23,241  
       Income taxes payable   2,513        
       Accounts payable and accrued expenses   13,730       19,249  
              Total current liabilities   55,262       83,105  
       Capital leases payable, net of current portion   858       886  
       Notes payable, net of current portion         19,010  
       Deferred revenue and fees   2,040       2,065  
       Deferred income taxes   4,359       5,405  
       Deferred compensation liabilities   11,441       9,190  
              Total liabilities   73,960       119,661  
       Contingencies and commitments (Note 13)              
Stockholders’ equity:              
       Common stock, $.01 par value; 100,000 shares authorized; 14,616 and              
              14,904 issued at December 31, 2010 and 2009, respectively   146       149  
       Retained earnings   188,779       135,401  
       Accumulated other comprehensive income   1,462       1,805  
       Treasury stock, at cost; 4,852 shares held at December 31, 2010              
              and 2009, respectively   (99,028 )     (99,028 )
                     Total stockholders’ equity   91,359       38,327  
                            Total liabilities and stockholders’ equity $   165,319     $   157,988  
               
The accompanying notes are an integral part of these financial statements.
 
54
 

 

PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000’s, except per share amounts)
 
    Year Ended December 31,
       2010      2009      2008
Revenues:                  
       Membership fees   $   424,090   $   426,429   $   436,778
       Associate services     26,543     28,352     23,534
       Other     3,303     3,696     4,177
      453,936     458,477     464,489
Costs and expenses:                  
       Membership benefits     141,578     145,128     150,318
       Commissions     114,224     130,601     126,758
       Associate services and direct marketing     26,788     31,921     23,582
       General and administrative     51,708     51,594     53,021
       Other, net     7,885     8,558     13,413
      342,183     367,802     367,092
Income before income taxes     111,753     90,675     97,397
Provision for income taxes     44,337     35,537     37,225
Net income   $ 67,416   $ 55,138   $ 60,172
Basic earnings per common share   $ 6.80   $ 5.05   $ 5.05
Diluted earnings per common share   $ 6.80   $ 5.04   $ 5.04
Weighted average number of shares:                  
       Basic     9,907     10,918     11,916
       Diluted     9,921     10,932     11,934
                   
The accompanying notes are an integral part of these financial statements.
 
55
 

 


PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000’s)
 
    Year Ended December 31,
        2010       2009       2008
Cash flows from operating activities:                        
Net income    $ 67,416      $ 55,138      $ 60,172  
Adjustments to reconcile net income to net cash                        
provided by operating activities:                        
       Provision for deferred income taxes     (2,473 )     (460 )     385  
       Depreciation and amortization     7,650       8,187       8,756  
       Decrease (increase) in accrued Membership fees receivable     18       353       (808 )
       Decrease in inventories     69       19       226  
       Decrease (increase) in refundable income taxes     1,330       (643 )     1,566  
       Decrease (increase) in deferred member and associate service costs     1,802       (399 )     1,150  
       Decrease (increase) in other assets     641       (2,013 )     (84 )
       Decrease in Membership benefits payable     (761 )     (26 )     (142 )
       (Decrease) increase in deferred revenue and fees     (642 )     1,889       (1,092 )
       Increase in other non-current liabilities     2,251       1,292       1,354  
       Increase (decrease) in income taxes payable     2,513             (5,590 )
       (Decrease) increase in accounts payable and accrued expenses     (5,742 )     4,457       (1,576 )
              Net cash provided by operating activities     74,072       67,794       64,317  
Cash flows from investing activities:                        
       Additions to property and equipment     (2,576 )     (3,396 )     (5,254 )
       Purchases of investments – available-for-sale     (4,258 )     (15,865 )     (64,983 )
       Maturities and sales of investments – available-for-sale     4,164       26,083       65,826  
              Net cash provided by (used in) investing activities     (2,670 )     6,822       (4,411 )
Cash flows from financing activities:                        
       Proceeds from issuance of debt           5,000       10,000  
       Repayments of debt     (42,251 )     (22,408 )     (24,074 )
       Repayment of capital lease obligations     (246 )     (249 )     (22 )
       Proceeds from exercise of stock options     33       108       338  
       Tax benefit on exercise of stock options     26       14       156  
       Purchases of treasury stock     (14,100 )     (50,705 )     (44,717 )
              Net cash used in financing activities     (56,538 )     (68,240 )     (58,319 )
Net increase in cash and cash equivalents     14,864       6,376       1,587  
Cash and cash equivalents at beginning of year     32,904       26,528       24,941  
Cash and cash equivalents at end of year   $ 47,768     $ 32,904     $ 26,528  
Supplemental disclosure of cash flow information:                        
       Cash paid for interest   $ 743     $ 1,232     $ 4,443  
       Cash paid for income taxes   $ 43,024     $ 38,070     $ 42,142  
Non-cash activities – capital lease obligation incurred   $     $ 446     $  –  
                         

The accompanying notes are an integral part of these financial statements.
 
56
 

 

PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND OTHER
COMPREHENSIVE INCOME
(Amounts and shares in 000’s, except dividend rates and par values)
 
    Common Stock   Retained   Accum.   Treasury Stock        
        Shares       Amount       Earnings       OCI(1)       Shares       Amount       Total
January 1, 2008   17,291      $ 173      $ 114,873      $ 1,821     4,852      $ (99,028 )    $ 17,839  
Exercise of stock options and other   16             338                       338  
Income tax benefit related to exercise                                                    
of stock options               156                       156  
Net income               60,172                       60,172  
Other comprehensive income(1)                     (1,981 )               (1,981 )
Treasury shares purchased                         1,053       (44,717 )     (44,717 )
Treasury shares retired   (1,053 )     (10 )     (44,707 )         (1,053 )     44,717        
December 31, 2008   16,254       163       130,832       (160 )   4,852       (99,028 )     31,807  
Exercise of stock options and other   4             108                       108  
Income tax benefit related to exercise                                                    
of stock options               14                       14  
Net income               55,138                       55,138  
Other comprehensive income(1)                     1,965                 1,965  
Treasury shares purchased                         1,354       (50,705 )     (50,705 )
Treasury shares retired   (1,354 )     (14 )     (50,691 )         (1,354 )     50,705        
December 31, 2009   14,904       149       135,401       1,805     4,852       (99,028 )     38,327  
Exercise of stock options and other   2             33                       33  
Income tax benefit related to exercise                                                    
of stock options               26                       26  
Net income               67,416                       67,416  
Other comprehensive income(1)                     (343 )               (343 )
Treasury shares purchased                         290       (14,100 )     (14,100 )
Treasury shares retired   (290 )     (3 )     (14,097 )         (290 )     14,100        
December 31, 2010   14,616     $ 146     $ 188,779     $ 1,462     4,852     $ (99,028 )   $ 91,359  
                                                     
____________________
 
(1)       Other Comprehensive Income   Year Ended December 31,
        2010       2009       2008
Net income    $ 67,416      $ 55,138      $ 60,172  
                         
Other comprehensive income, net of tax:                        
       Unrealized foreign currency translation adjustment     (126 )     1,535       (2,028 )
       Reclassification adjustment for realized foreign currency translation                        
              gains included in net income     (97 )            
      (223 )     1,535       (2,028 )
                         
       Unrealized (losses) gains on investments during period     (77 )     656       21  
       Reclassification adjustment for realized (gains) losses included in net income     (43 )     (226 )     26  
      (120 )     430       47  
                         
Other comprehensive (loss) income, net of income taxes of $478, $301                        
       and $25 in 2010,2009 and 2008, respectively     (343 )     1,965       (1,981 )
Comprehensive income   $ 67,073     $ 57,103     $ 58,191  
                         

The accompanying notes are an integral part of these financial statements.
 
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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)
 
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
 
     Nature of Operations
     Pre-Paid Legal Services, Inc. (the “Parent”) and subsidiaries (collectively, the “Company”) develop and market legal service plans (referred to as “Memberships”). The Memberships sold by us allow members to access legal services through a network of independent law firms (“provider law firms”) under contract with us. We offer our Identity Theft Shield to new and existing members at $9.95 - $12.95 per month if added to a legal service Membership or it may be purchased separately for $12.95 - $15.95 per month. The provider of the Identity Theft Shield benefits and the Provider law firms are paid a fixed fee on a capitated basis to render services to plan members residing within their designated geographic region. Because the fixed fee payments by us to benefit providers do not vary based on the type and amount of benefits utilized by the member, this capitated arrangement provides significant advantages to us in managing claims risk. At December 31, 2010, Memberships subject to the capitated benefit provider arrangement comprised approximately 99% of our active Memberships. The remaining Memberships, less than 1%, were primarily sold prior to 1987 and allow members to locate their own lawyer to provide legal services available under the Membership with the member’s lawyer being reimbursed for services rendered based on usual, reasonable and customary fees. Memberships are generally guaranteed renewable and Membership fees are principally collected on a monthly basis, although approximately 5% of Members have elected to pay their fees in advance on an annual or semi-annual basis. At December 31, 2010, we had 1,473,237 Memberships in force with members in all 50 states, the District of Columbia and the Canadian provinces of Ontario, British Columbia, Alberta and Manitoba. Approximately 90% of the Memberships were in 29 states and provinces. The Memberships are marketed by an independent sales force referred to as “associates.”
 
     Basis of Presentation
     The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) which vary in some respects from statutory accounting principles used when reporting to state insurance regulatory authorities.
 
     Principles of Consolidation
     The consolidated financial statements include our accounts and our wholly owned subsidiaries. Our primary subsidiaries include Pre-Paid Legal Casualty, Inc. (“PPLCI”), Legal Service Plans of Virginia (“LSPV”) and Pre-Paid Legal Services, Inc. of Florida (“PPLSIF”). All significant intercompany accounts and transactions have been eliminated.
 
     Foreign Currency Translation
     The financial results of our Canadian operations are measured in local currency and then translated into U.S. dollars. All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year.
 
     Estimates
     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include our member and associate revenue and cost deferrals, commissions to associates, incentive awards accrual, income tax accruals, legal contingencies accrual and the fair value of our financial instruments.
 
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     Cash and Cash Equivalents
     We consider all highly liquid unpledged investments with maturities of three months or less at time of acquisition to be cash equivalents. We place our temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on cash and cash equivalents.
 
     Investments
     We classify our investments held as available-for-sale and account for them at fair value with unrealized gains and losses, net of taxes, excluded from earnings and reported as other comprehensive income. We classify available-for-sale securities as current if we expect to sell the securities within one year, or if we intend to utilize the securities for current operations. All other available-for-sale securities are classified as non-current.
 
     All investment securities are adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded to income over the contractual maturity or estimated life of the individual investment on the level yield method. Gain or loss on sale of investments is based upon the specific identification method. Income earned on our investments in certain state and political subdivision debt instruments is not generally taxable for federal income tax purposes.
 
     Membership fees receivable
     Our Membership fees receivable consists of amounts due from members for services provided pursuant to their Membership contract. Membership fees are principally collected on a monthly basis. Membership fees receivable is a result of a portion of members, mostly group members, who pay their Membership fees in arrears and are recorded at amounts due under the terms of the Membership agreement. An allowance for doubtful accounts is not necessary as the recorded amount is adjusted to net realizable value at period-end based on our historical experience and the short period of time after period-end in which the accounts will be collected.
 
     Inventories
     Inventories include the cost of materials and packaging and are stated at the lower of cost or market.
 
     Property and Equipment
     Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the estimated useful lives of the related assets or the period of the lease, whichever is shorter. Maintenance and repairs are expensed as incurred and renewals and betterments are capitalized. Interest cost incurred during the construction period of major facilities is capitalized. The capitalized interest is recognized as part of the asset to which it relates and is amortized over the asset’s estimated useful life.
 
     Revenue recognition - Membership and Associate Fees
     Our principal revenues are derived from Membership fees, most of which are collected on a monthly basis. Memberships are generally guaranteed renewable and non-cancelable except for fraud, non-payment of Membership fees or upon written request. Membership fees are recognized in income ratably over the related service period in accordance with Membership terms, which generally require the holder of the Membership to remit fees on an annual, semi-annual or monthly basis. Approximately 95% of members remit their Membership fees on a monthly basis. Approximately 70% of our Membership fees are paid in advance and, therefore, are deferred and recognized over their respective periods.
 
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     We also charge new members, who are not part of an employee group, a $10 enrollment fee. This enrollment fee and related incremental direct and origination costs of $10 for 2010, 2009 and 2008 are deferred and recognized in income over the estimated life of a Membership in accordance with FASB ASC Section 605, Revenue Recognition. We compute the expected Membership life using more than 25 years of actuarial data. At December 31, 2010, we computed the expected Membership life to be approximately three years. If the expected Membership life were to change significantly, which management does not expect in the short term, the deferred Membership enrollment fee and related costs would be recognized over a longer or shorter period.
 
     We derive revenues from services provided to our marketing sales force primarily from a one-time non-refundable enrollment fee from each new sales associate for which we provide initial sales and marketing supplies and enrollment services to the associate. Average enrollment fees paid by new sales associates were $75, $87 and $72 for 2010, 2009 and 2008, respectively. Revenue from, and costs of, the initial sales and marketing supplies (approximately $15) are recognized when the materials are delivered to the associates. The remaining revenues and related incremental direct and origination costs are deferred and recognized over the estimated average active service period of associates which at December 31, 2010 is estimated to be approximately five months, unchanged from year end 2009. Management estimates the active service period of an associate periodically based on the average number of months an associate produces new Memberships including those associates that fail to write any Memberships. If the active service period of associates changes significantly, which management does not expect in the short term, the deferred revenue and related costs would be recognized over the new estimated active service period.
 
     Associate services revenue also includes revenue recognized on the sale of marketing supplies and promotional material to associates and includes fees related to our eService program for associates. The eService program provides subscribers Internet based back office support such as reports, on-line documents, tools, a personal e-mail account and multiple personalized web sites with “flash” movie presentations. eService fees are recognized in income ratably over the related service period in accordance with subscribers terms, which generally require the eService subscriber to remit fees on an annual or monthly basis. Revenue from the sale of marketing supplies and promotional material is recognized at the time of shipment.
 
     Member and Associate Costs
     Deferred costs represent the incremental direct and origination costs we incur in enrolling new members and new associates and that portion of payments made to provider law firms and associate commissions related to the deferred revenue discussed above. Deferred costs for enrolling new members include the cost of the Membership kit and salary and benefit costs for employees who process Membership enrollments. Deferred costs for enrolling new associates include training and success bonuses paid to individuals involved in recruiting the associate and salary and benefit costs of employees who process associate enrollments. Such costs are deferred to the extent of the lesser of actual costs incurred or the amount of the related fee charged for such services. Deferred costs are amortized to expense over the same period as the related deferred revenue. Deferred costs that will be recognized within one year of the balance sheet date are classified as current and all remaining deferred costs are considered noncurrent. Associate related costs are reflected as associate services and direct marketing, and are expensed as incurred if not related to the deferred revenue discussed above. These costs include providing materials and services to associates, associate introduction kits, the associate incentive program, group marketing and marketing services departments (including costs of related travel, marketing events, leadership summits and international sales convention). Shipping and handling costs of $1.9 million, $2.1 million and $1.7 million in 2010, 2009 and 2008, respectively, are primarily included in Associate services and direct marketing costs.
 
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     Membership Benefits Liability
     The Membership benefits liability represents per capita amounts due the provider of Identity Theft Shield benefits and provider law firms on approximately 99% of the Memberships and claims reported but not paid and actuarially estimated claims incurred but not reported on the remaining non-provider Memberships which represent less than 1%. We calculate the benefit liability on the non-provider Memberships based on completion factors that consider historical claims experience based on the dates that claims are incurred, reported to us and subsequently paid. Processing costs related to these claims are accrued based on an estimate of expenses to process such claims.
 
     Income Taxes
     We account for income taxes using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are recognized in different periods in our financial statements and tax returns. In estimating future tax consequences, we generally consider all future events other than future changes in the tax law or rates that have not been enacted.
 
     Deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. We record deferred tax assets related to the recognition of future tax benefits of temporary differences and net operating loss and tax credit carryforwards. To the extent that realization of such benefits is not considered more likely than not, we establish a valuation allowance to reduce such assets to the estimated realizable amount.
 
     We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
 
     We and our subsidiaries are subject to U.S. Federal income tax, Canadian income tax, as well as income tax of multiple state and local jurisdictions. Our 2007 – 2010 U.S. federal income tax returns remain open to examination by the Internal Revenue Service (IRS) with 2008 and 2009 under current examination. Our state and local income tax returns for years 2007 through 2010 remain open to examination by the state and local taxing authorities. Canadian income tax returns for 2006 - 2010 are open to examination. The IRS examined our U.S. federal income tax return for 2006 resulting in an amendment of years 2006 – 2008 for a State tax accrual deducted in 2006 but was not allowed until 2008, when the related payment was made.
 
     We recognize interest and/or penalties related to income tax matters in general and administrative expenses.
 
     Commissions to Associates
     Prior to March 1, 2002, we had a level Membership commission schedule of approximately 27% of Membership fees and advanced the equivalent of up to three years of commissions on new Membership sales. Effective March 1, 2002, and in order to offer additional incentives for increased Membership retention rates, we returned to a differential commission structure with rates of approximately 80% of first year Membership fees on new Memberships written and variable renewal commission rates ranging from five to 25% per annum based on the 12 month Membership retention rate of the associate’s sales organization. Beginning in August 2003, we allowed the associate to choose between the level commission structure and up to three-year commission advance or the differential commission structure with a one-year commission advance.
 
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     We expense advance commissions ratably over the first month of the related Membership. As a result of this accounting policy, our advance commission expenses are recorded in the first month of a Membership and there is no commission expense recognized for the same Membership during the remainder of the advance period. Associates must qualify for advance commissions by writing at least three Memberships. Renewal commissions are recognized as earned after the advance commission and any chargebacks have been recovered.
 
     Long-Lived Assets
     We review long-lived assets to be held and used in operations when events or changes in circumstances indicate that the assets might be impaired. The carrying value of long-lived assets is considered impaired when the identifiable undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced by disposal costs.
 
     Incentive awards accrual
     Associates can earn the right to attend an annual incentive trip by meeting monthly qualification requirements for the entire calendar year and maintaining certain personal retention rates for the Memberships sold during the calendar year. Associates can also earn the right to receive additional monthly bonuses by meeting the monthly qualification requirements for twelve consecutive months and maintaining certain personal retention rates for the Memberships sold during that twelve-month period. The incentive awards accrual at any date is estimated based on an evaluation of the existing associates that have met the monthly qualifications, any changes to the monthly qualification requirements, the estimated cost for each incentive earned and the number of associates that have historically met the personal retention rates. Changes to any of these assumptions would directly affect the amount accrued, but we do not expect any of the significant trends affecting this account to change significantly in the near term.
 
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     Legal Contingencies
     Our accounting for legal contingencies requires that a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. This process requires subjective judgment about the likely outcomes of litigation. Liabilities related to most of our lawsuits are especially difficult to estimate due to the nature of the claims, limitation of available data and uncertainty concerning the numerous variables used to determine likely outcomes or the amounts recorded. Litigation expenses are recorded as incurred and we do not accrue for future legal fees. 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.
 
     Treasury Stock
     We immediately retire all our treasury stock purchases at cost for all shares purchased with borrowed funds and for all other shares purchased since March 2002. We retired, at cost, 289,675, 1,354,183 and 1,053,614 shares of common stock during 2010, 2009 and 2008, respectively.
 
     Segment Information
     Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. Disclosures about products and services and geographic areas are presented in Note 17.
 
     Recently Issued Accounting Pronouncements
     In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements (Accounting Standards Codification — “ASC” — Topic 855) — Subsequent Events. The ASU amends the subsequent events disclosure guidance. The amendments include a definition of an SEC filer, require an SEC filer to evaluate subsequent events through the date the financial statements are issued, and remove the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. ASU 2010-09 was effective upon issuance. The adoption of this guidance required additional disclosures but did not have a material impact on the Company’s consolidated results of operations and financial position.
 
     In January 2010, the Financial Accounting Standards Board issued ASU 2010-06 “Improving Disclosures about Fair Value Measurements.” ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and more disaggregation for the different types of financial instruments. This ASU is effective for annual and interim reporting periods beginning after December 15, 2009 for most of the new disclosures and for periods beginning after December 15, 2010 for the new Level 3 disclosures. Comparative disclosures are not required in the first year the disclosures are required. We did not have any significant transfers in or out of Level 1 and Level 2 fair value measurements during the year ended December 31, 2010 and 2009.
 
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      Note 2 - Investments
 
      A summary of the amortized cost, unrealized gains and losses and fair values of our investments at December 31, 2010 and 2009 follows:
 
    December 31, 2010
    Amortized   Gross Unrealized   Fair
Available-for-Sale and pledged investments         Cost       Gains       Losses       Value
U.S. Government obligations    $ 85    $    $      $ 85
Corporate obligations     338     83           421
Obligations of state and political subdivisions     21,734     1,031     (171 )     22,594
Auction Rate Certificates     300               300
Certificates of deposit     4,274               4,274
Total   $      26,731   $ 1,114   $  (171 )   $ 27,674
                     
    December 31, 2009
    Amortized   Gross Unrealized   Fair
Available-for-Sale and pledged investments     Cost   Gains   Losses     Value
U.S. Government obligations   $ 85   $   $     $ 85
Corporate obligations     344     72           416
Obligations of state and political subdivisions     20,895     1,101     (4 )     21,992
Auction Rate Certificates     325         (29 )     296
Certificates of deposit     4,911               4,911
Total   $ 26,560   $ 1,173   $ (33 )   $ 27,700
                           

     In determining whether declines in the fair value of available-for-sale securities below their cost are other than temporary, management considers the financial condition of the issuer, causes for the decline in fair value (i.e., interest rate fluctuations or declines in creditworthiness) and severity and duration of the decline, among other things. At December 31, 2010, none of our 250 securities (primarily municipal securities) had unrealized losses in four consecutive quarters.
 
     The contractual maturities of our available-for-sale investments in debt securities and certificates of deposit at December 31, 2010 by maturity date follows:
 
    Amortized   Fair
        Cost       Value
One year or less    $ 4,734    $ 4,820
Two years through five years     5,531     5,846
Six years through ten years     9,767     10,136
More than ten years     6,699     6,872
Total   $      26,731   $ 27,674
             

     Our investment securities are included in the accompanying consolidated balance sheets at December 31, 2010 and 2009 as follows:
 
    December 31,
        2010       2009
Available-for-sale investments (current)    $ 2,812    $ 2,959
Available-for-sale investments (non-current)     20,401     20,529
Investments pledged     4,461     4,212
Total   $ 27,674   $ 27,700
             

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     We are required to pledge investments to various state insurance departments as a condition to obtaining authority to do business in certain states. The fair value of investments pledged to state regulatory agencies is as follows:
 
    December 31,
        2010       2009
Certificates of deposit    $ 2,058    $ 2,055
Obligations of state and political subdivisions     2,318     2,072
U. S. Government obligations     85     85
Total   $ 4,461   $ 4,212
             

     Proceeds from sales of investments during 2010, 2009 and 2008 were $4.2, $25.7 million and $14.4 million, respectively, and resulted in gross realized gains of $71,000, $425,000 and $109,000 and gross realized losses of $0, $54,000 and $72,000, respectively.
 
Note 3 - Property and Equipment
 
     Property and equipment is comprised of the following:
 
    Estimated   December 31,
        Useful Life       2010       2009
Equipment, furniture and fixtures   3-10 years    $ 49,417      $ 47,719  
Computer software   3 years     18,499       17,621  
Buildings   20-40 years     39,450       39,450  
Automotive and aviation equipment   3-10 years     14,048       14,142  
Land   N/A     445       445  
          121,859       119,377  
Accumulated depreciation         (77,833 )     (70,277 )
Property and equipment, net       $ 44,026     $ 49,100  
                     

     As of December 31, 2010 and 2009, capitalized interest of $706,000 was included in the cost of the building. No interest was capitalized during 2010, 2009 or 2008.
 
Note 4 – Other Assets, Current
 
     Other Assets, current, are comprised of the following:
 
    December 31,
        2010       2009
Prepaid Canadian income taxes    $ 1,150    $ 3,089
Other prepaid expenses, current portion     2,426     1,976
Accrued interest receivable     351     363
Other     372     695
Total   $ 4,299   $ 6,123
             

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Note 5 – Accounts Payable and Accrued Expenses
 
     Accounts payable and accrued expenses are comprised of the following:
 
    December 31,
        2010       2009
Accounts payable    $ 3,685    $ 3,550
Commissions         3,880
Marketing bonuses payable     2,635     3,518
Incentive awards accrual     2,530     2,476
Other     4,880     5,825
Total   $ 13,730   $ 19,249
             

Note 6 – Notes Payable
 
     During 2006, we received $80 million of senior, secured financing (the “Senior Loan”) from Wells Fargo Foothill, Inc. (“Wells Fargo”) consisting of a $75 million five year term loan facility (the “Term Facility”) and a $5 million five year revolving credit facility (the “Revolving Facility”). After payment of an origination fee of 1%, lender costs and retirement of $15.3 million of existing bank indebtedness, the net proceeds of the Term Facility we received were $58.8 million and were used to purchase treasury stock. During the 2010 fourth quarter, we fully retired all outstanding borrowings under both facilities without penalty and expensed $15,000 reflecting the unamortized debt origination costs at the time of debt retirement.
 
     Our $20 million real estate loan was fully funded in 2002 to finance our new headquarters building in Ada, Oklahoma and had a final maturity of August 2011. This loan, with interest at the 30-day LIBOR rate plus 150 basis points adjusted monthly, was secured by a mortgage on our headquarters and was fully retired during the 2010 fourth quarter without penalty.
 
     During 2007, we entered into a term loan agreement with Wells Fargo Equipment Finance, Inc. to refinance $9.6 million indebtedness related to our aircraft. This loan, with interest at the 30-day LIBOR rate plus 89 basis points adjusted monthly, was secured by a mortgage on the aircraft and engines. This loan was fully retired during the 2010 fourth quarter without penalty.
 
Note 7 - Income Taxes
 
     The provision for income taxes consists of the following:
 
    Year Ended December 31,
        2010       2009       2008
Current    $ 46,810      $ 35,997      $ 36,840
Deferred     (2,473 )     (460 )     385
Total provision for income taxes   $ 44,337     $ 35,537     $ 37,225
                       

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     A reconciliation of the statutory Federal income tax rate to the effective income tax rate is as follows:
 
    Year Ended December 31,
        2010       2009       2008
Statutory Federal income tax rate   35.0 %   35.0 %   35.0 %
Tax exempt interest   (.2 )   (.5 )   (.6 )
Wage tax credits   (.2 )   (.3 )   (.3 )
State income tax expense, net   4.8     4.7     4.0  
Other   .3     .3     .1  
Effective income tax rate        39.7 %        39.2 %        38.2 %
                   

     Deferred tax liabilities and assets at December 31, 2010 and 2009 are comprised of the following:
 
    December 31,
        2010       2009
Deferred tax liabilities relating to:              
       Deferred member and associate service costs    $ 6,371    $ 7,074  
       Property and equipment     8,002     8,710  
       Unrealized investment and foreign              
              currency exchange gains     935     457  
       Total deferred tax liabilities     15,308     16,241  
Deferred tax assets relating to:              
       Expenses not yet deducted for tax purposes     5,644     4,318  
       Deferred revenue and fees     11,624     11,875  
       Other         13  
       Total deferred tax assets     17,268     16,206  
       Net deferred tax asset (liability)   $ 1,960   $ (35 )
               

     Our deferred tax assets and liabilities are included in the accompanying consolidated balance sheets at December 31, 2010 and 2009 as follows.
 
    December 31,
        2010       2009
Deferred income taxes (current asset)    $ 6,319      $ 5,370  
Deferred income taxes (non-current liability)     (4,359 )     (5,405 )
Net deferred tax asset (liability)   $ 1,960     $ (35 )
                 

     A significant portion of the deferred tax assets recognized relate to deferred revenue and fees. A valuation allowance was not recorded since we believe that there is sufficient positive evidence to support our conclusion not to record a valuation allowance. We believe that we will realize the tax benefit of these deferred tax assets in the future because of our reversing deferred tax liabilities and history of taxable income. However, there can be no assurance that we will generate taxable income or that all of our deferred tax assets will be utilized.
 
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Note 8 - Stockholders’ Equity
 
     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 16 million shares during subsequent board meetings. At December 31, 2010, we had purchased 15.4 million treasury shares under these authorizations for a total consideration of $472.0 million, an average price of $30.67 per share. We purchased and formally retired 289,675 shares of our common stock during 2010 for $14.1 million, or an average price of $48.68 per share, reducing our common stock by $3 and our retained earnings by $14.1 million. At December 31, 2010 and 2009, we had 9.8 million and 10.1 million common shares outstanding, respectively, net of treasury shares. 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 affect our liquidity.
 
     The payment of dividends by PPLCI is restricted under the Oklahoma Insurance Code to available surplus funds derived from realized net profits and requires the approval of the Oklahoma Insurance Commissioner for any dividend representing more than the greater of 10% of such accumulated available surplus or the previous years’ net profits. Additionally, in one of its operating states, PPLCI must meet a premium to surplus ratio of 3:1. PPLCI also computes an analysis of its capital under a risk based capital formula prescribed by statutory accounting regulations and must maintain sufficient capital above amounts otherwise required by the various state insurance departments to meet the adjusted capital requirements. Dividends by LSPV have a similar restriction pursuant to requirements to meet risk based capital levels. During 2010, PPLCI declared and, after obtaining all necessary regulatory approvals, paid extraordinary dividends to us of $8.7 million compared to the $6.7 million dividend paid to us during 2009. During 2010, LSPV paid us an ordinary dividend of $1.9 million compared to $1.8 million during 2009. At December 31, 2010, the amount of restricted net assets of consolidated subsidiaries was $25.1 million, representing amounts that may not be paid to us as dividends either under the applicable regulations or without regulatory approval.
 
Note 9 – Other Expenses, net
 
     The components of other expenses, net are as follows:
 
    Year Ended December 31,
        2010       2009       2008
Depreciation and amortization    $ 7,650      $ 8,187      $ 8,756  
Premium taxes     1,774       1,765       1,776  
Interest expense     549       1,173       4,221  
Litigation settlements and change in litigation accrual     (141 )     (450 )     906  
Interest income     (1,947 )     (2,117 )     (2,246 )
Total Other expenses, net   $ 7,885     $ 8,558     $ 13,413  
                         

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Note 10 - Comprehensive Income
 
     Comprehensive income is comprised of two subsets - net income and other comprehensive income. Included in other comprehensive income for us are foreign currency translation adjustments and unrealized gains on investments. These items are accumulated within the Statements of Changes in Stockholders’ Equity and Other Comprehensive Income under the caption “Accumulated OCI.” As of December 31, accumulated other comprehensive income, as reflected in the Consolidated Statements of Changes in Stockholders’ Equity, was comprised of the following:
 
       2010      2009
Foreign currency translation adjustments, net of income            
       taxes of $567 and $0   $ 887   $ 1,110
Unrealized gains on investments, net of income taxes            
       of $368 and $457     575     695
Accumulated other comprehensive income    $ 1,462    $ 1,805
             
Note 11 - Related Party Transactions
 
     As part of the share repurchase program described previously, we may from time to time make such purchases from related parties. The table below reflects all such transactions during 2010, 2009 and 2008:
 
Transaction   No. of       Transaction       Acquired    
Date    shares    Price    Amount    Basis of Price    From    Relationship
       8/25/2008            6,500       $ 44.39         $ 288,535     Prior day close   Randy Harp   co-CEO, President and COO
  8/25/2008          2,000            44.39           88,780        Prior day close   Steve Williamson   Chief Financial Officer
  12/8/2008       150,000       35.08       5,262,000     Negotiated   Idoya Partners   Partnership jointly managed by
                                below closing       Director Thomas W. Smith and
                                price       others
  1/30/2009       200,000       33.57       6,714,000     Negotiated   Idoya Partners   Partnership jointly managed by
                                below closing       Director Thomas W. Smith and
                                price       others

     We have also made at-market share purchases of 47,220, 37,124 and 35,064 shares during 2010, 2009 and 2008, respectively, from the Associate Investment Club, a plan that we administer that is designed to provide our sales associates a convenient and economical way to purchase shares of our stock. Additionally, we have purchased 13,585, 10,825 and 8,692 shares during 2010, 2009 and 2008, respectively, from our 401(k) plan.
 
Note 12 – Leases
 
     At December 31, 2010, we were committed under noncancelable operating and capital leases, principally for buildings and equipment. Aggregate rental expense under all operating leases was $144,000, $133,000 and $122,000 in 2010, 2009 and 2008, respectively.
 
     Future commitments commencing January 2011 related to noncancelable operating leases are as follows:
 
Year Ended December 31,      
2011      $ 140
2012     85
2013     54
2014     27
2015     27
Thereafter     180
Total operating lease commitments    $ 513
       
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     Future minimum lease payments commencing in January 2011 related to capital leases are as follows:
 
Year Ended December 31,           
2011   $ 81  
2012     81  
2013     81  
2014     81  
2015     81  
Thereafter     1,163  
Total minimum lease payments     1,568  
Less: Imputed interest     (683 )
Present value of net minimum lease payments     885  
Less: Current portion     (27 )
Noncurrent portion of capital leases payable    $ 858  
         
     We have entered into capital leases to acquire equipment and buildings that expire at various dates through 2033. The capital lease assets are included in property and equipment as follows at December 31, 2010 and December 31, 2009.
 
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    December 31,
       2010      2009
Equipment, furniture and fixtures   $ 1,175     $ 1,175  
Buildings and improvements     314       314  
      1,489       1,489  
Less: accumulated amortization     (528 )     (340 )
Net capital lease assets    $ 961      $ 1,149  
                 
Note 13 - Commitments and Contingencies
 
     On March 27, 2006, we received a complaint filed by Blackburn & McCune PLLC, a former provider attorney law firm, in the Second Circuit Court of Davidson County, Tennessee seeking compensatory and punitive da