UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____ to _____
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Commission File Number: 1-9293
PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 East Main Street, Ada, Oklahoma 74821-0145
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (580) 436-1234
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No [ ]
The number of shares outstanding of the registrant's common stock as of
July 22, 2003 was 17,372,633.
PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended June 30, 2003
CONTENTS
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
a) Consolidated Balance Sheets
as of June 30, 2003 (Unaudited) and
December 31, 2002
b) Consolidated Statements of Income
(Unaudited) for the three months and the
six months ended June 30, 2003 and 2002
c) Consolidated Statements of Comprehensive Income
(Unaudited) for the three months and the
six months ended June 30, 2003 and 2002
d) Consolidated Statements of Cash Flows
(Unaudited) for the six months ended
June 30, 2003 and 2002
e) Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 4. Submission Of Matters To A Vote Of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
ITEM 1. FINANCIAL STATEMENTS OF REGISTRANT
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
June 30, December 31,
2003 2002
-------------- -------------
Current assets: (Unaudited)
Cash and cash equivalents........................................................ $ 14,225 $ 20,858
Available-for-sale investments, at fair value.................................... 3,550 3,970
Membership income receivable..................................................... 4,854 5,247
Inventories...................................................................... 953 1,212
Deferred member and associate service costs...................................... 13,597 13,639
Deferred income taxes............................................................ 4,515 4,603
Other current assets............................................................. 116 275
-------------- -------------
Total current assets......................................................... 41,810 49,804
-------------- -------------
Available-for-sale investments, at fair value...................................... 10,860 11,560
Investments pledged................................................................ 4,279 4,160
Property and equipment, net........................................................ 37,028 25,593
Deferred member and associate service costs........................................ 2,772 2,991
Other assets....................................................................... 3,395 2,728
-------------- -------------
Total assets............................................................... $ 100,144 $ 96,836
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.............................................................. $ 8,814 $ 8,610
Deferred revenue and fees........................................................ 22,833 22,612
Current portion of capital leases payable........................................ 808 14
Current portion of notes payable................................................. 6,707 2,412
Accounts payable and accrued expenses............................................ 14,624 13,498
-------------- -------------
Total current liabilities...................................................... 53,786 47,146
Capital leases payable........................................................... 1,694 912
Notes payable.................................................................... 12,226 8,221
Deferred revenue and fees........................................................ 3,942 4,266
Deferred income taxes ........................................................... 2,182 1,319
-------------- -------------
Total liabilities............................................................ 73,830 61,864
-------------- -------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 22,225 and
23,688 issued at June 30, 2003 and December 31, 2002, respectively............. 222 237
Capital in excess of par value................................................... 11,915 43,219
Retained earnings................................................................ 112,331 90,254
Accumulated other comprehensive income........................................... 874 290
Treasury stock, at cost; 4,852 shares held at
June 30, 2003 and December 31, 2002............................................ (99,028) (99,028)
-------------- -------------
Total stockholders' equity................................................... 26,314 34,972
-------------- -------------
Total liabilities and stockholders' equity................................. $ 100,144 $ 96,836
-------------- -------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2003 2002 2003 2002
---------- ----------- ----------- -----------
Revenues:
Membership fees.................................................$ 81,881 $ 77,585 $ 163,428 $ 149,479
Associate services.............................................. 6,330 9,117 13,867 18,136
Other........................................................... 1,431 1,242 2,667 2,360
---------- ----------- ----------- -----------
89,642 87,944 179,962 169,975
---------- ----------- ----------- -----------
Costs and expenses:
Membership benefits............................................. 27,590 26,004 54,315 50,316
Commissions..................................................... 28,353 32,799 56,531 60,607
Associate services and direct marketing......................... 7,350 7,155 14,409 14,723
General and administrative...................................... 8,928 7,538 16,921 15,340
Other, net...................................................... 2,088 1,430 4,081 2,429
---------- ----------- ----------- -----------
74,309 74,926 146,257 143,415
---------- ----------- ----------- -----------
Income before income taxes........................................ 15,333 13,018 33,705 26,560
Provision for income taxes........................................ 5,290 4,491 11,628 9,163
---------- ----------- ----------- -----------
Net income........................................................$ 10,043 $ 8,527 $ 22,077 $ 17,397
---------- ----------- ----------- -----------
Basic earnings per common share...................................$ .57 $ .42 $ 1.24 $ .86
---------- ----------- ----------- -----------
Diluted earnings per common share.................................$ .57 $ .42 $ 1.24 $ .86
---------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2003 2002 2003 2002
---------- ----------- ----------- -----------
Net income..................................................... $ 10,043 $ 8,527 $ 22,077 $ 17,397
---------- ----------- ----------- -----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... 61 57 129 99
---------- ----------- ----------- -----------
Unrealized gains (losses) on investments:
Unrealized holding gains arising during period............. 345 385 455 51
Reclassification adjustment for realized losses (gains)
included in net income................................... 22 4 - (29)
---------- ----------- ----------- -----------
367 389 455 22
---------- ----------- ----------- -----------
Other comprehensive income, net of income taxes
of $198 and $210 for the three months and $245 and $12 for the
six months ended June 30, 2003 and 2002, respectively........ 428 446 584 121
---------- ----------- ----------- -----------
Comprehensive income........................................... $ 10,471 $ 8,973 $ 22,661 $ 17,518
---------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Six months ended June 30,
-------------------------
2003 2002
------------ -----------
Cash flows from operating activities:
Net income....................................................................... $ 22,077 $ 17,397
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes............................................ 706 246
Depreciation and amortization.................................................. 3,453 2,497
Tax benefit on exercise of stock options....................................... 64 810
Contribution of stock to ESOP.................................................. 220 207
Decrease (increase) in Membership income receivable............................ 393 (135)
Decrease (increase) decrease in inventories.................................... 259 (146)
Decrease (increase) in other current assets.................................... 159 (396)
Decrease (increase) in deferred member and associate service costs............. 261 (2,521)
(Increase) decrease in other assets............................................ (667) 355
Increase in accrued Membership benefits........................................ 204 744
(Decrease) increase in deferred revenue and fees............................... (103) 3,049
Decrease in income taxes payable............................................... - (1,087)
Increase in accounts payable and accrued expenses and other.................... 1,255 2,514
------------ -----------
Net cash provided by operating activities.................................... 28,281 23,534
------------ -----------
Cash flows from investing activities:
Additions to property and equipment............................................ (13,513) (4,803)
Purchases of investments - available for sale.................................. (1,309) (7,779)
Maturities and sales of investments - available for sale....................... 3,010 7,046
------------ -----------
Net cash used in investing activities.................................... (11,812) (5,536)
------------ -----------
Cash flows from financing activities:
Proceeds from exercise of common stock options................................. 580 2,964
Decrease in capital lease obligations.......................................... (799) -
Proceeds from vendor rebate.................................................... 1,000 -
Proceeds from issuance of debt................................................. 10,800 -
Repayments of debt............................................................. (2,500) -
Purchases of treasury stock.................................................... (32,183) (25,062)
------------ -----------
Net cash used in financing activities ................................... (23,102) (22,098)
------------ -----------
Net decrease in cash and cash equivalents........................................ (6,633) (4,100)
Cash and cash equivalents at beginning of period................................. 20,858 14,290
------------ -----------
Cash and cash equivalents at end of period....................................... $ 14,225 $ 10,190
------------ -----------
Supplemental disclosure of cash flow information:
Cash paid for interest......................................................... $ 233 $ -
------------ -----------
Income taxes paid.............................................................. $ 10,700 $ 9,580
------------ -----------
Non-cash activities - capital lease obligations incurred (net of $1 million
rebate)........................................................................ $ 1,375 $ -
------------ -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Except for per share amounts, dollar amounts in tables
are in thousands unless otherwise indicated)
(Unaudited)
Note 1 - Basis Of Presentation
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been omitted. The
accompanying consolidated financial statements and notes thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's 2002 Annual Report on Form 10-K.
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries, as well as those of PPL Agency,
Inc. All significant intercompany balances and transactions have been eliminated
in consolidation.
In the opinion of management, the accompanying unaudited financial
statements as of June 30, 2003, and for the three and six month periods ended
June 30, 2003 and 2002, reflect adjustments (which were normal and recurring)
which, in the opinion of management, are necessary for a fair statement of the
financial position and results of operations of the interim periods presented.
Results for the three and six month periods ended June 30, 2003 are not
necessarily indicative of results expected for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
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.
Stock-Based Compensation
The Company has a stock-based employee compensation plan. The Company
accounts for this plan under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board Statement ("FASB") No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2003 2003 2002
--------- --------- --------- ---------
Net income, as reported................................ $ 10,043 $ 8,527 $ 22,077 $ 17,397
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects............................. (211) (1,719) (507) (701)
--------- --------- --------- ---------
Pro forma net income................................... $ 9,832 $ 6,808 $ 21,570 $ 16,696
--------- --------- --------- ---------
Earnings per share:
Basic - as reported................................ $ .57 $ .42 $ 1.24 $ .86
Basic - pro forma.................................. $ .56 $ .34 $ 1.21 $ .83
Diluted - as reported.............................. $ .57 $ .42 $ 1.24 $ .86
Diluted - pro forma................................ $ .56 $ .34 $ 1.21 $ .83
Note 2 - Contingencies
The Company and various of its executive officers have been named as
defendants in a putative securities class action originally filed in the United
States District Court for the Western District of Oklahoma in early 2001 seeking
unspecified damages on the basis of allegations that the Company issued false
and misleading financial information, primarily related to the method the
Company used to account for commission advance receivables from sales
associates. On March 5, 2002, the Court granted the Company's motion to dismiss
the complaint, with prejudice, and entered a judgment in favor of the
defendants. Plaintiffs thereafter filed a motion requesting reconsideration of
the dismissal which was denied. The plaintiffs have appealed the judgment and
the order denying their motion to reconsider the judgment to the Tenth Circuit
Court of Appeals, and as of June 30, 2003, the case was in the briefing stage.
The Company is unable to predict when a decision will be made on this appeal. In
August 2002, the lead institutional plaintiff withdrew from the case, leaving
two individual plaintiffs as lead plaintiffs on behalf of the putative class.
The ultimate outcome of this case is not determinable.
Beginning in the second quarter of 2001 multiple lawsuits were filed
against the Company, certain officers, employees, sales associates and other
defendants in various Alabama and Mississippi state courts by current or former
members seeking actual and punitive damages for alleged breach of contract,
fraud and various other claims in connection with the sale of memberships. As of
June 30, 2003, the Company was aware of 28 separate lawsuits involving
approximately 298 plaintiffs that have been filed in multiple counties in
Alabama. One suit involving two plaintiffs, which was filed as a class action,
has been dismissed with prejudice as to the class allegations and without
prejudice as to the individual claims. As of June 30, 2003, the Company was
aware of 18 separate lawsuits involving approximately 432 plaintiffs in multiple
counties in Mississippi. Certain of the Mississippi lawsuits also name the
Company's provider attorney in Mississippi as a defendant. Proceedings in eleven
cases which name the Company's provider attorney as a defendant had been stayed
for at least 90 days as to the provider attorney (and as to all defendants in
some cases) due to the rehabilitation proceeding involving the provider law
firm's insurer, though plaintiffs now contend that the stay as to the provider
attorney should be concluded due to the conversion of the rehabilitation
proceedings to liquidation proceedings. However, one case has been stayed by the
Mississippi Supreme Court pending its ruling on the Pre-Paid defendants' appeal
of the trial court's granting of a partial summary judgment that the action is
not required to be submitted to arbitration. Motions to stay other of the
actions on that ground are also pending. At least two complaints have been filed
on behalf of certain of the Mississippi plaintiffs and others with the Attorney
General of Mississippi in March 2002 and December 2002. The Company has
responded to the Attorney General's requests for information with respect to
both complaints, and as of June 30, 2003, the Company was not aware of any
further actions being taken by the Attorney General. In Mississippi, the Company
has filed lawsuits in the United States District Court for the Southern and
Northern Districts of Mississippi in which the Company seeks to compel
arbitration of the various Mississippi claims under the Federal Arbitration Act
and the terms of the Company's membership agreements, and has appealed the state
court rulings in favor of certain of the plaintiffs on the arbitration issue to
the Mississippi Supreme Court. These cases are all in various stages of
litigation, including trial settings beginning in Alabama in October 2003, and
in Mississippi in September 2003, and seek varying amounts of actual and
punitive damages. While the amount of membership fees paid by the plaintiffs in
the Mississippi cases is $500,000 or less, certain of the cases seek damages of
$90 million. Additional suits of a similar nature have been threatened. The
ultimate outcome of any particular case is not determinable.
On April 19, 2002, counsel in certain of the above-referenced Alabama suits
also filed a similar suit against the Company and certain of its officers in the
District Court of Creek County, Oklahoma on behalf of Jeff and Jana Weller
individually and doing business as Hi-Tech Auto making similar allegations
relating to the Company's memberships and seeking unspecified damages on behalf
of a "nationwide" class. The Pre-Paid defendants' preliminary motions in this
case were denied, and on June 17, 2003, the Oklahoma Court of Civil Appeals
reversed the trial court's denial of the Pre-Paid defendants' motion to compel
arbitration, finding that the trial court erred when it denied Pre-Paid's motion
to compel arbitration pursuant to the terms of the valid membership contracts,
and remanded the case to the trial court for further proceedings consistent with
that opinion. The ultimate outcome of this case is not determinable.
On June 29, 2001, an action was filed against the Company in the District
Court of Canadian County, Oklahoma. In 2002, the petition was amended to add
five additional named plaintiffs and to add and drop certain claims. This action
is a putative class action brought by Gina Kotwitz, George Kotwitz, Rick Coker,
Richard Starke, Jeff Turnipseed and Aaron Bouren on behalf of all sales
associates of the Company. The amended petition seeks injunctive and declaratory
relief, with such other damages as the court deems appropriate, for alleged
violations of the Oklahoma Uniform Consumer Credit Code in connection with the
Company's commission advances, and seeks injunctive and declaratory relief
regarding the enforcement of certain contract provisions with sales associates,
including a request stated in June 2003 for the imposition of a constructive
trust as to earned commissions applied to the reduction of debit balances and
disgorgement of all earned renewal commissions applied to the reduction of debit
balances. The impact of the claims alleged under the Consumer Credit Code and
the assertion of entitlement to the other relief requested could exceed $315
million if plaintiffs are successful both in their request for class
certification and on the merits. Though plaintiffs have stated that they no
longer seek class certification on the Consumer Credit Code claims, they have
also made recent statements inconsistent with that position. The hearing on
plaintiffs' request for class certification has been continued from July 22,
2003, to February 2004. The ultimate outcome of this case is not determinable.
On March 1, 2002, an action was filed in the United States District Court
for the Western District of Oklahoma by Caroline Sandler, Robert Schweikert, Sal
Corrente, Richard Jarvis and Vincent Jefferson against the Company and certain
executive officers. This action is a putative class action seeking unspecified
damages filed on behalf of all sales associates of the Company and alleges that
the marketing plan offered by the Company constitutes a security under the
Securities Act of 1933 and seeks remedies for failure to register the marketing
plan as a security and for violations of the anti-fraud provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934 in connection
with representations alleged to have been made in connection with the marketing
plan. The complaint also alleges violations of the Oklahoma Securities Act, the
Oklahoma Business Opportunities Sales Act, breach of contract, breach of duty of
good faith and fair dealing and unjust enrichment and violation of the Oklahoma
Consumer Protection Act and negligent supervision. This case is subject to the
Private Litigation Securities Reform Act. Pursuant to the Act, the Court has
approved the named plaintiffs and counsel and an amended complaint was filed in
August 2002. The Pre-Paid defendants filed motions to dismiss the complaint and
to strike the class action allegations on September 19, 2002, and discovery in
the action was stayed pending a ruling on the motion to dismiss. On July 24,
2003, the Court granted in part and denied in part the Pre-Paid defendants'
motion to dismiss. The claims asserted under the Securities Exchange Act of 1934
and the Oklahoma Securities Act were dismissed without prejudice. The motion was
denied as to the remaining claims. On July 23, 2003, the Court denied the motion
to strike class action allegations at this time. Accordingly, the case will now
proceed in the normal course as to the remaining claims. The Company is unable
to predict when a decision will be made. The ultimate outcome of this case is
not determinable.
In December 2002, the West Virginia Supreme Court reversed a summary
judgment which had been granted by the Circuit Court of Monangalia County, West
Virginia in favor of the Company in connection with the claims of a former
member, Georgia Poling and her daughters against the Company and a referral
lawyer with respect to a 1995 referral. That action was originally filed in
March 2000, and alleges breach of contract and fraud against the Company in
connection with the referral. Plaintiffs seek actual and punitive damages in
unspecified amounts. The case has been continued from the previously scheduled
trial in August 2003 at plaintiffs' request, and the new trial date has not yet
been set. The ultimate outcome of this case is not determinable.
On January 30, 2003, the Company announced that it had received a subpoena
from the office of the United States Attorney for the Southern District of New
York requesting information relating to trading activities in the Company's
stock in advance of the January 2003 announcement of recruiting and membership
production results for the fourth quarter of 2002. The Company also received
notice from the Securities and Exchange Commission that it is conducting an
informal inquiry into the same subject and requesting that the Company
voluntarily provide certain information. The Company has and continues to
respond to these requests. The ultimate outcome of these matters is not
determinable.
The Company is a defendant in various other legal proceedings that are
routine and incidental to its business. The Company will vigorously defend its
interests in all proceedings in which it is named as a defendant. The Company
also receives periodic complaints or requests for information from various state
and federal agencies relating to its business or the activities of its marketing
force. The Company promptly responds to any such matters and provides any
information requested.
While the ultimate outcome of these proceedings is not determinable, the
Company does not currently anticipate that these contingencies will result in
any material adverse effect to its financial condition or results of operation,
unless an unexpected result occurs in one of the cases. The Company has
established an accrued liability it believes will be sufficient to cover
estimated damages in connection with various cases, which at June 30, 2003 was
$3.3 million. If an unexpected result were to occur in one or more of the
pending cases, the amount of damages awarded could differ significantly from
management's estimates. The Company believes it has meritorious defenses in all
pending cases and will vigorously defend against the plaintiffs' claims.
The Company is constructing a new corporate office complex with an
estimated completion during the fourth quarter of 2003 at an estimated cost of
approximately $30 million. Costs incurred through June 30, 2003 of approximately
$22.8 million, including approximately $355,000 of capitalized interest costs,
have been paid from existing resources and a real estate line of credit. The
Company expects to incur additional indebtedness in order to finance the
remaining costs of its new corporate headquarters in order to allow cash flow
from operations to continue to be used to purchase treasury stock. The Company
has entered into construction contracts in the amount of $28.2 million with the
general contractor pertaining to the new office complex. Total remaining costs
of construction from July 1, 2003 are estimated at approximately $7.2 million.
Note 3 - Treasury Stock Purchases
The Company announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of the Company's common
stock. The Board of Directors has increased such authorization from 500,000
shares to 8,000,000 shares during subsequent board meetings. At June 30, 2003,
the Company had purchased 7.0 million treasury shares under these authorizations
for a total consideration of $157.3 million, an average price of $22.47 per
share. During the quarter ended June 30, 2003, the Company purchased and
formally retired 502,916 million shares of treasury shares reducing its common
stock by $5,000 and its capital in excess of par by $12.3 million. Treasury
stock purchases will be made at prices that are considered attractive by
management and at such times that management believes will not unduly impact the
Company's liquidity. No time limit has been set for completion of the treasury
stock purchase program. Given the current interest rate environment, the nature
of other investments available and the Company's expected cash flows, management
believes that purchasing treasury shares enhances shareholder value. The Company
expects to continue its treasury stock program and may seek alternative sources
of financing to continue or accelerate the program.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
respective periods.
Diluted earnings per common share are computed by dividing net income by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the respective periods. The weighted average
number of common shares is increased by the number of shares issuable on the
exercise of options less the number of common shares assumed to have been
purchased with the proceeds from the exercise of the options pursuant to the
treasury stock method; those purchases are assumed to have been made at the
average price of the common stock during the respective period.
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
Basic Earnings Per Share: 2003 2002 2003 2002
--------- --------- --------- ---------
Earnings:
Net income........................................................... $ 10,043 $ 8,527 $ 22,077 $ 17,397
--------- --------- --------- ---------
Shares:
Weighted average shares outstanding.................................. 17,611 20,126 17,824 20,215
--------- --------- --------- ---------
Diluted Earnings Per Share:
Earnings:
Net income........................................................... $ 10,043 $ 8,527 $ 22,077 $ 17,397
--------- --------- --------- ---------
Shares:
Weighted average shares outstanding.................................. 17,611 20,126 17,824 20,215
Assumed exercise of options.......................................... 73 99 42 118
--------- --------- --------- ---------
Weighted average number of shares, as adjusted....................... 17,684 20,225 17,866 20,333
--------- --------- --------- ---------
Options to purchase shares of common stock are excluded from the
calculation of diluted earnings per share when their inclusion would have an
anti-dilutive effect on the calculation. Options to purchase 1.0 million shares
and 951,000 shares for the three months and 1.3 million shares and 949,000
shares for the six months ended June 30, 2003 and 2002, respectively, with an
average exercise price of $28.32, $31.63, $28.81 and $31.74, respectively, were
excluded from the calculation of diluted earnings per share for the respective
periods.
Note 5 - Recent Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). Subject to certain criteria defined in the
Interpretation, FIN 46 will require consolidation by business enterprises of
variable interest entities if the enterprise has a variable interest that will
absorb the majority of the entity's expected losses, receives a majority of its
expected returns, or both. The provisions of FIN 46 are effective immediately
for interests acquired in variable interest entities after January 31, 2003, and
at the beginning of the first interim or annual period beginning after June 15,
2003, for interests acquired in variable interest entities before February 1,
2003 (for the Company in the third quarter of 2003). The Company has determined
the adoption of the provisions of FIN 46 will not have a material effect on its
financial condition or results of operations. Certain transitional disclosures
required by FIN 46 in all financial statements initially issued after January
31, 2003, have been included in the accompanying financial statements.
Note 6 - Notes Payable and Capital Leases
On June 11, 2002, the Company entered into two line of credit agreements
totaling $30 million with a commercial lender providing for a treasury stock
purchase line and a real estate line for funding of the Company's new corporate
office complex. The treasury stock line of credit provided for funding of up to
$10 million to finance treasury stock purchases through May 31, 2003 with
scheduled monthly repayments beginning after the initial advance and ending no
later than May 31, 2004 with interest at the 30 day LIBOR Rate plus two percent,
adjusted monthly. The real estate line of up to $20 million may be funded over
the period ending December 31, 2003 with interest at the 30 day LIBOR Rate plus
2.25%, adjusted monthly, and will be repayable beginning December 31, 2003 in
monthly principal payments equal to the principal balance outstanding at
December 31, 2003 divided by 105 plus interest with a balloon payment on
September 30, 2008. Additionally, interest on the outstanding balance of the
real estate line is payable monthly through November 30, 2003.
As of June 30, 2003, the Company had accessed all of the $10 million
treasury stock purchase line and made repayments of $4.2 million and had
accessed $13.1 million of the $20 million real estate line. The interest rates
as of June 30, 2003 are 3.32% and 3.57% for the treasury stock loan and the real
estate loan, respectively. The $5.8 million used to purchase treasury stock, net
of repayments of $4.2 million, is scheduled to be paid off by May 31, 2004 and
therefore has been classified as short term. Monthly principal payments on the
treasury stock line are $500,000. The Company is scheduled to begin principal
payments on the real estate line on December 31, 2003. As of June 30, 2003,
interest capitalized related to construction in progress was $355,000.
These lending agreements contain the following financial covenants: (a) the
Company's quarterly Debt Coverage Ratio shall not be less than 125%; (b) the
Company shall not permit the ratio of its Total Liabilities to its Tangible Net
Worth to exceed 3.75 to 1.00, measured at the end of each calendar quarter; (c)
the Company's cancellation rate on contracts less than or equal to twelve months
old shall not exceed 50% for fiscal year 2002 and 45% for each fiscal year
thereafter, on a trailing twelve months basis, (d) the Company shall maintain a
rolling twelve month average retention rate of membership contracts in place for
greater than eighteen months of not less than 70%, calculated on a calendar
quarter basis, and (e) the Company shall maintain tangible net worth of at least
$15 million at the end of each calendar quarter.
A schedule of outstanding balances and future maturities as of June 30,
2003 follows:
Real estate line of credit................. $ 13,100
Stock purchase line of credit.............. 5,833
----------------
Total notes payable........................ 18,933
Less: Current portion of notes payable..... (6,707)
Long term portion.......................... ----------------
$ 12,226
----------------
Repayment Schedule commencing
July 2003:
Year 1..................................... $ 6,707
Year 2..................................... 1,497
Year 3..................................... 1,497
Year 4..................................... 1,497
Year 5..................................... 1,497
Thereafter................................. 6,238
Total notes payable........................ ----------------
$ 18,933
----------------
During the six months ended June 30, 2003, the Company entered into a
capital lease in the amount of $2.4 million to acquire significant new computer
hardware to supplement its current information technology platform and provide
redundancy for its critical business systems. The capital lease requires the
Company to make annual payments of $792,000 beginning January 2003 through
January 2005. Pursuant to this lease, the Company received a $1 million vendor
rebate during April 2003, which was recorded as a reduction in property and
equipment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - First six months of 2003 compared to first
six months of 2002
The Company reported net income of $22.1 million, or $1.24 per diluted
common share, for the six months ended June 30, 2003, up 27% from net income of
$17.4 million, or $.86 per diluted common share, for the comparable period of
the prior year. Diluted earnings per share increased 44% due to increased net
income of 27% and an approximate 12% decrease in the weighted average number of
outstanding shares.
Membership fees totaled $163.4 million during 2003 compared to $149.5
million for 2002, an increase of 9%. Membership fees and their impact on total
revenues in any period are determined directly by the number of active
Memberships in force during any such period. The active Memberships in force are
determined by both the number of new Memberships sold in any period together
with the renewal rate of existing Memberships. New Membership sales decreased
14% during the six months ended June 30, 2003 to 350,000 from 406,975 during the
comparable period of 2002. At June 30, 2003, there were 1,405,121 active
Memberships in force compared to 1,360,502 at June 30, 2002, an increase of 3%.
Additionally, the average annual fee per Membership has increased from $256 for
all Memberships in force at June 30, 2002 to $257 for all Memberships in force
at June 30, 2003, as a result of a higher portion of active Memberships
containing the additional pre-trial hours benefit at an additional cost to the
member, a larger number of Legal Shield subscribers and increased sales of the
Company's business oriented memberships.
Associate services revenue decreased 24% from $18.1 million for the first
six months of 2002 to $13.9 million during the same period of 2003 primarily as
a result of fewer new associates recruited. As a result of the decrease in
recruiting for the 2003 period, the Fast Start program generated training fees
of approximately $4.0 million during the first six months of 2003 compared to
$6.0 million for the comparable period of 2002. The field training program,
titled Fast Start to Success ("Fast Start") is aimed at increasing the level of
new Membership sales per associate. Fast Start typically requires a training fee
of $184 per new associate, except for special promotions the Company implements
from time to time, and upon successful completion of the program provides for
the payment of certain training bonuses. The $4.0 million and $6.0 million for
the six month periods ending June 30, 2003 and 2002, respectively, in training
fees was collected from approximately 52,183 new sales associates who elected to
participate in Fast Start during the first six months of 2003 compared to 74,422
that participated during the comparable period of 2002. Total new associates
enrolled during the first six months of 2003 were 52,502 compared to 79,455 for
the same period of 2002, a decrease of 34%. Future revenues from associate
services will depend primarily on the number of new associates enrolled and the
number who choose to participate in the Company's training program, but the
Company expects that such revenues will continue to be largely offset by the
direct and indirect cost to the Company of training (including training bonuses
paid), providing associate services and other direct marketing expenses.
Other revenue increased 13%, to $2.7 million for the six months ended June
30, 2003 from $2.4 million for the comparable period of 2002 primarily due to an
increase in enrollment fees of $365,000. Enrollment fee revenue increased for
the six months ended June 30, 2003 despite a lower number of Memberships being
written during the period compared to the 2002 period due to the amortization of
previously deferred revenue.
Primarily as a result of the increase in Membership fees, total revenues
increased to $180.0 million for the six months ended June 30, 2003 from $170.0
million during the comparable period of 2002, an increase of 6%.
Membership benefits totaled $54.3 million for the six months ended June 30,
2003 compared to $50.3 million for the comparable period of 2002, and
represented 33% and 34% of Membership fees for the 2003 and 2002 periods,
respectively. This Membership benefit ratio (Membership benefits as a percentage
of Membership fees) should remain near current levels as substantially all
active Memberships provide for a capitated cost in the absence of any changes in
the capitated benefit level, which has not changed significantly since 1993.
Commissions to associates decreased 7% to $56.5 million for the six months
ended June 30, 2003 compared to $60.6 million for the comparable period of 2002,
and represented 35% and 41% of Membership fees for such periods. These amounts
were reduced by $110,000 and $550,000, respectively, representing Membership
lapse fees. These fees were determined by applying the prime interest rate to
the unearned advance commission balance pertaining to lapsed Memberships. The
Company realizes and recognizes this fee only when the amount of the calculated
fee is collected by withholding from cash commissions due the associate, because
the Company's ability to recover fees in excess of current payments is primarily
dependent on the associate selling new Memberships which qualify for advance
commission payments. These fees were eliminated for Memberships sold after March
1, 2002. Commissions to associates are primarily dependent on the number of new
memberships sold during a period. New memberships sold during the six months
ended June 30, 2003 totaled 350,000, a 14% decrease from the 406,975 sold during
the comparable period of 2002. Commissions to associates per new membership sold
were $162 per membership for the six months ended June 30, 2003 compared to $150
for the comparable period of 2002. The average commission per new membership
sold varies depending on the compensation structure that is in place at the time
a new membership is sold and the amount of any charge-backs (recoupment of
previous commission advances) that are deducted from amounts that would
otherwise be paid to the various sales associates that are compensated for the
membership sale. Should the Company add additional commissions to its
compensation plan or reduce the amount of chargebacks collected from its
associates as it has from time to time, the commission cost per new Membership
will increase accordingly.
Associate services and direct marketing expenses decreased to $14.4 million
for the six months ended June 30, 2003 from $14.7 million for the comparable
period of 2002. Fast Start training bonuses incurred were approximately $1.4
million during the first six months of 2003 compared to $2.6 million in the same
period of 2002. This $1.2 million decline in bonuses and a $1.4 million decline
in associate incentive program costs more than offset a $1.4 million increase in
Fast Start attendance bonuses incurred, implemented January 2003, and an
$842,000 increase in the amortization of deferred associate costs. The Fast
Start training bonuses are affected by the number of new sales associates that
successfully meet the qualification criteria established by the Company, i.e.
more training bonuses will be paid when a higher number of new sales associates
meet such criteria. These expenses also include the costs of providing associate
services and marketing expenses.
General and administrative expenses during the six months ended June 30,
2003 and 2002 were $16.9 million and $15.3 million, respectively, and
represented 10% of Membership fees for each period. Management expects general
and administrative expenses when expressed as a percentage of Membership fees to
remain relatively consistent over the near term. The Company should experience
cost efficiencies as a result of certain economies of scale in some areas but
expects such cost savings for the remainder of 2003 to be largely offset by
higher levels of expenses related to legal fees, expenses related to moving its
corporate headquarters to its new facilities and increased compliance costs as a
result of new requirements of the Sarbanes-Oxley Act of 2002.
Other expenses, net, which include depreciation and amortization and
premium taxes reduced by interest income, was $4.1 million for the period ended
June 30, 2003 compared to $2.4 million for the 2002 comparable period.
Depreciation increased to $3.5 million for the first six months of 2003 from
$2.5 million for the comparable period of 2002 due to technology infrastructure
additions during the last 12 months. Premium taxes increased from $900,000 for
the six months ended June 30, 2002 to $1.3 million for the comparable period of
2003. The increase in 2003 was due to a change in the tax structure of one of
the states in which the Company pays premium taxes. Interest income decreased by
approximately $285,000 for the first six months of 2003 to $715,000 from $1.0
million for the 2002 period due to a decrease in balances of interest bearing
notes.
The Company has recorded a provision for income taxes of $11.6 million
(34.5% of pretax income) for the first six months of 2003 compared to $9.2
million (34.5% of pretax income) for the same period of 2002.
Results of Operations - Second Quarter of 2003 compared to the Second
Quarter of 2002
The results of operations in the second quarter of 2003, compared to the
second quarter of 2002, reflect increases in revenues and expenses primarily as
a result of the same factors discussed in the comparison of the first six months
of 2003 to the first six months of 2002.
Total revenues increased 2% or approximately $1.7 million to $89.6 million
in the second quarter of 2003 compared to $87.9 million in the second quarter of
2002, primarily as a result of increases in membership premiums. The membership
premium increase of 6% primarily resulted from an increase in the number of
average active memberships during the second quarter of 2003 compared to the
similar period in 2002.
Membership benefits totaled $27.6 million in the 2003-second quarter
compared to $26.0 million in the 2002-second quarter and resulted in a loss
ratio of 34% for both periods.
Associate services revenue decreased 31% to $6.3 million for the second
quarter of 2003 from $9.1 million during the same period of 2002 primarily as a
result of less new associates enrolled during the second quarter of 2003 of
22,747 compared to 45,962 enrolled during the comparable period of 2002. The
Fast Start program generated training fees of approximately $1.8 million during
the second quarter of 2003 compared to $2.5 million for the comparable period of
2002. The $1.8 million and $2.5 million for the second quarter 2003 and 2002,
respectively, in training fees was collected from approximately 22,658 new sales
associates who elected to participate in Fast Start during the 2003-second
quarter compared to 43,235 that participated during the comparable quarter of
2002. Total new associates enrolled during the second quarter of 2003 were
22,747 compared to 45,962 for the same period of 2002, a decrease of 51%. The
number of new associates recruited in the second quarter of 2002 represents the
highest recruiting quarter in the Company's history. The Company's quarterly
average of new associate enrollments during the last three years is 31, 749.
Other income increased 15%, to $1.4 million for the three months ended June
30, 2003 from $1.2 million for the comparable period of 2002 primarily due to an
increase in enrollment fees of $231,000.
Commissions to associates decreased 14% to $28.4 million for the three
months ended June 30, 2003 compared to $32.8 million for the comparable period
of 2002, and represented 35% and 42% of Membership fees for such periods. These
amounts were reduced by $46,000 and $111,000, respectively, representing
Membership lapse fees. Commissions to associates per new membership sold were
$166 per membership for the three months ended June 30, 2003 compared to $159
for the comparable period of 2002.
Associate services and direct marketing expenses increased to $7.4 million
for the three months ended June 30, 2003 from $7.2 million for the comparable
period of 2002. Fast Start bonuses incurred were approximately $666,000 during
the second quarter of 2003 compared to $1.0 million in the same period of 2002.
This approximate $400,000 decline in bonuses and a $466,000 decline in associate
incentive program costs partially offset a $712,000 increase in Fast Start
attendance bonuses incurred, implemented January 2003, and a $748,000 increase
in the amortization of deferred associate costs. These expenses also include
marketing costs, other than commissions, that are directly associated with new
Membership sales.
General and administrative expenses during the three months ended June 30,
2003 and 2002 were $8.9 million and $7.5 million, respectively, and represented
11% and 10% of Membership fees, respectively, for each period. Management
expects general and administrative expenses when expressed as a percentage of
Membership fees to remain relatively consistent over the near term. The Company
should experience cost efficiencies as a result of certain economies of scale in
some areas but expects such cost savings for the remainder of 2003 to be largely
offset by higher levels of expenses related to legal fees, expenses related to
moving its corporate headquarters to its new facilities and increased compliance
costs as a result of new requirements of the Sarbanes-Oxley Act of 2002.
Other expenses, net, which include depreciation and amortization and
premium taxes reduced by interest income, were approximately $2.1 million and
$1.4 million for the three-month periods ended June 30, 2003 and 2002,
respectively. Depreciation and amortization increased to $1.8 million for the
three months ended June 30, 2003 from $1.3 million for the comparable period of
2002 due to technology infrastructure additions during the last 12 months and
premium taxes increased $57,000 from $622,000 for the three months ended June
30, 2002 to $679,000 for the comparable period of 2003 due to an increase in
membership revenues. Interest income decreased by approximately $135,000 for the
three months ended June 30, 2003 to $357,000 from $492,000 for the 2002 period
primarily due to a decrease in balances of interest bearing notes.
The Company has recorded a provision for income taxes of $5.3 million
(34.5% of pretax income) for the 2003 second quarter compared to $4.5 million
(34.5% of pretax income) for the same period of 2002.
The above factors resulted in a 2003 second quarter net income of $10.0
million, or $.57 per share, diluted, compared to $8.5 million, or $.42 per
share, for the second quarter of 2002.
Second quarter 2003 membership fees increased slightly to $81.9 million
from $81.5 million for first quarter of 2003. Associate services revenues
declined during the 2003 second quarter by approximately $1.2 million to $6.3
million from $7.5 million for the 2003 first quarter while associate services
and direct marketing expenses increased by $291,000 during the same period.
Membership benefits totaled $27.6 million in the second quarter of 2003 compared
to $26.7 million for the first quarter and represented 34% of membership fees
for the second quarter compared to 33% for the first quarter. Total commissions
to associates per new membership sold during the respective quarters were $166
per membership for the three months ended June 30, 2003 compared to $158 for the
first three months of 2003 and increased primarily due to the reduction of
commission chargebacks during the second quarter for qualifying sales
associates. Primarily due to increased legal fees and telecommunication
expenses, general and administrative expenses during the 2003 second quarter
increased to $8.9 million compared to $8.0 million for the first quarter of 2003
and represented 11% and 10% of membership fees, respectively, for each period.
Liquidity and Capital Resources
General
Consolidated net cash provided by operating activities was $28.3 million
for the first six months of 2003 compared to cash provided of $23.5 million for
the 2002 period. The increase of $4.7 million resulted primarily from the
increase in net income of $4.7 million, a net increase in the change in income
taxes payable of $1.1 million partially offset by a change in accounts payable
and accrued expenses of $1.3 million and a decrease in deferred revenue and fees
of $3.2 million.
Consolidated net cash used in investing activities was $11.8 million for
the first six months of 2003 compared to $5.5 million for the comparable period
of 2002. This $6.3 million increase in cash used in investing activities
resulted from the $8.7 million increase in additions to property and equipment,
primarily additional costs of the Company's new corporate office complex offset
by a $2.4 million net decrease in available-for-sale investments.
Net cash used in financing activities during the first six months of 2003
was $23.1 million compared to $22.1 million for the comparable period of 2002,
in each case primarily for treasury stock purchases. This $1.0 million change
was primarily comprised of the $10.8 million increase in net proceeds from
issuance of debt and a $1.0 million vendor rebate offset by the $3.3 million in
repayments on debt and capital lease obligations, a $2.4 million decrease in
proceeds from sale of common stock and a $7.1 million increase of treasury stock
purchases.
During the six months ended June 30, 2003, the Company purchased and
formally retired 1.5 million shares of treasury stock reducing its common stock
accounts by $15,000 and capital in excess of par accounts by $32.2 million.
Primarily due to the large amount of treasury stock purchases in the first six
months of 2003 of approximately $32.2 million, the Company had a consolidated
working capital deficit of $12.0 million at June 30, 2003, a decrease of $14.6
million compared to a consolidated working capital surplus of $2.7 million at
December 31, 2002. Approximately $9.2 million of the working capital deficit at
June 30, 2003 is related to deferred revenue and fees in excess 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 the Company
incurring other current liabilities. Additionally, at the current rate of cash
flow provided by operations ($28.3 million during the first six months of 2003),
the Company's ability to control the timing of its discretionary treasury stock
purchases and the availability pursuant to its real estate line of credit, ($4
million at June 30, 2003), the Company does not expect any difficulty in meeting
its financial obligations in the short term or the long term.
At June 30, 2003 the Company reported $32.9 million in cash and cash
equivalents and unpledged investments compared to $36.4 million at December 31,
2002. The Company's investments consist of common stocks, investment grade
(rated Baa or higher) preferred stocks and investment grade bonds primarily
issued by corporations, the United States Treasury, federal agencies, federally
sponsored agencies and enterprises as well as mortgage-backed securities and
state and municipal tax-exempt bonds.
The Company generally advances significant commissions at the time a
Membership is sold. During the six months ended June 30, 2003, the Company
advanced commissions of $54.9 million on new Membership sales compared to $61.2
million for the same period of 2002. 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, the Company
typically derives significant positive cash flow from the Membership over its
remaining life.
The Company expenses advance commissions ratably over the first month of
the related membership. As a result of this accounting policy, the Company's
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. The Company tracks its unearned advance
commission balances outstanding in order to ensure the advance commissions are
recovered before any renewal commissions are paid and for internal purposes of
analyzing its commission advance program. While not recorded as an asset,
unearned advance commission balances from associates as of June 30, 2003, and
related activity for the six month period then ended, were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)............................... $ 227,084
Advance commission payments, net................................................. 54,905
Earned commissions applied....................................................... (78,308)
Advance commission payment write-offs............................................ (1,472)
-------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 202,209
Estimated unrecoverable advance commission payments (1).......................... (23,216)
Ending unearned advance commission payments, net (1)............................. -------------
$ 178,993
-------------
(1) These amounts do not represent fair value, as they do not take into
consideration timing of estimated recoveries.
The ending unearned advance commission payments, net, above includes net
unearned advance commission payments to non-vested associates of $28.0 million.
As such, at June 30, 2003 future commission payments and related expense should
be reduced as unearned advance commission payments of $151 million are
recovered. Commissions are earned by the associate as Membership premiums are
earned by the Company, usually on a monthly basis. For additional information
concerning these commission advances, see the Company's Annual report on Form
10-K under the heading Commissions to Associates in Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The Company believes that it has significant ability to finance expected
future growth in Membership sales based on its recurring cash flow and existing
amount of cash and cash equivalents and unpledged investments at June 30, 2003
of $28.6 million. The Company expects to maintain cash and investment balances,
including pledged investments, on an on-going basis of approximately $20 to $30
million in order to meet expected working capital needs and regulatory capital
requirements. Cash balances in excess of this amount would be used for
discretionary purposes such as treasury stock purchases.
The Company is constructing a new corporate office complex with an
estimated completion during the fourth quarter of 2003 at an estimated cost of
approximately $30 million. Costs incurred through June 30, 2003 of approximately
$22.8 million, including approximately $355,000 of capitalized interest costs,
have been paid from existing resources and the real estate line of credit. The
Company expects to incur additional indebtedness in order to finance the
remaining costs of its new corporate headquarters in order to allow cash flow
from operations to continue to be used to purchase treasury stock. The Company
has entered into construction contracts in the amount of $28.4 million with the
general contractor pertaining to the new office complex. Total remaining costs
of construction from July 1, 2003 are estimated at approximately $7.2 million.
On June 11, 2002, the Company entered into two line of credit agreements
totaling $30 million with a commercial lender providing for a treasury stock
purchase line and a real estate line for funding of the Company's new corporate
office complex. The treasury stock line of credit provided for funding of up to
$10 million to finance treasury stock purchases through May 31, 2003 with
scheduled monthly repayments beginning after the initial advance and ending no
later than May 31, 2004 with interest at the 30 day LIBOR Rate plus two percent,
adjusted monthly. The real estate line of up to $20 million may be funded over
the period ending December 31, 2003 with interest at the 30 day LIBOR Rate plus
2.25%, adjusted monthly, and will be repayable beginning after the advance
period in monthly principal payments equal to the principal balance outstanding
at December 31, 2003 divided by 105 plus interest with a balloon payment on
September 30, 2008. These credit agreements, as amended, contain, among others,
a financial covenant that the Company shall not permit the ratio of its total
liabilities to its tangible net worth to exceed 3.75 to 1.00, measured at the
end of each calendar quarter and a financial covenant prohibiting the Company's
tangible net worth to fall below $15 million effective June 30, 2003 and each
quarter thereafter.
As of June 30, 2003, the Company had accessed all of the $10 million
treasury stock purchase line and made repayments of $4.2 million and had
accessed $13.1 million of the $20 million real estate line. The interest rates
as of June 30, 2003 are 3.32% and 3.57% for the treasury stock loan and the real
estate loan, respectively. The $5.8 million used to purchase treasury stock, net
of repayments of $4.2 million, is scheduled to be paid off by May 31, 2004, and
therefore has been classified as short term. Monthly principal payments on the
treasury stock line are $500,000. The Company is scheduled to begin payments on
the real estate line on December 31, 2003.
During the six months ended June 30, 2003, the Company entered into a
capital lease in the amount of $2.4 million to acquire significant new computer
hardware to supplement its current information technology platform and provide
redundancy for its critical business systems. The capital lease requires the
Company to make annual payments of $792,000 beginning January 2003 through
January 2005. Pursuant to this lease, the Company received a $1 million vendor
rebate during April 2003, which was recorded as a reduction in property and
equipment.
Actions that May Impact Retention in the Future
The potential impact on the Company's future profitability and cash flow
due to future changes in Membership retention can be significant. For additional
information concerning Membership retention, see the Company's Annual report on
Form 10-K under the heading Measures of Member Retention in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations. While blended retention rates have not changed significantly over
the past five years, the Company continues to take actions that it expects to
favorably impact retention rates in the future. Since December 31, 2002, the
Company has implemented several new initiatives aimed at improving the retention
rate of both new and existing Memberships. Such initiatives include newly
designed marketing tools and Fast Start training materials as well as a
completely redesigned membership contract kit. The Company believes that such
efforts may increase the utilization by members and therefore lead to higher
retention rates.
Parent Company Funding and Dividends
Although the Company is the operating entity in many jurisdictions, the
Company's 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 and PPLSIF. The
ability of PPLCI and PPLSIF to provide funds to the Company is subject to a
number of restrictions under various insurance laws in the jurisdictions in
which PPLCI and PPLSIF conduct business, including limitations on the amount of
dividends and management fees that may be paid and requirements to maintain
specified levels of capital and reserves. In addition PPLCI will be required to
maintain its stockholders' equity at levels sufficient to satisfy various state
or provincial regulatory requirements, the most restrictive of which is
currently $3.0 million. Additional capital requirements of PPLCI or PPLSIF will
be funded by the Company in the form of capital contributions or surplus
debentures. At June 30, 2003, PPLSIF did not have funds available for payment of
substantial dividends without the prior approval of the insurance commissioner.
PPLCI had approximately $3.5 million in surplus funds available for payment of
an ordinary dividend during December 2003.
Forward-Looking Statements
All statements in this report concerning Pre-Paid Legal Services, Inc. (the
"Company") other than purely historical information, including but not limited
to, statements relating to the Company's future plans and objectives,
discussions with the staff of the SEC, 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 the Company's historical operating trends and financial condition as of June
30, 2003 and other information currently available to management. The Company
cautions that the Forward-Looking Statements are subject to all the risks and
uncertainties incident to its business, including but not limited to risks
described below. Moreover, the Company may make acquisitions or dispositions of
assets or businesses, enter into new marketing arrangements or enter into
financing transactions. None of these can be predicted with certainty and,
accordingly, are not taken into consideration in any of the Forward-Looking
Statements made herein. For all of the foregoing reasons, actual results may
vary materially from the Forward-Looking Statements. The Company assumes no
obligation to update the Forward-Looking Statements to reflect events or
circumstances occurring after the date of the statement.
Risk Factors
There are a number of risk factors that could affect our financial
condition or results of operations. See Note 2 - Contingencies and Part II, Item
1 - Legal Proceedings. Please refer to page 37 and 38 of the Company's 2002
Annual Report on Form 10-K for a description of other risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's consolidated balance sheets include a certain amount of
assets and liabilities whose fair values are subject to market risk. Due to the
Company's significant investment in fixed-maturity investments, interest rate
risk represents the largest market risk factor affecting the Company's
consolidated financial position. Increases and decreases in prevailing interest
rates generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, liquidity of the instrument and
other general market conditions.
As of June 30, 2003, substantially all of the Company's investments were in
investment grade (rated Baa or higher) fixed-maturity investments,
interest-bearing money market accounts and a collateralized repurchase
agreement. The Company does 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 the Company's 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 (dollars in 000's):
Hypothetical change in Estimated fair value
interest rate after hypothetical
Fair Value (bp=basis points) change in interest rate
----------- ---------------------- ------------------------
Fixed-maturity investments at June 30, 2003 (1)............. $ 16,056 100 bp increase $ 14,682
200 bp increase 13,693
50 bp decrease 16,404
100 bp decrease 16,814
Fixed-maturity investments at December 31, 2002 (1)......... $ 16,111 100 bp increase $ 14,740
200 bp increase 13,806
50 bp decrease 16,310
100 bp decrease 16,794
--------------------
(1) Excluding short-term investments with a fair value of $2.4 and $2.7 million
at June 30, 2003 and December 31, 2002, respectively.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at June 30, 2003 would reduce the
estimated fair value of the Company's fixed-maturity investments by
approximately $2.4 million at that date. At December 31, 2002, an
instantaneous 200 basis point increase in market interest rates would have
reduced the estimated fair value of the Company's fixed-maturity
investments by approximately $2.3 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 the Company does not believe
such risk is material.
The Company primarily manages its exposure to interest rate risk by
purchasing investments that can be readily liquidated should the interest rate
environment begin to significantly change.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's Principal
Executive Officer and Principal Financial Officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 240.13a-14(c)) as of the end of
the period covered by this report. Based on that evaluation, the Principal
Executive Officer and the Principal Financial Officer have concluded that
the Company's current disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls over financial reporting. There were no
changes in the Company's internal control over financial reporting that
occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 2 of the Notes to Consolidated Financial Statements included in
Part I, Item 1 of this report for information with respect to legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2003 Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held on May 29, 2003. The following matters were submitted to a
vote of the Company's shareholders at the Annual Meeting.
Election of Two Directors.
The results of the election for two directors were as follows:
Abstentions and
Votes For Votes Withheld
---------- ---------------
John W. Hail 14,541,121 235,451
Steven R. Hague 14,559,431 217,141
The Board of Directors of the Company now consists of six members and is
divided into three classes equal in size, with the term of office of one class
expiring each year. The new terms of service of Messrs. Hail and Hague will
expire in 2006. The terms of the other four directors of the Company did not
expire at the Annual Meeting. The names of such other directors and the year of
expiration of their respective terms are as follows: Harland C. Stonecipher -
2005; Martin H. Belsky - 2005; Peter K. Grunebaum - 2004 and Randy Harp - 2004.
Approval Of Amendment to Stock Option Plan
The results of the amendment of the Company's Stock Option Plan to increase
the maximum number of shares of Common Stock in respect of which options may be
granted under the Stock Option Plan from 2,000,000 shares to 3,000,000 shares
and to extend the termination date of the Stock Option Plan from December 12,
2005 to December 12, 2012 were as follows:
Votes For 8,048,346
Votes Against 1,471,810
Votes Abstain 31,831
Delivered non-votes 5,224,585
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Bylaws of the Company as adopted May 29, 2003
31.1 Certification of Harland C. Stonecipher, Chairman and Chief Executive
Officer, Pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K
31.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed
under Exhibit 31 of Item 601 of Regulation S-K.
32.1 Certification of Harland C. Stonecipher, Chairman and Chief Executive
Officer, Pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of
Item 601 of Regulation S-K.
32.2 Certification of Steve Williamson, Chief Financial Officer, Pursuant
to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of
Regulation S-K.
(b) Reports on Form 8-K:
The Company filed Form 8-K dated April 2, 2003 providing under Item 7 -
Financial Statements and Exhibits the Company's press release dated April
2, 2003, announcing its membership and recruiting information for the three
months ended March 31, 2003.
The Company filed Form 8-K dated April 28, 2003 providing under Item 7 -
Financial Statements and Exhibits the Company's press release dated April
28, 2003, announcing its earnings and operating results for the three
months ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: July 28, 2003 /s/ Harland C. Stonecipher
------------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: July 28, 2003 /s/ Randy Harp
------------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: July 28, 2003 /s/ Steve Williamson
------------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 3.1
AMENDED AND RESTATED BYLAWS
OF
PRE-PAID LEGAL SERVICES, INC.
(As Adopted May 29, 2003)
TABLE OF CONTENTS
TO
AMENDED AND RESTATED BYLAWS
OF
PRE-PAID LEGAL SERVICES, INC.
(an Oklahoma Corporation)
ARTICLE I - SHAREHOLDERS
Section 1.01. Annual Meeting
Section 1.02. Special Meetings
Section 1.03. Notice of Meetings
Section 1.04. Quorum
Section 1.05. Organization
Section 1.06. Conduct of Business
Section 1.07. Proxies and Voting
Section 1.08. Stock List
Section 1.09. Inspectors of Elections
Section 1.10. Voting Procedures
Section 1.11. Notice of Shareholder Nomination and Shareholder Business
ARTICLE II - BOARD OF DIRECTORS
Section 2.01. Number and Term of Office
Section 2.02. Vacancies
Section 2.03. Regular Meetings
Section 2.04. Special Meetings
Section 2.05. Quorum
Section 2.06. Participation in Meetings by Conference Telephone
Section 2.07. Written Consents
Section 2.08. Conduct of Business
Section 2.09. Powers
Section 2.10. Compensation of Directors
ARTICLE III - COMMITTEES
Section 3.01. Executive Committee
Section 3.02. Other Committees of the Board of Directors
Section 3.03. Limitations on Power and Authority of Committees
Section 3.04. Conduct of Business
ARTICLE IV - OFFICERS
Section 4.01. Generally
Section 4.02. Chairman of the Board
Section 4.03. Vice Chairman of the Board
Section 4.04. Chief Executive Officer
Section 4.05. President
Section 4.06. Vice Presidents
Section 4.07. Secretary
Section 4.08. Treasurer
Section 4.09. Delegation of Authority
Section 4.10. Removal
Section 4.11. Action with Respect to Securities of Other Corporations
ARTICLE V - STOCK
Section 5.01. Certificates of Stock
Section 5.02. Transfers of Stock
Section 5.03. Record Date
Section 5.04. Lost, Stolen or Destroyed Certificates
Section 5.05. Regulations
ARTICLE VI - NOTICES
Section 6.01. Notices
Section 6.02. Waivers
ARTICLE VII - MISCELLANEOUS
Section 7.01. Facsimile Signatures
Section 7.02. Corporate Seal
Section 7.03. Reliance upon Books, Reports and Records
Section 7.04. Fiscal Year
Section 7.05. Time Periods
ARTICLE VIII - INDEMNIFICATION
ARTICLE IX - AMENDMENTS
ARTICLE X - ELECTRONIC TRANSMISSION
AMENDED AND RESTATED BYLAWS
OF
PRE-PAID LEGAL SERVICES, INC.
(As Adopted May 29, 2003)
ARTICLE I - SHAREHOLDERS
Section 1.01. Annual Meeting
An annual meeting of the shareholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen months subsequent to the later of the date of
incorporation or the last annual meeting of the shareholders. The board of
directors may, in its sole discretion, determine that the meeting shall not be
held at any place, but may be held solely by means of remote communication.
Section 1.02. Special Meetings
Special meetings of the shareholders, for any purpose or purposes
prescribed in the notice of the meeting, may be called by the Board of Directors
or by the Chairman of the Board or the President and shall be held on such date,
and at such time as they or he shall fix.
Section 1.03. Notice of Meetings
Written notice of the place, if any, date, and time of all meetings, and
the means of remote communications, if any, by which shareholders and
proxyholders may be deemed to be present in person and vote at the meetings, of
the shareholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each shareholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Oklahoma General Corporation Act or the Certificate of Incorporation). The
term "Certificate of Incorporation" as used herein shall mean the Certificate of
Incorporation of the corporation as may be amended from time to time. Notice of
a special meeting of the shareholders shall also state the purpose or purposes
for which the meeting is called.
When a meeting is adjourned to another place, if any, date or time, written
notice need not be given of the adjourned meeting if the place, if any, date,
and time thereof and the means of remote communications, if any, by which
shareholders and proxyholders may be deemed to be present in person and vote at
the adjourned meeting are announced at the meeting at which the adjournment is
taken; provided, however, that if the date of any adjourned meeting is more than
thirty (30) days after the date for which the meeting was originally noticed, or
if a new record date is fixed for the adjourned meeting, written notice of the
place, if any, date, and time of the adjourned meeting shall be given in
conformity herewith. At any adjourned meeting, any business may be transacted
which might have been transacted at the original meeting.
If a meeting is to be held solely by remote communication, notice of a
meeting shall also provide the information required to gain access to the
shareholder list by reasonably accessible electronic network; provided, however,
that such list shall only be available to shareholders of the corporation.
Notice may be given effectively to shareholders if given by a form of
electronic transmission consented to by the shareholder to whom the notice is
given. The consent shall be revocable by the shareholder by written notice to
the corporation. Such consent shall be deemed revoked if (a) the corporation is
unable to deliver by electronic transmission two consecutive notices given by
the corporation in accordance with the consent; and (b) the inability becomes
known to the secretary or an assistant secretary of the corporation or to the
transfer agent, or other person responsible for the giving of notice; provided,
however, the inadvertent failure to treat the inability as a revocation shall
not invalidate any meeting or other action. Notice shall be deemed effectively
given if by (i) facsimile telecommunication, when directed to a number at which
the shareholder has consented to receive notice; (ii) electronic mail, when
directed to an electronic mail address at which the shareholder has consented to
receive notice; (iii) a posting on an electronic network together with separate
notice to the shareholder of the specific posting, upon the later of the posting
and the giving of separate notice; and (iv) any other form of electronic
transmission, when directed to the shareholder in accordance with the
shareholder's consent. An affidavit of the secretary or an assistant secretary
or of the transfer agent or other agent of the corporation that the notice has
been given by a form of electronic transmission shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
Section 1.04. Quorum
At any meeting of the shareholders, the holders of one-third of all of the
shares of the stock entitled to vote at the meeting, present in person,
represented by proxy or by means of remote communication, shall constitute a
quorum for all purposes, unless or except to the extent that the presence of a
larger number may be required by law or by the Certificate of Incorporation.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of the stock entitled to vote who are
present, in person, represented by proxy or by means of electronic
communication, may adjourn the meeting to another date, or time.
Section 1.05. Organization
Such person as the Board of Directors may have designated or, in the
absence of such a person, the highest ranking officer of the corporation who is
present shall call to order any meeting of the shareholders and act as chairman
of the meeting. In the absence of the Secretary of the corporation, the
secretary of the meeting shall be such person as the chairman appoints.
Section 1.06. Conduct of Business
The chairman of any meeting of shareholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him in order.
Section 1.07. Proxies and Voting
At any meeting of the shareholders, every shareholder entitled to vote may
vote in person or by proxy authorized in such manner as specifically permitted
by the Oklahoma General Corporation Act or as the corporation may otherwise
permit. Proof of such authority shall be filed in accordance with the procedure
established for the meeting. If authorized by the Board of Directors, the
requirement of a written ballot shall be satisfied by a ballot submitted by
electronic transmission; provided that the electronic transmission must either
set forth or be submitted with information from which it can be determined that
the electronic transmission was authorized by the shareholder or proxyholder.
The validity and authenticity of any proxy shall be determined by the
corporation.
Each shareholder shall have one vote for every share of stock entitled to
vote which is registered in his name on the record date for the meeting, except
as otherwise provided herein or required by law or by the Certificate of
Incorporation.
All voting, except where otherwise required by law or by the Certificate of
Incorporation, may be by a voice vote; provided, however, that upon demand
therefor by a shareholder entitled to vote or his proxy, a stock vote shall be
taken. Every stock vote shall be taken by ballots, each of which shall state the
name of the shareholder or proxy voting and such other information as may be
required under the procedure established for the meeting. Every vote taken by
ballots shall be counted by an inspector or inspectors appointed by the chairman
of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or by the Certificate of Incorporation, all
other matters shall be determined by a majority of the votes cast.
Notwithstanding the provisions of this Section 1.07, any action, except as
set forth below, required or which may be taken at any annual or special meeting
of the shareholders may be taken without a meeting, without prior notice or a
vote, if a consent or consents in writing or by electronic transmission, setting
forth the action so taken, shall be signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted and shall be delivered to the corporation by
delivery to its registered office in this state, its principal place of
business, or an officer or agent of the corporation having custody of the book
in which proceedings of meetings of shareholders are recorded. Delivery made to
a corporation's registered office shall be by hand, by certified or registered
mail, return receipt requested, or electronic transmission. Such written consent
or consents shall be filed with the minutes of the proceedings of the
shareholders, provided the filings shall be in paper form if the minutes are
maintained in paper form and shall be in electronic form if the minutes are
maintained in electronic form. Prompt notice of the taking of corporate action
without a meeting by less than unanimous written consent shall be given to those
shareholders who have not consented in writing.
Shareholders may, unless the certificate of incorporation otherwise
provides, act by written consent to elect directors; provided however, that if
the consent is less than unanimous, the action by written consent may be in lieu
of holding an annual meeting only if all the directorships to which directors
could be elected at an annual meeting held at the effective time of the action
are vacant and are filled by the action.
Every written consent shall bear the date of signature of each shareholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
earliest dated consent delivered in the manner required by this section to the
corporation, written consents signed by a sufficient number of holders to take
action are delivered to the corporation by delivery to its registered office in
this state, its principal place of business, or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
shareholders are recorded. Delivery made to a corporation's registered office
shall be by hand, by certified or registered mail, return receipt requested, or
by electronic transmission.
An electronic transmission consenting to an action to be taken and
transmitted by a shareholder or proxyholder, shall be deemed to be written,
signed and dated for the purposes herein, provided that such electronic
transmission sets forth or is delivered with information from which the
corporation can determine (a) that the shareholder or proxyholder was authorized
to act for the shareholder or proxyholder and (b) the date on which such
shareholder or proxyholder transmitted such electronic transmission. The date on
which such electronic transmission is transmitted shall be deemed to be the date
on which such consent was signed. An electronic transmission shall be deemed to
be delivered when reproduced in paper form and delivered to (i) the
corporation's registered office, (ii) its principal place of business or (iii)
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of shareholders are recorded, or as provided by
resolution of the board of directors of the corporation.
Section 1.08. Stock List
The officer who has charge of the stock ledger of the corporation shall
prepare a complete list of shareholders entitled to vote at any meeting of
shareholders, arranged in alphabetical order for each class of stock and showing
the address of each such shareholder and the number of shares registered in the
name of each shareholder. The corporation shall not be required to include
electronic mail addresses or other electronic contact information of a
shareholder on the list. Such list shall be open to the examination of any
shareholder, for any purpose germane to the meeting, for a period of at least
ten (10) days prior to the meeting, (i) on a reasonably accessible electronic
network, or (ii) during ordinary business hours at the principal place of
business of the corporation.
If the meeting is to be held at a place, the stock list shall also be kept
at the place of the meeting during the whole time thereof and shall be open to
examination by any shareholder who is present. If the meeting is to be held
solely by means of remote communication, the list shall be open to examination
of any shareholder during the whole time of the meeting on a reasonably
accessible electronic network. The stock ledger shall be the only evidence as to
the identity of the shareholders entitled to examine the stock list and to vote
in person or by proxy at the meeting.
Section 1.09. Inspectors of Elections
The corporation may, but shall not be required to in advance of any meeting
of shareholders, appoint one or more persons to act as inspector of elections at
the meeting and make a written report thereof. The corporation may designate one
or more persons as an alternate inspector to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of shareholders,
the person presiding at the meeting may appoint one or more inspectors to act at
the meeting. Each inspector, before entering upon the discharge of the duties of
inspector, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of the inspector's
ability.
The inspector or inspectors, if appointed, shall (i) ascertain the number
of shares outstanding and the voting power of each; (ii) determine the shares
represented at the meeting and the validity of proxies and ballots; (iii) count
all votes and ballots; (iv) determine and retain for a reasonable period a
record of the disposition of any challenges made to any determination by the
inspectors; and (v) certify their determination of the number of shares
represented at the meeting and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of the duties of such inspectors. The person
presiding at the meeting of shareholders shall announce the date and time of the
opening and the closing of the polls for each matter upon which the shareholders
will vote at a meeting.
No ballot, proxy or vote, nor any revocation thereof or change thereto,
shall be accepted by the inspectors after the closing of the polls unless the
district court upon application by a shareholder shall determine otherwise.
Section 1.10. Voting Procedures
In determining the validity and counting of proxies and ballots, the
inspectors shall be limited to an examination of the proxies, any envelopes
submitted with those proxies, any information provided by electronic
transmission or remote communication, ballots and the regular books and records
of the corporation, except that the inspectors may consider other reliable
information for the limited purpose of reconciling proxies and ballots submitted
by or on behalf of banks, brokers, their nominees or similar persons which
represent more votes than the holder of a proxy is authorized by the record
owner to cast or more votes that the shareholder holds of record. If the
inspectors consider other reliable information for the limited purpose permitted
by the Oklahoma General Corporation Act or these bylaws, the inspectors at the
time they may their certification as required by these Bylaws, shall specify the
precise information considered by them, including the person or persons from
whom they obtained the information, when the information was obtained, the means
by which the information was obtained and the basis for the inspectors' belief
that the information is accurate and reliable.
Section 1.11. Notice of Shareholder Nomination and Shareholder Business
At a meeting of the shareholders, only such business shall be conducted as
shall have been properly brought before the meeting. Nominations for the
election of directors may be made by the Board of Directors or by any
shareholder entitled to vote for the election of directors. Other matters to be
properly brought before the meeting must be: (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, including matters covered by Rule 14a-8 under the Securities Exchange
Act of 1934, as in effect from time to time; (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors; or (c)
otherwise properly brought before the meeting by a shareholder, as provided
below.
A notice of the intent of a shareholder to make a nomination or to bring
any other matter before the meeting shall be made in writing and received by the
Secretary of the corporation not more than 150 days and not less than 90 days in
advance of the annual meeting or, in the event of a special meeting of
shareholders, such notice shall be received by the Secretary of the corporation
not later than the close of the fifteenth day following the day on which notice
of the meeting is first mailed to shareholders.
Every such notice by a shareholder shall set forth:
(a) the name and residence address of the shareholder of the
corporation who intends to make a nomination or bring up any other
matter;
(b) a representation that the shareholder is a registered holder of
the corporation's voting stock and intends to appear in person or by
proxy at the meeting to make the nomination or bring up the matter
specified in the notice;
(c) with respect to notice of an intent to make a nomination, a
description of all arrangements or understandings among the
shareholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or
nominations are to made by the shareholder;
(d) with respect to notice of an intent to make a nomination, such
other information regarding each nominee proposed by such shareholder
as would have been required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission
had each nominee been nominated by the Board of Directors of the
corporation; and
(e) with respect to notice of an intent to bring up any other matter,
a description of the matter, and any material interest of the
shareholder in the matter.
Notice of intent to make a nomination shall be accompanied by the written
consent of each nominee to serve as director of the corporation, if so elected.
At the meeting of shareholders, the Chairman of the meeting shall declare
out of order and disregard any nomination or other matter not presented in
accordance with this section.
ARTICLE II - BOARD OF DIRECTORS
Section 2.01. Number and Term of Office
The number of directors who shall constitute the whole board shall consist
of not less than three nor more than twenty-four members with the exact number
to be fixed from time to time by the Board of Directors. The directors shall be
divided into three classes, designated Class A, Class B, and Class C, as nearly
equal in number as possible. The number of directors equal to the number of
class whose term expires at the time of such meeting shall be elected to hold
office until the third succeeding annual meeting of shareholders. Each director
shall hold office until his successor is elected and qualified, or until his
earlier resignation or removal.
Whenever the authorized number of directors is increased between annual
meetings of the shareholders, the affirmative vote of 80% of the directors then
in office, although less than a quorum, shall be required to elect such new
directors for the balance of a term and until their successors are elected and
qualified. Any decrease in the authorized number of directors shall not become
effective until the expiration of the term of the directors then in office
unless, at the time of such decrease, there shall be vacancies on the board
which are being eliminated by the decrease.
Section 2.02. Vacancies
If the office of any director becomes vacant by reason of death,
resignation, disqualification, removal or other cause, such vacancy may be
filled only by the affirmative vote of 80% of the directors remaining in office,
although less than a quorum, and each director so chosen shall hold office for a
term expiring at the annual meeting of shareholders at which term of the class
to which such director has been elected expires and until his successor is
elected and qualified.
Section 2.03. Regular Meetings
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 2.04. Special Meetings
Special meetings of the Board of Directors may be called by any two of the
directors then in office or by the chief executive officer and shall be held at
such place, on such date, and at such time as they or he shall fix. Notice of
the place, date, and time of each such special meeting shall be given each
director by whom it is not waived in one or more of the following ways: (i) by
mailing written notice not less than three (3) days before the meeting, or (ii)
by personally delivering the same not less than eighteen (18) hours before the
meeting; or (iii) by telegraphing, transmitting by facsimile or telephoning the
same or by electronic transmission in a manner reasonably designed to reach the
director not less than eighteen (18) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 2.05. Quorum
At any meeting of the Board of Directors, one-third of the total number of
the whole board, but not less than two directors, shall constitute a quorum for
all purposes, unless or except in the event that a board of one is authorized in
which case one director shall constitute a quorum. If a quorum shall fail to
attend any meeting, a majority of the directors present may adjourn the meeting
to another place, date, or time, without further notice or waiver thereof.
Section 2.06. Participation in Meetings by Conference Telephone
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such board or committee by means of conference
telephone or other communications equipment that enables all persons
participating in the meeting to hear each other. Such participation shall
constitute presence in person at such meeting.
Section 2.07. Written Consents
Action may be taken by the Board of Directors without a meeting if all
members thereof consent thereto in writing or by electronic transmission, and
the writing or writings or electronic transmission or transmissions are filed
with the minutes of proceedings of the Board of Directors. The filing shall be
in paper form if the minutes are maintained in paper form and shall be in
electronic form if the minutes are maintained in electronic form.
Section 2.08. Conduct of Business
At any meeting of the Board of Directors at which a quorum of the directors
is present, business shall be transacted in such order and manner as the board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
required by law or by the Certificate of Incorporation.
Section 2.09. Powers
The Board of Directors may, except as otherwise required by law or by the
Certificate of Incorporation, exercise all such powers and do all such acts and
things as may be exercised or done by the corporation, including, without
limiting the generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary
in connection therewith;
(4) To remove any officer of the corporation with or without cause,
and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;
(5) To confer upon any officer of the corporation the power to
appoint, remove and suspend subordinate officers and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers and agents
of the corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers and agents of the corporation
and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with
these bylaws, for the management of the corporation's business and
affairs.
Section 2.10. Compensation of Directors
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
directors.
ARTICLE III - COMMITTEES
Section 3.01. Executive Committee
The Board of Directors may designate an Executive Committee to serve at the
pleasure of the board and shall elect a director or directors to serve as the
member or members of the Executive Committee, designating, if it desires, other
directors as alternative members who may replace any absent or disqualified
member at any meeting of the Executive Committee. The Executive Committee,
except to the extent as it may be restricted from time to time by the vote of a
majority of the total number of directors, may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it subject to the limitations set forth
on Section 3.03. Unless expressly restricted by resolution of the Board of
Directors, the Executive Committee shall have the power and authority to declare
a dividend, to authorize the issuance of stock and to adopt a certificate of
ownership and merger. In the absence or disqualification of any member of the
Executive Committee, and any alternate member in his place, the member or
members of the Executive Committee present at the meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may by unanimous
vote appoint another member of the Board of Directors to act at the meeting in
the place of the absent or disqualified member.
Section 3.02. Other Committees of the Board of Directors
The Board of Directors may from time to time designate other committees of
the board, with such lawfully delegable powers and duties as it thereby confers,
to serve at the pleasure of the board and shall, for those committees, elect a
director or directors to serve as the member or members, designating, if it
desires, other directors as alternative members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so designated
may exercise the power and authority of the Board of Directors to the extent the
resolution designating the committee or a supplemental resolution of the Board
of Directors shall so provide subject to the limitation set forth in Section
3.03. In the absence or disqualification of any member of any committee and any
alternate member in his place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 3.03. Limitations on Power and Authority of Committees
No committee of the Board of Directors shall have any power or authority in
reference to amending the certificate of incorporation of the corporation
(except that the Executive Committee, to the extent authorized in the resolution
or resolutions providing for the issuance of shares of stock adopted by the
Board of Directors, may fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of the shares in any series of stock or authorize the increase or
decrease of the shares of any series), adopting an agreement of merger or
consolidation, recommending to the shareholders the sale, lease or exchange of
all or substantially all of the property and assets of the corporation,
recommending to the shareholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation.
Section 3.04. Conduct of Business
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the total committee
members shall constitute a quorum unless the committee shall consist of one or
two members, in which event one member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Minutes
of each committee meeting shall be prepared, approved by the chairman of the
meeting and filed with the Secretary of the corporation. Action may be taken by
any committee without a meeting if all members thereof consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of such committee.
ARTICLE IV - OFFICERS
Section 4.01. Generally
The officers of the corporation shall consist of a Chief Executive Officer,
a President and a Secretary and such other senior or subordinate officers as may
from time to time be elected by the Board of Directors. The Board of Directors
may also elect from its number a Chairman and Vice Chairman of the Board of the
corporation. Officers shall be elected by the Board of Directors, which shall
consider that subject at its first meeting after every annual meeting of
shareholders. Each officer shall hold his office until his successor is elected
and qualified or until his earlier resignation or removal. Any number of offices
may be held by the same person.
Section 4.02. Chairman of the Board
The Chairman of the Board, if any, shall, if present, preside at all
meetings of the Board of Directors and exercise and perform such other powers
and duties as may be from time to time assigned to him by the Board of
Directors. He shall be the senior officer of the corporation and shall be
responsible for overall planning and policy.
Section 4.03. Vice Chairman of the Board
The Vice Chairman of the Board shall perform such duties as the Board of
Directors shall prescribe. In the absence or disability of the Chairman of the
Board, the Vice Chairman shall perform the duties and exercise the powers of the
Chairman of the Board.
Section 4.04. Chief Executive Officer
The Chief Executive Officer shall, subject to the provisions of these
bylaws and to the direction of the Board of Directors, have the responsibility
and the general management and control of the affairs and business of the
corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him by the
Board of Directors. He shall have power to sign all stock certificates,
contracts and other instruments of the corporation which are authorized. He
shall have general supervision and direction or all of the other officers and
agents of the corporation.
Section 4.05. President
The President shall have such duties as are assigned to him by the Board of
Directors or the Chief Executive Officer. In the absence or disability of the
Chief Executive Officer, the President shall perform the duties and exercise the
powers of the Chief Executive Officer.
Section 4.06. Vice Presidents
Each Vice President shall perform such duties as the Board of Directors or
Chief Executive Officer shall prescribe. In the absence or disability of the
President, the Vice President with the highest ranking shall perform the duties
and exercise the powers of the President.
Section 4.07. Secretary
The Secretary shall issue all authorized notices for, and shall keep
minutes of, all meetings of the shareholders and the Board of Directors. He
shall have charge of the corporate records.
Section 4.08. Treasurer
The Treasurer, if any, shall have the custody of all monies and securities
of the corporation and shall keep regular books of account. He shall make such
disbursements of the funds of the corporation as are proper and shall render
from time to time an account of all such transactions and of the financial
condition of the corporation.
Section 4.09. Delegation of Authority
The Board of Directors may from time to time delegate the powers or duties
of any officer to any other officers or agents, notwithstanding any provision
hereof.
Section 4.10. Removal
Any officer of the corporation may be removed at any time, with or without
cause, by the Board of Directors.
Section 4.11. Action with Respect to Securities of Other Corporations
Unless otherwise directed by the Board of Directors, the Chief Executive
Officer or the President shall have power to vote and otherwise act on behalf of
the corporation, in person or by proxy, at any meeting of shareholders of or
with respect to any action of shareholders of any other corporation in which
this corporation may hold securities and otherwise to exercise any and all
rights and powers which this corporation may possess by reason of its ownership
of securities in such other corporation.
ARTICLE V - STOCK
Section 5.01. Certificates of Stock
Each shareholder shall be entitled to a certificate signed by, or in the
name of, the corporation by the Chairman or the Vice Chairman of the Board, or
the President or a Vice President, and by the Secretary or an Assistant
Secretary, or the Treasurer or an Assistant Treasurer, certifying and
representing the number of shares owned by him. Any of or all the signatures on
the certificate may be facsimile. The board of directors may provide by
resolution or resolutions that some or all of any or all classes or series of
the corporation's stock may be uncertificated shares.
Section 5.02. Transfers of Stock
Transfers of stock shall be made only upon the transfer books of the
corporation kept at an office of the corporation or by transfer agents
designated to transfer shares of the stock of the corporation. Except where a
certificate is issued in accordance with Section 5.04 of these bylaws, an
outstanding certificate for the number of shares involved shall be surrendered
for cancellation before a new certificate is issued therefor.
Section 5.03. Record Date
The Board of Directors may fix a record date for determining shareholders
entitled to notice of or to vote at a meeting of shareholders, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of such meeting. If no
record date is fixed by the Board of Directors, the record date for determining
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of shareholders
of record entitled to notice of or to vote at a meeting of shareholders shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
In order that the corporation may determine the shareholders entitled to
consent to corporate action in writing without a meeting, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If no
record date has been fixed by the Board of Directors, the record date for
determining shareholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is required by
the Oklahoma General Corporation Act, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in this state,
its principal place of business, or an officer or agent of the corporation
having custody of the book in which proceedings of meetings of shareholders are
recorded. Delivery made to a corporation's registered office shall be by hand or
by certified or registered mail, return receipt requested. If no record date has
been fixed by the Board of Directors and prior action by the Board of Directors
is required by the Oklahoma General Corporation Act, the record date for
determining shareholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action.
In order that the corporation may determine the shareholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the shareholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty (60) days prior to such
action. If no record date is fixed, the record date for determining shareholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
Section 5.04. Lost, Stolen or Destroyed Certificates
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5.05. Regulations
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
Section 6.01. Notices
Except as otherwise permitted herein, whenever notice is required to be
given to any shareholder, director, officer, or agent, such requirement shall
not be construed to mean personal notice. Such notice may in every instance be
effectively given by depositing a writing in a post office or letter box, first
class postage prepaid, by dispatching a prepaid telegram, addressed to such
shareholder, director, officer, or agent at his or her address as the same
appears on the books of the corporation or by electronic transmission. The time
when such notice is deposited or dispatched shall be the time of the giving of
the notice.
Section 6.02. Waivers
A written waiver of any notice, signed by a shareholder, director, officer,
or agent, whether before or after the time of the event for which notice is to
be given, shall be deemed equivalent to the notice required to be given to such
shareholder, director, officer, or agent. Neither the business nor the purpose
of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 7.01. Facsimile Signatures
In addition to the provisions for the use of facsimile signatures elsewhere
specifically authorized in these bylaws, facsimile signatures of any officer or
officers of the corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 7.02. Corporate Seal
The Board of Directors may provide a suitable seal, containing the name of
the corporation and the word "Oklahoma", which seal shall be placed in the
custody of the Secretary. If and when so directed by the Board of Directors or a
committee thereof, duplicates of the seal may be kept and used by the Treasurer
or by an Assistant Secretary or Assistant Treasurer.
Section 7.03. Reliance upon Books, Reports and Records
A member of the Board of Directors or a member of any committee designated
by the Board of Directors, in the performance of his duties, shall be fully
protected in relying in good faith upon the records of the corporation and upon
such information, opinions, reports or statements presented to the corporation
by any of the corporation's officers or employees, or committees of the Board of
Directors, or by any other person as to matters the member reasonably believes
are within such officer's, employee's, committee's or other person's competence
and who have been selected with reasonable care by or on behalf of the
corporation.
Section 7.04. Fiscal Year
The fiscal year of the corporation shall be as fixed by the Board of
Directors.
Section 7.05. Time Periods
In applying any provision of these bylaws which require that an act be done
or not done a specified number of days prior to an event or that an act be done
during a period of a specified number of days prior to an event, calendar days
shall be used, the day of the doing of the act shall be excluded and the day of
the event shall be included.
ARTICLE VIII - INDEMNIFICATION
(1) The Corporation shall indemnify, and may advance litigation expenses
to, its officers and directors to the fullest extent permitted by the Oklahoma
General Corporation Act, as the same exists or may hereafter be amended, and all
other laws of the State of Oklahoma.
(2) The Corporation may indemnify, and may advance litigation expenses to,
employees and agents of the Corporation, and persons serving at the request of
the Corporation as directors, officers, employees or agents of another
corporation, partnership, joint venture, trust or enterprise, to the fullest
extent permitted by the Oklahoma General Corporation Act, as the same exists or
may hereafter be amended, and all other laws of the State of Oklahoma.
(3) No amendment to or repeal of this Article VIII shall apply to or have
any effect on the right of a person entitled to indemnification hereunder to
receive such indemnification or on the ability of the Corporation to provide
indemnification to any person to which indemnification is permitted hereunder
for or with respect to any acts or omissions of any such person occurring prior
to the time of such amendment or repeal.
(4) By action of the Board of Directors, notwithstanding any interest of
the directors in the action, the Corporation may purchase and maintain
insurance, in such amounts as the Board of Directors deems appropriate, on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power or would be required to
indemnify him against such liability under the provisions of this Article VIII
or of the Oklahoma General Corporation Act.
(5) Any right to indemnification conferred in this Article VIII shall be a
contract right and shall not be exclusive of any other right which any person
may have or hereafter acquire under the Corporation's Certificate of
Incorporation, bylaws, or any statute, bylaw, agreement, resolution of
shareholders or directors or otherwise.
ARTICLE IX - AMENDMENTS
These bylaws may be amended or repealed by the Board of Directors at any
meeting.
ARTICLE X - ELECTRONIC TRANSMISSION
As used herein, electronic transmission means any form of communication,
not directly involving the physical transmission of paper, that creates a record
that may be retained, retrieved, and reviewed by a recipient thereof, and that
may be directly reproduced in paper form by such a recipient through an
automated process.
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Pre-Paid Legal
Services, Inc., an Oklahoma corporation;
2. That the foregoing bylaws comprising sixteen (16) pages constitute the
bylaws of said corporation as duly adopted by resolution of Board of Directors
effective May 29, 2003.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 29th day of
May, 2003.
/s/ Kathryn Walden
-----------------------------------------
Kathryn Walden, Secretary
Exhibit 31.1
CERTIFICATION
I, Harland C. Stonecipher, Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-159e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Omitted pursuant to Exchange Act Release 34-47986
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: July 28, 2003 /s/ Harland C. Stonecipher
-------------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Steve Williamson, Chief Financial Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: July 28, 2003 /s/ Steve Williamson
-------------------------------------------
Steve Williamson
Chief Financial Officer
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: July 28, 2003 /s/ Harland C. Stonecipher
-------------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: July 28, 2003 /s/ Steve Williamson
-------------------------------------------
Steve Williamson
Chief Financial Officer