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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-9293
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PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Pre-Paid Way
Ada, Oklahoma 74820
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (580) 436-1234
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered under Section 12 (g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ( ).
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes |X| No [ ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked prices of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter. As of June 30, 2004 - $265,000,000
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of February 18,
2005 there were 15,642,299 shares of Common Stock, par value $.01 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of our definitive proxy statement for its 2005 annual meeting of
shareholders are incorporated into Part III of this Form 10-K by reference.
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PRE-PAID LEGAL SERVICES, INC.
FORM 10-K
For the Year Ended December 31, 2004
TABLE OF CONTENTS
PART I
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ITEM 1. BUSINESS
General
Industry Overview
Description of Memberships
Specialty Legal Service Plans
Provider Law Firms
Identity Theft Shield Provider
Marketing
Operations
Quality Control
Competition
Regulation
Employees
Foreign Operations
Availability of Information
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price of and Dividends on the Common Stock
Recent Sales of Unregistered Securities
Equity Compensation Plans
Issuer Purchases of Equity Securities
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview of our Financial Model
Measures of Member Retention
Results of Operations
Comparison of 2004 to 2003
Comparison of 2003 to 2002
Liquidity and Capital Resources
Forward Looking Statements
Risk Factors
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III (Information required by Part III is incorporated by
reference from our definitive proxy statement for its 2005
annual meeting of shareholders.)
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
PRE-PAID LEGAL SERVICES, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
PART I.
ITEM 1. BUSINESS.
General
We were one of the first companies in the United States organized solely to
design, underwrite and market legal expense plans. Our predecessor commenced
business in 1972 and began offering legal expense reimbursement services as a
"motor service club" under Oklahoma law. In 1976, we were formed and acquired
our predecessor in a stock exchange. We began offering Memberships independent
of the motor service club product by adding a legal consultation and advice
service, and in 1979 we implemented a legal expense benefit that provided for
partial payment of legal fees in connection with the defense of certain civil
and criminal actions. Our legal expense plans (referred to as "Memberships")
currently provide for a variety of legal services in a manner similar to medical
plans. In most states and provinces, standard plan benefits include preventive
legal services, motor vehicle legal defense services, trial defense services,
IRS audit services and a 25% discount off legal services not specifically
covered by the Membership for an average monthly Membership fee of approximately
$21. Additionally, in approximately 40 states, the Legal Shield rider can be
added to the standard plan for only $1 per month and provides members with
24-hour access to a toll-free number for attorney assistance if the member is
arrested or detained. Also, during the third quarter of 2003, we began offering
our Identity Theft Shield ("IDT") to new and existing members at $9.95 per month
if added to a legal service Membership ("add-on IDT") or it may be purchased
separately for $12.95 per month ("stand-alone IDT"). The identity theft related
benefits include a credit report and related instructional guide, a credit score
and related instructional guide, credit report monitoring with daily online and
monthly offline notification of any changes in credit information and
comprehensive identity theft restoration services.
Legal plan benefits are generally provided through a network of independent
provider law firms, typically one firm per state or province and IDT plan
benefits are provided by Kroll Background America, Inc., a subsidiary of Kroll
Inc. ("Kroll"). Members have direct, toll-free access to Kroll or their provider
law firm rather than having to call for a referral. At December 31, 2004, we had
1,451,700 Memberships in force with members in all 50 states, the District of
Columbia and the Canadian provinces of Ontario, British Columbia, Alberta and
Manitoba. Approximately 90% of such Memberships were in 29 states.
Industry Overview
Legal service plans, while used in Europe for more than one hundred years
and representing more than a $4 billion European industry, were first developed
in the United States in the late 1960s. Since that time, there has been
substantial growth in the number of Americans entitled to receive various forms
of legal services through legal service plans. The National Resource Center for
Consumers of Legal Services ("NRC") previously provided market information for
different types of legal service plans and estimates of number of users.
However, the NRC is no longer in existence and we are unaware of any current
comparable information sources. In the last NRC report in 2002, the NRC
estimated there were 164 million Americans without any type of legal service
plan. The NRC estimated that 122 million Americans were entitled to service
through at least one legal service plan in 2002 although more than half are
"free" plans that generally provide limited benefits on an automatic enrollment
without any direct cost to the individual. The 122 million Americans compares to
4 million in 1981, 58 million in 1990 and 115 million in 2000. We believe the
legal service plan industry continues to evolve and market acceptance of legal
service plans, as indicated by the continuing growth in the number of
individuals covered by plans, is increasing.
Legal service plans are offered through various organizations and marketing
methods and contain a wide variety of benefits. Free plans include those
sponsored by labor unions, elder hotlines, the American Association of Retired
Persons and the National Education Association and employee assistance plans
that are also automatic enrollment plans without direct cost to participants
designed to provide limited telephonic access to attorneys for members of
employee groups. There are also employer paid plans pursuant to which more
comprehensive benefits are offered by the employer as a fringe benefit. Finally,
there are individual enrollment plans, other employment based plans, including
voluntary payroll deduction plans, and miscellaneous plans. These plans
typically have more comprehensive benefits, higher utilization, involve higher
costs to participants, and are offered on an individual enrollment or voluntary
basis. This is the market segment in which we compete.
According to the latest estimates of the census bureaus of the United
States and Canada, the two geographic areas in which we operate, the number of
households in the combined area exceeds 127 million. Since we have always
disclosed our members in terms of Memberships and individuals covered by the
Membership include the individual who purchases the Membership together with his
or her spouse and never married children living at home up to age 21 or up to
age 23 if the children are full time college students, we believe that our
market share should be viewed as a percentage of households. Historically, our
primary market focus has been the "middle" eighty percent of such households
rather than the upper and lower ten percent segments based on our belief that
the upper ten percent may already have a relationship with an attorney or law
firm and the lower ten percent may not be able to afford the cost of a legal
service plan. As a percentage of this defined "middle" market of approximately
100 million households, we currently have an approximate 1.5% share of the
estimated market based on our existing 1.5 million active Memberships and, over
the last 30 years, an additional 4% of households have previously purchased, but
no longer own, Memberships. We routinely remarket to previous members and
reinstated approximately 72,000, 66,000 and 57,000 Memberships during 2004, 2003
and 2002, respectively.
Description of Memberships
The Memberships we sell generally allow members to access legal services
through a network of independent law firms ("provider law firms") under contract
with us. Provider law firms are paid a monthly fixed fee on a capitated basis to
render services to plan members residing within the state or province in which
the provider law firm attorneys are licensed to practice. Because the fixed fee
payments by us to provider law firms do not vary based on the type and amount of
benefits utilized by the member, this capitated arrangement provides significant
advantages to us in managing claims risk. At December 31, 2004, Memberships
subject to the capitated provider law firm arrangement comprised approximately
99% of our active Memberships. The remaining Memberships, approximately 1%, were
primarily sold prior to 1987 and allow members to locate their own lawyer ("open
panel") to provide legal services available under the Membership with the
member's lawyer being reimbursed for services rendered based on usual,
reasonable and customary fees, or are in states where there is no provider law
firm in place and our referral attorney network described below is utilized.
Family Legal Plan
The Family Legal Plan we currently market in most jurisdictions consists of
five basic benefit groups that provide coverage for a broad range of preventive
and litigation-related legal expenses. The Family Legal Plan accounted for more
than 92% of our Membership fees in 2004 and approximately 95% of the outstanding
Memberships at December 31, 2004. In addition to the Family Legal Plan, we
market other specialized legal services products specifically related to
employment in certain professions described below.
In 12 states, certain of our plans are available in the Spanish language.
For the Spanish language plans, the provider law firms have both bilingual staff
and lawyers and we have bilingual staff for both customer service and marketing
service functions. We will continue to evaluate making our plans available in
additional languages in markets where demand for such a product is expected to
be sufficient to justify this additional cost.
In exchange for a fixed monthly, semi-annual or annual payment, members are
entitled to specified legal services. Those individuals covered by the
Membership include the individual who purchases the Membership along with his or
her spouse and never married children living at home up to age 21 or up to age
23 if the children are full time college students. Also included are children up
to age 18 for whom the member is legal guardian and any dependent child,
regardless of age, who is mentally or physically disabled. Each Membership,
other than the Business Owners' Legal Solutions Plan, is guaranteed renewable,
except in the case of fraud or nonpayment of Membership fees. Historically, we
have not raised rates to existing members. If new benefits become available,
existing members may choose the newer, more comprehensive plan at a higher rate
or keep their existing Memberships. Memberships are automatically renewed at the
end of each Membership period unless the member cancels prior to the renewal
date or fails to make payment on a timely basis.
The basic legal service plan Membership is sold as a package consisting of
five separate benefit groups. Memberships range in cost from $14.95 to $25.00
per month depending in part on the schedule of benefits, which may vary from
state or province in compliance with regulatory requirements. Benefits for
domestic matters, bankruptcy and drug and alcohol related matters are limited in
most Memberships.
Preventive Legal Services. These benefits generally offer unlimited
toll-free access to a member's provider law firm for advice and consultation on
any legal matter. These benefits also include letters and phone calls on the
member's behalf, review of personal contracts and documents, each up to 10 pages
in length, last will and testament preparation for the member and annual will
reviews at no additional cost. Additional wills for spouse and other covered
members may be prepared at a cost of $20.
Motor Vehicle Legal Protection. These benefits offer legal assistance for
matters resulting from the operation of a licensed motor vehicle. Members have
assistance available to them at no additional cost for: (a) defense in the court
of original jurisdiction of moving traffic violations deemed meritorious, (b)
defense in the court of original jurisdiction of any charge of manslaughter,
involuntary manslaughter, vehicular homicide or negligent homicide as the result
of a licensed motor vehicle accident, (c) up to 2.5 hours of assistance per
incident for collection of minor property damages (up to $2,000) sustained by
the member's licensed motor vehicle in an accident, (d) up to 2.5 hours of
assistance per incident for collection of personal injury damages (up to $2,000)
sustained by the member or covered family member while driving, riding or being
struck as a pedestrian by a motor vehicle, and (e) up to 2.5 hours of assistance
per incident in connection with an action, including an appeal, for the
maintenance or reinstatement of a member's driver's license which has been
canceled, suspended, or revoked. No coverage under this benefit of the basic
legal service plan is offered to members for pre-existing conditions, drug or
alcohol related matters, or for commercial vehicles over two axles or operation
without a valid license.
Trial Defense. These benefits offer assistance to the member and the
member's spouse through an increasing schedule of benefits based on Membership
year. Up to 60 hours are available for the defense of civil or job-related
criminal charges by the provider law firm in the first Membership year. The
criminal action must be within the scope and responsibility of employment
activities of the member or spouse. Up to 2.5 hours of assistance are available
prior to trial, and the balance is available for actual trial services. The
schedule of benefits under this benefit area increases by 60 hours each
Membership year to: 120 hours in the second Membership year, 3 hours of which
are available for pre-trial services; 180 hours in the third Membership year,
3.5 hours of which are available for pre-trial services; 240 hours in the fourth
Membership year, 4 hours of which are available for pre-trial services, to the
maximum limit of 300 hours in the fifth Membership year, 4.5 hours of which are
available for pre-trial services. This benefit excludes domestic matters,
bankruptcy, deliberate criminal acts, alcohol or drug-related matters, business
matters, and pre-existing conditions.
In addition to the pre-trial benefits of the basic legal plan described
above, there are additional pre-trial hours available as an option, or add-on,
to the basic plan. These optional benefits cost $9.00 per month and add 15 hours
of pre-trial services during the first year of the Membership increasing 5
additional hours each Membership year to the maximum limit of 35 hours in the
fifth Membership year and increases total pre-trial and trial defense hours
available pursuant to the expanded Membership to 75 hours during the first
Membership year to 335 hours in the fifth Membership year. These pre-trial hours
are in addition to those hours already provided by the basic plan so that the
member, in the first year of the Membership, has a combined total of 17.5
pre-trial hours available escalating to a combined total of 39.5 pre-trial hours
in the fifth Membership year. There were approximately 545,000 subscribers of
this benefit at December 31, 2004 compared to 598,000 at December 31, 2003.
IRS Audit Protection Services. This benefit offers up to 50 hours of legal
assistance per year in the event the member, spouse or dependent children
receive written notification of an Internal Revenue Service ("IRS") audit or are
summoned in writing to appear before the IRS concerning a tax return. The 50
hours of assistance are available in the following circumstances: (a) up to 1
hour for initial consultation, (b) up to 2.5 hours for representation in
connection with the audit if settlement with the IRS is not reached within 30
days, and (c) the remaining 46.5 hours of actual trial time if settlement is not
achieved prior to litigation. Coverage is limited to audit notification received
regarding the tax return for years during which the Membership is effective.
Representation for charges of fraud or income tax evasion, business and
corporate tax returns and certain other matters are excluded from this benefit.
With pre-trial benefits limited to 2.5 hours to 4.5 hours based on the
Membership year for trial defense (without the pre-trial option described) and
3.5 hours for the IRS audit benefit, these benefits do not ensure complete
pre-trial coverage. In order to receive additional pre-trial IRS audit or trial
defense benefits, a matter must actually proceed to trial. The costs of
pre-trial preparation that exceed the benefits under the Membership are the
responsibility of the member. Provider law firms under the closed panel
Membership have agreed to provide to members any additional pre-trial services
beyond those stipulated in the Membership at a 25% discount from the provider
law firm's customary and usual hourly rate. Retainer fees for these additional
services may be required.
Preferred Member Discount for All Other Services. Provider law firms have
agreed to provide to members any legal services beyond those stipulated in the
Membership at a fee discounted 25% from the provider law firm's customary and
usual hourly rate. This "customary and usual hourly rate" is a fixed single
hourly rate for each provider firm that is generally an average of the firm's
various hourly rates for its attorneys which typically vary based on experience
and expertise.
Legal Shield Benefit
In approximately 41 states, the Legal Shield plan can be added to the
standard or expanded Family Legal Plan for $1 per month and provides members
with 24-hour access to a toll-free number for provider law firm assistance if
the member is arrested or detained. The Legal Shield member, if detained, can
present their Legal Shield card to the officer that has detained them to make it
clear that they have access to legal representation and that they are requesting
to contact a lawyer immediately. The benefits of the Legal Shield plan are
subject to conditions imposed by the detaining authority, which may not allow
for the provider law firm to communicate with the member on an immediate basis.
The Legal Shield benefit was introduced in 1999. There were approximately
932,000 Legal Shield subscribers at December 31, 2004 compared to approximately
881,000 at December 31, 2003.
Identity Theft Shield Benefit
During the third quarter of 2003, we announced a joint marketing agreement
with Kroll Background America Inc., a subsidiary of Kroll Inc., that allows our
independent sales associates to market Kroll's identity theft benefits in 48
states. By adding the new Identity Theft Shield to their existing family
Membership, members have toll free access to the identity theft specialists at
Kroll. This benefit can be added to a legal service Membership for $9.95 per
month or purchased separately for $12.95 per month. The identity theft related
benefits include a credit report and related instructional guide, a credit score
and related instructional guide, credit report monitoring with daily online and
monthly offline notification of any changes in credit information and
comprehensive identity theft restoration services. There were approximately
311,000 and 91,000 subscribers at December 31, 2004 and 2003, respectively,
comprised of 284,000 and 87,000 subscribers at $9.95 per month and 27,000 and
4,000 subscribers at $12.95 per month.
Canadian Family Plan
The Family Legal Plan is currently marketed in the Canadian provinces of
Ontario, British Columbia, Alberta and Manitoba. We began operations in Ontario
and British Columbia during 1999, Alberta in February 2001 and Manitoba in
August 2001. Benefits of the Canadian plan include expanded preventive benefits
including assistance with Canadian Government agencies, warranty assistance and
small claims court assistance as well as the preferred member discount. Canadian
Membership fees collected during 2004 were approximately $4.4 million in U.S.
dollars compared to $4.2 million collected in 2003 and $3.7 million collected in
2002.
Specialty Legal Service Plans
In addition to the Family Legal Plan described above, we also offer other
specialty or niche legal service plans. These specialty plans usually contain
many of the Family Legal Plan benefits adjusted as necessary to meet specific
industry or prospective member requirements. In addition to those specialty
plans described below, we will continue to evaluate and develop other such plans
as the need and market allow.
Business Owners' Legal Solutions Plan
The Business Owners' Legal Solutions plan was developed during 1995 and
provides business oriented legal service benefits for small businesses with 99
or fewer employees. This plan was developed and test marketed in selected
geographical areas and more widely marketed beginning in 1996 at a monthly rate
of $69.00. This plan provides small businesses with legal consultation and
correspondence benefits, contract and document reviews, debt collection
assistance and reduced rates for any non-covered areas. During 1997, the
coverage offered pursuant to this plan was expanded to include trial defense
benefits and Membership in GoSmallBiz.com, an unrelated Internet based service
provider. Through GoSmallBiz.com, members may receive unlimited business
consultations from business consultants and have access to timely small business
articles, educational software, Internet tools and more. This expanded plan is
currently marketed at a monthly rate ranging from $69 to $150 ($175 in Canada)
depending on the number of employees and provides business oriented legal
service benefits for any for-profit business with 99 or fewer employees. This
plan is available in 42 states and provinces and represented approximately 4.3%,
3.7% and 4.0% of our Membership fees during 2004, 2003 and 2002, respectively.
Law Officers Legal Plan
The Law Officers Legal Plan, developed in 1991 and marketed to law
enforcement officers, provides 24-hour job-related emergency toll-free access to
a provider law firm and provides legal services associated with administrative
hearings. This plan was designed to meet the legal needs of persons in the law
enforcement profession and is currently marketed at the monthly rate of $16.00
or at a group rate of $14.95. We have members covered under the Law Officers
Legal Plan in 27 states. The Law Officers Legal Plan offers the basic family
legal plan benefits described above without the motor vehicle related benefits.
These motor vehicle benefits are available in the Law Officers Legal Plan only
for defense of criminal charges resulting from the operation of a licensed motor
vehicle. Additionally, at no charge to the member, a 24-hour emergency hotline
is available to access the services of the provider law firm in situations of
job-related urgency. The Law Officers Legal Plan also offers representation at
no additional charge for up to ten hours (five hours per occurrence) for two
administrative hearings or inquiries per year and one pre-termination hearing
per Membership year before a review board or arbitrator. Preparation and/or
counsel for post-termination hearings are also available to members as a
schedule of benefits, which increases with each Membership year. The schedule of
benefits is similar to that offered under the Family Legal Plan Trial Defense,
including the availability of the optional pre-trial hours described above for
an additional $9.00 per month. During the years ended December 31, 2004, 2003
and 2002, the Law Officers Legal Plan accounted for approximately 1.4%, .9% and
1.4%, respectively, of our Membership fees.
Commercial Driver Legal Plan
The Commercial Driver Legal Plan, developed in 1986, is designed
specifically for the professional truck driver and offers a variety of
driving-related benefits, including coverage for moving and non-moving
violations. This plan provides coverage by a provider law firm for persons who
drive a commercial vehicle. This legal service plan is currently offered in 45
states. In certain states, the Commercial Driver Legal Plan is underwritten by
the Road America Motor Club, an unrelated motor service club. During the years
ended December 31, 2004, 2003 and 2002, this plan accounted for approximately
1.2%, .9% and 1.3%, respectively, of Membership fees. The Plan underwritten by
the Road America Motor Club is available at the monthly rate of $35.95 or at a
group rate of $32.95. Plans underwritten by us are available at the monthly rate
of $32.95 or at a group rate of $29.95. Benefits include the motor vehicle
related benefits described above, defense of Department of Transportation
violations and the 25% discounted rate for services beyond plan scope, such as
defense of non-moving violations. The Road America Motor Club underwritten plan
includes bail and arrest bonds and services for family vehicles.
Home-Based Business Rider
The Home-Based Business plan was designed to provide small business owners
access to commonly needed legal services. It can be added to the Expanded Family
Legal Plan in approved states. To qualify, the business and residence address
must be the same with three or fewer employees and be a for-profit business that
is not publicly traded. Benefits under this plan include unlimited business
telephone consultation, review of three business contracts per month, three
business and debt collection letters per month and discounted trial defense
rates. This plan also includes Membership in GoSmallBiz.com. This plan is
available in 36 states and represented approximately 1.4%, 1.6% and 1.7% of our
Membership fees during 2004, 2003 and 2002, respectively.
Comprehensive Group Legal Services Plan
In late 1999 we introduced the Comprehensive Group plan, designed for the
large group employee benefit market. This plan, available in 35 states, provides
all the benefits of the Family Legal Plan as well as mortgage document
preparation, assistance with uncontested legal situations such as adoptions,
name changes, separations and divorces. Additional benefits include the
preparation of health care power of attorney and living wills or directives to
physicians. Although we have experienced decreased sales of this plan during the
last year (4,482 Memberships, 8,795 Memberships and 7,051 Memberships during
2004, 2003 and 2002, respectively), we still believe this plan improves our
competitive position in the large group market. We continue to emphasize group
marketing to employee groups of less than 50 rather than larger groups where
there is more competition, price negotiation and typically a longer sales cycle.
Other than additional benefits such as the Legal Shield and Identity Theft
Shield benefits described above, the basic structure and design of the
Membership benefits has not significantly changed over the last several years.
The consistency in plan design and delivery provides us consistent, accurate
data about plan utilization which enables us to manage our benefit costs through
the capitated payment structure to provider firms. We frequently evaluate and
consider other plan benefits that may include other services complimentary to
the basic legal service plan.
Provider Law Firms
Our Memberships generally allow members to access legal services through a
network of independent provider law firms under contract with us generally
referred to as "provider law firms." Provider law firms are paid a fixed fee on
a per capita basis to render services to plan members residing within the state
or province as provided by the contract. Because the fixed fee payments by us to
provider law firms in connection with the Memberships do not vary based on the
type and amount of benefits utilized by the member, this arrangement provides
significant advantages to us in managing our cost of benefits. Pursuant to these
provider law firm arrangements and due to the volume of revenue directed to
these firms, we have the ability to more effectively monitor the customer
service aspects of the legal services provided and the financial leverage to
help ensure a customer friendly emphasis by the provider law firms. Generally,
due to the volume of revenue that may be directed to particular provider law
firms, we have has access to larger, more diversified law firms. Through our
members, we are typically the largest client base of our provider law firms.
Provider law firms are selected to serve members based on a number of
factors, including recommendations from provider law firms and other lawyers in
the area in which the candidate provider law firm is located and in neighboring
states, our investigation of bar association standing and client references,
evaluation of the education, experience and areas of practice of lawyers within
the firm, on-site evaluations by our management, and interviews with lawyers in
the firm who would be responsible for providing services. Most importantly,
these candidate law firms are evaluated on the firm's customer service
philosophy.
The majority of provider law firms are connected to us via high-speed
digital links to our management information systems, thereby providing real-time
monitoring capability. This online connection offers the provider law firm
access to specially designed software developed by us for administration of
legal services by the firm. These systems provide statistical reports of each
law firm's activity and performance and allow virtually all of the members
served by provider law firms to be monitored on a near real-time basis. The few
provider law firms that are not online with us typically have a small Membership
base and must provide various weekly reports to us to assist in monitoring the
firm's service level. The combination of the online statistical reporting and
weekly service reports for smaller provider law firms allows quality control
monitoring of over 15 separate service delivery benchmarks. In addition, we
regularly conduct extensive random surveys of members who have used the legal
services of a provider law firm. We survey members in each state every 60 days,
compile the results of such surveys and provide the provider law firms with
copies of each survey and the overall summary of the results. If a member
indicates on a survey the service did not meet their expectation, the member is
contacted as soon as possible to resolve the issue.
Each month, provider law firms are presented with a comprehensive report of
ratings related to our online monitoring, member complaints, member survey
evaluations, telephone reports and other information developed in connection
with member service monitoring. If a problem is detected, we recommend immediate
remedial actions to the provider law firms to eliminate service deficiencies. In
the event the deficiencies of a provider law firm are not eliminated through
discussions and additional training with us, such deficiencies may result in the
termination of the provider law firm. We are in constant communication with our
provider law firms and meet with them frequently for additional training, to
encourage increased communications with us and to share suggestions relating to
the timely and effective delivery of services to our members.
Each attorney member of the provider law firm rendering services must have
at least two years of experience as a lawyer, unless we waive this requirement
due to special circumstances such as instances when the lawyer demonstrates
significant legal experience acquired in an academic, judicial or similar
capacity other than as a lawyer. We provide customer service training to the
provider law firms and their support staff through on-site training that allows
us to observe the individual lawyers of provider law firms as they directly
assist the members.
Agreements with provider law firms: (a) generally permit termination of the
agreement by either party upon 60 days prior written notice, (b) permit us to
terminate the Agreement for cause immediately upon written notice, (c) require
the firm to maintain a minimum amount of malpractice insurance on each of its
attorneys, in an amount not less than $100,000, (d) preclude us from
interference with the lawyer-client relationship, (e) provide for periodic
review of services provided, (f) provide for protection of our proprietary
information and (g) require the firm to indemnify us against liabilities
resulting from legal services rendered by the firm. We are precluded from
contracting with other law firms to provide the same service in the same
geographic area, except in situations where the designated law firm has a
conflict of interest, we enroll a group of 500 or more members, or when the
agreement is terminated by either party. Provider law firms are precluded from
contracting with other prepaid legal service companies without our approval.
Provider law firms receive a fixed monthly payment for each member who are
residents in the service area and are responsible for providing the Membership
benefits without additional remuneration. If a provider law firm delivers legal
services to an open panel member, the law firm is reimbursed for services
rendered according to the open panel Membership. As of December 31, 2004,
provider law firms averaged approximately 59 employees each and on average are
evenly split between support staff and lawyers.
We have had occasional disputes with provider law firms, some of which have
resulted in litigation. The toll-free telephone lines utilized and paid for by
the provider law firms are owned by us so that in the event of a termination,
the members' calls can be rerouted very quickly. Nonetheless, we believe that
our relations with provider law firms are generally very good. At the end of
2004 and 2003, we had provider law firms representing 46 states and four
provinces compared to 45 states and three provinces at the end of 2002. During
the last three calendar years, our relationships with a total of four provider
law firms were terminated by us or the provider law firm. As of December 31,
2004, 26 provider law firms have been under contract with us for more than eight
years with the average tenure of all provider law firms being approximately 7.6
years.
We have an extensive database of referral lawyers who have provided
services to our members for use by members when a designated provider law firm
is not available. Lawyers with whom members have experienced verified service
problems, or are otherwise inappropriate for the referral system, are removed
from our list of referral lawyers.
Identity Theft Shield Benefits Provider
Kroll, a wholly-owned subsidiary of March & McLennan Companies, Inc., is
one of the world's leading risk consulting companies. Kroll provides a broad
range of investigative, intelligence, financial, security, and technology
services to help clients reduce risks, solve problems, and capitalize on
opportunities. Headquartered in New York with more than 60 offices on six
continents, Kroll has a multidisciplinary corps of more than 2,200 employees and
serves a global clientele of law firms, financial institutions, corporations,
nonprofit institutions, government agencies, and individuals. Over the last
three years, Kroll has developed a unique solution for victims of identity theft
and this service is now available to our members through the Identity Theft
Shield benefit. Similar to the provider law firms, Kroll is paid a fixed fee on
a monthly per capita basis to render services to IDT members.
Marketing
Multi-Level Marketing
We market Memberships through a multi-level marketing program that
encourages individuals to sell Memberships and allows individuals to recruit and
develop their own sales organizations. Commissions are paid only when a
Membership is sold or an associate subscribes to our eService package (described
below). No commissions are paid based solely on recruitment. When a Membership
is sold, commissions are paid to the associate making the sale, and to other
associates (on average, 13 others at December 31, 2004 and December 31, 2003)
who are in the line of associates who directly or indirectly recruited the
selling associate. We provide training materials, organize area-training
meetings and designate personnel at the home office specially trained to answer
questions and inquiries from associates. We offer various communication avenues
to our sales associates to keep such associates informed of any changes in the
marketing of our Memberships. The primary communication vehicles we utilize to
keep our sales associates informed include extensive use of conference calls and
e-mail, an interactive voice-mail service, The Connection monthly magazine, an
interactive voice response system, a monthly DVD (digital video disc) program
and our website, prepaidlegal.com.
Multi-level marketing is primarily used for marketing based on personal
sales since it encourages individual or group face-to-face meetings with
prospective members and has the potential of attracting a large number of sales
personnel within a short period of time. Our marketing efforts towards
individuals typically target the middle income family or individual and seek to
educate potential members concerning the benefits of having ready access to
legal counsel for a variety of everyday legal problems. Memberships with
individuals or families sold by the multi-level sales force constituted 75% of
our Memberships in force at December 31, 2004 compared to 75% and 73% at
December 31, 2003 and 2002. Although other means of payment are available,
approximately 73% of fees on Memberships purchased by individuals or families
are paid on a monthly basis by means of automatic bank draft or credit card.
Our marketing efforts towards employee groups, principally on a payroll
deduction payment basis, are designed to permit our sales associates to reach
more potential members with each sales presentation and strive to capitalize on,
among other things, what we perceive to be a growing interest among employers in
the value of providing legal service plans to their employees. Memberships sold
through employee groups constituted approximately 25% of total Memberships in
force at December 31, 2004 compared to 25% and 27% at December 31, 2003 and
2002. Adverse publicity about us is responsible, to some extent, for the decline
in group memberships on a percentage basis. The majority of employee group
Memberships are sold to school systems, governmental entities and businesses. We
emphasize group marketing to employee groups of less than 50 rather than larger
groups where there is more competition, price negotiation and typically a longer
sales cycle. No group accounted for more than 1% of our consolidated revenues
from Memberships during 2004, 2003 or 2002. Substantially all group Memberships
are paid on a monthly basis. We are active in legislative lobbying efforts to
enhance our ability to market to public employee groups and to encourage
Congress to reenact legislation to permit legal service plans to qualify for
pre-tax payments under tax qualified employee cafeteria plans.
Sales associates are generally engaged as independent contractors and are
provided with training materials and are given the opportunity to participate in
our training programs. Sales associates are required to complete a specified
training program prior to marketing our Memberships to employee groups. All
advertising and solicitation materials used by sales associates must be approved
by us prior to use. At December 31, 2004, we had 343,696 "vested" sales
associates compared to 329,600 and 341,116 "vested" sales associates at December
31, 2003 and 2002, respectively. A sales associate is considered to be "vested"
if he or she has personally sold at least three new Memberships per quarter or
if he or she retains a personal Membership. A vested associate is entitled to
continue to receive commissions on prior sales after all previous commission
advances have been recovered. However, a substantial number of vested associates
do not continue to market the Membership, as they are not required to do so in
order to continue to be vested. During 2004, we had 79,716 sales associates who
personally sold at least one Membership, of which 41,699 (52%) made first time
sales. During 2003 and 2002 we had 84,207 and 103,112 sales associates producing
at least one Membership sale, respectively, of which 45,920 (55%) and 65,383
(63%), respectively, made first time sales. During 2004, we had 9,895 sales
associates who personally sold more than ten Memberships compared to 10,685 and
12,738 in 2003 and 2002, respectively. A substantial number of our sales
associates market our Memberships on a part-time basis only. For the year 2004,
new sales associates enrolled decreased 1% to 107,552 from the 108,557 enrolled
in 2003.
We derive revenues from our multi-level marketing sales force, principally
from a one-time enrollment fee of $65 from each new sales associate for which we
provide initial marketing supplies and enrollment services to the associate. In
January 1997, we implemented a new combination classroom and field training
program, titled Fast Start to Success ("Fast Start"), aimed at increasing the
level of new Membership sales per associate. Associates successfully completed
the program by writing three new Memberships and recruiting a new sales
associate or by personally selling five new Memberships within 45 days of the
associate's start date. Associates in states that require the associate to
become licensed have 45 days from the issue date on their license to complete
the same requirements. The program typically requires a fee ranging from zero to
$184 per new associate, depending on special promotions we implement from time
to time, that we earn upon completion of the training program. Amounts collected
from sales associates are intended primarily to offset our costs incurred in
recruiting and training and providing materials to sales associates and are not
intended to generate profits from such activities. Other revenues from sales
associates represent the sale of marketing supplies and promotional materials
and includes fees related to our eService program for associates. The eService
program provides subscribers Internet based back office support such as reports,
on-line documents, tools, a personal e-mail account and multiple personalized
web sites with "flash" movie presentations.
We continually review our compensation plan for the multi-level marketing
force to assure that the various financial incentives in the plan encourage our
desired goals. We offer various incentive programs from time to time and
frequently adjust the program to maintain appropriate incentives and to improve
Membership production and retention.
We hold our International Convention once a year, typically in the spring,
and a Leadership Summit, typically in the fall, and routinely host more than
10,000 of our sales associates at these events. These events are intended to
provide additional training, corporate updates, new announcements, motivation
and associate recognition. Additionally, we offer the Player's Club incentive
program providing additional incentives to our associates as a reward for
consistent, quality business. Associates can earn the right to attend an annual
incentive trip by meeting monthly qualification requirements for the entire
calendar year and maintaining certain personal retention rates for the
Memberships sold during the calendar year. Associates can also earn the right to
receive additional monthly bonuses by meeting the monthly qualification
requirements for twelve consecutive months and maintaining certain personal
retention rates for the Memberships sold during that twelve month period.
Regional Vice Presidents
We have a group of employees that serve as Regional Vice Presidents
("RVPs") responsible for associate activity in a given geographic region and
with the ability to appoint independent contractors as Area Coordinators within
the RVP's region. The RVPs have weekly reporting requirements as well as
quarterly sales and recruiting goals. The RVP and Area Coordinator program
provides a basis to effectively monitor current sales activity, further educate
and motivate the sales force and otherwise enhance the relationships between the
associates and us. New products and initiatives will continue to be channeled
through the RVPs and Area Coordinators. At December 31, 2004, we had 102 RVPs in
place.
Pre-Paid Legal Benefits Association
The PPL Benefits Association (PPLBA) was founded in 1999 with the intent of
providing sales associates the opportunity to have access, at their own expense,
to health insurance and life insurance benefits. Membership in the Association
allows a sales associate to become eligible to enroll in numerous benefit
programs, as well as take advantage of attractive affinity agreements.
Membership in this association is open to sales associates that reach a certain
level within our marketing programs who also maintain an active personal legal
services Membership. The PPLBA is a separate association not owned or controlled
by us and is governed by an 8 member Board of Directors, including four officer
positions. None of the officers or directors of the PPLBA serve in any such
capacity with us. The PPLBA employs a Director of Associate Benefits paid by the
Association. Affinity programs available to members of the PPLBA include credit
cards, long-distance, wireless services, safety trip plan, mortgage and real
estate assistance and a travel club. As determined by its Board of Directors,
some of the revenue generated by the PPLBA through commissions from vendors of
the benefits and affinity programs or contributed to the Association by us may
be used to make open-market purchases of our stock for use in stock bonus awards
to Association members based on criteria established from time to time by the
Board of Directors of the PPLBA. Since inception and through December 31, 2004,
approximately 36,000 shares were purchased by the PPLBA for awards to its
members. In 2002, the PPLBA offered cash in lieu of stock awards and
approximately 21,000 shares purchased by the Association were sold to us on
January 2, 2003 at the stock's closing price to fund the awards. The PPLBA
awarded approximately 5,000 and 10,000 shares of stock to Association members
representing the 2004 and 2003 stock bonus awards, respectively.
Cooperative Marketing
We have in the past, and may in the future, develop marketing strategies
pursuant to which we seek arrangements with insurance and service companies that
have established sales forces. Under such arrangements, the agents or sales
force of the cooperative marketing partner market our Memberships along with the
products already marketed by the partner's agents or sales force. Such
arrangements allow the cooperative marketing partner to enhance its existing
customer relationships and distribution channels by adding our product to the
marketing partner's existing range of products and services, while we are able
to gain broader Membership distribution and access to established customer
bases.
We have a cooperative marketing agreement with Atlanta-based Primerica
Financial Services ("PFS"), a subsidiary of Citigroup, Inc. PFS is one of the
largest financial services marketing organizations in North America with more
than 100,000 personal financial analysts across the U.S. and Canada. The PFS
cooperative marketing agreement resulted in approximately 19,000 new Membership
sales during 2004 and 15,000 new Membership sales during each of 2003 and 2002.
We have had limited success with cooperative marketing arrangements in the
past and are unable to predict with certainty what success we will achieve, if
any, under our existing or future cooperative marketing arrangements.
Operations
Our corporate operations involve Membership application processing,
member-related customer service, various associate-related services including
commission payments, receipt of Membership fees, related general ledger
accounting, and managing and monitoring the provider law firm relationships.
We utilize a management information system to control operations costs and
monitor benefit utilization. Among other functions, the system evaluates benefit
claims, monitors member use of benefits and monitors marketing/sales data and
financial reporting records. Our dominant concerns in the architecture of
private networks and web systems include security, scalability, capacity to
accommodate peak traffic and business continuity in the event of a disaster. We
believe our management information system has substantial capacity to
accommodate increases in business data before substantial upgrades will be
required. We believe this excess capacity will enable us to experience a
significant increase in the number of members serviced with less than a
commensurate increase of administrative costs.
We have built a strong Internet presence to strengthen the services
provided to both members and associates. Our Internet site, at
www.prepaidlegal.com, welcomes the multifaceted needs of our members, sales
force, investors and prospects. It has also reduced costs associated with
communicating critical information to the associate sales force.
Our operations also include departments specifically responsible for
marketing support and regulatory and licensing compliance. We have an internal
production staff that is responsible for the development of new audio and video
sales materials.
Quality Control
In addition to our quality control efforts for provider law firms described
above, we also closely monitor the performance of our home office personnel,
especially those who have telephone contact with members or sales associates. We
record home office employee telephone calls with our members and sales
associates to assure that our policies are being followed and to gather data
about recurring problems that may be avoided through modifications in policies.
We also use such recorded calls for training and recognition purposes.
Competition
We compete in a variety of market segments in the legal service plan
industry, including, among others, individual enrollment plans, employee benefit
plans and certain specialty segments. Our principal competitors are Hyatt Legal
Plans (a MetLife company), ARAG Group (formerly Midwest Legal Services),
LawPhone/ACS, National Legal Plan and Legal Services Plan of America (a GE
Financial Assurance Partnership Marketing Group company, formerly the Signature
Group). Most of these concentrate their marketing to larger employer groups and
offer open panel plans.
If a greater number of companies seek to enter the legal service plan
market, we will experience increased competition in the marketing of our
Memberships. However, we believe our competitive position is enhanced by our
actuarial database, our existing network of provider attorney law firms and our
ability to tailor products to suit various types of distribution channels or
target markets. We believe that no other competitor has the ability to monitor
the customer service aspect of the delivery of legal services to the same extent
we do. Finally, we have intentionally concentrated our group marketing to small
employer groups. Serious competition is most likely from companies with
significant financial resources and advanced marketing techniques.
Regulation
We are regulated by or required to file with or obtain approval of State
Insurance Departments, Secretaries of State, State Bar Associations and State
Attorney General offices depending on individual state opinions of regulatory
responsibility for legal expense plans. We are also required to file with
similar government agencies in Canada. While some states or provinces regulate
legal expense plans as insurance or specialized legal expense products, others
regulate them as services.
As of December 31, 2004, we or one of our subsidiaries were marketing new
Memberships in 38 states or provinces that require no special licensing. Our
subsidiaries serve as operating companies in 16 states that regulate Memberships
as insurance or specialized legal expense products. The most significant of
these wholly owned subsidiaries are Pre-Paid Legal Casualty, Inc. ("PPLCI") and
Pre-Paid Legal Services, Inc. of Florida ("PPLSIF"). Of our total Memberships in
force as of December 31, 2004, 32% were written in jurisdictions that subject us
or one of our subsidiaries to insurance or specialized legal expense plan
regulation. We are actively working with regulators in the various states in
which our subsidiaries are regulated as insurance to explore other regulatory
alternatives to eliminate some of the agent licensing or financial and marketing
regulation that is prevalent in the insurance industry. The regulatory
environment in Texas was modified, effective March 1, 2004, to eliminate
insurance regulation of our business.
We began selling Memberships in the Canadian provinces of Ontario and
British Columbia during 1999, Alberta during February 2001 and Manitoba during
August 2001. The Memberships we currently market in such provinces do not
constitute an insurance product and therefore are exempt from insurance
regulation.
In states with no special licensing or regulatory requirements, we commence
operations only when advised by the appropriate regulatory authority that
proposed operations do not constitute conduct of the business of insurance.
There is no assurance that Memberships will be exempt from insurance regulation
even in states or provinces with no specific regulations. In these situations,
we or one of our subsidiaries would be required to qualify as an insurance
company in order to conduct business.
PPLCI serves as the operating company in most states where Memberships are
determined to be an insurance product. PPLCI is organized as a casualty
insurance company under Oklahoma law and as such is subject to regulation and
oversight by various state insurance agencies where it conducts business. These
agencies regulate PPLCI's forms, rates, trade practices, allowable investments
and licensing of agents and sales associates. These agencies also prescribe
various reports, require regular evaluations by regulatory authorities, and set
forth-minimum capital and reserve requirements. Our insurance subsidiaries are
routinely evaluated and examined by representatives from the various regulatory
authorities in the normal course of business. Such examinations have not and are
not expected to adversely impact our operations or financial condition in any
material way. We believe that all of our subsidiaries meet any required capital
and reserve requirements. Dividends paid by PPLCI are restricted under Oklahoma
law to available surplus funds derived from realized net profits.
We are required to register and file reports with the Oklahoma Insurance
Commissioner as a member of a holding company system under the Oklahoma
Insurance Holding Company System Regulatory Act. Transactions between PPLCI and
us or any other subsidiary must be at arms-length with consideration for the
adequacy of PPLCI's surplus, and must have prior approval of the Oklahoma
Insurance Commissioner. Payment of any extraordinary dividend by PPLCI to us
requires approval of the Oklahoma Insurance Commissioner. The payment of
dividends by PPLCI is restricted under the Oklahoma Insurance Code to available
surplus funds derived from realized net profits and requires the approval of the
Oklahoma Insurance Commissioner for any dividend representing more than 10% of
such accumulated available surplus or an amount representing more than the
previous years' net profits. During 2002 and 2001, PPLCI declared a $6 million
and a $5 million dividend, respectively, payable to us, both of which were paid
during 2002. No dividends were declared or paid during 2004 or 2003. At December
31, 2004 PPLCI had approximately $4.1 million available for payment of an
ordinary dividend. Any change in our control, defined as acquisition by any
method of more than 10% of our outstanding voting stock, including rights to
acquire such stock by conversion of preferred stock, exercise of warrants or
otherwise, requires approval of the Oklahoma Insurance Commissioner. Holding
company laws in some states in which PPLCI operates provide for comparable
registration and regulation of us.
Certain states have enacted special licensing or regulatory requirements
designed to apply only to companies offering legal service products. These
states most often follow regulations similar to those regulating casualty
insurance providers. Thus, the operating company may be expected to comply with
specific minimum capitalization and unimpaired surplus requirements; seek
approval of forms, Memberships and marketing materials; adhere to required
levels of claims reserves, and seek approval of premium rates and agent
licensing. These laws may also restrict the amount of dividends paid to us by
such subsidiaries. PPLSIF is subject to restrictions of this type under the laws
of the State of Florida, including restrictions with respect to payment of
dividends to us. At December 31, 2004, PPLSIF did not have funds available for
payment of substantial dividends without the prior approval of the insurance
commissioner.
As the legal plan industry continues to mature, additional legislation may
be enacted that would affect us and our subsidiaries. We cannot predict with any
accuracy if such legislation would be adopted or its ultimate effect on
operations, but expect to continue to work closely with regulatory authorities
to minimize any undesirable impact and, as noted above, to reduce regulatory
cost and burden where possible.
Our operations are further impacted by the American Bar Association Model
Rules of Professional Conduct ("Model Rules") and the American Bar Association
Code of Professional Responsibility ("ABA Code") as adopted by various states.
Arrangements for payments to a lawyer by an entity providing legal services to
its members are permissible under both the Model Rules and the ABA Code, so long
as the arrangement prohibits the entity from regulating or influencing the
lawyer's professional judgment. The ABA Code prohibits lawyer participation in
closed panel legal service programs in certain circumstances. Our agreements
with provider law firms comply with both the Model Rules and the ABA Code. We
rely on the lawyers serving as the designated provider law firms for the closed
panel benefits to determine whether their participation would violate any
ethical guidelines applicable to them. We and our subsidiaries comply with
filing requirements of state bar associations or other applicable regulatory
authorities.
We are also required to comply with state, provincial and federal laws
governing our multi-level marketing approach. These laws generally relate to
unfair or deceptive trade practices, lotteries, business opportunities and
securities. We have experienced no material problems with marketing compliance.
In jurisdictions that require associates to be licensed, we receive all
applications for licenses from the associates and forward them to the
appropriate regulatory authority. We maintain records of all associates
licensed, including effective and expiration dates of licenses and all states in
which an associate is licensed. We do not accept new Membership sale
applications from any unlicensed associate in such jurisdictions.
Employees
At December 31, 2004, we employed 680 individuals on a full-time basis,
exclusive of independent agents and sales associates who are not employees, and
excluding RVPs described above. None of our employees are represented by a
union. We consider our employee relations to be good.
Foreign Operations
We began operations in the Canadian provinces of Ontario and British
Columbia during 1999, Alberta in February 2001 and Manitoba in August 2001 and
derived aggregate revenues, including Membership fees and revenues from
associate services, from Canada of $4.7 million in U.S. dollars during 2004
compared to $4.5 million and $4.0 million in 2003 and 2002, respectively. Due to
the relative stability of the United States and Canadian foreign relations and
currency exchange rates, we believe that any risk of foreign operations or
currency valuations is minimal and would not have a material effect on our
financial condition, liquidity or results of operations.
Availability of Information
We file periodic reports and proxy statements with the Securities and
Exchange Commission. The public may read and copy any materials we file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. We file our reports with
the SEC electronically. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. The address of this site is
http://www.sec.gov.
Our Internet address is www.prepaidlegal.com. We make available on our
website free of charge copies of our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon
as reasonably possible after we electronically file such material with, or
furnish it to, the SEC.
ITEM 2. PROPERTIES.
Our executive and administrative offices and our subsidiaries are located
at One Pre-Paid Way, Ada, Oklahoma. The office complex, completed in 2004,
contains approximately 170,000 square feet of office space and is owned by us
and constructed on approximately 87 acres contributed to us by the City of Ada
in 2001 as part of an economic development incentive package. Costs incurred
through December 31, 2004 of approximately $34.1 million, including $706,000 in
capitalized interest costs, have been paid from existing resources and proceeds
from a $20 million line of credit for the new office construction.
Continued growth over the past 12 years required us to lease and purchase
several ancillary sites to accommodate our expanding workforce before
constructing our new headquarters. The new headquarters contains two long bars
of open office area designed to serve as podiums, which stretch east from the
northern and southern edges of the tower. Two and three stories high
respectively, the podiums house the call centers and Information Technology
departments. Only 60 feet across, they are designed to ensure that employees are
never more that thirty feet from a source of daylight. Shared corporate services
- -- including a 650-seat auditorium, dining hall, exercise facility, and a
connecting corridor containing a company history gallery -- are located at the
east end of the bars, creating a central courtyard. The courtyard features a
reflecting pool and a 12-foot bronze sculpture of our logo, the Lady of Justice,
a universal symbol of justice. The building's main entrance welcomes its
frequent visitors, celebrates our history, and is designed to convey the
tradition of civic judicial buildings. The building is designed to expand over
time without negatively impacting the site layout or the building concept and we
emphasized the use of modular furnishings to provide enhanced flexibility. We
placed importance on the goal of providing each employee with an excellent work
environment.
Additionally, we fully utilize another distribution facility located about
two miles from our new offices and containing approximately 17,000 square feet
of office and warehouse and shipping space. Our previous headquarters of
approximately 40,000 square feet and two other buildings containing
approximately 18,600 combined square feet located adjacent to the distribution
facility are now used as disaster recovery, or business continuity, sites.
In addition to the property described above that we own, we opened an
additional Customer Care facility in Antlers, Oklahoma during March 2000, in
building space provided by the City of Antlers at no cost to us. In conjunction
with a rural economic development program coordinated by the City of Antlers, a
new facility was built at no cost to us that can accommodate approximately 100
customer service representatives. We leased the facilities from the City of
Antlers upon completion of the construction in November 2002. We are considering
similar arrangements with other cities within Oklahoma to help diversify our
access to competent labor pools and expect to open a facility in Duncan,
Oklahoma in 2005 which will ultimately employ approximately 100 customer service
representatives.
ITEM 3. LEGAL PROCEEDINGS.
We and various of our executive officers have been named as defendants in a
putative securities class action originally filed in the United States District
Court for the Western District of Oklahoma in early 2001 seeking unspecified
damages on the basis of allegations that we issued false and misleading
financial information, primarily related to the method we used to account for
commission advance receivables from sales associates. On March 5, 2002, the
Court granted our motion to dismiss the complaint, with prejudice, and entered a
judgment in favor of the defendants. Plaintiffs thereafter filed a motion
requesting reconsideration of the dismissal which was denied. The plaintiffs
have appealed the judgment and the order denying their motion to reconsider the
judgment to the Tenth Circuit Court of Appeals. In August 2002 the lead
institutional plaintiff withdrew from the case, leaving two individual
plaintiffs as lead plaintiffs on behalf of the putative class. As of December
31, 2003, the briefing in the appeal had been completed. On January 14, 2004
oral argument was held in the appeal and as of February 22, 2005, a decision was
pending. We are unable to predict when a decision will be made on this appeal,
and the ultimate outcome of the case is not determinable.
Beginning in the second quarter of 2001 multiple lawsuits were filed
against us, certain officers, employees, sales associates and other defendants
in various Alabama and Mississippi state courts by current or former members
seeking actual and punitive damages for alleged breach of contract, fraud and
various other claims in connection with the sale of Memberships. During 2004,
there were at one time as many as 30 separate lawsuits involving approximately
285 plaintiffs in Alabama. As of February 22, 2005, as a result of dismissals,
summary judgments, or settlements for nominal amounts, we were aware of
approximately 15 separate lawsuits involving approximately 56 plaintiffs that
have been filed in multiple counties in Alabama. As of February 22, 2005, we
were aware of 16 separate lawsuits involving approximately 426 plaintiffs in
multiple counties in Mississippi. Certain of the Mississippi lawsuits also name
our former provider attorney in Mississippi as a defendant. Proceedings in
several of the eleven cases which name our provider attorney as a defendant had
been stayed pending the Mississippi Supreme Court's ruling on the Pre-Paid
defendants' appeal of a trial court's granting of a partial summary judgment
that the action is not required to be submitted to arbitration. On April 1,
2004, the Mississippi Supreme Court affirmed the trial court's partial summary
judgment that arbitration should not be had in one of the cases on appeal.
Pre-Paid asked the Mississippi Supreme Court to rehear that issue but that
motion was denied on June 3, 2004 and Pre-Paid sought certiorari on that issue
with the United States Supreme Court on September 1 and 8, 2004 which was denied
At least three complaints have been filed by the law firm representing
plaintiffs in eleven of the cases on behalf of certain of the Mississippi
plaintiffs and others with the Attorney General of Mississippi in March 2002,
December 2002 and August 2003. We have responded to the Attorney General's
requests for information with respect to these complaints, and as of February
22, 2005, we were not aware of any further actions being taken by the Attorney
General. In Mississippi, we filed lawsuits in the United States District Court
for the Southern and Northern Districts of Mississippi in which we seek to
compel arbitration of the various Mississippi claims under the Federal
Arbitration Act and the terms of our Membership agreements. One of the federal
courts has ordered arbitration of a case involving 8 plaintiffs. These cases are
all in various stages of litigation, including trial settings in Alabama in
April 2005, and in Mississippi in May 2005, and seek varying amounts of actual
and punitive damages. The first trial in Mississippi on these cases resulted in
a unanimous jury verdict in our favor, including other named defendants, on all
claims on October 19, 2004, while the second trial in Mississippi resulted in an
insubstantial plaintiff's verdict on February 15, 2005. Although the amount of
Membership fees paid by the plaintiffs in the Mississippi cases is $500,000 or
less, certain of the cases seek damages of $90 million. Additional suits of a
similar nature have been threatened. The ultimate outcome of any particular case
is not determinable.
On April 19, 2002, counsel in certain of the above-referenced Alabama suits
also filed a similar suit against us and certain of our officers in the District
Court of Creek County, Oklahoma on behalf of Jeff and Jana Weller individually
and doing business as Hi-Tech Auto making similar allegations relating to our
Memberships and seeking unspecified damages on behalf of a "nationwide" class.
The Pre-Paid defendants' preliminary motions in this case were denied, and on
June 17, 2003, the Oklahoma Court of Civil Appeals reversed the trial court's
denial of the Pre-Paid defendants' motion to compel arbitration, finding that
the trial court erred when it denied Pre-Paid's motion to compel arbitration
pursuant to the terms of the valid Membership contracts, and remanded the case
to the trial court for further proceedings consistent with that opinion. On
December 3, 2004, the District Court ordered the plaintiffs to proceed with the
arbitration. The ultimate outcome of this case is not determinable.
On June 29, 2001, an action was filed against us in the District Court of
Canadian County, Oklahoma. In 2002, the petition was amended to add five
additional named plaintiffs and to add and drop certain claims. This action was
originally a putative class action brought by Gina Kotwitz, later adding, George
Kotwitz, Rick Coker, Richard Starke, Jeff Turnipseed and Aaron Bouren, on behalf
of our sales associates. The amended petition seeks injunctive and declaratory
relief, with such other damages as the court deems appropriate, for alleged
violations of the Oklahoma Uniform Consumer Credit Code in connection with our
commission advances, and seeks injunctive and declaratory relief regarding the
enforcement of certain contract provisions with sales associates, including a
request stated in June 2003 for the imposition of a constructive trust as to
earned commissions applied to the reduction of debit balances and disgorgement
of all earned renewal commissions applied to the reduction of debit balances. On
September 23, 2003 the court entered an order dismissing the class action
allegations upon the motion of the plaintiffs. The order provides that the
action will proceed only on an individual basis, and that the hearing on
plaintiffs' motion for class certification previously set for February 2004 was
cancelled. Oral argument on our motion for summary judgment was held on July 2,
2004 and on December 17, 2004 the District Court granted our motion for summary
judgment. On January 27, 2005 three of the five plaintiffs filed a motion to
vacate and/or for new trial. This motion is set for hearing on April 22, 2005.
The claims of the remaining two plaintiffs have been dismissed with prejudice.
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 us and certain executive
officers. This action is a putative class action seeking unspecified damages
filed on behalf of our sales associates and alleges that the marketing plan
offered by us constitutes a security under the Securities Act of 1933 and seeks
remedies for failure to register the marketing plan as a security and for
violations of the anti-fraud provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934 in connection with representations alleged to
have been made in connection with the marketing plan. The complaint also alleges
violations of the Oklahoma Securities Act, the Oklahoma Business Opportunities
Sales Act, breach of contract, breach of duty of good faith and fair dealing and
unjust enrichment and violation of the Oklahoma Consumer Protection Act and
negligent supervision. This case is subject to the Private Litigation Securities
Reform Act. Pursuant to the Act, the Court has approved the named plaintiffs and
counsel and an amended complaint was filed in August 2002. The Pre-Paid
defendants filed motions to dismiss the complaint and to strike the class action
allegations on September 19, 2002, and discovery in the action was stayed
pending a ruling on the motion to dismiss. On July 24, 2003, the Court granted
in part and denied in part the Pre-Paid defendants' motion to dismiss. The
claims asserted under the Securities Exchange Act of 1934 and the Oklahoma
Securities Act were dismissed without prejudice. The motion was denied as to the
remaining claims. On September 8, 2004, the Court denied plaintiffs motion for
class certification. Plaintiffs petitioned the Tenth Circuit Court of Appeals
for permission to appeal the class certification ruling, and the Tenth Circuit
Court of Appeals denied the petition for interlocutory appeal. The ultimate
outcome of this case is not determinable.
We are a defendant in various other legal proceedings that are routine and
incidental to our business. We will vigorously defend our interests in all
proceedings in which it is named as a defendant. We also receive periodic
complaints or requests for information from various state and federal agencies
relating to our business or the activities of our marketing force. We promptly
respond to any such matters and provide any information requested.
While the ultimate outcome of these proceedings is not determinable, we do
not currently anticipate that these contingencies will result in any material
adverse effect to our financial condition or results of operation, unless an
unexpected result occurs in one of the cases. The costs of the defense of these
various matters are reflected as a part of general and administrative expense in
the consolidated statements of income. We have established an accrued liability
it believes will be sufficient to cover estimated damages in connection with
various cases (exclusive of ongoing defense costs which are expensed as
incurred), which at December 31, 2004 was $3.0 million. We believe we have
meritorious defenses in all pending cases and will vigorously defend against the
plaintiffs' claims. However, it is possible that an adverse outcome in certain
cases or increased litigation costs could have an adverse effect upon our
financial condition, operating results or cash flows in particular quarterly or
annual periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Price of and Dividends on the Common Stock
At February 18, 2005, there were 5,400 holders of record (including
brokerage firms and other nominees) of our common stock, which is listed on the
New York Stock Exchange under the symbol "PPD." The following table sets forth,
for the periods indicated, the range of high and low sales prices for the common
stock, as reported by the New York Stock Exchange.
High Low
---- ---
2005:
1st Quarter (through February 23)............................................ $ 38.37 $ 30.69
2004:
4th Quarter ................................................................. $ 40.39 $ 25.45
3rd Quarter.................................................................. 26.10 22.25
2nd Quarter.................................................................. 25.50 22.27
1st Quarter.................................................................. 26.33 21.57
2003:
4th Quarter ................................................................. $ 28.30 $ 23.24
3rd Quarter.................................................................. 25.21 20.60
2nd Quarter.................................................................. 27.40 17.22
1st Quarter.................................................................. 26.80 15.80
On December 6, 2004, we declared our first cash dividend of $0.50 per share
on our outstanding shares of common stock. The $7.8 million dividend was payable
on January 14, 2005 to shareholders of record as of the close of business on
December 20, 2004.
It is anticipated that earnings generated from our operations will be used
to finance our growth, to continue to purchase shares of our stock, to retire
existing debt and possibly pay cash dividends. We have loans as described in
"Management's Discussion and Analysis - Liquidity and Capital Resources," which
currently prohibit payment of cash dividends in excess of 50% of net income. Any
decision by our Board of Directors to pay additional cash dividends in the
future will depend upon, among other factors, our earnings, financial condition,
capital requirements and approval from our lender for any dividends in excess of
50% of net income. In addition, our ability to pay dividends is dependent in
part on our ability to derive dividends from our subsidiaries. The payment of
dividends by PPLCI is restricted under the Oklahoma Insurance Code to available
surplus funds derived from realized net profits and requires the approval of the
Oklahoma Insurance Commissioner for any dividend representing more than 10% of
such accumulated available surplus or an amount representing more than the
previous years' net profits. During 2002 and 2001, PPLCI declared a $6 million
and a $5 million dividend payable to us, both of which were paid during 2002 but
no dividends were declared or paid during 2004 or 2003. PPLSIF is similarly
restricted pursuant to the insurance laws of Florida. At December 31, 2004,
PPLSIF did not have funds available for payment of substantial dividends without
the prior approval of the insurance commissioner. At December 31, 2004 PPLCI had
approximately $4.1 million available for payment of an ordinary dividend. At
December 31, 2004 the amount of restricted net assets of consolidated
subsidiaries was $21.3 million.
Recent Sales of Unregistered Securities
None.
Equity Compensation Plans
The following table provides information with respect to our equity
compensation plans as of December 31, 2004, (other than our tax qualified
Employee Stock Ownership Plan designed to provide retirement benefits).
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
----------------------- -------------------- -------------------------
Equity compensation plans approved by
security holders (1)................. 734,500 $24.22 1,346,252
Equity compensation plans not approved
by security holders (2).............. 127,990 21.94 -
----------------------- -------------------- -------------------------
Total.................................. 862,490 $23.88 1,346,252
======================= ==================== =========================
- -----------
(1) These stock options have been issued pursuant to our Stock Option Plan
which has been approved by security holders. We do not expect to grant any
additional options under this plan.
(2) These stock options have been issued to our Regional Vice Presidents
("RVPs") (described above) in order to encourage stock ownership by our
RVPs and to increase the proprietary interest of such persons in our growth
and financial success. These options have been granted periodically to RVPs
since 1996. Options are granted at fair market value at the date of the
grant and are generally immediately exercisable for a period of three years
or within 90 days of termination, whichever occurs first. There were
36,751, 106,002 and 244,679 total options granted to RVPs in the years
ended December 31, 2004, 2003 and 2002, respectively. We discontinued the
RVP stock option grants immediately after the 2003 fourth quarter stock
options were awarded in the first quarter of 2004.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of stock in the
open market during the fourth quarter of 2004.
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Period Total Number of Average Price Paid Announced Plans or the Plans or
Shares Purchased per Share Programs Programs (1)
--------------------- --------------------- --------------------- --------------------
October 2004........... 4,400 $ 27.42 4,400 964,682
November 2004.......... 42,500 29.62 42,500 922,182
December 2004.......... - - - 922,182
--------------------- --------------------- ---------------------
Total.................. 46,900 $ 31.63 46,900
===================== ===================== =====================
- -----------
(1) We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock.
The Board of Directors has subsequently from time to time increased such
authorization from 500,000 shares to 10,000,000 shares. The most recent
authorization was for 1,000,000 additional shares August 9, 2004 and there
has been no time limit set for completion of the repurchase program. In
addition, we purchased 980,518 shares for $26.00 per share in a tender
offer completed on September 28, 2004.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial and statistical data for
us as of the dates and for the periods indicated. This information is not
necessarily indicative of our future performance. The following information
should be read in conjunction with our Consolidated Financial Statements and
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operation included elsewhere herein.
Year Ended December 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ------------ ----------
Income Statement Data: (In thousands, except ratio, per share and Membership amounts)
Revenues:
Membership fees...................................... $ 355,461 $ 330,322 $ 308,401 $ 263,514 $ 211,763
Associate services................................... 24,901 25,704 37,418 36,485 30,372
Other................................................ 5,575 5,287 4,804 3,662 4,248
----------- ----------- ----------- ------------ ----------
Total revenues..................................... 385,937 361,313 350,623 303,661 246,383
----------- ----------- ----------- ------------ ----------
Costs and expenses:
Membership benefits.................................. 122,280 111,165 103,761 87,429 69,513
Commissions.......................................... 118,757 115,386 119,371 111,060 96,614
Associate services and direct marketing.............. 29,325 28,929 32,566 29,879 23,251
General and administrative expenses.................. 43,742 36,711 33,256 28,243 21,524
Other, net........................................... 9,578 8,546 6,685 5,917 5,078
----------- ----------- ----------- ------------ ----------
Total costs and expenses........................... 323,682 300,737 295,639 262,528 215,980
----------- ----------- ----------- ------------ ----------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle.... 62,255 60,576 54,984 41,133 30,403
Provision for income taxes............................. 21,478 20,669 18,970 13,519 9,550
----------- ----------- ----------- ------------ ----------
Income from continuing operations before cumulative
effect 40,777 39,907 36,014 27,614 20,853
of change in accounting principle....................
Income (loss) from operations of discontinued UFL segment
(net of applicable income tax benefit of $0 and $387
for years 2001 and 2000, respectively)............... - - - (504) 649
----------- ----------- ----------- ------------ ----------
Income before cumulative effect of change in accounting
principle............................................ 40,777 39,907 36,014 27,110 21,502
Cumulative effect of adoption of SAB 101 (net of
applicable income tax benefit of $546)............... - - - - (1,013)
----------- ----------- ----------- ------------ ----------
Net income............................................... 40,777 39,907 36,014 27,110 20,489
Less dividends on preferred shares..................... - - - - 4
----------- ----------- ----------- ------------ ----------
Net income applicable to common stockholders............. $ 40,777 $ 39,907 $ 36,014 $ 27,110 $ 20,485
=========== ========== ========== =========== ==========
Basic earnings per common share from continuing
operations before cumulative effect of accounting change $ 2.50 $ 2.28 $ 1.83 $ 1.28 $ .93
Basic earnings per common share from discontinued
operations........................................... - - - (.02) .03
=========== ========== ========== =========== ==========
Basic earnings per common share before cumulative effect
of change in accounting principle.................... 2.50 2.28 1.83 1.26 .96
Cumulative effect of adoption of SAB 101................. - - - - (.05)
----------- ----------- ----------- ------------ ----------
Basic earnings per common share.......................... $ 2.50 $ 2.28 $ 1.83 $ 1.26 $ .91
=========== ========== ========== =========== ==========
Diluted earnings per common share from continuing
operations before cumulative effect of accounting change $2.48 $ 2.27 $ 1.82 $ 1.28 $ .92
Diluted earnings per common share from discontinued
operations........................................... - - - (.02) .03
----------- ----------- ----------- ------------ ----------
Diluted earnings per common share before cumulative
effect of accounting change.......................... 2.48 2.27 1.82 1.26 .95
Cumulative effect of adoption of SAB 101................. - - - - (.05)
----------- ----------- ----------- ------------ ----------
Diluted earnings per common share........................ $ 2.48 $ 2.27 $ 1.82 $ 1.26 $ .90
=========== ========== ========== =========== ==========
Selected Financial Data, continued
Year Ended December 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ------------ ----------
(In thousands, except ratio, per share and Membership amounts)
Pro forma amounts assuming adoption of SAB 101 is retroactively applied:
Net income............................................................................................... $ 21,502
Basic earnings per common share....................................................................... $ .96
Diluted earnings per common share..................................................................... $ .95
Weighted average number of common shares
outstanding - basic.................................. 16,313 17,530 19,674 21,504 22,504
Weighted average number of common shares
outstanding - diluted................................ 16,458 17,599 19,764 21,544 22,679
Membership Benefits Cost and Statistical Data:
Membership benefits ratio (1).......................... 34.4% 33.7% 33.6% 33.2% 32.8%
Commissions ratio (1).................................. 33.4% 34.9% 38.7% 42.1% 45.6%
General & administrative expense ratio (1)............. 12.3% 11.1% 10.8% 10.7% 10.2%
Commission cost per new Membership sold................ $ 190 $ 172 $ 154 $ 152 $ 144
New Memberships and stand-alone IDT plans sold......... 624,525 671,857 773,767 728,295 670,118
Period end Memberships and stand-alone IDT plans in 1,451,700 1,418,997 1,382,306 1,242,908 1,064,805
force
New add-on IDT memberships sold........................ 335,792 89,928 - - -
Period end add-on IDT memberships in force............. 283,889 86,602 - - -
Average annual Membership fee.......................... $ 274 $ 262 $ 256 $ 251 $ 244
Cash Flow Data:
Net cash provided before changes in assets and liabilities $ 51,689 $ 47,731 $ 42,699 $ 30,679 $ 24,247
Net cash provided by operating activities................ 47,263 51,693 52,073 37,801 23,201
Net cash used in investing activities.................... (11,322) (36,901) (11,074) (6,963) (7,965)
Net cash used in financing activities................... (31,428) (14,191) (34,431) (27,414) (13,714)
Balance Sheet Data:
Total assets........................................... $ 146,064 $ 131,012 $ 96,836 $ 85,720 $ 77,766
Total liabilities...................................... 114,617 101,438 61,864 43,496 35,999
Stockholders' equity .................................. 31,447 29,574 34,972 42,224 41,767
- -----------
(1) The Membership benefits ratio, the commissions ratio and the general and
administrative expense ratio represent those costs as a percentage of
Membership fees. These ratios do not measure total profitability because
they do not take into account all revenues and expenses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview of the Our Financial Model
We are in one line of business - the marketing of legal expense and other
complimentary plans primarily through a multi-level marketing force to
individuals. Our principal revenues are derived from membership fees, and to a
much lesser extent, revenues from marketing associates. Our principal expenses
are commissions, Membership benefits, associates services and direct marketing
costs and general and administrative expense. The following table reflects the
changes in these categories of revenues and expenses in the last 3 years (dollar
amounts in 000's):
% % %
Change Change Change
% of from % of from % of from
Total Prior Total Prior Total Prior
2004 Revenue Year 2003 Revenue Year 2002 Revenue Year
--------- ------- ------ --------- ------- ------ --------- ------- ------
Revenues:
Membership fees.......... $ 355,461 92.1 7.6 $ 330,322 91.4 7.1 $ 308,401 88.0 17.0
Associate services....... 24,901 6.5 (.03) 25,704 7.1 (31.3) 37,418 10.6 2.6
Other.................... 5,575 1.4 5.4 5,287 1.5 10.1 4,804 1.4 31.2
--------- ------- ------ --------- ------- ------ --------- ------- ------
385,937 100.0 6.8 361,313 100.0 3.0 350,623 100.0 15.5
--------- ------- ------ --------- ------- ------ --------- ------- ------
Costs and expenses:
Commissions.............. 118,757 30.8 2.9 115,386 31.9 (3.3) 119,371 34.0 7.5
Membership benefits...... 122,280 31.7 10.0 111,165 30.8 7.1 103,761 29.6 18.7
Associate services and
direct marketing....... 29,325 7.6 1.4 28,929 8.0 (11.2) 32,566 9.3 9.0
General and admin........ 43,742 11.3 19.2 36,711 10.2 10.4 33,256 9.5 17.7
Other, net............... 9,578 2.5. 12.1 8,546 2.4 27.8 6,685 1.9 13.0
--------- ------- ------ --------- ------- ------ --------- ------- ------
323,682 83.9 7.6 300,737 83.2 1.7 295,639 84.3 12.6
--------- ------- ------ --------- ------- ------ --------- ------- ------
Provision for income taxes 21,478 5.6 3.9 20,669 5.7 9.0 18,970 5.4 40.3
--------- ------- ------ --------- ------- ------ --------- ------- ------
Net Income ............... $ 40,777 10.6 2.2 $ 39,907 11.0 10.8 $ 36,014 10.3 32.8
========= ======= ====== ========= ======= ====== ========= ======= ======-
The following table reflects certain data concerning our Membership sales and
associate recruiting:
% Change % Change
from Prior from
New Memberships: 2004 Year 2003 Prior Year 2002
- ------------------------------------------------------------ ---------- ----------- ---------- ---------- ----------
New legal service membership sales.......................... 599,929 (10.1) 667,480 (13.7) 773,767
New "stand-alone" IDT membership sales...................... 24,596 461.9 4,377 Note 1 -
Total new membership sales......................... ---------- ----------- ---------- ---------- ----------
624,525 (7.0) 671,857 (13.2) 773,767
========== =========== ========== ========== ==========
New "add-on" IDT membership sales........................... 335,792 273.4 89,928 -
Active Memberships:
Active legal service memberships at end of period........... 1,424,707 .7 1,414,746 2.3 1,382,306
Active "stand-alone" IDT memberships at end of period....... 26,993 535.0 4,251 Note 1 -
Total active memberships at end of period.......... ---------- ----------- ---------- ---------- ----------
1,451,700 2.3 1,418,997 2.7 1,382,306
========== =========== ========== ========== ==========
Active "add-on" IDT memberships at end of period............ 283,889 227.8 86,602 Note 1 -
New sales associates recruited.............................. 107,552 (.9) 108,557 (30.3) 155,663
Average Membership fee in force............................. $274.02 4.4 $262.36 2.4 $256.21
Note 1: During the third quarter of 2003, we began offering our Identity Theft
Shield ("IDT") to new and existing members at $9.95 per month if added to a
legal service Membership or $12.95 per month if purchased separately.
The number of active Memberships in force and the average monthly fee will
directly determine Membership fees and their impact on total revenues during any
period. The two most important variables impacting the number of active
Memberships during a period are the number of new Memberships written during the
period combined with the retention characteristics of both new and existing
Memberships. See "Measures of Member Retention" below for a discussion of our
Membership retention. Associate services revenues are a function of the number
of new sales associates enrolled and the price of entry during the period, the
number of associates subscribing to our eService offering and the amount of
sales tools purchased by the sales force.
Membership benefits expense is primarily determined by the number of active
Memberships and the per capita contractual rate that exists between us and our
benefits providers and during the last five years has been and is expected to
continue to be a relatively fixed percentage of Membership revenues of
approximately 33%-34%. Commissions paid to associates are primarily dependent on
the number and price of new Memberships sold during a period and any special
incentives that may be in place during the period. We expense advance
commissions ratably over the first month of the related Membership. The level of
commission expense in relation to Membership revenues varies depending on the
level of new Memberships written and is expected to be higher when we experience
increases in new Membership sales. During the last five years this percentage
has ranged from approximately 33% to 46% of Membership revenues. Associate
services and direct marketing expenses are directly impacted by the number of
new associates enrolled during a period due to the cost of materials provided to
such new associates, the number of associates subscribing to our eService
offering, the amount of sales tools purchased by the sales force as well as the
number of those associates who successfully meet the Fast Start to Success
training and incentive award program qualifications. Prior to 2003 these costs
were more than offset by associate services revenue, however this did not occur
in 2004 or 2003 primarily due to the lower entry fees charged during most of the
periods. General and administrative expenses are expected to trend up in terms
of dollars, but remain relatively constant as a percent of Membership fees.
During the past five years, general and administrative expenses have ranged from
10% to 12% of Membership fees.
The primary benchmarks monitored by us throughout the various periods
include the number of active Memberships and their related retention
characteristics, the number of new Memberships written, the number of new
associates enrolled and the percentage of new associates that successfully meet
the Fast Start to Success qualification requirements.
We experienced decreases in both the number of new Memberships written and
the number of new associates enrolled during 2004 and 2003 compared to 2002.
During the 2002 fourth quarter, we eliminated the commission advances to certain
associates that had below average retention and due to below average retention
rates of Internet submitted Memberships, we placed restrictions on those
associates who are able to submit new memberships via the Internet and the
number they could submit. These actions naturally reduced the number of new
memberships written and new associates enrolled during the 2002 fourth quarter
and during 2003 and 2004 but demonstrate our commitment to improve Membership
retention. We also attribute such decline, in part, to negative publicity (see
Risk Factors). Such adverse publicity may affect our ability to write new
Memberships (especially in large employee groups), recruit new associates and
may have a detrimental effect on the persistency of our Memberships. However,
depending on the average monthly Membership fee and the entry price for new
associates, we may experience declines in both areas in terms of numbers but may
experience increases in both Membership fees and associate services revenue and
vice versa.
Although we have grown our active Membership base and related Membership
fees in each of the past 12 years, the rate of growth has slowed to an
unacceptable rate. We believe however, that our current product design, pricing
parameters and business model are generally appropriate and it has no immediate
plans to change these fundamental sectors. Our focus during 2005 will continue
to be on improved training of our associates, enhancing the quality and quantity
of sales tools provided to new and existing associates, providing incentives for
associates to write consistent, quality business and continued emphasis on
improving the basic retention characteristics of our Memberships.
Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance
with accounting principles generally accepted in the United States of America.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. If these estimates or assumptions are
incorrect, there could be a material change in our financial condition or
operating results. Many of these "critical accounting policies" are common in
the insurance and financial services industries; others are specific to our
business and operations. Our critical accounting policies include estimates
relating to revenue recognition related to Membership and associate fees,
deferral of Membership and associate related costs, expense recognition related
to commissions to associates, accrual of incentive awards payable and accounting
for legal contingencies.
Revenue recognition - Membership and Associate Fees
Our principal revenues are derived from Membership fees, most of which are
collected on a monthly basis. Memberships are generally guaranteed renewable and
non-cancelable except for fraud, non-payment of Membership fees or upon written
request. Membership fees are recognized in income ratably over the related
service period in accordance with Membership terms, which generally require the
holder of the Membership to remit fees on an annual, semi-annual or monthly
basis. Approximately 95% of members remit their Membership fees on a monthly
basis, of which approximately 73% are paid in advance and, therefore, are
deferred and recognized over the following month. At December 31, 2004 the
deferred revenue associated with the Membership fees was $18.6 million which is
classified as a current liability.
We also charge new members, who are not part of an employee group, a $10
enrollment fee. This enrollment fee and related incremental direct and
origination costs are deferred and recognized in income over the estimated life
of a Membership in accordance with SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," ("SAB 101") as revised by SEC
Staff Accounting Bulletin No. 104. At December 31, 2004 the deferred revenue
associated with the Membership enrollment fees was $6.8 million, of which $4.4
million was classified as a current liability. We compute the expected
Membership life using more than 20 years of actuarial data as explained in more
detail in "Measures of Membership Retention" below. At December 31, 2004,
management computed the expected Membership life to be approximately 3 years,
which is unchanged from year end 2003. If the expected Membership life were to
change significantly, which management does not expect in the short term, the
deferred Membership enrollment fee and related costs would be recognized over a
longer or shorter period.
We derive revenues from services provided to our marketing sales force from
a one-time non-refundable enrollment fee of $65 from each new sales associate
for which we provide initial sales and marketing supplies and enrollment
services to the associate. Revenue from, and costs of, the initial sales and
marketing supplies (approximately $14) are recognized when the materials are
delivered to the associates. The remaining $51 of revenues and related
incremental direct and origination costs are deferred and recognized over the
estimated average active service period of associates which at December 31, 2004
is estimated to be approximately six months, unchanged from year end 2003. At
December 31, 2004, the deferred revenue associated with sales associate
enrollment fees was $1.6 million, which is classified as a current liability.
Management estimates the active service period of an associate periodically
based on the average number of months an associate produces new Memberships
including those associates that fail to write any Memberships. If the active
service period of associates changes significantly, which management does not
expect in the short term, the deferred revenue and related costs would be
recognized over the new estimated active service period.
Member and Associate Costs
Deferred costs represent the incremental direct and origination costs we
incur in enrolling new Members and new associates related to the deferred
revenue discussed above, and that portion of payments made to provider law firms
($5.8 million deferred at December 31, 2004 which is classified as a current
asset) and associates related to deferred Membership revenue. Deferred costs for
enrolling new members include the cost of the Membership kit and salary and
benefit costs for employees who process Membership enrollments, and were $5.8
million at December 31, 2004, of which $3.2 million is classified in current
assets. Deferred costs for enrolling new associates include training and success
bonuses paid to individuals involved in recruiting the associate and salary and
benefit costs of employees who process associate enrollments, and were $800,000
at December 31, 2004, and is classified as a current asset. Such costs are
deferred to the extent of the lesser of actual costs incurred or the amount of
the related fee charged for such services. Deferred costs are amortized to
expense over the same period as the related deferred revenue as discussed above.
Deferred costs that will be recognized within one year of the balance sheet date
are classified as current and all remaining deferred costs are considered
noncurrent. Associate related costs are reflected as associate services and
direct marketing, and are expensed as incurred if not related to the deferred
revenue discussed above. These costs include providing materials and services to
associates, Fast Start bonuses, associate introduction kits, associate incentive
programs, group marketing and marketing services departments (including costs of
related travel, marketing events, leadership summits and international sales
convention).
Commissions to Associates
Beginning with new Memberships written after March 1, 1995, we implemented
a level commission schedule (approximately 27% per annum at December 31, 2001)
with up to a three-year advance commission payment. Prior to March 1, 1995, our
commission program provided for advance commission payments to associates of
approximately 70% of first year Membership premiums on new Membership sales and
commissions were earned by the associate at a rate of approximately 16% in all
subsequent years. Effective March 1, 2002, and in order to offer additional
incentives for increased Membership retention rates, we returned to a
differential commission structure with rates of approximately 80% of first year
Membership premiums on new Memberships written and variable renewal commission
rates ranging from five to 25% per annum based on the first 12 month Membership
retention rate of the associate's personal sales and those of his organization.
Beginning in August 2003, we allowed the associate to choose between the level
commission structure and up to three year commission advance or the differential
commission structure with a one year commission advance.
Prior to January 1997 we advanced commissions at the time of sale of all
new Memberships. In January 1997, we implemented a policy whereby the associate
receives only earned commissions on the first three sales unless the associate
has successfully completed the Fast Start training program. For all sales
beginning with the fourth Membership or all sales made by an associate
successfully completing the Fast Start training program, we currently advance
commission payments at the time of sale of a new Membership. The amount of cash
potentially advanced upon the sale of a new Membership, prior to the recoupment
of any charge-backs (described below), represents an amount equal to up to
one-year commission earnings. Although the average number of marketing
associates receiving an advance commission payment on a new Membership is 14,
the overall initial advance may be paid to approximately 30 different
individuals, each at a different level within the overall commission structure.
The commission advance immediately increases an associate's unearned advance
commission balance to us.
Although we, prior to March 1, 2002, advanced our sales associates up to
three years commission when a Membership is sold and subsequent to March 1,
2002, up to one year commission, the average commission advance paid to our
sales associates as a group is actually less than the maximum amount possible
because some associates choose to receive less than a full advance and we pay
less than a full advance on some of our specialty products. In addition, we may
from time to time place associates on a less than full advance basis if there
are problems with the quality of the business being submitted or other
performance problems with an associate. Additionally, we do not advance
commissions on certain categories of group business which have historically
demonstrated below average retention characteristics. Also, any residual
commissions due an associate (defined as commission on an individual Membership
after the advance has been earned) are retained to reduce any remaining unearned
commission advance balances prior to being paid to that sales associate. For
those associates that have made at least 10 personal sales, opened at least one
group and personally write 15% or more of their organizational business, 15% of
their commissions are set aside in individual reserve balance accounts, further
reducing the amount of advance commissions. The average commission advance paid
as a percentage of the maximum advance possible pursuant to our commission
structures was approximately 78%, 80% and 76% during 2004, 2003 and 2002,
respectively. The commission cost per new Membership sold has increased over
each of the last three years by 10%, 12% and 1% for 2004, 2003 and 2002,
respectively, and varies depending on the compensation structure that is in
place at the time a new Membership is sold and the amount of any charge-backs
(recoupment of previous commission advances) that are deducted from amounts that
would otherwise be paid to the various sales associates that are compensated for
the Membership sale. Should we add additional products, such as the Identity
Theft Shield described above or add additional commissions to our compensation
plan or reduce the amount of chargebacks collected from our associates, the
commission cost per new Membership will increase accordingly.
We expense advance commissions ratably over the first month of the related
Membership. At December 31, 2004, advance commissions deferred were $5.6 million
and included as a current asset. As a result of this accounting policy, our
commission expenses are all recognized over the first month of a Membership and
there is no commission expense recognized for the same Membership during the
remainder of the advance period. We track our unearned advance commission
balances outstanding in order to ensure the advance commissions are recovered
before any renewal commissions are paid and for internal purposes of analyzing
our commission advance program. While not recorded as an asset, unearned advance
commission balances from associates for the following years ended December 31
were:
2004 2003 2002
---- ---- ----
(Amounts in 000's)
Beginning unearned advance commission balances (1)..................$ 191,894 $ 227,084 $ 211,609
Advance commissions, net of chargebacks and other................... 115,942 113,030 118,917
Earned commissions applied.......................................... (122,393) (145,371) (101,030)
Advance commission write-offs....................................... (2,383) (2,849) (2,412)
----------- ----------- -----------
Ending unearned advance commission balances before estimated
unrecoverable balances (1)........................................ 183,060 191,894 227,084
Estimated unrecoverable advance commission balances (1)(2).......... (28,554) (24,862) (25,156)
----------- ----------- -----------
Ending unearned advance commission balances, net (1)................$ 154,506 $ 167,032 $ 201,928
=========== =========== ===========
(1) These amounts do not represent fair value, as they do not take into
consideration timing of estimated recoveries.
(2) Estimated unrecoverable advances increased as a percentage of ending
advances from 11% at December 31, 2002 to 16% at December 31, 2004
primarily due to the change in the compensation structure described
above from a 36-month possible advance to a 12-month possible advance
and fewer new Memberships written during 2003 and 2004. The commission
structure change allows the advances to be earned more quickly by the
associate and the reduction in new Memberships written creates fewer
new advances.
The ending unearned advance commission balances, net, above includes net
unearned advance commission balances of non-vested associates of $27 million,
$30 million and $26 million at December 31, 2004, 2003 and 2002, respectively.
As such, at December 31, 2004 future commissions and related expense will be
reduced as unearned advance commission balances of $128 million are recovered.
Commissions are earned by the associate as Membership premiums are earned by us,
usually on a monthly basis. We reduce unearned advance commission balances or
remits payment to an associate, as appropriate, when commissions are earned.
Should a Membership lapse before the advances have been recovered for each
commission level, we, except as described below, generate an immediate
"charge-back" to the applicable sales associate to recapture up to 50% of any
unearned advance on Memberships written prior to March 1, 2002, and 100% on any
Memberships written thereafter. Beginning in August 2003, we allowed the
associate to choose between the level commission structure and up to three year
commission advance and up to 50% chargebacks or the differential commission
structure with a one year commission advance and up to 100% chargebacks. This
charge-back is deducted from any future advances that would otherwise be payable
to the associate for additional new Memberships. In order to encourage
additional Membership sales, we waived chargebacks for associates that met
certain criteria in December 2002 and March 2003, which effectively increases
our commission expense. Any remaining unearned advance commission balance may be
recovered by withholding future residual earned commissions due to an active
associate on active Memberships. Additionally, even though a commission advance
may have been fully recovered on a particular Membership, no additional
commission earnings from any Membership are paid to an associate until all
previous advances on all Memberships, both active and lapsed, have been
recovered. We also have reduced chargebacks from 100% to 50% for certain senior
marketing associates who have demonstrated the ability to maintain certain
levels of sales over specified periods and maintain certain Membership retention
levels. We may adjust chargebacks from time to time in the future in order to
encourage certain production incentives.
Prior to March 1, 2002, we charged associates a fee on unearned advance
commission balances relating to lapsed Memberships ("Membership lapse fee"). The
fee that was recorded on the associates unearned commission balance was
determined by applying the prime interest rate to the unearned advance
commission balance pertaining to lapsed Memberships. We realized and recognized
this fee only when the amount of the calculated fee was collected by withholding
from cash commission payments due the associate. The fees collected reduced
commission expense. Our ability to recover these fees was primarily dependant on
the associate selling new Memberships, which qualify for commission advances. We
eliminated the Membership lapse fee for Memberships sold after March 1, 2002 in
conjunction with the change in the commission structure described above.
We have the contractual right to require associates to repay unearned
advance commission balances from sources other than earned commissions including
cash (a) from all associates either (i) upon termination of the associate
relationship, which includes but is not limited to when an associate becomes
non-vested or (ii) when it is ascertained that earned commissions are
insufficient to repay the unearned advance commission payments and (b) upon
demand, from agencies or associates who are parties to the associate agreements
signed between October 1989 and July 1992 or July 1992 to August 1998,
respectively. The sources, other than earned commissions, that may be available
to recover associate unearned advance commission balances are potentially
subject to limitation based on applicable state laws relating to creditors'
rights generally. Historically, we have not demanded repayments of the unearned
advance commission balances from associates, including terminated associates,
because collection efforts would likely increase costs and have the potential to
disrupt our relationships with our sales associates. This business decision by
us has a significant effect on our cash flow by electing to defer collection of
advance payments of which approximately $28.6 million were not expected to be
collected from future commissions at December 31, 2004. However, we regularly
review the unearned advance commission balance status of associates and will
exercise our right to require associates to repay advances when management
believes that such action is appropriate.
Non-vested associates are those that are no longer "vested" because they
fail to meet our established vesting requirements by selling at least three new
Memberships per quarter or retaining a personal Membership. Non-vested
associates lose their right to any further commissions earned on Memberships
previously sold at the time they become non-vested. As a result we have no
continuing obligation to individually account to these associates as we do to
active associates and are entitled to retain all commission earnings that would
be otherwise payable to these terminated associates. We do continue to reduce
the unearned advance commission balances for commissions earned on active
Memberships previously sold by those associates. Substantially all individual
non-vested associate unearned advance commission balances were less than $1,000
and the average balance was $400 at December 31, 2004.
Although the advance commissions are expensed ratably over the first month
of the related Membership, we assess, at the end of each quarter, on an
associate-by-associate basis, the recoverability of each associate's unearned
advanced commission balance by estimating the associate's future commissions to
be earned on active Memberships. Each active Membership is assumed to lapse in
accordance with our estimated future lapse rate, which is based on our actual
historical Membership retention experience as applied to each active
Membership's year of origin. The lapse rate is based on our more than 20-year
history of Membership retention rates, which is updated quarterly to reflect
actual experience. We also closely review current data for any trends that would
affect the historical lapse rate. The sum of all expected future commissions to
be earned for each associate is then compared to that associate's unearned
advance commission balance. We estimate unrecoverable advance commission
balances when expected future commissions to be earned on active Memberships
(aggregated on an associate-by-associate basis) are less than the unearned
advance commission balance. If an associate with an outstanding unearned advance
commission balance has no active Memberships, the unearned advance commission
balance is written off but has no financial statement impact as advance
commissions are expensed ratably over the first month of the related
Memberships. Refer to "Measures of Member Retention - Expected Membership Life,
Expected Remaining Membership Life" for a description of the method used by us
to estimate future commission earnings.
Further, our analysis of the recoverability of unearned advance commission
balances is also based on the assumption that the associate does not write any
new Memberships. We believe that this assessment methodology is highly
conservative since our actual experience is that many associates do continue to
sell new Memberships and we, through our chargeback rights, gain an additional
source to recover unearned advance commission balances.
Changes in our estimates with respect to recoverability of unearned
commissions could occur if the underlying Membership persistency changes from
historical levels. Should Membership persistency decrease, the unearned
commissions would be recovered over a longer period and the amount not recovered
would most likely increase, although any increase in uncollectible unearned
commissions would not have any immediate expense impact since the commission
advances are expensed in the month they incurred. Holding all other factors
constant, the decline in persistency would also lead to lower Membership fees,
less net income and less cash flow from operations. Conversely, should
persistency increase, the unearned commissions would be recovered more quickly,
the amount unrecovered would decrease and, holding all other factors constant,
we would enjoy higher Membership fees, more net income and more cash flow from
operations.
Incentive awards payable
Associates can earn the right to attend an annual incentive trip by meeting
monthly qualification requirements for the entire calendar year and maintaining
certain personal retention rates for the Memberships sold during the calendar
year. Associates can also earn the right to receive additional monthly bonuses
by meeting the monthly qualification requirements for twelve consecutive months
and maintaining certain personal retention rates for the Memberships sold during
that twelve month period. The incentive awards payable at any date is estimated
based on an evaluation of the existing associates that have met the monthly
qualifications, any changes to the monthly qualification requirements, the
estimated cost for each incentive earned and the number of associates that have
historically met the personal retention rates. At December 31, 2004, the accrued
amount payable was $2.6 million. Changes to any of these assumptions would
directly affect the amount accrued but we do not expect any of the significant
trends impacting this account to change significantly in the near term.
Legal Contingencies
We are subject to various legal proceedings and claims, the outcomes of
which are subject to significant uncertainty. Given the inherent
unpredictability of litigation, it is difficult to estimate the impact of
litigation on our financial condition or results of operation. SFAS 5,
Accounting for Contingencies, requires that an estimated loss from a loss
contingency should be accrued by a charge to income if it is probable that an
asset has been impaired or a liability has been incurred and the amount of the
loss can be reasonably estimated. Disclosure of a contingency is required if
there is at least a reasonable possibility that a loss has been incurred. We
evaluate, among other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss. We
have established an accrued liability it believes will be sufficient to cover
estimated damages in connection with various cases, which at December 31, 2004
was $3.0 million. This process requires subjective judgment about the likely
outcomes of litigation. Liabilities related to most of our lawsuits are
especially difficult to estimate due to the nature of the claims, limitation of
available data and uncertainty concerning the numerous variables used to
determine likely outcomes or the amounts recorded. Litigation expenses are
recorded as incurred and we do not accrue for future legal fees. It is possible
that an adverse outcome in certain cases or increased litigation costs could
have an adverse effect upon our financial condition, operating results or cash
flows in particular quarterly or annual periods. See "Legal Proceedings."
Other General Matters
Operating Ratios
Three principal operating measures monitored by us in addition to measures
of Membership retention are the Membership benefits ratio, commission ratio and
the general and administrative expense ratio. The Membership benefits ratio, the
commissions ratio and the general and administrative expense ratio represent
those costs as a percentage of Membership fees. We strive to maintain these
ratios as low as possible while at the same time providing adequate incentive
compensation to our sales associates and provider law firms. These ratios do not
measure total profitability because they do not take into account all revenues
and expenses.
Cash Flow Considerations Relating to Sales of Memberships
We generally advance significant commissions at the time a Membership is
sold. Since approximately 95% of Membership fees are collected on a monthly
basis, a significant cash flow deficit is created at the time a Membership is
sold. This deficit is reduced as monthly Membership fees are remitted and no
additional commissions are paid on the Membership until all previous unearned
advance commission balances have been fully recovered. Since the cash advanced
at the time of sale of a new Membership may be recovered over a multi-year
period, cash flow from operations may be adversely affected depending on the
number of new Memberships written in relation to the existing active base of
Memberships and the composition of new or existing sales associates producing
such Memberships.
Investment Policy
Our investment policy is to some degree controlled by certain insurance
regulations, which, coupled with management's own investment philosophy, results
in a conservative investment portfolio that is not risk oriented. Our
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. We are required to pledge investments to various state
insurance departments as a condition to obtaining authority to do business in
certain states.
New Accounting Standards Issued
In December 2004, the FASB issued SFAS 123R which requires the measurement
of all employee share-based payments to employees, including grants of employee
stock options, using a fair-value-based method and the recording of such expense
in our consolidated statements of income. The accounting provisions of SFAS 123R
are effective for reporting periods beginning after June 15, 2005. We are
required to adopt SFAS 123R in the third quarter of fiscal 2005. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. See Note 1 - Stock-Based Compensation in our
consolidated financial statements included in Item 8 for the pro forma net
income and net income per share amounts, for 2002 through 2004, as if we had
used a fair-value-based method similar to the methods required under SFAS 123R
to measure compensation expense for employee stock incentive awards. Although we
have not yet determined whether the adoption of SFAS 123R will result in amounts
that are similar to the current pro forma disclosures under SFAS 123, we are
evaluating the requirements under SFAS 123R and do not expect the adoption to
have a significant adverse impact on our consolidated statements of income and
net income per share.
Measures of Member Retention
One of the major factors affecting our profitability and cash flow is our
ability to retain a Membership, and therefore continue to receive fees, once it
has been sold. We monitor our overall Membership persistency rate, as well as
the retention rates with respect to Memberships sold by individual associates
and agents and retention rates with respect to Memberships by year of issue,
geographic region, utilization characteristics and payment method, and other sub
groupings.
Terminology
The following terms are used in describing the various measures of
retention:
o Membership life is a period that commences on the day of initial enrollment of
a member and continues until the individual's Membership eventually terminates
or lapses (the terms terminate or lapse may be used interchangeably here).
o Membership age means the time since the Membership has been in effect.
o Lapse rate means the percentage of Memberships of a specified group of
Memberships that lapse in a specified time period.
o Retention rate is the complement of a lapse rate, and means the percentage of
Memberships of a specified group that remain in force at the end of a specified
time period.
o Persistency and retention are used in a general context to mean the tendency
for Memberships to continue to remain in force, while the term persistency rate
is a specific measure that is defined below.
o Lapse rates, retention rates, persistency rates, and expected Membership life
may be referred to as measures of Membership retention.
o Expected Membership life means the average number of years a new Membership is
expected to remain in force.
o Blended rate when used in reference to any measure of member retention means a
rate computed across a mix of Memberships of various Membership ages.
o Expected remaining Membership life means the number of additional years that
an existing member is expected to continue to renew from a specific point in
time based on the Membership life.
Variations in Membership Retention by Sub-Groups, Impact on Aggregate
Numbers
Company wide measures of Membership retention include data relating to
members who can potentially be further sorted by identifiable sub-groupings. For
example, Memberships may be subdivided into those owned by members who are or
are not sales associates, to those who are or are not members of group plans,
etc.
Measures of Membership retention of different sub-groups may vary. For
example, our experience indicates that first year retention rate of Memberships
owned by members who also are sales associates is approximately 10% better than
retention of Memberships owned by non-associate members. While this correlation
can be identified, the cause and effect relationship here cannot be isolated.
These sales associate members may have a financial incentive to retain the
Membership in order to continue to receive commissions. They also likely have a
better understanding and appreciation of the benefits of the Membership, which
may have contributed in fact to their decision to also become a sales associate.
Additionally, members who have accessed the services of the provider law firms
historically have higher retention rates than those who have not.
All aggregate measures of Membership retention or expected life may be
impacted by shifts in the underlying enrollment mix of sub-groups that have
different retention rates. For example Memberships owned by non-associate new
members have comprised an increasing percentage of new Memberships enrolled each
year over the past five years. Since non-associate members have a known lower
first year retention rate, a shift in mix alone will cause a reduction in
reported aggregate retention measures and expected member life, even if the
retention rates within each sub-group do not change. It is important to note
that all blended rates discussed here may reflect the impact of such shifts in
enrollment mixes. At December 31, 2004, 303,131 of the active 1,451,700
Memberships were also vested associates which represents 21% of the total active
Memberships compared to 21% at December 31, 2003 and 2002. The following table
shows total new Memberships sold during each year and the number and percentage
of Memberships sold to persons who are associates.
Total New Associate
Year Memberships Memberships Ratio
---- ----------- ----------- -----
2000 670,118 90,684 13.5%
2001 728,295 103,515 14.2%
2002 773,767 119,326 15.4%
2003 671,857 86,406 12.9%
2004 624,525 89,230 14.3%
Variations in Retention over Life of a Membership, Impact on Aggregate
Measures
Measures of member retention also vary significantly by the Membership age.
Historically, we have observed that Memberships in their first year have a
significantly higher lapse rate than Memberships in their second year, and so
on. The following chart shows the historical observed lapse rates and
corresponding yearly retention rates as a function of Membership age. For
example, 49.1% of all new Memberships lapse during the first year, leaving 50.9%
still in force at the end of the first year. More tenured Memberships have
significantly lower lapse rates. For example, by year seven lapse rates are
under 10% and annual retention exceeds 90%. The following table shows as of
December 31, 2004 our blended retention rate and lapse rates based on our
historical experience for the last 23 years. The blended retention and lapse
rates as of the end of 2004 did not differ materially from those previously
reported at the end of 2003.
Membership Retention versus Membership Age
- -----------------------------------------------------------
Membership Yearly Lapse Yearly End of Year
Year Rate Retention Memberships
- ------------ ------------ --------- ------------
0 100.0
1 49.1% 50.9% 50.9
2 28.2% 71.8% 36.5
3 21.1% 78.9% 28.8
4 17.1% 82.9% 23.9
5 15.3% 84.7% 20.2
6 11.9% 88.1% 17.8
7 9.5% 90.5% 16.1
Membership Persistency
Our Membership persistency rate is a specific computation that measures the
number of Memberships in force at the end of a year as a percentage of the total
of (i) Memberships in force at the beginning of such year, plus (ii) new
Memberships sold during such year. From 1981 through the year ended December 31,
2004, our annual Membership persistency rates, using the foregoing method, have
averaged approximately 71.8%.
Beginning New Ending
Year Memberships Memberships Total Memberships Persistency
------ ----------- ----------- ----------- ----------- -----------
2000 827,979 670,118 1,498,097 1,064,805 71.1%
2001 1,064,805 728,295 1,793,100 1,242,908 69.3%
2002 1,242,908 773,767 2,016,675 1,382,306 68.5%
2003 1,382,306 671,857 2,054,163 1,418,997 69.1%
2004 1,418,997 624,525 2,043,522 1,451,700 71.0%
Our overall Membership persistency rate varies based on, among other
factors, the relative age of total Memberships in force, and shifts in the mix
of members enrolled. Our overall Membership persistency rate could become lower
when the Memberships in force include a higher proportion of newer Memberships,
as will happen following periods of rapid growth. Our overall Membership
persistency rate could also become lower when the new enrollments include a
higher proportion of non-associate members.
Unless offset by other factors, these factors could result in a decline in
our overall Membership persistency rate as determined by the formula described
above, but does not necessarily indicate that the new Memberships written are
less persistent.
Expected Membership Life
Using historical data through 2004 for all past Members enrolled, the
expected Membership life can be computed to be approximately three years. This
number represents the average number of years a new Membership can be expected
to remain in force. Although about half of all new Memberships may lapse in the
first year, the expected Membership life is much longer due to the contribution
of higher annual retention rates in subsequent years.
Since our experience is that the retention rate of a given generation of
new Memberships improves with Membership age, the expected remaining Membership
life of a Membership also increases with Membership age. For example, while a
new Membership may have an expected Membership life of three years, the expected
remaining Membership life of a Membership that reaches its first year
anniversary is approximately 4.5 years.
Since the actual population of Memberships in force at any time is a
distribution of ages from zero to more than 20 years, the expected remaining
Membership life of the entire population at large greatly exceeds three years
per Membership. As of December 31, 2004, based on the historical data described
above, the current expected remaining Membership life of the actual population
is over six years per Membership. This measure is used by us to estimate the
future revenues expected from Memberships currently in place.
Expected Membership life measures are based on more than 20 years of
historical Membership retention data, unlike the Membership persistency rate
described above which is computed from, and determined by, the most recent
one-year period only. Both or these measures however include data from
Memberships of all Membership ages and hence are referred to as "blended"
measures.
Actions that May Impact Retention in the Future
The potential impact on our future profitability and cash flow due to
future changes in Membership retention can be significant. While blended
retention rates have not changed significantly over the past five years, we have
implemented several initiatives aimed at improving the retention rate of both
new and existing Memberships. Such initiatives include an optional revised
compensation structure featuring variable renewal commission rates ranging from
five to 25% per annum based on the 12 month Membership retention rate of the
associate's personal sales and those of his organization and implementation of a
"non-taken" administrative fee to sales associates of $35 for any Membership
application that is processed but for which a payment is never received. We have
designed and implemented an enhanced member "life cycle" communication process
aimed at both increasing the overall amount of communication from us to the
members as well as more specific target messaging to members based on the length
of their Membership as well as utilization characteristics. We believe that such
efforts may ultimately increase the utilization by members and therefore lead to
higher retention rates. Our 2004 retention rates did not differ materially from
2003 and we intend to continue to develop programs and initiatives designed to
improve retention.
Results of Operations
Comparison of 2004 to 2003
Net income for 2004 increased 2 % to $40.8 million from $39.9 million for
2003. Diluted earnings per share for 2004 increased 9 % to $2.48 per share from
$2.27 per share for the prior year due to increased net income of 2 % and an
approximate 9 % decrease in the weighted average number of outstanding shares.
Membership revenues for 2004 were up 8 % to $355.5 million from $330.3 million
for the prior year marking the twelfth consecutive year of increased membership
revenue.
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 7% during 2004 to 624,525 from
671,857 during 2003. At December 31, 2004, there were 1,451,700 active
Memberships in force compared to 1,418,997 at December 31, 2003, an increase of
2%. Additionally, the average annual fee per Membership has increased from $262
for all Memberships in force at December 31, 2003 to $274 for all Memberships in
force at December 31, 2004, a 5% increase, as a result of a larger number of
Legal Shield subscribers, increased sales of our business oriented Memberships,
and the introduction of the Identity Theft Shield Membership during the last
quarter of 2003.
Associate services revenue decreased 3% from $25.7 million for 2003 to
$24.9 million during 2004 primarily as a result of a decline in new enrollments
of sales associates and fewer associates enrolling in the eService program. The
eService fees totaled $7.6 million during 2004 compared to $8.4 million for
2003, a decrease of 9%. We had a slight increase in fees for the Fast Start
program for 2004. We received training fees of approximately $8.9 million during
2004 compared to $7.7 million during 2003. The field-training program, titled
Fast Start to Success ("Fast Start") is aimed at increasing the level of new
Membership sales per associate. In addition to the usual $65 associate fee,
associates participating in this program typically pay a fee ranging from zero
to $184, depending on special promotions we implement from time to time. In
order to be deemed successful for Fast Start purposes, the new associate must
write three new Memberships and recruit one new sales associate or personally
sell five Memberships within 45 days of becoming an associate. The $8.9 million
and $7.7 million for 2004 and 2003, respectively, in training fees was collected
from approximately 105,247 new sales associates who elected to participate in
Fast Start in 2004 compared to 107,490 during 2003. New associates electing to
participate in Fast Start decreased to 98% of new associates during 2004 from
99% for 2003. Total new associates enrolled during 2004 were 107,552 compared to
108,557 for 2003, a decrease of 1%. Future revenues from associate services will
depend primarily on the number of new associates enrolled, the price charged for
the Fast Start program and the number who choose to participate in our eService
program, but we expect that such revenues will continue to be largely offset by
the direct and indirect cost to us of training (including training bonuses
paid), providing associate services and other direct marketing expenses.
Other revenue increased 6%, from $5.3 million to $5.6 million primarily due
to the increase in revenue recognized from Membership enrollment fees.
Primarily as a result of the increase in Membership fees, total revenues
increased to $385.9 million for 2004 from $361.3 million during 2003, an
increase of 7%.
Membership benefits, which represent payments to provider law firms and
Kroll, totaled $122.3 million for 2004 compared to $111.2 million for 2003, and
represented 34% of Membership fees for both years. This Membership benefits
ratio (Membership benefits as a percentage of Membership fees) should remain
near current levels as substantially all active Memberships provide for a
capitated benefit in the absence of any changes in the capitated benefit level,
which has not changed significantly since 1993. However, since the benefit ratio
of the IDT Memberships is higher than the legal Memberships, we expect the
benefits ratio to increase above 34% if we continue to increase the IDT
Membership base and revenues.
Commissions to associates increased 3% from $115.4 million for 2003 to
$118.8 million for 2004, and represented 35% and 33% of Membership fees for such
years. These amounts were reduced by $196,000 and $165,000, 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. We realize and recognize this fee only when the amount of
the calculated fee is collected by withholding from cash commissions due the
associate, because our 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 and the average premium of those
Memberships. New Memberships sold during 2004 totaled 624,525, a 7% decrease
from the 671,857 sold during 2003, but the "add-on" IDT Memberships are not
included in these totals and have increased from 86,602 at December 31, 2003 to
283,889 at December 31, 2004 which caused our total commissions to increase
during 2004.
Associate services and direct marketing expenses increased to $29.3 million
for 2004 from $28.9 million for 2003. Fast Start training bonuses incurred were
approximately $3.1 million during 2004 compared to $2.9 million in 2003. This
$200,000 increase in bonuses, a $233,000 increase in the amortization of
deferred associate costs and a $1.0 million increase in the cost of marketing
supplies were primarily offset by a $1.1 million decrease in direct marketing
costs and marketing team overrides. The Fast Start training bonuses are affected
by the number of new sales associates that successfully meet the qualification
criteria established by us, i.e. more training bonuses will be paid when a
higher number of new sales associates meet such criteria. These expenses also
include the costs of providing associate services and marketing expenses as
discussed under Member and Associate Costs.
General and administrative expenses during 2004 and 2003 were $43.7 million
and $36.7 million, respectively, and represented 12% and 11%, respectively, of
Membership fees for such years. Management expects general and administrative
expenses, when expressed as a percentage of Membership fees, to remain
relatively constant in the near term. We should experience cost efficiencies as
a result of certain economies of scale in some areas over the long term.
Increases in the 2004 period were attributable primarily to increases in
printing and fulfillment costs associated with our new Membership kit which we
fully introduced in 2004, increases in other taxes (other than Federal income
tax), higher employee costs, legal fees and Sarbanes Oxley compliance costs.
Other expenses, net, which includes depreciation and amortization,
litigation accruals and premium taxes reduced by interest income, increased 12%
to $9.6 million for 2004 from $8.5 million for 2003. Depreciation and
amortization increased to $7.7 million for 2004 from $7.1 million for 2003.
Premium taxes decreased from $2.7 million for 2003 to $1.7 million for 2004 due
to decreased revenues in the states in which we pay premium taxes. Interest
income increased to $1.7 million for 2004 from $1.4 million for 2003. Interest
expense increased to $2.0 million for 2004 compared to $123,000 for the prior
year. At December 31, 2004 we reported $56.6 million in cash and investments
(after utilizing $37.4 million to purchase approximately 1.5 million treasury
shares of our common stock during 2004) compared to $51.6 million at December
31, 2003.
The provision for income taxes increased during 2004 to $21.5 million
compared to $20.7 million for 2003, representing 34.5% and 34.1% of income
before income taxes for 2004 and 2003, respectively.
Comparison of 2003 to 2002
Net income for 2003 increased 11% to $39.9 million from $36.0 million for
2002. Diluted earnings per share for 2003 increased 25 % to $2.27 per share from
$1.82 per share for the prior year due to increased net income of 11 % and an
approximate 11 % decrease in the weighted average number of outstanding shares.
Membership revenues for 2003 were up 7 % to $330.3 million from $308.4 million
for the prior year marking the eleventh consecutive year of increased membership
revenue.
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 13% during 2003 to 671,857 from
773,767 during 2002. At December 31, 2003, there were 1,418,997 active
Memberships in force compared to 1,382,306 at December 31, 2002, an increase of
3%. Additionally, the average annual fee per Membership has increased from $256
for all Memberships in force at December 31, 2002 to $262 for all Memberships in
force at December 31, 2003, a 2% increase, as a result of a larger number of
Legal Shield subscribers, increased sales of our business oriented Memberships,
and the introduction of the Identity Theft Shield Membership during the last
quarter of 2003.
Associate services revenue decreased 31% from $37.4 million for 2002 to
$25.7 million during 2003 primarily as a result of a decline in new enrollments
of sales associates and fewer associates enrolling in the eService program. The
eService fees totaled $8.4 million during 2003 compared to $11.2 million for
2002, a decrease of 25%. We also had a decline in fees for the Fast Start
program for 2003. We received training fees of approximately $7.7 million during
2003 compared to $13.1 million during 2002, primarily as a result of special
training promotions during 2003 that reduced the net amount of training fees
received by us. The field-training program, titled Fast Start to Success ("Fast
Start") is aimed at increasing the level of new Membership sales per associate.
In addition to the $65 associate fee, associates participating in this program
typically pay a fee ranging from $34 to $184, depending on special promotions we
implement from time to time. In order to be deemed successful for Fast Start
purposes, the new associate must write three new Memberships and recruit one new
sales associate or personally sell five Memberships within 60 days of becoming
an associate. The $7.7 million and $13.1 million for 2003 and 2002,
respectively, in training fees was collected from approximately 107,490 new
sales associates who elected to participate in Fast Start in 2003 compared to
150,247 during 2002. New associates electing to participate in Fast Start
increased to 99% of new associates during 2003 from 97% for 2002. Total new
associates enrolled during 2003 were 108,557 compared to 155,663 for 2002, a
decrease of 30%.
Other revenue increased 10%, from $4.8 million to $5.3 million primarily
due to the increase in revenue recognized from Membership enrollment fees.
Primarily as a result of the increase in Membership fees, total revenues
increased to $361.3 million for 2003 from $350.6 million during 2002, an
increase of 3%.
Membership benefits, which represent payments to provider law firms,
totaled $111.2 million for 2003 compared to $103.8 million for 2002, and
represented 34% of Membership fees for both years. This Membership benefits
ratio (Membership benefits as a percentage of Membership fees) should remain
near current levels as substantially all active Memberships provide for a
capitated benefit in the absence of any changes in the capitated benefit level,
which has not changed significantly since 1993.
Commissions to associates decreased 3% from $119.4 million for 2002
compared to $115.4 million for 2003, and represented 39% and 35% of Membership
fees for such years. These amounts were reduced by $705,000 and $196,000,
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. We realize and recognize this fee only when
the amount of the calculated fee is collected by withholding from cash
commissions due the associate, because our 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 2003 totaled 671,857, a 13% decrease from the 773,767 sold during
2002.
Associate services and direct marketing expenses decreased to $28.9 million
for 2003 from $32.6 million for 2002. Fast Start training bonuses incurred were
approximately $2.9 million during 2003 compared to $6.8 million in 2002. This
$3.9 million decline in bonuses, a $521,000 decrease in cost of marketing
materials sent to new associates, and a $1.6 million decrease in the
amortization of deferred associate costs were offset by a $1.3 million increase
in Fast Start attendance bonuses incurred and a $1.4 million increase in the
cost of associate incentive program costs. The Fast Start training bonuses are
affected by the number of new sales associates that successfully meet the
qualification criteria established by us, i.e. more training bonuses will be
paid when a higher number of new sales associates meet such criteria. These
expenses also include the costs of providing associate services and marketing
expenses as discussed under Member and Associate Costs.
General and administrative expenses during 2003 and 2002 were $36.7 million
and $33.3 million, respectively, and represented 11% of Membership fees for both
years.
Other expenses, which includes depreciation and amortization, litigation
accruals and premium taxes reduced by interest income, increased 28% to $8.5
million for 2003 from $6.7 million for 2002. Depreciation and amortization
increased to $7.1 million for 2003 from $5.3 million for 2002. Premium taxes
increased from $2.2 million for 2002 to $2.7 million for 2003 due to increased
revenues in the states in which we pay premium taxes. Interest income decreased
to $1.4 million for 2003 from $2.1 million for 2002. At December 31, 2003 we
reported $51.6 million in cash and investments (after utilizing $48.3 million to
purchase approximately 2.1 million treasury shares of our common stock during
2003) compared to $41 million at December 31, 2002.
The provision for income taxes increased during 2003 to $20.7 million
compared to $19.0 million for 2002, representing 34.1% and 34.5% of income from
continuing operations before income taxes for 2003 and 2002, respectively.
Liquidity and Capital Resources
The number of active Memberships in force and the average monthly fee will
directly determine Membership fees collected and their contribution to cash flow
from operations during any period. Cash receipts from associate services are
directly impacted by the number of new sales associates enrolled and the price
of entry during the period, the number of associates subscribing to our eService
offering and the amount of sales tools purchased by the sales force.
The cash outlay related to Membership benefits is directly impacted by the
number of active Memberships and the contractual rate that exists between us and
our benefits providers. Commissions paid to associates are primarily dependent
on the number and price of new Memberships sold during a period and any special
incentives that may be in place during the period. Cash requirements related to
associate services and direct marketing activities are directly impacted by the
number of new associates enrolled during a period due to the cost of materials
provided to such new associates, the number of associates subscribing to our
eService offering, the amount of sales tools purchased by the sales force as
well as the number of those associates who successfully meet the Fast Start to
Success training and incentive award program qualifications.
Membership revenues are more than sufficient to fund the cash requirements
for membership benefits (at approximately 33%-34% of Membership revenues),
commissions (ranging from 33% to 46% of Membership revenues) and general and
administrative expense (at approximately 12% of Membership revenues). We have
generated significant cash flow from operations before changes in assets and
liabilities of approximately $52 million, $48 million and $43 million in 2004,
2003 and 2002, respectively. As discussed below, we have used a significant
portion of our cash flow to repurchase shares of our stock in the open market.
Cash flow from operations could be reduced if we experienced significant growth
in new members because of the negative cash flow characteristics of our
commission advance policies discussed above.
As a result of our ability to generate cash flow from operations, including
in periods of Membership growth, we have not historically been dependent on, and
do not expect to need in the future, external sources of financing from the sale
of securities or from bank borrowings to fund our basic business operations.
However, as described below, during the last three years, we incurred debt for
limited and specific purposes to permit us to construct a new corporate
headquarters and to accelerate our treasury stock purchase program.
General
Consolidated net cash provided by operating activities before changes in
assets and liabilities was $51.7 million, $47.8 million and $42.7 million for
2004, 2003 and 2002, respectively. Consolidated net cash provided by operating
activities was $47.3 million, $51.7 million and $52.1 million for 2004, 2003 and
2002, respectively. Cash provided by operating activities decreased $4.4 million
during 2004 compared to 2003 primarily due to the $3.8 million decrease in the
change in accounts payable and accrued expenses, the $1.5 million increase in
the change in deferred member and associate service costs, the $1.1 million
increase in the change in accrued Membership income and the $1.1 million
increase in the change in inventories partially offset by the $1.9 million
increase in the provision of deferred income taxes and a $627,000 increase in
depreciation and amortization.
Net cash used in investing activities was $11.3 million, $36.9 million and
$11.1 million for 2004, 2003 and 2002, respectively. In addition to capital
expenditures of $10.9 million, $27.0 million and $15.2 million during 2004, 2003
and 2002, respectively, our purchases of available-for-sale investments exceeded
the maturities and sales of such investments by $443,000 and $9.9 million in
2004 and 2003, respectively, but maturities and sales exceeded purchases by $4.1
million during 2002.
Net cash used in financing activities was $31.4 million, $14.2 million and
$34.4 million for 2004, 2003 and 2002, respectively. This $17.2 million change
during 2004 was primarily comprised of a $23.7 million decrease in proceeds from
issuance of debt and a $7.4 million increase in repayment of debt and capital
lease obligations partially offset by a $10.8 million decrease in purchases of
treasury stock and a $3.2 million increase in proceeds from sale of common stock
on exercise of options.
We had a consolidated working capital deficit of $21.7 million at December
31, 2004, a decrease of $9.8 million compared to a consolidated working capital
deficit of $11.9 million at December 31, 2003. The decrease was primarily due to
the $7.8 million increase in common stock cash dividends payable. The $21.7
million working capital deficit at December 31, 2004 would have been a $12.5
million working capital deficit excluding the current portion of deferred
revenue and fees in excess of the current portion of deferred member and
associate service costs. These amounts will be eliminated by the passage of time
without the utilization of other current assets or us incurring other current
liabilities. Additionally, at the current rate of cash flow provided by
continuing operations ($47.3 million during 2004) and our contractual commitment
that limits the amount of any future dividends, we do not expect any difficulty
in meeting our financial obligations in the short term or the long term.
We generally advance significant commissions to associates at the time a
Membership is sold. We expense these advances ratably over the first month of
the related Membership. During 2004, we paid advance commissions to associates
of $115.9 million on new Membership sales compared to $113.0 million for 2003.
Since approximately 95% of Membership fees are collected on a monthly basis, a
significant cash flow deficit is created on a per Membership basis at the time a
Membership is sold. Since there are no further commissions paid on a Membership
during the advance period, we typically derive significant positive cash flow
from the Membership over its remaining life. See Commissions to Associates above
for additional information on advance commissions.
We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock. The
Board of Directors has increased such authorization from 500,000 shares to
10,000,000 shares during subsequent board meetings. At December 31, 2004, we had
purchased 9.1 million treasury shares under these authorizations for $210.9
million, an average price of $23.23 per share, including $37.5 million of
purchases in 2004. 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 our liquidity, however, due to restrictions contained in
our debt agreements with lenders, we are limited in our treasury stock
purchases. At December 31, 2004, we had more than $10 million availability under
existing bank covenant restrictions to purchase additional treasury shares. 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 our expected cash flows, management believes that purchasing
treasury shares enhances shareholder value. We expect to continue our treasury
stock program and are actively evaluating alternative sources of financing to
continue or accelerate the program.
We believe that we have significant ability to finance expected future
growth in Membership sales based on our existing amount of cash and cash
equivalents and unpledged investments at December 31, 2004 of $52.2 million. We
expect to maintain cash and cash equivalents and investment balances on an
on-going basis of approximately $20 million to $30 million in order to meet
expected working capital needs and regulatory capital requirements. Balances in
excess of this amount would be used for discretionary purposes such as treasury
stock purchases, dividends, and advance repayment of debt subject to the
restrictions contained in our debt agreements.
As more fully discussed in Item 2 - Description of Property, we completed a
new office complex during 2004, containing approximately 170,000 square feet of
office space, and constructed on approximately 87 acres contributed to us by the
City of Ada in 2001 as part of an economic development incentive package. Costs
incurred through December 31, 2004 of approximately $34.1 million, including
$706,000 in capitalized interest costs, have been paid from existing resources
and proceeds from a $20 million line of credit for the new office construction.
On June 11, 2002, we entered into two line of credit agreements totaling
$30 million with a commercial lender providing for a treasury stock purchase
line and a real estate line for funding of our new corporate office complex. The
treasury stock line of credit provided for funding of up to $10 million to
finance treasury stock purchases and has been repaid. The real estate line of
$20 million was fully funded in December 2003 with interest at the 30 day LIBOR
rate plus 2.25%, adjusted monthly, and repayments began in December 2003 with
monthly principal payments of $191,000 plus interest with a balloon payment on
September 30, 2008. The loan is primarily collateralized by a first mortgage on
the 87 acre construction site, the 170,000 square foot home office complex, our
rights to receive Membership fees on a portion of our Memberships and by a
security interest covering all equipment. The interest rate at December 31, 2004
was 4.56%. The real estate loan agreement provides for financial covenants
substantially the same as those described below for the amended stock purchase
loan.
During the 2003 third quarter, we arranged $25 million in additional
financing for treasury stock purchases from a group of banks, consisting of Bank
of Oklahoma, Comerica Bank and First United Bank and Trust. The $25 million was
fully funded on November 30, 2003 with scheduled monthly principal payments of
$1.4 million beginning December 31, 2003 through May 31, 2005 with interest at
the 30 day LIBOR rate plus three percent, adjusted monthly. During August 2004,
we amended the terms of the loan agreement with these banks to increase the loan
amount to $31.5 million and allow for additional treasury stock purchases of up
to $31.5 million. We fully funded the loan on September 30, 2004 which resulted
in a net increase in credit of $19.0 million above the outstanding balance of
our existing treasury stock term loan of $12.5 million at the time. Proceeds of
this loan together with existing cash resources were used to purchase treasury
shares. The amortization of the amended loan has been modified to provide for
repayment over 24 months in equal monthly principal payments beginning October
31, 2004 and ending September 30, 2006 with interest at the 30 day LIBOR rate
plus 3%. The interest rate at December 31, 2004 was 5.31%. The monthly principal
payment is $1.3 million compared to the monthly payment on the prior loan of
$1.4 million. The amended loan agreement continues all of the covenants of the
prior agreement with certain modifications to permit additional stock purchases
and/or dividends while the loan is outstanding generally in an amount no greater
than 50% of net income and modifies the debt service coverage ratio definition
slightly.
The loan is primarily collateralized by our rights to receive Membership
fees on a portion of our Memberships and a pledge of the stock of our
subsidiaries. The definitive agreement contains covenants prohibiting us from
pledging assets, incurring additional indebtedness and selling assets. In
addition to customary events of default, an additional event of default occurs
if Harland C. Stonecipher ceases to be our chairman and Chief Executive Officer
for 90 days. Pre-payment of the loan is permitted. The loan agreements contain
the following financial covenants: (a) our quarterly Debt Coverage Ratio (as
defined in the loan agreements) shall not be less than 125%; (b) our
cancellation rate on contracts less than or equal to twelve months old shall not
exceed 45% on a trailing 12 month basis, calculated on a quarterly basis; (c) we
shall maintain a rolling twelve month average retention rate of Membership
contracts in place for greater than eighteen months of not less than 70%,
calculated on a monthly basis; (d) we shall not pay dividends or purchase
treasury shares, which during any fiscal quarter, on a combined basis, would
exceed fifty percent (50%) of our cumulative net income for all previous fiscal
quarters beginning July 1, 2004 less any dividends or stock purchases in such
previous fiscal quarters, with provisions for carry forwards of unused
availability; and, (e) our tangible net worth shall not fall below $10 million
for the period of time dating from September 30, 2004, $15 million beginning
March 31, 2005 and $25 million beginning December 31, 2005.
Parent Company Funding and Dividends
Although we are the operating entity in many jurisdictions, our
subsidiaries serve as operating companies in various states that regulate
Memberships as insurance or specialized legal expense products. The most
significant of these wholly owned subsidiaries are PPLCI and PPLSIF. The ability
of PPLCI and PPLSIF to provide funds to us is subject to a number of
restrictions under various insurance laws in the jurisdictions in which PPLCI
and PPLSIF conduct business, including limitations on the amount of dividends
and management fees that may be paid and requirements to maintain specified
levels of capital and reserves. In addition PPLCI will be required to maintain
its stockholders' equity at levels sufficient to satisfy various state or
provincial regulatory requirements, the most restrictive of which is currently
$3 million. Additional capital requirements of PPLCI or PPLSIF, or any of our
regulated subsidiaries, will be funded by us in the form of capital
contributions or surplus debentures. During February 2004, we made a capital
contribution to a wholly-owned subsidiary of PPLCI, Pre-Paid Legal Services of
Tennessee, Inc. in the amount of $600,000. At December 31, 2004, PPLSIF did not
have funds available for payment of substantial dividends without the prior
approval of the insurance commissioner. While PPLCI had surplus funds available
for payment of an ordinary dividend, no such dividend was declared or paid
during 2004 or 2003. At December 31, 2004 PPLCI had approximately $4.1 million
available for payment of an ordinary dividend. At December 31, 2004 the amount
of restricted net assets of consolidated subsidiaries was $21.3 million.
Contractual Obligations
The following table reflects our contractual obligations as of December 31,
2004.
Payments Due by Period (In Thousands)
More
Less than than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- -------------------------------------------------- ---------- ---------- ---------- --------- ----------
Long-term debt.................................... $ 45,086 $ 18,036 $ 27,050 $ - $ -
Purchase obligations (1).......................... 8,209 5,500 2,709 - -
Capital leases.................................... 3,070 420 921 243 1,486
Deferred compensation plan........................ 2,794 - - - 2,794
Operating leases.................................. 324 86 171 67 -
---------- ---------- ---------- --------- ----------
Total (2)......................................... $ 59,483 $ 24,042 $ 30,851 $ 310 $ 4,280
========== ========== ========== ========= ==========
(1) Includes contractual commitments pursuant to executory contracts for
products and services such as voice and data services and contractual
obligations related to future Company events such as hotel room blocks,
meeting space and food and beverage guarantees. We expect to receive
proceeds from such future events and reimbursement from provider law firms
for certain voice and data services that will partially offset these
obligations.
(2) Does not include commitments for attorney provider payments, commissions,
etc. which are expected to remain in existence for several years but as to
which our obligations vary directly either based on Membership revenues or
new Memberships sold and are not readily estimable.
Forward-Looking Statements
All statements in this report other than purely historical information,
including but not limited to, statements relating to our future plans and
objectives, expected operating results and the assumptions on which such
forward-looking statements are based, constitute "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and are based on our historical operating
trends and financial condition as of December 31, 2004 and other information
currently available to management. We caution that the Forward-Looking
Statements are subject to all the risks and uncertainties incident to our
business, including but not limited to risks described below. Moreover, we may
make acquisitions or dispositions of assets or businesses, enter into new
marketing arrangements or enter into financing transactions. None of these can
be predicted with certainty and, accordingly, are not taken into consideration
in any of the Forward-Looking Statements made herein. For all of the foregoing
reasons, actual results may vary materially from the Forward-Looking Statements.
We assume no obligation to update the Forward-Looking Statements to reflect
events or circumstances occurring after the date of the statement.
Risk Factors
There are a number of risk factors which could affect our financial
condition or results of operations.
Our future results may be adversely affected if Membership persistency or
renewal rates are lower than our historical experience.
We have over 20 years of actual historical experience to measure the
expected retention of new members. These retention rates could be adversely
affected by the quality of services delivered by provider law firms, the
existence of competitive products or services, our ability to provide
administrative services to members or other factors. If our Membership
persistency or renewal rates are less than we have historically experienced, our
cash flow, earnings and growth rates could be adversely affected.
We may not be able to grow Memberships and revenues at the same rate as we
have historically experienced and have recently experienced declines in new
membership sales and associate recruitment.
Our year end active Memberships have increased 2%, 3% and 11% in the years
ended December 31, 2004, 2003 and 2002, respectively. Net income for the same
three years has increased 2%, 11% and 33%, respectively. We experienced
decreases in both the number of new Memberships written and the number of new
associates enrolled during 2004 and 2003 compared to 2002. Our ability to grow
Memberships and revenues is substantially dependent upon our ability to expand
or enhance the productivity of our sales force, develop additional legal expense
products, develop alternative marketing methods or expand geographically. There
is no assurance that we will be able to achieve increases in Membership and
revenue growth comparable to our historical growth rates.
We are dependent upon the continued active participation of our principal
executive officer.
Our success depends substantially on the continued active participation of
our principal executive officer, Harland C. Stonecipher. Although our management
includes other individuals with significant experience in our business, the loss
of the services of Mr. Stonecipher could have a material adverse effect on our
financial condition and results of operations.
There is litigation pending that may have a material adverse effect on us
if adversely determined.
See "Item 3. Legal Proceedings".
We are in a regulated industry and regulations could have an adverse effect
on our ability to conduct our business.
We are regulated by or required to file with or obtain approval of State
Insurance Departments, State Bar Associations and State Attorney General's
Offices, depending on individual state positions regarding regulatory
responsibility for legal service plans. Regulation of our activities is
inconsistent among the various states in which we do business with some states
regulating legal service plans as insurance or specialized legal service
products and others regulating such plans as services. Such disparate regulation
requires us to structure our Memberships and operations differently in certain
states in accordance with the applicable laws and regulations. Our multi-level
marketing strategy is also subject to U.S. federal, Canadian provincial and U.S.
state regulation under laws relating to consumer protection, pyramid sales,
business opportunity, lotteries and multi-level marketing. Changes in the
regulatory environment for our business could increase the compliance costs we
incur in order to conduct our business or limit the jurisdictions in which we
are able to conduct business.
The business in which we operate is competitive.
There are a number of existing and potential competitors that have the
ability to offer competing products that could adversely affect our ability to
grow. In addition, we may face competition from a growing number of Internet
based legal sites with the potential to offer legal and related services at
competitive prices. Increased competition could have a material adverse effect
on our financial condition and results of operations. See "Description of
Business - Competition".
We are dependent upon the success of our marketing force.
Our principal method of product distribution is through multi-level
marketing. The success of a multi-level marketing force is highly dependent upon
our ability to offer a commission and organizational structure and sales
training and incentive program that enable sales associates to recruit and
develop other sales associates to create an organization. There are a number of
other products and services that use multi-level marketing as a distribution
method and we must compete with these organizations to recruit, maintain and
grow our multi-level marketing force. In order to do so, we may be required to
increase our marketing costs through increases in commissions, sales incentives
or other features, all of which could adversely affect our future earnings. In
addition, the level of confidence of the sales associates in our ability to
perform is an important factor in maintaining and growing a multi-level
marketing force. Adverse financial developments concerning us, including
negative publicity or common stock price declines, could adversely affect our
ability to maintain the confidence of our sales force.
Our stock price may be affected by the significant level of short sellers
of our stock.
As of January 14, 2005, the New York Stock Exchange reported that
approximately 6.6 million shares of our stock were sold short, which constitutes
approximately 42% of our outstanding shares and 62% of our public float,
representing one of the largest short interest percentages of any New York Stock
Exchange listed company. Short sellers expect to make a profit if our shares
decline in value. We have been the subject of a negative publicity campaign from
several known sources of information who support short sellers. The existence of
this short interest position may contribute to volatility in our stock price and
may adversely affect the ability of our stock price to rise if market conditions
or our performance would otherwise justify a price increase.
We have not been able to increase significantly our employee group
membership sales.
Our success in growing membership sales is dependent in part on our ability
to market to employee groups. At December 31, 2004 and 2003, group memberships
represented 25% of total Memberships. Adverse publicity about us may affect our
ability to market successfully to employee groups, particularly larger groups.
There is no assurance that we will be able to increase our group business.
Failure to achieve and maintain effective internal controls could have a
material adverse effect on our business, operating results and stock price.
We have been unable to complete our assessment as of December 31, 2004 of
our internal control procedures as required by Section 404 of the Sarbanes-Oxley
Act, which requires annual management assessments of the effectiveness of our
internal controls over financial reporting and a report by our independent
auditors addressing these assessments. We have also identified material
weaknesses in our internal controls relating to the documentation of our
application based controls and our application controls over our commission
payment systems. As a result, our auditors are unable to render an opinion on
our internal controls or our assessment. See Item 9A- Controls and Procedures. A
material weakness is a significant deficiency, or combination of significant
deficiencies, that result in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Accordingly, we are not be able to ensure that we can conclude on
an ongoing basis that we have effective internal controls over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act. As a result
of our inability to complete this assessment on a timely basis, our business and
operating results could be harmed, investors and others could lose confidence in
our reported financial information, and the trading price of our stock could
drop significantly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Disclosures About Market Risk
Our consolidated balance sheets include a certain amount of assets and
liabilities whose fair values are subject to market risk. Due to our significant
investment in fixed-maturity investments, interest rate risk represents the
largest market risk factor affecting our consolidated financial position.
Increases and decreases in prevailing interest rates generally translate into
decreases and increases in fair values of those instruments. Additionally, fair
values of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment options, relative values of
alternative investments, liquidity of the instrument and other general market
conditions.
As of December 31, 2004, substantially all of our investments were in
investment grade (rated Baa or higher) fixed-maturity investments and
interest-bearing money market accounts including certificates of deposit. We do
not hold any investments classified as trading account assets or derivative
financial instruments.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on our fixed-maturity investment portfolio. It
is assumed that the changes occur immediately and uniformly, with no effect
given to any steps that 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:
Hypothetical change Estimated fair value
in interest rate after hypothetical
Fair value (bp = basis points) change in inerest rate
---------- ------------------- ----------------------
(Dollars in thousands)
Fixed-maturity investments at December 31, 2004 (1).... $ 27,023 100 bp increase $ 25,454
200 bp increase 24,024
50 bp decrease 27,605
100 bp decrease 28,288
Fixed-maturity investments at December 31, 2003 (1).... $ 27,052 100 bp increase $ 26,009
200 bp increase 24,977
50 bp decrease 27,451
100 bp decrease 27,904
- --------------------
(1) Excluding short-term investments with a fair value of $2.5 million and $2.4
million at December 31, 2004 and 2003, respectively.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31, 2004 would reduce
the estimated fair value of our fixed-maturity investments by approximately
$3.0 million at that date. At December 31, 2003, and based on the fair
value of fixed-maturity investments of $27.1 million, an instantaneous 200
basis point increase in market interest rates would have reduced the
estimated fair value of our fixed-maturity investments by approximately
$2.1 million at that date. Our increased sensitivity to rising interest
rates is due to a $9.5 million reduction in floating rate municipal bonds,
of which $8.5 million was reinvested in longer term fixed rate municipal
bonds. The definitive extent of the interest rate risk is not quantifiable
or predictable due to the variability of future interest rates, but we do
not believe such risk is material.
We primarily manage our exposure to interest rate risk by purchasing
investments that can be readily liquidated should the interest rate environment
begin to significantly change.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates. As of
December 31, 2004, we had $45.1 million in notes payable outstanding at interest
rates indexed to the 30 day LIBOR rate that exposes it to the risk of increased
interest costs if interest rates rise. Assuming a 100 basis point increase in
interest rates on the floating rate debt, interest expense would increase by
approximately $450,000. As of December 31, 2004, we had not entered into any
interest rate swap agreements with respect to the term loans or the floating
rate municipal bonds.
Foreign Currency Exchange Rate Risk
Although we are exposed to foreign currency exchange rate risk inherent in
revenues, net income and assets and liabilities denominated in Canadian dollars,
the potential change in foreign currency exchange rates is not a substantial
risk, as approximately 1% of our revenues are derived outside of the United
States.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PRE-PAID LEGAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 2004 and 2003
Consolidated Statements of Income - For the years ended December 31, 2004, 2003
and 2002
Consolidated Statements of Cash Flows - For the years ended December 31, 2004,
2003 and 2002
Consolidated Statements of Changes In Stockholders' Equity - For the years ended
December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule I - Condensed Financial Information of the Registrant
(All other schedules have been omitted since the required information
is not applicable or because the information is included in the
consolidated financial statements or the notes thereon.)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Pre-Paid Legal Services, Inc.
We were engaged to audit management's assessment, included in Management's
Report on Internal Control over Financial Reporting (included in Item 9A of this
Form 10-K), that Pre-Paid Legal Services, Inc. and subsidiaries (the "Company")
maintained effective internal control over financial reporting as of December
31, 2004, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). Management of the Company is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting.
A control deficiency exists when the design or operation of a control does not
allow management or employees, in the normal course of performing their assigned
functions, to prevent or detect misstatements on a timely basis. A significant
deficiency is a control deficiency, or combination of control deficiencies, that
adversely affects a company's ability to initiate, authorize, record, process,
or report external financial data reliably in accordance with generally accepted
accounting principles such that there is more than a remote likelihood that a
misstatement of the entity's annual or interim financial statements that is more
than inconsequential will not be prevented or detected.
A material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. We believe that the following significant deficiencies constitute
material weaknesses under the standards of the Public Company Accounting
Oversight Board (United States).
A material weakness exists as of December 31, 2004, with regard to the lack of
properly documented financially significant automated applications, which
affects management's ability to effectively monitor risks relating to
applications that are significant to financial reporting. In addition, a
material weakness exists as of December 31, 2004, with regard to the Company's
controls over commission processes that could potentially result in
misstatements. The application system that automates processing of commissions
is complex, inadequately documented, and has not been maintained in a manner
that provides assurance that all and only authorized changes have been properly
designed, tested, and used. The material weaknesses did not affect our opinion
on the Company's consolidated financial statements.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Since management was unable to complete its assessment on internal control over
financial reporting as of December 31, 2004, and therefore we were unable to
apply other procedures to satisfy ourselves as to the effectiveness of the
Company's internal control over financial reporting, the scope of our work was
not sufficient to enable us to express, and we do not express, an opinion either
on management's assessment or on the effectiveness of the Company's internal
control over financial reporting.
We have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 2004, and our report dated February
25, 2005, expressed an unqualified opinion on those consolidated financial
statements.
.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 25, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Pre-Paid Legal Services, Inc.
We have audited the accompanying consolidated balance sheets of Pre-Paid Legal
Services, Inc. and subsidiaries (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of income, cash flows and changes
in stockholders' equity for each of the three years in the period ended December
31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pre-Paid Legal
Services, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited Schedule I as of December 31, 2004 and 2003 and for each of
the three years in the period ended December 31, 2004. In our opinion, this
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information therein.
We were also engaged to audit, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Since
management was unable to complete its assessment on internal control over
financial reporting as of December 31, 2004, and therefore we were unable to
apply other procedures to satisfy ourselves as to the effectiveness of the
Company's internal control over financial reporting, the scope of our work was
not sufficient to enable us to express, and we did not express, an opinion
either on management's assessment or on the effectiveness of the Company's
internal control over financial reporting in our report dated February 25, 2005.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 25, 2005
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts and shares in 000's, except par values)
ASSETS
December 31,
---------------------------
2004 2003
------------ -------------
Current assets:
Cash and cash equivalents............................................................ $ 25,972 $ 21,459
Available-for-sale investments, at fair value........................................ 804 10,203
Membership fees receivable........................................................... 4,961 4,575
Inventories.......................................................................... 1,623 857
Refundable income taxes.............................................................. 1,241 331
Deferred member and associate service costs.......................................... 15,420 14,215
Deferred income taxes................................................................ 4,829 4,894
------------ -------------
Total current assets............................................................. 54,850 56,534
Available-for-sale investments, at fair value.......................................... 25,455 15,711
Investments pledged.................................................................... 4,381 4,253
Property and equipment, net............................................................ 51,232 47,004
Deferred member and associate service costs............................................ 2,580 2,375
Other assets........................................................................... 7,566 5,135
------------ -------------
Total assets................................................................... $ 146,064 $ 131,012
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.................................................................. $ 10,340 $ 9,289
Deferred revenue and fees............................................................ 24,585 23,763
Current portion of capital leases payable............................................ 338 19
Current portion of notes payable..................................................... 18,036 18,953
Common stock dividends payable....................................................... 7,796 -
Accounts payable and accrued expenses................................................ 15,451 16,380
------------ -------------
Total current liabilities.......................................................... 76,546 68,404
Capital leases payable............................................................... 1,618 1,687
Notes payable........................................................................ 27,050 24,468
Deferred revenue and fees............................................................ 2,361 3,330
Deferred income taxes................................................................ 4,248 2,104
Other non-current liabilities........................................................ 2,794 1,445
------------ -------------
Total liabilities................................................................ 114,617 101,438
------------ -------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 20,465 and
21,674 issued at December 31, 2004 and 2003, respectively.......................... 205 217
Retained earnings.................................................................... 129,290 127,576
Accumulated other comprehensive income............................................... 980 809
Treasury stock, at cost; 4,852 shares held at December 31, 2004
and 2003, respectively............................................................. (99,028) (99,028)
------------ -------------
Total stockholders' equity....................................................... 31,447 29,574
------------ -------------
Total liabilities and stockholders' equity..................................... $ 146,064 $ 131,012
============ =============
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)
Year Ended December 31,
------------------------------------------
2004 2003 2002
------------- ------------ -------------
Revenues:
Membership fees...................................................... $ 355,461 $ 330,322 $ 308,401
Associate services................................................... 24,901 25,704 37,418
Other................................................................ 5,575 5,287 4,804
------------- ------------ -------------
385,937 361,313 350,623
------------- ------------ -------------
Costs and expenses:
Membership benefits.................................................. 122,280 111,165 103,761
Commissions.......................................................... 118,757 115,386 119,371
Associate services and direct marketing.............................. 29,325 28,929 32,566
General and administrative........................................... 43,742 36,711 33,256
Other, net........................................................... 9,578 8,546 6,685
------------- ------------ -------------
323,682 300,737 295,639
------------- ------------ -------------
Income before income taxes............................................. 62,255 60,576 54,984
Provision for income taxes............................................. 21,478 20,669 18,970
------------- ------------ -------------
Net income............................................................. $ 40,777 $ 39,907 $ 36,014
============= ============ =============
Basic earnings per common share........................................ $ 2.50 $ 2.28 $ 1.83
============= ============ =============
Diluted earnings per common share...................................... $ 2.48 $ 2.27 $ 1.82
============= ============ =============
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)
Year Ended December 31,
----------------------------------
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net income....................................................................... $ 40,777 $ 39,907 $ 36,014
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for deferred income taxes............................................ 2,197 288 102
Depreciation and amortization.................................................. 7,709 7,082 5,272
Tax benefit on exercise of stock options....................................... 775 234 1,104
Compensation expense relating to contribution of stock to ESOP................. 231 220 207
--------- --------- ---------
Cash provided by operating activities before changes in assets and liabilities 51,689 47,731 42,699
(Increase) decrease in accrued Membership income............................... (386) 672 225
(Increase) decrease in inventories............................................. (766) 355 (290)
Increase in refundable income taxes............................................ (910) (56) (275)
(Increase) decrease in deferred member and associate service costs............. (1,410) 40 505
(Increase) decrease in other assets............................................ (2,431) (2,407) 3,234
Increase in accrued Membership benefits........................................ 1,051 679 946
(Decrease) increase in deferred revenue and fees............................... (147) 215 1,827
Increase in other non-current liabilities...................................... 1,349 1,445 -
Decrease in income taxes payable............................................... - - (1,087)
(Decrease) increase in accounts payable and accrued expenses and other......... (776) 3,019 4,289
--------- --------- ---------
Net cash provided by operating activities.................................... 47,263 51,693 52,073
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment............................................ (10,879) (27,012) (15,184)
Purchases of investments - available for sale.................................. (24,135) (15,695) (12,280)
Maturities and sales of investments - available for sale....................... 23,692 5,806 16,390
--------- --------- ---------
Net cash used in investing activities........................................ (11,322) (36,901) (11,074)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt................................................. 19,000 42,700 12,300
Repayments of debt............................................................. (17,335) (9,912) (1,667)
Proceeds from exercise of stock options........................................ 5,176 2,014 5,088
Purchases of treasury stock.................................................... (37,461) (48,292) (50,152)
Proceeds from other financing.................................................. - 1,000 -
Decrease in capital lease obligations.......................................... (808) (1,701) -
--------- --------- ---------
Net cash used in financing activities........................................ (31,428) (14,191) (34,431)
--------- --------- ---------
Net increase in cash and cash equivalents........................................ 4,513 601 6,568
Cash and cash equivalents at beginning of year................................... 21,459 20,858 14,290
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 25,972 $ 21,459 $ 20,858
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amount capitalized.............................. $ 1,752 $ 78 $ -
========= ========= =========
Cash paid for income taxes..................................................... $ 19,429 $ 20,200 $ 19,116
========= ========= =========
Non-cash activities - cash dividends declared but not paid..................... $ 7,796 $ - $ -
========= ========= =========
Non-cash activities - capital lease obligations incurred....................... $ 1,058 $ 2,481 $ 926
========= ========= =========
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts and shares in 000's, except dividend rates and par values)
Common Stock Capital in Treasury Stock
---------------- Excess of Retained Accum. ------------------
Shares Amount Par Value Earnings OCI(1) Shares Amount Total
------- ------- ---------- -------- ------ ------- -------- -------
January 1, 2002............................ 24,806 $ 248 $ 66,223 $ 54,240 $ 186 3,989 $(78,673) $42,224
Contributed to Company's ESOP plan....... 10 - 207 - - - - 207
Exercise of stock options and other...... 314 3 5,085 - - - - 5,088
Income tax benefit related to exercise
of stock options....................... - - 1,104 - - - - 1,104
Subscriptions receivable retired (net
of additional advances of $489 and
interest recognized of $85)............ - - 383 - - - - 383
Net income............................... - - - 36,014 - - - 36,014
Other comprehensive income............... - - - - 104 - - 104
Treasury shares purchased................ - - - - - 2,305 (50,152) (50,152)
Treasury shares retired.................. (1,442) (14) (29,783) - - (1,442) 29,797 -
------- ------- ---------- ---------- ------ ------- -------- -------
December 31, 2002.......................... 23,688 237 43,219 90,254 290 4,852 (99,028) 34,972
Contributed to Company's ESOP plan....... 8 - 220 - - - - 220
Exercise of stock options and other...... 105 - 2,014 - - - - 2,014
Income tax benefit related to exercise
of stock options....................... - - 234 - - - - 234
Net income............................... - - - 39,907 - - - 39,907
Other comprehensive income............... - - - - 519 - - 519
Treasury shares purchased................ - - - - - 2,127 (48,292) (48,292)
Treasury shares retired.................. (2,127) (20) (45,687) (2,585) - (2,127) 48,292 -
------- ------- ---------- ---------- ------ ------- -------- -------
December 31, 2003.......................... 21,674 217 - 127,576 809 4,852 (99,028) 29,574
Contributed to Company's ESOP plan....... 10 - - 231 - - - 231
Exercise of stock options and other...... 234 2 - 5,174 - - - 5,176
Income tax benefit related to exercise
of stock options....................... - - - 775 - - - 775
Net income............................... - - - 40,777 - - - 40,777
Other comprehensive income............... - - - - 171 - - 171
Treasury shares purchased................ - - - - - 1,453 (37,461) (37,461)
Treasury shares retired.................. (1,453) (14) - (37,447) - (1,453) 37,461 -
Common stock dividends incurred.......... - - - (7,796) - - - (7,796)
------- ------- ---------- ---------- ------ ------- -------- -------
December 31, 2004.......................... 20,465 $ 205 $ - $129,290 $ 980 4,852 $ 99,028 $31,447
======== ======== ========== ========== ====== ======== ========= ========
(1) Other Comprehensive Income Year Ended December 31,
-----------------------------
2004 2003 2002
-------- --------- ---------
Net income.................................................................... $ 40,777 $ 39,907 $ 36,014
-------- --------- ---------
Other comprehensive income, net of tax:
Foreign currency translation adjustment..................................... 153 137 85
-------- --------- ---------
Unrealized gains on investments:
Unrealized holding gains arising during period,........................... 116 469 75
Less: reclassification adjustment for gains included in net income...... (98) (87) (56)
-------- --------- ---------
18 382 19
-------- --------- ---------
Other comprehensive income, net of income taxes of $12, $206 and $11 in 2004,
2003 and 2002, respectively................................................. 171 519 104
-------- --------- ---------
Comprehensive income.......................................................... $ 40,948 $ 40,426 $ 36,118
======== ========== ==========
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)
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Pre-Paid Legal Services, Inc. (the "Parent") and subsidiaries
(collectively, the "Company") develops and markets legal service plans (referred
to as "Memberships"). The Memberships sold by us allow members to access legal
services through a network of independent law firms ("provider law firms") under
contract with us. During the third quarter of 2003, we began offering our
Identity Theft Shield to new and existing members at $9.95 per month if added to
a legal service Membership or it may be purchased separately for $12.95 per
month. The nationwide provider of the Identity Theft Shield benefits and the
Provider law firms are paid a fixed fee on a capitated basis to render services
to plan members residing within the state or province in which the provider law
firm is licensed to practice. Because the fixed fee payments by us to benefit
providers do not vary based on the type and amount of benefits utilized by the
member, this capitated arrangement provides significant advantages to us in
managing claims risk. At December 31, 2004, Memberships subject to the capitated
benefit provider arrangement comprised approximately 99% of our active
Memberships. The remaining Memberships, approximately 1%, were primarily sold
prior to 1987 and allow members to locate their own lawyer to provide legal
services available under the Membership with the member's lawyer being
reimbursed for services rendered based on usual, reasonable and customary fees.
Memberships are generally guaranteed renewable and Membership fees are
principally collected on a monthly basis, although approximately 5% of Members
have elected to pay their fees in advance on an annual or semi-annual basis. At
December 31, 2004, we had 1,451,700 Memberships in force with members in all 50
states, the District of Columbia and the Canadian provinces of Ontario, British
Columbia, Alberta and Manitoba. Approximately 90% of the Memberships were in 29
states. The Memberships are marketed by an independent sales force referred to
as "associates".
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("generally accepted accounting principles") which vary in some respects from
statutory accounting principles used when reporting to state insurance
regulatory authorities.
Principles of Consolidation
The consolidated financial statements include our accounts and our wholly
owned subsidiaries, as well as those of PPL Agency, Inc. (See Note 10 for
additional information regarding PPL Agency, Inc.). Our primary subsidiaries
include Pre-Paid Legal Casualty, Inc. ("PPLCI") and Pre-Paid Legal Services,
Inc. of Florida ("PPLSIF"). All significant intercompany accounts and
transactions have been eliminated.
Foreign Currency Translation
The financial results of our Canadian operations are measured in local
currency and then translated into U.S. dollars. All balance sheet accounts have
been translated using the current rate of exchange at the balance sheet date.
Results of operations have been translated using the average rates prevailing
throughout the year.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash, certificates of
deposit, short-term investments, debt and equity securities, Membership fees
receivable, Membership benefits payable, notes payable and accounts payable and
accrued expenses. Fair value estimates have been determined by us, using
available market information and appropriate valuation methodologies. The
carrying value of cash, certificates of deposit, Membership fees receivable,
Membership benefits payable and accounts payable and accrued expenses are
considered to be representative of their respective fair value, due to the short
term nature of these instruments. The carrying value of notes payable is
considered to be representative of their respective fair value, due to the
variable interest rate feature of such notes. The fair value disclosures
relating to debt and equity securities are presented in Note 2.
Cash and Cash Equivalents
We consider all highly liquid unpledged investments with maturities of
three months or less at time of acquisition to be cash equivalents. We place our
temporary cash investments with high credit quality financial institutions. At
times such investments may be in excess of the Federal Deposit Insurance
Corporation (FDIC) insurance limit. We have not experienced any losses in such
accounts and believe we are not exposed to any significant credit risk on cash
and cash equivalents.
Investments
We classify our investments held as available for sale and accounts for
them at fair value with unrealized gains and losses, net of taxes, excluded from
earnings and reported as other comprehensive income. We classify
available-for-sale securities as current if we expect to sell the securities
within one year, or if we intend to utilize the securities for current
operations. All other available-for-sale securities are classified as
non-current.
All investment securities are adjusted for amortization of premiums and
accretion of discounts. Amortization of premiums and accretion of discounts are
recorded to income over the contractual maturity or estimated life of the
individual investment on the level yield method. Gain or loss on sale of
investments is based upon the specific identification method. Income earned on
our investments in certain state and political subdivision debt instruments is
not generally taxable for federal income tax purposes.
Membership fees receivable
Our Membership fees receivable consists of amounts due from members for
services provided pursuant to their Membership contract. Membership fees are
principally collected on a monthly basis. Membership fees receivable is a result
of a portion of members, mostly group members, who pay their Membership fees in
arrears and are recorded at amounts due under the terms of the Membership
agreement. An allowance for doubtful accounts is not necessary as the recorded
amount is adjusted to net realizable value at period-end based on our historical
experience and the short period of time after period-end in which the accounts
will be collected.
Inventories
Inventories include the cost of materials and packaging and are stated at
the lower of cost or market.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the estimated useful lives of the related assets
or the period of the lease, whichever is shorter. Maintenance and repairs are
expensed as incurred and renewals and betterments are capitalized. Interest cost
incurred during the construction period of major facilities is capitalized. The
capitalized interest is recognized as part of the asset to which it relates and
is amortized over the asset's estimated useful life.
Revenue recognition - Membership and Associate Fees
Our principal revenues are derived from Membership fees, most of which are
collected on a monthly basis. Memberships are generally guaranteed renewable and
non-cancelable except for fraud, non-payment of Membership fees or upon written
request. Membership fees are recognized in income ratably over the related
service period in accordance with Membership terms, which generally require the
holder of the Membership to remit fees on an annual, semi-annual or monthly
basis. Approximately 95% of members remit their Membership fees on a monthly
basis, of which approximately 73% are paid in advance and, therefore, are
deferred and recognized over the following month.
We also charge new members, who are not part of an employee group, a $10
enrollment fee. This enrollment fee and related incremental direct and
origination costs are deferred and recognized in income over the estimated life
of a Membership in accordance with SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," ("SAB 101"). We compute the
expected Membership life using more than 20 years of actuarial data. At December
31, 2004, we computed the expected Membership life to be approximately 3 years.
If the expected Membership life were to change significantly, which management
does not expect in the short term, the deferred Membership enrollment fee and
related costs would be recognized over a longer or shorter period.
We derive revenues from services provided to our marketing sales force from
a one-time non-refundable enrollment fee of $65 from each new sales associate
for which we provide initial sales and marketing supplies and enrollment
services to the associate. Revenue from, and costs of, the initial sales and
marketing supplies (approximately $11) are recognized when the materials are
delivered to the associates. The remaining $54 of revenues and related
incremental direct and origination costs are deferred and recognized over the
estimated average active service period of associates which at December 31, 2004
is estimated to be approximately six months. Management estimates the active
service period of an associate periodically based on the average number of
months an associate produces new Memberships including those associates that
fail to write any Memberships. If the active service period of associates
changes significantly, the deferred revenue and related costs will be recognized
over the new estimated active service period.
We also encourage participation in a training program ("Fast Start") that
allows an associate who successfully completes the program to advance through
the various commission levels at a faster rate. Associates participating in this
training program typically pay a fee ranging from zero to $184, depending on
special promotions we implement from time to time. The fee covers the additional
training and materials used in the training program, and is recognized in income
upon completion of the training. Associate services revenue also includes
revenue recognized on the sale of marketing supplies and promotional material to
associates and includes fees related to our eService program for associates. The
eService program provides subscribers Internet based back office support such as
reports, on-line documents, tools, a personal e-mail account and multiple
personalized web sites with "flash" movie presentations.
Member and Associate Costs
Deferred costs represent the incremental direct and origination costs we
incur in enrolling new Members and new associates related to the deferred
revenue discussed above, and that portion of payments made to provider law firms
and associates related to deferred Membership revenue. Deferred costs for
enrolling new members include the cost of the Membership kit and salary and
benefit costs for employees who process Membership enrollments. Deferred costs
for enrolling new associates include training and success bonuses paid to
individuals involved in recruiting the associate and salary and benefit costs of
employees who process associate enrollments. Such costs are deferred to the
extent of the lesser of actual costs incurred or the amount of the related fee
charged for such services. Deferred costs are amortized to expense over the same
period as the related deferred revenue. Deferred costs that will be recognized
within one year of the balance sheet date are classified as current and all
remaining deferred costs are considered noncurrent. Associate related costs are
reflected as associate services and direct marketing, and are expensed as
incurred if not related to the deferred revenue discussed above. These costs
include providing materials and services to associates, Fast Start bonuses,
associate introduction kits, the associate incentive program, group marketing
and marketing services departments (including costs of related travel, marketing
events, leadership summits and international sales convention). Shipping and
handling costs of $2.4 million in 2004 and $2.3 million in 2003 are primarily
included in Associate services and direct marketing costs.
Membership Benefits Liability
The Membership benefits liability represents per capita amounts due the
provider of Identity Theft Shield benefits and provider law firms on
approximately 99% of the Memberships and claims reported but not paid and
actuarially estimated claims incurred but not reported on the remaining
non-provider Memberships which represent approximately 1%. We calculate the
benefit liability on the non-provider Memberships based on completion factors
that consider historical claims experience based on the dates that claims are
incurred, reported to us and subsequently paid. Processing costs related to
these claims are accrued based on an estimate of expenses to process such
claims.
Income Taxes
We account for income taxes using the asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that are recognized in different periods in
our financial statements and tax returns. In estimating future tax consequences,
we generally consider all future events other than future changes in the tax law
or rates that have not been enacted.
Deferred income taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
We record deferred tax assets related to the recognition of future tax benefits
of temporary differences and net operating loss and tax credit carryforwards. To
the extent that realization of such benefits is not considered more likely than
not, we establish a valuation allowance to reduce such assets to the estimated
realizable amount.
Commissions to Associates
Prior to March 1, 2002, we had a level Membership commission schedule of
approximately 27% of Membership fees and advanced the equivalent of up to three
years of commissions on new Membership sales. Effective March 1, 2002, and in
order to offer additional incentives for increased Membership retention rates,
we returned to a differential commission structure with rates of approximately
80% of first year Membership premiums on new Memberships written and variable
renewal commission rates ranging from five to 25% per annum based on the 12
month Membership retention rate of the associate's sales organization. Beginning
in August 2003, we allowed the associate to choose between the level commission
structure and up to three year commission advance or the differential commission
structure with a one year commission advance.
We expense advance commissions ratably over the first month of the related
Membership. As a result of this accounting policy, our advance commission
expenses are recorded in the first month of a Membership and there is no
commission expense recognized for the same Membership during the remainder of
the advance period. Associates must qualify for advance commissions by writing
at least three Memberships.
Long-Lived Assets
We review long-lived assets to be held and used in operations when events
or changes in circumstances indicate that the assets might be impaired. The
carrying value of long-lived assets is considered impaired when the identifiable
undiscounted cash flows estimated to be generated by those assets are less than
their carrying amounts. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the long-lived asset. Fair
value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair values are
reduced by disposal costs.
Stock-Based Compensation
We have a stock-based employee compensation plan, which is described more
fully in Note 13. We account for this plan under the recognition and measurement
principles of 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 had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if we had applied
the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
2004 2003 2002
--------- --------- ---------
Net income, as reported................................................... $ 40,777 $ 39,907 $ 36,014
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects........ (441) (860) (3,201)
--------- --------- ---------
Pro forma net income...................................................... $ 40,336 $ 39,047 $ 32,813
========== ========= =========
<
Earnings per share:
Basic - as reported................................................... $ 2.50 $ 2.28 $ 1.83
Basic - pro forma..................................................... $ 2.47 $ 2.23 $ 1.67
Diluted - as reported................................................. $ 2.48 $ 2.27 $ 1.82
Diluted - pro forma................................................... $ 2.45 $ 2.22 $ 1.66
The estimated fair value of options granted to employees was estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used: no dividend yield; risk-free
interest rate of 2.16% for 2004, 2.38% for 2003 and 3.06% for 2002; expected
life of 3-5 years; and expected volatility for the years ending December 31,
2004, 2003 and 2002 were 52.8%, 55.9% and 59.3%, respectively. Using these
assumptions, the weighted average fair values at date of grant for options
granted during 2004, 2003 and 2002 were $8.74, $8.63 and $9.86, respectively.
The exercise of certain stock options which have been granted gives rise to
compensation which is includable in the taxable income of the option grantee and
deductible by us for federal and state income tax purposes. Such compensation
results from increases in the fair market value of our common stock subsequent
to the date of grant of the applicable exercised stock options, and in
accordance with Accounting Principles Board Opinion No. 25, such compensation is
not recognized as an expense for financial accounting purposes and the related
tax benefits are recorded in capital in excess of par value.
Incentive awards payable
Associates can earn the right to attend an annual incentive trip by meeting
monthly qualification requirements for the entire calendar year and maintaining
certain personal retention rates for the Memberships sold during the calendar
year. Associates can also earn the right to receive additional monthly bonuses
by meeting the monthly qualification requirements for twelve consecutive months
and maintaining certain personal retention rates for the Memberships sold during
that twelve month period. The incentive awards payable at any date is estimated
based on an evaluation of the existing associates that have met the monthly
qualifications, any changes to the monthly qualification requirements, the
estimated cost for each incentive earned and the number of associates that have
historically met the personal retention rates. Changes to any of these
assumptions would directly affect the amount accrued but we do not expect any of
the significant trends impacting this account to change significantly in the
near term.
Legal Contingencies
We account for legal contingencies in accordance with SFAS 5, Accounting
for Contingencies, which requires that a loss contingency should be accrued by a
charge to income if it is probable that an asset has been impaired or a
liability has been incurred and the amount of the loss can be reasonably
estimated. Disclosure of a contingency is required if there is at least a
reasonable possibility that a loss has been incurred. We evaluate, among other
factors, the degree of probability of an unfavorable outcome and the ability to
make a reasonable estimate of the amount of loss. This process requires
subjective judgment about the likely outcomes of litigation. Liabilities related
to most of our lawsuits are especially difficult to estimate due to the nature
of the claims, limitation of available data and uncertainty concerning the
numerous variables used to determine likely outcomes or the amounts recorded.
Litigation expenses are recorded as incurred and we do not accrue for future
legal fees. It is possible that an adverse outcome in certain cases or increased
litigation costs could have an adverse effect upon our financial condition,
operating results or cash flows in particular quarterly or annual periods.
Segment Information
Operating segments are defined as components of an enterprise for which
separate financial information is available that is evaluated regularly by the
chief operating decision maker(s) in deciding how to allocate resources and in
assessing performance. Disclosures about products and services and geographic
areas are presented in Note 16.
New Accounting Standards Issued
In December 2004, the FASB issued SFAS 123R which requires the measurement
of all employee share-based payments to employees, including grants of employee
stock options, using a fair-value-based method and the recording of such expense
in our consolidated statements of income. The accounting provisions of SFAS 123R
are effective for reporting periods beginning after June 15, 2005. We are
required to adopt SFAS 123R in the third quarter of fiscal 2005. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. See "Stock-Based Compensation" above for the
pro forma net income and net income per share amounts, for fiscal 2002 through
fiscal 2004, as if we had used a fair-value-based method similar to the methods
required under SFAS 123R to measure compensation expense for employee stock
incentive awards. Although we have not yet determined whether the adoption of
SFAS 123R will result in amounts that are similar to the current pro forma
disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R
and do not expect the adoption to have a significant adverse impact on our
consolidated statements of income and net income per share.
Note 2 - Investments
A summary of the amortized cost, unrealized gains and losses and fair
values of our investments at December 31, 2004 and 2003 follows:
December 31, 2004
--------------------------------------------------
Amortized Gross Unrealized Fair
Available-for-Sale Cost Gains Losses Value
- ------------------ ----------- -------- -------- ----------
U.S. Government obligations........................ $ 9,784 $ 146 $ (39) $ 9,891
Corporate obligations.............................. 2,982 28 (9) 3,001
Equity securities.................................. 417 663 - 1,080
Obligations of state and political subdivisions.... 13,898 271 (38) 14,131
Certificates of deposit............................ 2,537 - - 2,537
----------- -------- -------- ----------
Total.............................................. $ 29,618 $ 1,108 $ (86) $ 30,640
=========== ======== ========= ==========
December 31, 2003
--------------------------------------------------
Amortized Gross Unrealized Fair
Available-for-Sale Cost Gains Losses Value
- ------------------ ----------- -------- -------- ----------
U.S. Government obligations........................ $ 7,086 $ 155 $ (45) $ 7,196
Corporate obligations.............................. 4,388 337 (14) 4,711
Equity securities.................................. 417 322 - 739
Obligations of state and political subdivisions.... 14,968 203 (25) 15,146
Certificates of deposit............................ 2,375 - - 2,375
----------- -------- -------- ----------
Total.............................................. $ 29,234 $ 1,017 $ (84) $ 30,167
=========== ======== ========= ==========
In determining whether declines in the fair value of available-for-sale
securities below their cost are other than temporary, management considers the
financial condition of the issuer, causes for the decline in fair value (i.e.,
interest rate fluctuations or declines in creditworthiness) and severity and
duration of the decline, among other things. There were no individual securities
with unrealized losses in four consecutive quarters, accordingly no individual
security unrealized losses have been recognized as other than temporary at
December 31, 2004.
The contractual maturities of our available-for-sale investments in debt
securities and certificates of deposit at December 31, 2004 by maturity date
follows:
Amortized
Cost Fair value
----------- -----------
One year or less................................... $ 3,011 $ 3,013
Two years through five years....................... 4,061 4,082
Six years through ten years........................ 14,932 15,084
More than ten years................................ 7,197 7,381
----------- -----------
Total.............................................. $ 29,201 $ 29,560
=========== ===========
Our investment securities are included in the accompanying consolidated
balance sheets at December 31, 2004 and 2003 as follows:
December 31,
-------------------------
2004 2003
----------- -----------
Available-for-sale investments (current)........... $ 804 $ 10,203
Available-for-sale investments (non-current)....... 25,455 15,711
Investments pledged................................ 4,381 4,253
----------- -----------
Total.............................................. $ 30,640 $ 30,167
=========== ===========
We are required to pledge investments to various state insurance
departments as a condition to obtaining authority to do business in certain
states. The fair value of investments pledged to state regulatory agencies is as
follows:
December 31,
-------------------------
2004 2003
----------- -----------
Certificates of deposit............................ $ 2,537 $ 2,375
Obligation of state and political subdivisions..... 131 136
U. S. Government obligations....................... 1,713 1,742
----------- -----------
Total.............................................. $ 4,381 $ 4,253
=========== ============
Proceeds from sales of investments during 2004, 2003 and 2002 were $4.6
million, $4.7 million and $7.6 million, respectively, and resulted in gross
realized gains of $224,000, $154,000 and $95,000 and gross realized losses of
$63,000, $19,000 and $9,000, respectively.
Note 3 - Property and Equipment
Property and equipment is comprised of the following:
December 31,
Estimated ----------------------
Useful Life 2004 2003
------------ ---------- ----------
Equipment, furniture and fixtures.......... 3-10 years $ 31,727 $ 26,109
Computer software.......................... 3 years 9,342 8,370
Building and improvements.................. 20-40 years 36,540 31,107
Automotive and aviation equipment.......... 3 years 3,104 188
Construction in progress................... N/A - 3,002
Land....................................... N/A 170 170
---------- ----------
80,883 68,946
Accumulated depreciation................................. (29,651) (21,942)
---------- ----------
Property and equipment, net.............................. $ 51,232 $ 47,004
========== ==========
Construction in progress includes all construction costs, including
capitalized interest on funds borrowed, associated with the portion of our new
corporate headquarters not placed in service prior to December 31, 2003. As of
December 31, 2004 and 2003, capitalized interest of $706,000 was included in the
cost of the building.
Note 4 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses are comprised of the following:
December 31,
------------------------
2004 2003
---------- ----------
Accounts payable................................... $ 4,873 $ 4,875
Marketing bonuses payable.......................... 1,792 1,049
Incentive awards payable........................... 2,616 4,453
Litigation accrual................................. 3,013 3,263
Other.............................................. 3,157 2,740
---------- ----------
Total.............................................. $ 15,451 $ 16,380
========== ===========
Our litigation accrual increased from $2.0 million at December 31, 2001 to
$3.3 million at December 31, 2002 due to increased litigation during 2002 (See
Note 12) and only insignificant changes occurred during 2003 and 2004.
Note 5 - Notes Payable
On June 11, 2002, we entered into two line of credit agreements totaling
$30 million with a commercial lender providing for a treasury stock purchase
line and a real estate line for funding of our new corporate office complex. The
treasury stock line of credit provided for funding of up to $10 million to
finance treasury stock purchases and has been repaid. The real estate line of
$20 million was fully funded in December 2003 with interest at the 30 day LIBOR
rate plus 2.25%, adjusted monthly, and repayments began in December 2003 with
monthly principal payments of $191,000 plus interest with a balloon payment on
September 30, 2008. The loan is primarily collateralized by a first mortgage on
the 87 acre construction site, the 170,000 square foot home office complex, our
rights to receive Membership fees on a portion of our Memberships and by a
security interest covering all equipment. The interest rate at December 31, 2004
was 4.65%. The real estate loan agreement provides for financial covenants
substantially the same as those described below for the amended stock purchase
loan.
During the 2003 third quarter, we arranged $25 million in additional
financing for treasury stock purchases from a group of banks, consisting of Bank
of Oklahoma, Comerica Bank and First United Bank and Trust. The $25 million was
fully funded on November 30, 2003 with scheduled monthly principal payments of
$1.4 million beginning December 31, 2003 through May 31, 2005 with interest at
the 30 day LIBOR rate plus three percent, adjusted monthly. During August 2004,
we amended the terms of the loan agreement with these banks to increase the loan
amount to $31.5 million and allow for additional treasury stock purchases of up
to $31.5 million. We fully funded the loan on September 30, 2004 which resulted
in a net increase in credit of $19.0 million above the outstanding balance of
our existing treasury stock term loan of $12.5 million at the time. Proceeds of
this loan together with existing cash resources were used to purchase treasury
shares. The amortization of the amended loan has been modified to provide for
repayment over 24 months in equal monthly principal payments beginning October
31, 2004 and ending September 30, 2006 with interest at the 30 day LIBOR rate
plus 3%. The interest rate at December 31, 2004 was 5.31%. The monthly principal
payment will be $1.3 million compared to the monthly payment on the prior loan
of $1.4 million. The amended loan agreement continues all of the covenants of
the prior agreement with certain modifications to permit additional stock
purchases and/or dividends while the loan is outstanding generally in an amount
no greater than 50% of net income and modifies the debt service coverage ratio
definition slightly.
The loan is primarily collateralized by our rights to receive Membership
fees on a portion of our Memberships and a pledge of the stock of our
subsidiaries. The definitive agreement contains covenants prohibiting us from
pledging assets, incurring additional indebtedness and selling assets. In
addition to customary events of default, an additional event of default occurs
if Harland C. Stonecipher ceases to be our chairman and Chief Executive Officer
for 90 days. Pre-payment of the loan is permitted. The loan agreements contain
the following financial covenants: (a) our quarterly Debt Coverage Ratio (as
defined in the loan agreements) shall not be less than 125%; (b) our
cancellation rate on contracts less than or equal to twelve months old shall not
exceed 45% on a trailing 12 month basis, calculated on a quarterly basis; (c) we
shall maintain a rolling twelve month average retention rate of Membership
contracts in place for greater than eighteen months of not less than 70%,
calculated on a monthly basis; (d) we shall not pay dividends or purchase
treasury shares, which during any fiscal quarter, on a combined basis, would
exceed fifty percent (50%) of our cumulative net income for all previous fiscal
quarters beginning July 1, 2004 less any dividends or stock purchases in such
previous fiscal quarters, with provisions for carry forwards of unused
availability; and, (e) our tangible net worth shall not fall below $10 million
for the period of time dating from September 30, 2004, $15 million beginning
March 31, 2005 and $25 million beginning December 31, 2005. We were in
compliance with the above covenants at December 31, 2004.
A schedule of outstanding balances as of December 31, 2004 and 2003 is as
follows:
December 31,
--------------------------------
2004 2003
-------------- --------------
Real estate line of credit................. $ 17,524 $ 19,810
Stock purchase line of credit.............. 27,562 23,611
-------------- --------------
Total notes payable........................ 45,086 43,421
Less: Current portion of notes payable..... (18,036) (18,953)
-------------- --------------
Long term portion.......................... $ 27,050 $ 24,468
============== ===============
A schedule of future maturities as of December 31, 2004 is as follows:
Repayment Schedule commencing January 2005:
Year 1..................................... $ 18,036
Year 2..................................... 14,098
Year 3..................................... 2,286
Year 4..................................... 10,666
----------------
Total notes payable........................ $ 45,086
================
Note 6 - Income Taxes
The provision for income taxes consists of the following:
Year Ended December 31,
----------------------------------
2004 2003 2002
--------- --------- ---------
Current.................................... $ 19,281 $ 20,381 $ 18,868
Deferred................................... 2,197 288 102
--------- --------- ---------
Total provision for income taxes......... $ 21,478 $ 20,669 $ 18,970
========= ========= =========
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate is as follows:
Year Ended December 31,
----------------------------------
2004 2003 2002
--------- --------- ---------
Statutory Federal income tax rate.......... 35.0% 35.0% 35.0%
Tax exempt interest........................ (.2) (.1) (.1)
Wage tax credits........................... (.5) (.5) (.4)
Other...................................... .2 (.3) -
--------- --------- ---------
Effective income tax rate.................. 34.5% 34.1% 34.5%
========= ========= =========
Deferred tax liabilities and assets at December 31, 2004 and 2003 are
comprised of the following:
December 31,
----------------------
2004 2003
---------- ----------
Deferred tax liabilities relating to:
Unrealized investment gains, net................. $ 399 $ 326
Deferred member and associate service costs...... 7,020 6,337
Depreciation..................................... 4,854 2,695
---------- ----------
Total deferred tax liabilities................ 12,273 9,358
---------- ----------
Deferred tax assets relating to:
Expenses not yet deducted for tax purposes....... 2,265 1,798
Deferred revenue and fees........................ 10,509 10,350
Other............................................ 80 -
---------- ----------
Total deferred tax assets..................... 12,854 12,148
---------- ----------
Net deferred tax asset........................... $ 581 $ 2,790
========== ==========
Our deferred tax assets and liabilities are included in the accompanying
consolidated balance sheets at December 31, 2004 and 2003 as follows.
December 31,
----------------------
2004 2003
---------- ----------
Deferred income taxes (current asset).............. $ 4,829 $ 4,894
Deferred income taxes (non-current liability)...... (4,248) (2,104)
---------- ----------
Net deferred tax asset............................. $ 581 $ 2,790
========== ==========
A significant portion of the deferred tax assets recognized relate to
deferred revenue and fees. A valuation allowance was not recorded since we
believe that there was sufficient positive evidence to support our conclusion
not to record a valuation allowance. Management believes that we will realize
the tax benefit of these deferred tax assets in the future because of our
history of pre-tax income. However, there can be no assurance that we will
generate taxable income or that all of our deferred tax assets will be utilized.
Note 7 - Stockholders' Equity
We announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of our common stock. The
Board of Directors has increased such authorization from 500,000 shares to
10,000,000 shares during subsequent board meetings. At December 31, 2004, we had
purchased 9.1 million treasury shares under these authorizations for $210.9
million, an average price of $23.23 per share. At December 31, 2004 and 2003, we
had 15.6 million and 16.8 million common shares outstanding, respectively, net
of treasury shares.
We have lines of credit (see Note 5) that prohibit payment of cash
dividends on our common stock in excess of 50% of net income. Any decision by
our Board of Directors to pay cash dividends in the future will depend upon,
among other factors, our earnings, financial condition, capital requirements and
approval from our lender for any dividends in excess of 50% of net income. In
addition, our ability to pay dividends is dependent in part on our ability to
derive dividends from our subsidiaries. The payment of dividends by PPLCI is
restricted under the Oklahoma Insurance Code to available surplus funds derived
from realized net profits and requires the approval of the Oklahoma Insurance
Commissioner for any dividend representing more than 10% of such accumulated
available surplus or an amount representing more than the previous years' net
profits. PPLSIF is similarly restricted pursuant to the insurance laws of
Florida. At December 31, 2004, PPLSIF did not have funds available for payment
of substantial dividends without the prior approval of the insurance
commissioner. While PPLCI had surplus funds available for payment of an ordinary
dividend during 2004, no dividends were declared or paid during 2004 or 2003. At
December 31, 2004 PPLCI had approximately $4.1 million available for payment of
an ordinary dividend. At December 31, 2004 the amount of restricted net assets
of consolidated subsidiaries was $21.3 million.
Note 8 - Other Expenses, net
The components of Other expenses, net are as follows:
Year Ended December 31,
---------------------------------
2004 2003 2002
--------- --------- --------
Depreciation............................... $ 7,709 $ 7,082 $ 5,273
Premium taxes.............................. 1,698 2,703 2,175
Interest expense........................... 1,990 123 -
Litigation accrual expense................. (121) - 1,290
Interest income............................ (1,698) (1,362) (2,053)
--------- --------- --------
Total Other expenses, net................ $ 9,578 $ 8,546 $ 6,685
========= ========== =========
Interest expense is net of capitalized interest of $0, $586,000 and
$120,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
Note 9 - Comprehensive Income
Comprehensive income is comprised of two subsets - net income and other
comprehensive income. Included in other comprehensive income for us are foreign
currency translation adjustments and unrealized gains on investments. These
items are accumulated within the Statements of Changes in Stockholders' Equity
under the caption "Accumulated Other Comprehensive Income". As of December 31,
accumulated other comprehensive income, as reflected in the Consolidated
Statements of Changes in Stockholders' Equity, was comprised of the following:
2004 2003
-------- --------
Foreign currency translation adjustments.................................. $ 356 $ 203
Unrealized gains on investments, net of income taxes of $399 and $326..... 624 606
-------- --------
Accumulated other comprehensive income.................................. $ 980 $ 809
======== =========
Note 10 - Related Party Transactions
Our Chairman, Harland C. Stonecipher, is the owner of PPL Agency, Inc.
("Agency"). We have agreed to indemnify and hold harmless the Chairman for any
personal losses incurred as a result of his ownership of this corporation and
any income earned by Agency accrues to us. We provide management and
administrative services for Agency, for which it receives specified management
fees and expense reimbursements.
Agency's financial position and results of operations are included in our
financial statements on a combined basis. Agency earned commissions, net of
amounts paid directly to its agents by the underwriter, during 2004, 2003 and
2002 of $220,000, $119,000 and $138,000, respectively, through its sales of
insurance products of an unaffiliated company. Agency had net income of
$127,000, $20,000 and $33,000 for the years ended December 31, 2004, 2003 and
2002, respectively, after incurring commissions earned by the Chairman of
$55,000, $57,000 and $58,000, respectively, and annual management fees paid to
us of $36,000 for 2004, 2003 and 2002.
Mr. Stonecipher and his wife, Shirley A. Stonecipher, own Stonecipher
Aviation LLC ("SA") and Mr. and Mrs. Stonecipher together with Wilburn L. Smith,
our National Marketing Director and formerly our President and one of our
directors , own S & S Aviation LLC ("S&SA"). We had agreed to reimburse SA and
S&SA for certain expenses pertaining to trips made by Company personnel for
Company business purposes using aircraft owned by SA and S&SA. Such
reimbursement represents the pro rata portion of direct operating expenses, such
as fuel, maintenance, pilot fees and landing fees, incurred in connection with
such aircraft based on the relative number of flights taken for Company business
purposes versus the number of other flights during the applicable period. No
reimbursement is made for depreciation, capital expenditures or improvements
relating to such aircraft. During 2004, 2003 and 2002, we paid $329,000,
$307,000 and $397,000, respectively, to SA and paid $561,000, $592,000 and
$436,000 to S&SA during 2004, 2003 and 2002, respectively, as reimbursement for
such transportation expenses.
On December 9, 2004, we entered into and consummated an agreement with SA
to purchase a 1980 Beech King Air 200 airplane for a purchase price of
$1,083,355. On the same date, we entered into and consummated an agreement to
purchase a 1983 Mitsubishi MU-300 jet airplane owned by S&SA for a purchase
price of $1,230,200. In connection with the purchase of this plane, we also
agreed to pay the expenses associated with a pending avionics upgrade,
inspection and maintenance of approximately $450,000. On the same date, we also
purchased the leasehold interest in a hangar building located at the Ada
Municipal airport which is used as the hangar facility for the two purchased
planes for a purchase price of $465,000 and also purchased certain equipment and
furniture used at the facility for a purchase price of $9,272. The hangar and
related equipment was purchased from SA, which constructed the hangar and
acquired the equipment at its expense. Under the terms of the lease, which we
assumed, which expires in 2027, we are obligated to pay annual rental of $10 per
year. The purchase prices were paid in cash from our existing cash resources.
The Audit Committee of the Board of Directors and the full Board, with Mr.
Stonecipher abstaining, approved all of the transactions. The prices for each of
the planes and hangar were determined by independent appraisals and the related
equipment and furniture was purchased for book value, which approximates fair
market value. The Board determined that it was appropriate for us to acquire
ownership of the airplanes and hangar in light of the fact that the planes are
used almost exclusively in furtherance of our business. We will be reimbursed
for personal use of either aircraft, if any.
John W. Hail, one of our directors, served as our Executive Vice President,
Director and Agency Director from July 1986 through May 1988 and also served as
Chairman of the Board of Directors of TVC Marketing, Inc., which was our
exclusive marketing agent from April 1984 through September 1985. Pursuant to
agreements between Mr. Hail and us entered into during the period in which Mr.
Hail was one of our executive officers , Mr. Hail receives override commissions
from renewals of certain Memberships initially sold by us during such period.
During 2004, 2003 and 2002, such override commissions on renewals totaled
$79,000, $81,000 and $87,000, respectively. Mr. Hail also owns interests ranging
from 12% to 100% in corporations not currently affiliated with us, including TVC
Marketing, Inc., but which were engaged in the marketing of our legal service
Memberships and which earn renewal commissions from Memberships previously sold.
These entities earned renewal commissions of $557,000, $552,000 and $526,000
during 2004, 2003 and 2002, respectively, of which $322,000, $300,000 and
$266,000, respectively, was passed through as commissions to their sales agents.
During 2003, we terminated a marketing services agreement with a senior
marketing associate, and commenced an action in the District Court of Pontotoc
County, Oklahoma alleging breach of contract and seeking to collect $1.4 million
in outstanding notes receivable arising from loans made by us at various times
between 1998 and 2001. Due to uncertainties about the full recoverability of
these notes, we recorded a reserve and bad debt expense of $515,000 in 2003 to
write down the notes to our estimate of their recoverable value. Each quarter,
we evaluate the recoverability of these notes receivable and adjust the reserve
accordingly. During 2004 we increased the reserve by $19,000 to $534,000 at
December 31, 2004.
Note 11 - Leases
At December 31, 2004, we were committed under noncancelable operating and
capital leases, principally for buildings and equipment. Aggregate rental
expense under all operating leases was $79,000, $93,000 and $174,000 in 2004,
2003 and 2002, respectively.
Future commitments commencing January 2005 related to noncancelable
operating leases are as follows:
Year Ended December 31,
2005............................................... $ 86
2006............................................... 86
2007............................................... 85
2008............................................... 62
2009............................................... 5
Total operating lease commitments.................. ------------
$ 324
============
Future minimum lease payments commencing in January 2005 related to capital
leases are as follows:
Year Ended December 31,
2005............................................... $ 420
2006............................................... 420
2007............................................... 420
2008............................................... 81
2009............................................... 81
Thereafter......................................... 1,648
-----------
Total minimum lease payments....................... $ 3,070
Less: Imputed interest............................. (1,114)
-----------
Present value of net minimum lease payments........ 1,956
Less: Current portion.............................. (338)
-----------
Non current portion of capital leases payable...... $ 1,618
===========
We entered into two capital leases near the end of 2002 and one early
in 2003 to acquire equipment and buildings. These capital leases expire at
various dates through 2032. The capital lease assets are included in property
and equipment as follows at December 31, 2004 and December 31, 2003.
December 31,
2004 2003
------------- -----------
Equipment, furniture and fixtures.................. $ 1,670 $ 2,094
Buildings and improvements......................... 314 314
------------- -----------
1,984 2,408
Less: accumulated amortization..................... (91) (519)
------------- -----------
Net capital lease assets........................... $ 1,893 $ 1,889
============= ===========
Note 12 - Commitments and Contingencies
We and various of our executive officers have been named as defendants in a
putative securities class action originally filed in the United States District
Court for the Western District of Oklahoma in early 2001 seeking unspecified
damages on the basis of allegations that we issued false and misleading
financial information, primarily related to the method we used to account for
commission advance receivables from sales associates. On March 5, 2002, the
Court granted our motion to dismiss the complaint, with prejudice, and entered a
judgment in favor of the defendants. Plaintiffs thereafter filed a motion
requesting reconsideration of the dismissal which was denied. The plaintiffs
have appealed the judgment and the order denying their motion to reconsider the
judgment to the Tenth Circuit Court of Appeals. In August 2002 the lead
institutional plaintiff withdrew from the case, leaving two individual
plaintiffs as lead plaintiffs on behalf of the putative class. As of December
31, 2003, the briefing in the appeal had been completed. On January 14, 2004
oral argument was held in the appeal and as of February 22, 2005, a decision was
pending. We are unable to predict when a decision will be made on this appeal,
and the ultimate outcome of the case is not determinable.
Beginning in the second quarter of 2001 multiple lawsuits were filed
against us, certain officers, employees, sales associates and other defendants
in various Alabama and Mississippi state courts by current or former members
seeking actual and punitive damages for alleged breach of contract, fraud and
various other claims in connection with the sale of Memberships. During 2004,
there were at one time as many as 30 separate lawsuits involving approximately
285 plaintiffs in Alabama. As of February 22, 2005, as a result of dismissals,
summary judgments, or settlements for nominal amounts, we were aware of
approximately 15 separate lawsuits involving approximately 56 plaintiffs that
have been filed in multiple counties in Alabama. As of February 22, 2005, we
were aware of 16 separate lawsuits involving approximately 426 plaintiffs in
multiple counties in Mississippi. Certain of the Mississippi lawsuits also name
our former provider attorney in Mississippi as a defendant. Proceedings in
several of the eleven cases which name our provider attorney as a defendant had
been stayed pending the Mississippi Supreme Court's ruling on the Pre-Paid
defendants' appeal of a trial court's granting of a partial summary judgment
that the action is not required to be submitted to arbitration. On April 1,
2004, the Mississippi Supreme Court affirmed the trial court's partial summary
judgment that arbitration should not be had in one of the cases on appeal.
Pre-Paid asked the Mississippi Supreme Court to rehear that issue but that
motion was denied on June 3, 2004 and Pre-Paid sought certiorari on that issue
with the United States Supreme Court on September 1 and 8, 2004 which was
denied. At least three complaints have been filed by the law firm representing
plaintiffs in eleven of the cases on behalf of certain of the Mississippi
plaintiffs and others with the Attorney General of Mississippi in March 2002,
December 2002 and August 2003. We have responded to the Attorney General's
requests for information with respect to these complaints, and as of February
22, 2005, we were not aware of any further actions being taken by the Attorney
General. In Mississippi, we filed lawsuits in the United States District Court
for the Southern and Northern Districts of Mississippi in which we seek to
compel arbitration of the various Mississippi claims under the Federal
Arbitration Act and the terms of our Membership agreements. One of the federal
courts has ordered arbitration of a case involving 8 plaintiffs. These cases are
all in various stages of litigation, including trial settings in Alabama in
April 2005, and in Mississippi in May 2005, and seek varying amounts of actual
and punitive damages. The first trial in Mississippi on these cases resulted in
a unanimous jury verdict in our favor, including other named defendants, on all
claims on October 19, 2004, while the second trial in Mississippi resulted in an
insubstantial plaintiff's verdict on February 15, 2005. Although the amount of
Membership fees paid by the plaintiffs in the Mississippi cases is $500,000 or
less, certain of the cases seek damages of $90 million. Additional suits of a
similar nature have been threatened. The ultimate outcome of any particular case
is not determinable.
On April 19, 2002, counsel in certain of the above-referenced Alabama suits
also filed a similar suit against us and certain of our officers in the District
Court of Creek County, Oklahoma on behalf of Jeff and Jana Weller individually
and doing business as Hi-Tech Auto making similar allegations relating to our
Memberships and seeking unspecified damages on behalf of a "nationwide" class.
The Pre-Paid defendants' preliminary motions in this case were denied, and on
June 17, 2003, the Oklahoma Court of Civil Appeals reversed the trial court's
denial of the Pre-Paid defendants' motion to compel arbitration, finding that
the trial court erred when it denied Pre-Paid's motion to compel arbitration
pursuant to the terms of the valid Membership contracts, and remanded the case
to the trial court for further proceedings consistent with that opinion. On
December 3, 2004, the District Court ordered the plaintiffs to proceed with the
arbitration. The ultimate outcome of this case is not determinable.
On June 29, 2001, an action was filed against us in the District Court of
Canadian County, Oklahoma. In 2002, the petition was amended to add five
additional named plaintiffs and to add and drop certain claims. This action was
originally a putative class action brought by Gina Kotwitz, later adding, George
Kotwitz, Rick Coker, Richard Starke, Jeff Turnipseed and Aaron Bouren, on behalf
of our sales associates. The amended petition seeks injunctive and declaratory
relief, with such other damages as the court deems appropriate, for alleged
violations of the Oklahoma Uniform Consumer Credit Code in connection with our
commission advances, and seeks injunctive and declaratory relief regarding the
enforcement of certain contract provisions with sales associates, including a
request stated in June 2003 for the imposition of a constructive trust as to
earned commissions applied to the reduction of debit balances and disgorgement
of all earned renewal commissions applied to the reduction of debit balances. On
September 23, 2003 the court entered an order dismissing the class action
allegations upon the motion of the plaintiffs. The order provides that the
action will proceed only on an individual basis, and that the hearing on
plaintiffs' motion for class certification previously set for February 2004 was
cancelled. Oral argument on our motion for summary judgment was held on July 2,
2004 and on December 17, 2004 the District Court granted our motion for summary
judgment. On January 27, 2005 three of the five plaintiffs filed a motion to
vacate and/or for new trial. This motion is set for hearing on April 22, 2005.
The claims of the remaining two plaintiffs have been dismissed with prejudice.
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 us and certain executive
officers. This action is a putative class action seeking unspecified damages
filed on behalf of our sales associates and alleges that the marketing plan
offered by us constitutes a security under the Securities Act of 1933 and seeks
remedies for failure to register the marketing plan as a security and for
violations of the anti-fraud provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934 in connection with representations alleged to
have been made in connection with the marketing plan. The complaint also alleges
violations of the Oklahoma Securities Act, the Oklahoma Business Opportunities
Sales Act, breach of contract, breach of duty of good faith and fair dealing and
unjust enrichment and violation of the Oklahoma Consumer Protection Act and
negligent supervision. This case is subject to the Private Litigation Securities
Reform Act. Pursuant to the Act, the Court has approved the named plaintiffs and
counsel and an amended complaint was filed in August 2002. The Pre-Paid
defendants filed motions to dismiss the complaint and to strike the class action
allegations on September 19, 2002, and discovery in the action was stayed
pending a ruling on the motion to dismiss. On July 24, 2003, the Court granted
in part and denied in part the Pre-Paid defendants' motion to dismiss. The
claims asserted under the Securities Exchange Act of 1934 and the Oklahoma
Securities Act were dismissed without prejudice. The motion was denied as to the
remaining claims. On September 8, 2004, the Court denied plaintiffs motion for
class certification. Plaintiffs petitioned the Tenth Circuit Court of Appeals
for permission to appeal the class certification ruling, and the Tenth Circuit
Court of Appeals denied the petition for interlocutory appeal. The ultimate
outcome of this case is not determinable.
We are a defendant in various other legal proceedings that are routine and
incidental to our business. We will vigorously defend our interests in all
proceedings in which it is named as a defendant. We also receive periodic
complaints or requests for information from various state and federal agencies
relating to our business or the activities of our marketing force. We promptly
respond to any such matters and provide any information requested.
While the ultimate outcome of these proceedings is not determinable, we do
not currently anticipate that these contingencies will result in any material
adverse effect to our financial condition or results of operation, unless an
unexpected result occurs in one of the cases. The costs of the defense of these
various matters are reflected as a part of general and administrative expense in
the consolidated statements of income. We have established an accrued liability
we believes will be sufficient to cover estimated damages in connection with
various cases (exclusive of ongoing defense costs which are expensed as
incurred), which at December 31, 2004 was $3.0 million. We believe we have
meritorious defenses in all pending cases and will vigorously defend against the
plaintiffs' claims. However, it is possible that an adverse outcome in certain
cases or increased litigation costs could have an adverse effect upon our
financial condition, operating results or cash flows in particular quarterly or
annual periods.
Near the end of 2002, we committed to acquire significant new computer
hardware to supplement our current information technology platform and provide
redundancy for our critical business systems. We paid approximately $1.6 million
in 2003 and received a $1 million vendor rebate during 2003 as a result of this
commitment. The commitment calls for us to expend approximately $800,000 in
2005.
Note 13 - Stock Options, Stock Ownership Plan and Benefit Plan
We have a stock option plan (the "Plan") under which the Board of Directors
(the "Board") or our Stock Option Committee (the "Committee") may grant options
to purchase shares of our common stock. The Plan permits the granting of options
to our directors, officers and employees to purchase our common stock at not
less than the fair value at the time the options are granted. The Plan provides
for option grants to acquire up to 3,000,000 shares and permits the granting of
incentive stock options as defined under Section 422 of the Internal Revenue
Code at an exercise price for each option equal to the market price of our
common stock on the date of the grant and a maximum term of 10 years. Options
not qualifying as incentive stock options under the Plan have a maximum term of
15 years. The Board or Committee determines vesting of options granted under the
Plan. No options may be granted under the Plan after December 12, 2012.
The Plan previously provided for automatic grants of options to our
non-employee directors. Under the Plan, each incumbent non-employee director and
any new non-employee director received options to purchase 10,000 shares of
common stock on March 1 of each year. The options granted each year were
immediately exercisable as to 2,500 shares and vested in additional increments
of 2,500 shares on the following June 1st, September 1st, and December 1st in
the year of grant, subject to continued service by the non-employee director
during such periods. Options granted to non-employee directors under the Plan
have an exercise price equal to the closing price of the common stock on the
date of grant. These automatic grants of options to non-employee directors were
eliminated effective January 1, 2005, and therefore no further grants to
non-employee directors will be made.
Also included below are stock options that have been issued to our Regional
Vice Presidents ("RVPs") in order to encourage stock ownership by our RVPs and
to increase the proprietary interest of such persons in our growth and financial
success. These options have been granted periodically to RVPs since 1996.
Options are granted at fair market value at the date of the grant and are
generally immediately exercisable for a period of three years or within 90 days
of termination, whichever occurs first. There were 36,751, 106,002 and 244,679
total options granted to RVPs in the years ended December 31, 2004, 2003 and
2002, respectively. We discontinued the RVP stock option grants immediately
after the 2003 fourth quarter stock options were awarded in the first quarter of
2004.
A summary of the status of our total stock option activity as of December
31, 2004, 2003 and 2002, and for the years ended on those dates is presented
below:
2004 2003 2002
---------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- --------- ----------- ---------- ---------- ----------
Outstanding at beginning of year..... 1,275,499 $ 24.06 1,498,392 $ 26.09 1,336,636 $ 25.09
Granted.............................. 76,751 23.42 153,502 20.99 499,679 22.54
Exercised............................ (234,170) 22.10 (105,514) 25.42 (329,229) 16.73
Terminated........................... (255,590) 26.27 (270,881) 35.45 (8,694) 23.31
----------- --------- ----------- ---------- ---------- ----------
Outstanding at end of year........... 862,490 $ 23.88 1,275,499 $ 24.06 1,498,392 $ 26.09
----------- --------- ----------- ---------- ---------- ----------
Options exercisable at year end...... 837,490 $ 23.99 1,206,124 $ 24.18 1,378,392 $ 26.54
=========== ========= =========== ========== ========== ==========
The following table summarizes information about stock options outstanding
at December 31, 2004:
Weighted Average
Range of Exercise Remaining Weighted Average
Prices Number Outstanding Contractual Life Exercise Price
-------------------- ------------------ ----------------- -----------------
$15.65 - $20.16 284,772 2.2 $ 17.56
$20.24 - $24.20 277,098 2.4 23.67
$24.46 - $32.81 300,620 0.8 30.07
-------------------- ------------------ ----------------- -----------------
862,490 1.8 $ 23.88
================== ================= =================
The following table summarizes information about stock options exercisable
at December 31, 2004:
Weighted Average
Range of Exercise Remaining Weighted Average
Prices Number Outstanding Contractual Life Exercise Price
-------------------- ------------------ ----------------- -----------------
$15.65 - $20.16 264,772 1.9 $ 17.43
$20.24 - $24.20 274,598 2.4 23.69
$24.46 - $32.81 298,120 0.8 30.10
-------------------- ------------------ ----------------- -----------------
837,490 1.7 $ 23.99
================== ================= =================
During 1988, we adopted an employee stock ownership plan. Under the plan,
employees may elect to defer a portion of their compensation by making
contributions to the plan. Up to seventy-five percent of the contributions made
by employees may be used to purchase Company common stock. At our option, we may
make matching contributions to the plan, and recorded expense during 2004, 2003
and 2002 of $232,000, $220,000 and $207,000, based on annual contributions of
Company stock of 10,100 shares, 8,220 shares and 10,000 shares, respectively.
In November 2002, we adopted a deferred compensation plan, which permits
executive officers and key employees to defer receipt of a portion of their
compensation. Deferred amounts accrue hypothetical returns based upon investment
options selected by the participant. Deferred amounts are paid in cash based on
the value of the investment option and are generally payable following
termination of employment in a lump sum or in installments as elected by the
participant, but the plan permits on demand distributions, which are subject to
a 10% penalty, and provides for financial hardship distributions, distributions
in the event of total disability or death and distributions upon a change in
control. The plan also provides for a death benefit of $500,000 for each
participant. Although the plan is unfunded and represents an unsecured liability
of ours to the participants, during 2003, we purchased variable life insurance
policies owned by us to insure the lives of the group of participants and to
finance our obligations under the plan. As of December 31, 2004 and 2003, we had
an aggregate deferred compensation liability of $2.8 million and $1.4 million,
respectively, which is included in other non-current liabilities. At December
31, 2004, the cash value of the underlying insurance policies owned by us was
$2.4 million and included in other assets.
Note 14 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share are computed by dividing net income
by the weighted average number of shares of common stock and dilutive
potential common shares outstanding during the year. The weighted average
number of common shares is also increased by the number of dilutive
potential common shares issuable on the exercise of options less the number
of common shares assumed to have been purchased with the proceeds from the
exercise of the options pursuant to the treasury stock method; those
purchases are assumed to have been made at the average price of the common
stock during the respective period.
Year Ended December 31,
-----------------------------
Basic Earnings Per Share: 2004 2003 2002
-------- --------- ---------
Earnings:
Income from continuing operations............................................. $ 40,777 $ 39,907 $ 36,014
======== ========= =========
Shares:
Weighted average shares outstanding........................................... 16,313 17,530 19,674
======== ========= =========
Diluted Earnings Per Share:
Earnings:
Income from continuing operations after assumed conversions................... $ 40,777 $ 39,907 $ 36,014
======== ========= =========
Shares:
Weighted average shares outstanding........................................... 16,313 17,530 19,674
Assumed exercise of options................................................... 145 69 90
-------- --------- ---------
Weighted average number of shares, as adjusted................................ 16,458 17,599 19,764
======== ========= =========
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 218,000 shares,
799,000 shares and 921,000 shares with an average exercise price of $32.05,
$27.48 and $29.76, were excluded from the calculation of diluted earnings per
share for the years ended December 31, 2004, 2003 and 2002, respectively.
Note 15 - Selected Quarterly Financial Data (Unaudited)
Following is a summary of the unaudited interim results of operations for
the years ended December 31, 2004 and 2003.
Selected Quarterly Financial Data
(In thousands, except per share amounts)
2004 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ----------- ------------ ------------ ------------
Revenues........................................... $ 94,609 $ 95,429 $ 96,853 $ 99,046
Net income......................................... 10,622 10,006 9,657 10,492
Basic income per common share (1):
Net Income....................................... $ .63 $ .61 $ .59 $ .68
Diluted income per common share (1):
Net Income....................................... $ .63 $ .60 $ .58 $ .66
2003
Revenues........................................... $ 90,320 $ 89,642 $ 90,024 $ 91,327
Net income......................................... 12,034 10,043 9,438 8,392
Basic income per common share (1):
Net Income....................................... $ .67 $ .57 $ .54 $ .49
Diluted income per common share (1):
Net Income....................................... $ .67 $ .57 $ .54 $ .49
(1) The sum of EPS for the four quarters may differ from the annual EPS due to
rounding and the required method of computing weighted average number of
shares in the respective periods.
Note 16 - Segment Information
Substantially all of our business is currently conducted in the United
States. Revenues from our Canadian operations for 2004, 2003 and 2002 were $4.7
million, $4.5 million and $4.0 million, respectively. We have no significant
long-lived assets located in Canada.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Controls and Procedures
Based on their evaluation as of December 31, 2004, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were sufficiently effective to ensure that the
information required to be disclosed by us in this Annual Report on Form 10-K
was recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and instructions for Form 10-K.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934, as amended). Our management is also
required to assess the effectiveness of our internal control over financial
reporting as of December 31, 2004. In making this assessment, our management
uses the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") in Internal Control-Integrated Framework.
During the course of 2004 we engaged in a substantial effort to complete
the documentation and testing of our internal control over financial reporting
in order to permit us to make an assessment of the effectiveness of our internal
control as of December 31, 2004 as required by Section 404 of the Sarbanes-Oxley
Act and applicable rules of the Securities and Exchange Commission and the
Public Company Accounting Oversight Board. In the fall of 2004, after
discussions with our independent registered public accounting firm, Grant
Thornton LLP, we engaged consultants to assist us in the documentation and
assessment of our information technology internal controls with the expectation
that these consultants would provide solutions to meet the applicable
requirements by the December 31, 2004 compliance date. In connection with the
audit procedures for the audit of our 2004 financial statements and internal
controls assessment, we determined, in consultation with Grant Thornton and our
consultants, that documentation and assessment of our computer programs
responsible for processing financially-significant transactions had not been
adequately documented as we had expected. As a result, we are unable to properly
analyze these computer programs as part of the overall financial reporting risk
assessment and controls evaluation process necessary to support management's
opinion on internal controls. One of the reasons for this lack of documentation
is that much of our software has been custom designed for our circumstances and
lacks documentation typically available for commercial business application
software packages. Accordingly, we have concluded that we are unable to complete
the required management assessment of our internal control over financial
reporting as of December 31, 2004, and Grant Thornton has issued a "disclaimer"
opinion, included in Item 8 of this Annual Report on Form 10-K, indicating that
they do not express an opinion as to management's assessment and as to the
effectiveness of our internal control over financial reporting as of December
31, 2004.
We have been informed by Grant Thornton that they have identified two
material weaknesses as of December 31, 2004. The first is related to the lack of
properly documented financially significant applications, which affects
management's ability to effectively monitor risks relating to applications that
are significant to financial reporting. In addition, Grant Thornton has also
informed management that a material weakness exists as of December 31, 2004,
with regard to the Company's controls over commission processes that could
potentially result in misstatements. The application system that automates
processing of commissions is complex, inadequately documented, and has not been
maintained in a manner that provides assurance that all and only authorized
changes have been properly designed, tested, and used. A material weakness is a
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the financial
statements will not be prevented or detected. In response, management will
aggressively engage in a process to address these weaknesses, which will include
documentation and assessment of application controls in general and
documentation and implementation of additional controls on the commission
expense application. Because of the relative complexity of our information
technology systems, we currently expect that the application-based control
documentation process could take up to several months. When completed later in
2005, management expects to evaluate, test, remediate and complete its
assessment of internal control over financial reporting.
Notwithstanding the fact that management is unable to complete an
assessment of internal controls and the disclaimer of opinion that Grant
Thornton has issued, Grant Thornton has issued an unqualified opinion on our
financial statements for 2004, which is also included Item 8 of this Annual
Report on Form 10-K.
Nothing has come to the attention of management which would cause them to
believe that the material weaknesses described above have resulted in any
material inaccuracies or errors in our financial statements as of December31,
2004 or any prior period. However, it is possible during the completion of
additional documentation, evaluation and testing we will identify one or more
errors, significant deficiencies or material weaknesses.
There were no changes in our internal controls over financial reporting
during the quarter ended December 31, 2004 that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
Our Chief Executive and Chief Financial Officers have completed the
certifications required to be filed as an Exhibit to this Report (See Exhibits
31.1 and 31.2) relating to the design of our disclosure controls and procedures
and the design of our internal control over financial reporting. These officers
believe these certifications to be accurate, despite our inability to provide
documentation necessary to complete the assessment required by Section 404 of
the Sarbanes-Oxley Act, because we did have procedures in place during 2004 to
detect errors in our computer programs (although these procedures were not
adequately documented). We have also instituted additional control systems to
for authorizing program changes and Grant Thornton has issued an unqualified
opinion on our financial statements.
ITEM 9B. OTHER INFORMATION.
None.
PART III
In accordance with the provisions of General Instruction G (3), information
required by Items 10 through 14 of Form 10-K are incorporated herein by
reference to our Proxy Statement for the Annual Meeting of Shareholders to be
filed prior to April 30, 2005.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Consolidated Financial Statements
and Consolidated Financial Statement Schedule set forth on page 41 of
this report.
(2) Exhibits: For a list of the documents filed as exhibits to this
report, see the Exhibit Index following the signatures to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: March 3, 2005 By: /s/ Randy Harp
------------------------------
Randy Harp
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Position Date
/s/ Harland C. Stonecipher Chairman of the Board of Directors March 3, 2005
- ----------------------------------------------------
Harland C. Stonecipher (Principal Executive Officer)
/s/ Randy Harp Chief Operating Officer March 3, 2005
- ----------------------------------------------------
Randy Harp
/s/ Steve Williamson Chief Financial Officer March 3, 2005
- ----------------------------------------------------
Steve Williamson (Principal Financial and
Accounting Officer)
/s/ Orland G. Aldridge Director March 3, 2005
- ----------------------------------------------------
Orland G. Aldridge
/s/ Martin H. Belsky Director March 3, 2005
- ----------------------------------------------------
Martin H. Belsky
/s/ Peter K. Grunebaum Director March 3, 2005
- ----------------------------------------------------
Peter K. Grunebaum
/s/ John W. Hail Director March 3, 2005
- ----------------------------------------------------
John W. Hail
/s/ Thomas W. Smith Director March 3, 2005
- ----------------------------------------------------
Thomas W. Smith
PRE-PAID LEGAL SERVICES, INC AND SUBSIDIARIES
Schedule I - Condensed Financial Information of the Registrant
PRE-PAID LEGAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
BALANCE SHEETS
(Amounts in 000's)
ASSETS
December 31,
-----------------------
2004 2003
---------- ----------
Current assets:
Cash and cash equivalents............................................................ $ 22,991 $ 17,981
Available-for-sale investments, at fair value........................................ 510 9,895
Membership income receivable......................................................... 3,225 2,637
Inventories.......................................................................... 1,623 857
Refundable income taxes.............................................................. 1,241 331
Deferred member and associate service costs.......................................... 13,893 12,372
Deferred income taxes................................................................ - 2,837
---------- ----------
Total current assets............................................................. 43,483 46,910
---------- ----------
Available-for-sale investments, at fair value.......................................... 1,181 792
Investments pledged.................................................................... 374 273
Property and equipment, net............................................................ 50,916 46,615
Investments in and amounts due to/from subsidiaries, net............................... 31,331 18,140
Deferred member and associate service costs............................................ 2,325 2,375
Other assets........................................................................... 7,471 5,184
---------- ----------
Total assets................................................................... $ 137,081 $ 120,289
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.................................................................. $ 9,904 $ 9,008
Deferred revenue and fees............................................................ 19,544 17,740
Current portion of capital leases payable............................................ 338 19
Current portion of notes payable..................................................... 18,036 18,953
Income taxes payable................................................................. 7,795 -
Accounts payable and accrued expenses................................................ 11,963 14,065
---------- ----------
Total current liabilities.......................................................... 67,580 59,785
Capital leases payable............................................................... 1,618 1,687
Notes payable........................................................................ 27,050 24,468
Deferred revenue and fees............................................................ 1,877 3,330
Deferred income taxes................................................................ 4,715 -
Other non-current liabilities........................................................ 2,794 1,445
---------- ----------
Total liabilities................................................................ 105,634 90,715
---------- ----------
Stockholders' equity:
Common stock......................................................................... 205 217
Retained earnings.................................................................... 129,290 127,576
Accumulated other comprehensive income............................................... 980 809
Treasury stock, at cost.............................................................. (99,028) (99,028)
---------- ----------
Total stockholders' equity....................................................... 31,447 29,574
---------- ----------
Total liabilities and stockholders' equity..................................... $ 137,081 $ 120,289
=========== ==========
See accompanying notes to condensed financial statements.
PRE-PAID LEGAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
STATEMENTS OF INCOME
(Amounts in 000's)
Year Ended December 31,
-----------------------------------------
2004 2003 2002
------------ ------------ -------------
Revenues:
Membership fees...................................................... $ 260,959 $ 211,824 $ 199,849
Associate services................................................... 24,618 25,499 37,195
Other................................................................ 5,247 3,796 3,004
------------ ------------- -------------
290,824 241,119 240,048
------------ ------------- -------------
Costs and expenses:
Membership benefits.................................................. 89,016 66,524 63,515
Commissions.......................................................... 88,963 68,353 83,097
Associate services and direct marketing.............................. 24,618 28,823 32,516
General and administrative........................................... 32,037 14,711 13,773
Other, net........................................................... 9,157 6,792 5,829
------------ ------------- -------------
243,791 185,203 198,730
------------ ------------- -------------
Income before income taxes and equity in net income of subsidiaries.... 47,033 55,916 41,318
Provision for income taxes............................................. 16,226 19,080 14,271
------------ ------------- -------------
Income before equity in net income of subsidiaries..................... 30,807 36,836 27,047
Equity in net income of subsidiaries................................... 9,970 3,071 8,967
------------ ------------- -------------
Net income............................................................. $ 40,777 $ 39,907 $ 36,014
============ ============ ============
See accompanying notes to condensed financial statements.
PRE-PAID LEGAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
STATEMENTS OF CASH FLOWS
(Amounts in 000's)
Year Ended December 31,
-----------------------------------------
2004 2003 2002
------------ ------------ ------------
Net cash provided by operating activities.............................. $ 38,393 $ 50,271 $ 55,380
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment.................................. (10,879) (27,012) (15,184)
Purchases of investments - available for sale........................ (2,858) (9,915) -
Maturities and sales of investments - available for sale............. 11,783 - 64
------------ ------------ ------------
Net cash used in investing activities.............................. (1,954) (36,927) (15,120)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options.............................. 5,176 2,014 5,088
Decrease in capital lease obligations................................ (808) (1,701) -
Purchases of treasury stock.......................................... (37,462) (48,292) (50,152)
Proceeds from issuance of debt....................................... 19,000 42,700 12,300
Repayments of debt................................................... (17,335) (9,912) (1,667)
Proceeds from other financing........................................ - 1,000 -
------------ ------------ ------------
Net cash used in financing activities.............................. $ (31,429) (14,191) (34,431)
------------ ------------ ------------
Net increase in cash and cash equivalents.............................. 5,010 (847) 5,829
Cash and cash equivalents at beginning of year......................... 17,981 18,828 12,999
------------ ------------ ------------
Cash and cash equivalents at end of year............................... $ 22,991 $ 17,981 $ 18,828
============ ============ ============
See accompanying notes to condensed financial statements.
<
PRE-PAID LEGAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Notes to Condensed Financial Statements
Basis of Presentation
In the parent-company-only financial statements, Pre-Paid Legal Services, Inc.'s
("Parent Company") investment in subsidiaries is stated at cost plus equity in
undistributed earnings of subsidiaries since the date of acquisition. The
parent-company-only financial statements should be read in conjunction with the
Parent Company's consolidated financial statements.
Notes 5 and 12 and the first two paragraphs of Note 10 to the consolidated
financial statements of Pre-Paid Legal Services, Inc. relate to the Parent
Company and therefore have not been repeated in these notes to condensed
financial statements.
Expense Advances and Reimbursements
Pursuant to management agreements with certain subsidiaries, which have been
approved by insurance regulators, commission advances are paid and expensed by
the Parent Company and the Parent Company is compensated for a portion of its
general and administrative expenses determined in accordance with the
agreements.
Dividends from Subsidiaries
Dividends paid to the Parent Company from its subsidiaries are accounted for by
the equity method. Pre-Paid Legal Casualty, Inc. paid a total of $11 million to
the Parent Company during 2002. No dividends were paid during 2003 or 2004.
INDEX TO EXHIBITS
Exhibit No. Description
- ------------- ------------------
3.1 Restated Certificate of Incorporation of the Company
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.1 of our Report
on Form 10-Q for the period ended June 30, 2003)
*10.1 Employment Agreement effective January 1, 1993 between the Company and Harland C. Stonecipher
(Incorporated by reference to Exhibit 10.1 of our Annual Report on Form 10-KSB for the year ended
December 31, 1992)
*10.2 Agreements between Shirley Stonecipher, New York Life Insurance
Company and the Company regarding life insurance policy covering
Harland C. Stonecipher (Incorporated by reference to Exhibit
10.21 of our Annual Report on Form 10-K for the year ended
December 31, 1985)
*10.3 Amendment dated January 1, 1993 to Split Dollar Agreement
between Shirley Stonecipher and the Company regarding life
insurance policy covering Harland C. Stonecipher (Incorporated
by reference to Exhibit 10.3 of our Annual Report on Form 10-KSB
for the year ended December 31, 1992)
*10.4 Form of New Business Generation Agreement Between the Company
and Harland C. Stonecipher (Incorporated by reference to Exhibit
10.22 of our Annual Report on Form 10-K for the year ended
December 31, 1986)
*10.5 Amendment to New Business Generation Agreement between the Company and Harland C. Stonecipher
effective January, 1990 (Incorporated by reference to Exhibit 10.12 of our Annual Report on Form
10-KSB for the year ended December 31, 1992)
*10.6 Amendment No. 2 to New Business Generation Agreement between the Company and Harland C. Stonecipher
effective January, 1990 (Incorporated by reference to Exhibit 10.13 of our Annual Report on Form
10-K for the year ended December 31, 2002)
*10.7 Stock Option Plan, as amended effective May 2003
10.8 Loan agreement dated June 11, 2002 between Bank of Oklahoma, N.A. and the Company (Incorporated by
reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the six-months ended June 30,
2002)
10.9 Security agreement dated June 11, 2002 between Bank of Oklahoma, N.A. and the Company (Incorporated
by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the six months ended June 30,
2002)
10.10 Form of Mortgage dated July 23, 2002 between Bank of Oklahoma, N.A. and the Company (Incorporated
by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for the six months ended June 30,
2002)
*10.11 Deferred compensation plan effective November 6, 2002 (Incorporated by reference to Exhibit 10.14
of our Annual Report on Form 10-K for the year ended December 31, 2002)
10.12 Loan agreement dated September 19, 2003 between Registrant and Bank of Oklahoma, N.A., Comerica
Bank and First United Bank & Trust (Incorporated by reference to Exhibit 10.1 of our Report on Form
10-Q for the period ended September 30, 2003)
10.13 Aircraft purchase agreement dated December 9, 2004 by and between S&S Aviation, LLC and the Company
10.14 Aircraft purchase agreement dated December 9, 2004 by and between Harland C. Stonecipher and/or
Shirley A. Stonecipher and Stonecipher Aviation, LLC and the Company
10.15 Assignment and Assumption of Lease dated December 20, 2004 between Harland C. and Shirley
Stonecipher and the Company
*10.16 Amended Deferred Compensation Plan effective January 1, 2005
21.1 List of Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
31.1 Certification of Harland C. Stonecipher, Chairman and Chief Executive Officer, pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification of Steve Williamson, Chief Financial Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
32.1 Certification of Harland C. Stonecipher, Chairman and Chief Executive Officer, pursuant to 18
U.S.C. Section 1350
32.2 Certification of Steve Williamson, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350
- --------------------
* Constitutes a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
EXHIBIT 3.1
Filed with Oklahoma Secretary of State
August 29, 2000
RESTATED
CERTIFICATE OF INCORPORATION
OF
PRE-PAID LEGAL SERVICES, INC.
The undersigned officers of Pre-Paid Legal Services, Inc., an Oklahoma
corporation (the "Corporation"), do hereby certify as follows:
1. The Articles of Incorporation of the Corporation were originally filed
with the Secretary of State of the State of Oklahoma on January 20, 1976 and
were amended from time to time thereafter.
2. This Restated Certificate of Incorporation has been duly adopted by the
Board of Directors of the Corporation in accordance with Section 1080 of the
Oklahoma General Corporation Act.
3. This Restated Certificate of Incorporation restates and integrates and
does not further amend the provisions of the Corporation's Certificate of
Incorporation, as amended, and there is no discrepancy between those provisions
and the provisions of this Restated Certificate of Incorporation, except as
permitted by Section 1080.C of the Oklahoma General Corporation Act.
4. The text of the Corporation's Certificate of Incorporation, as amended,
is hereby restated in its entirety by this Restated Certificate of Incorporation
as follows:
FIRST. The name of the Corporation is PRE-PAID LEGAL SERVICES, INC.
SECOND. The address of its registered office in the-State of Oklahoma is
321 East Main, in the City of Ada, County of Pontotoc, 74820. The name of its
registered agent at such address is Harland C. Stonecipher.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Oklahoma General
Corporation Act.
FOURTH. The total number of shares of capital stock which the Corporation
shall have authority to issue is 100,900,000 shares, consisting of 400,000
shares of Preferred Stock, par value $1.00 per share, 500,000 shares of Special
Preferred Stock, par value $1.00 per share, and 100,000,000 shares of Common
Stock, par value $.01 per share.
The shares of such classes shall have the following express terms:
DIVISION A
EXPRESS TERMS OF THE PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized to provide for the issuance of
Preferred Stock in series and by filing a certificate pursuant to the applicable
law of the State of Oklahoma, to establish from time to time the number of
shares to be included in such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations, or restrictions thereof.
The authority of the Board of Directors with respect to each series shall
include, but not be limited to, determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(5) Whether or not the shares of that series will be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the corporation,
and the relative rights of priority, if any, of payment of shares of that
series; and
(8) Any other relative rights, preferences and limitations of that
series.
DIVISION B
EXPRESS TERMS OF THE SPECIAL PREFERRED STOCK
Section 1. The Special Preferred Stock may be issued from time to time in
one or more series. Subject to the provisions of Section 2 of this Division,
which provisions shall apply to all Special Preferred Stock, the Board of
Directors is authorized to provide for the issuance of Special Preferred Stock
in series and by filing a certificate pursuant to the applicable law of the
State of Oklahoma, to establish from time to time the number of shares to be
included in such series, and to fix the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations, or
restrictions thereof.
The authority of the Board of Directors with respect to each series shall
include, but not be limited to, determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(5) Whether or not the shares of that series will be redeemable, and,
if no, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights of priority, if any, of payment of shares of that
series; and
(8) Any other relative rights, preferences and limitations of that
series.
Section 2. The Special Preferred Stock shall be on a ranking junior to the
Preferred Stock as to payment of dividends and as to distributions in the event
of a voluntary or involuntary liquidation, dissolution or winding up of the
corporation. Accordingly, holders of shares of Preferred Stock shall be entitled
to receive dividends and distributions in priority to any dividends or
distributions to holders of shares of Special Preferred Stock in accordance with
the express terms of the Preferred Stock or any series thereof.
DIVISION C
EXPRESS TERMS OF THE COMMON STOCK
The Common Stock shall be subject to the express terms of the Preferred
Stock and the Special Preferred Stock in any series thereof. The holders of the
Common Stock voting together as one class shall have the sole and exclusive
right to elect the directors of the Corporation, subject to any voting rights of
any outstanding shares of Preferred Stock or Special Preferred Stock.
Dividends on the Common Stock may be declared at or for such time and
periods as the Board of Directors may from time to time, in its sole discretion,
determine out of funds legally available therefor.
In the event of a voluntary or involuntary winding up, distribution or
liquidation of this Corporation, after distribution of any amounts distributable
to holders of securities of the Corporation having a preference in liquidation,
all funds, assets or property available for distribution shall be ratably paid
and distributed among the holders of the issued and outstanding Common Stock.
FIFTH. The bylaws may be adopted, altered, amended or repealed by the Board
of Directors. Election of directors need not be by written ballot unless the
bylaws so provide.
SIXTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors, or any class of them and/or between this
Corporation and its shareholders or any class of them, any court of equitable
jurisdiction within the State of Oklahoma, on the application in a summary way
of this Corporation or of any creditor or shareholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 1106 of Title 18 of the Oklahoma Statutes (Supp. 1986)
or on the application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 1100 of Title 18
of the Oklahoma Statutes (Supp. 1986), may order a meeting of the creditors or
class of creditor, and/or of the shareholders or class of shareholders of this
Corporation, as the case may be, to be summoned in such manner as the court
directs. If a majority in number representing three-fourths (3/4) in value of
the creditors or class of creditors, and/or of the shareholders or class of
shareholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the compromise or arrangement and the
reorganization, if sanctioned by the court to which the application has been
made, shall be binding on all the creditors or class of creditors, and/or on all
the shareholders or class of shareholders, of this Corporation, as the case may
be, and also on this Corporation.
SEVENTH: (1) To the fullest extent that the Oklahoma General Corporation
Act as it existed on December 16, 1987 (the original date of filing with the
Oklahoma Secretary of State of the Amended and Restated Certificate of
Incorporation originally containing this Article SEVENTH) (the "Effective
Date"), permits the limitation or elimination of the liability of directors, no
director of this Corporation shall be liable to this Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director. No
amendment to or repeal of this Article SEVENTH shall apply to or have any effect
on the liability or alleged liability of any director of this Corporation for or
with respect to any acts or omissions of such director occurring prior to the
time of such amendment or repeal.
(2) If the Oklahoma General Corporation Act is amended after the Effective
Date to further limit or eliminate liability of this Corporation's directors for
breach of fiduciary duty, then a director of this Corporation shall not be
liable for any such breach to the fullest extent permitted by the Oklahoma
General Corporation Act as so amended. If the Oklahoma General Corporation Act
is amended after the Effective Date to increase or expand liability of this
Corporation's directors for breach of fiduciary duty, no such amendment shall
apply to or have any effect on the liability or alleged liability of any
director of this Corporation for or with respect to any acts or omissions of
such director occurring prior to the time of such amendment or otherwise
adversely affect any right or protection of a director of this Corporation
existing at the time of such amendment.
EIGHTH: The provisions of this Article EIGHTH shall apply to any of the
following transactions (hereinafter referred to as "Business Combinations"):
(a) any merger, consolidation or reorganization of the Corporation or
any significant subsidiary of the Corporation in any manner permitted by
law with or into any Related Person; or
(b) any sale, lease, mortgage, pledge, exchange or other disposition
(in one transaction or series of related transactions) of all or
substantially all of the assets of the Corporation or of any significant
subsidiary of the Corporation to any Related Person, or
(c) any sale, lease, mortgage, pledge, exchange or other disposition
(in one transaction or a series of related transactions) by any Related
Person to the Corporation or any subsidiary of the Corporation of any
assets in exchange for voting securities (or securities, or options,
warrants or rights to purchase voting securities or securities convertible
into or exchangeable for voting securities) constituting 5% or more of the
outstanding securities of the Corporation after such transaction; or
(d) any reclassification of securities, recapitalization or other
transaction which has the direct or indirect effect of increasing the
voting power, whether or not then exercisable, of any Related Person; or
(e) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Related
Person.
A corporation, person or other entity which is the beneficial owner, directly or
indirectly, of 5% or more of the total voting power of the outstanding voting
securities of the Corporation is herein referred to as the "Related Person."
Section 1. No Business Combination may be effected unless all of the
following conditions, to the extent applicable, are fulfilled:
(a) The Related Person shall not have acquired any voting
securities, directly or indirectly, from the Corporation except in a
Business Combination to which this Article did not apply or in a
Business Combination to which this Article did apply and which
satisfied all of the requirements of this Article.
(b) After the time when the Related Person became the beneficial
owner, directly or indirectly, of 5% or more of the total voting power
of the outstanding voting securities of the Corporation, the Related
Person shall not have (i) received the benefit, directly or
indirectly, of any loans, advances, extensions of credit, guarantees,
pledges or other financial assistance or tax benefits provided,
directly or indirectly, by the Corporation, or (ii) made or caused to
be made any major changes in the Corporation's business or equity
capital structure without the unanimous approval of the directors of
the Corporation then in office.
(c) A proxy statement complying with the requirements of the
Securities Exchange Act of 1934, or any similar or superseding federal
statute, as at the time in effect (whether or not the provisions of
such act or statute shall be applicable to the Corporation) shall be
mailed to shareholders of the Corporation for the purpose of
soliciting shareholder approval of the Business Combination and shall
contain at the front thereof, in a prominent place, any
recommendations as to the advisability (or inadvisability) of the
Business Combination which any of the directors may choose to state
and an opinion of a reputable investment banking firm stating that the
terms of the Business Combination are fair from the point of view of
both the Corporation and the shareholders of the Corporation other
than any Related Person.
Section 2. No Business Combination shall be effected unless it is approved
at an annual meeting or a special meeting of the Corporation's shareholders
called for that purpose. The affirmative vote in person or by proxy of the
holders of not less than 80% of the voting power of all outstanding voting stock
of the Corporation, voting as a single class, shall be required for approval of
any such Business Combination.
Section 3. For the purposes of this Article, any corporation, person or
entity will be deemed to be the beneficial owner of any voting securities of the
Corporation:
(a) which it owns directly, whether or not of record; or
(b) which it has the right to acquire pursuant to any agreement
or arrangement or understanding or upon exercise of conversion rights,
exchange rights, warrants or options or otherwise; or
(c) which are beneficially owned, directly or indirectly
(including shares deemed to be owned through application of clause (b)
above), by any 'affiliate' or 'associate' as those terms as defined in
Rule 12b-2 of the General Rules and Regulations of the Securities and
Exchange Commission adopted pursuant to the Securities Exchange Act of
1934 as in effect on the date hereof; or
(d) which are beneficially owned, directly or indirectly
(including shares deemed owned through application of clause (b)
above), by any other corporation, person or entity with which it or
any of its 'affiliates' or 'associates' has any agreement or
arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of voting securities of the Corporation.
For the purposes only of determining whether a corporation, person or other
entity owned beneficially, directly or indirectly, 5% or more of the total
voting power of the outstanding voting securities of the Corporation, the
outstanding voting securities of the Corporation will be deemed to include any
voting securities that may be issuable pursuant to any agreement, arrangement or
understanding or upon exercise of conversion rights, exchange rights, warrants,
options or otherwise which are deemed to be beneficially owned by such
corporation, person or other entity pursuant to the foregoing provisions of this
Section 3.
Section 4. The provisions of this Article shall not apply to a Business
Combination which (a) (i) does not change any voting security holder's
percentage ownership of voting power in any successor of the corporation from
the percentage of voting power beneficially owned by such holder in the
Corporation, (ii) provides for the provisions of this Article, without any
amendment, change, alteration or deletion, to apply to any successor to the
Corporation, and (iii) does not transfer all or substantially all of the
Corporation's assets other than to a wholly-owned subsidiary of the corporation;
or (b) shall have been authorized by a majority of the Board of Directors of the
Corporation prior to the time that the Related Person became the beneficial
owner, directly or indirectly, of 5% or more of the total voting power of the
outstanding voting securities of the Corporation.
Section 5. The affirmative vote required by this Article will be in
addition to the vote of the holders of any class or series of stock of the
Corporation otherwise required by law, or this Certificate of Incorporation, or
the resolution providing for the issuance of a class or series of stock which
has been adopted by the Board of Directors, or any agreement between the
Corporation and any national securities exchange.
Section 6. The Board of Directors of the Corporation shall make all
determinations pursuant to this Article, including, without limitation, (i) the
amount of voting power beneficially owned directly or indirectly, by any
corporation, person or entity, and (ii) the status of any corporation, person or
entity as an affiliate or associate of another. Any such determination
reasonably made in good faith by the Board of Directors on the basis of
available information shall be conclusive and binding, and no director will have
any liability to the Corporation, or any other corporation, person or entity by
reason of any such determination so made.
Section 7. This Article EIGHTH shall not be altered, amended or repealed,
nor shall any provision inconsistent with this Article EIGHTH be adopted, except
by the affirmative vote of at least eighty percent (80%) of the voting power of
the outstanding voting stock of the Corporation, voting as a single class.
NINTH: Notwithstanding anything contained in the Certificate of
Incorporation or the Bylaws of the Corporation to the contrary:
Section 1. Number, Election and Terms. The Board of Directors of the
Corporation 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. Upon the adoption of this Article NINTH, the directors shall be
divided into three classes, designated Class A, Class B, and Class C, as nearly
equal in number as possible, with the term of office of the Class C directors to
expire at the 1988 annual meeting of shareholders, the term of office of the
Class B directors to expire at the 1989 annual meeting of shareholders, and the
term of office of the Class A directors to expire at the 1990 annual meeting of
shareholders. At each meeting of shareholders following such initial
classification and election, the number of directors equal to the number of the
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.
Section 2. Newly Created Directorships and Vacancies. Newly created
directors resulting from any increase in the authorized number of directors and
any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by the affirmative vote of 80% of the directors then in office, although
less than a quorum, and directors so chosen shall hold office for a term
expiring at the annual meeting of shareholders at which the term of the class to
which they have been elected expires and until his successor is elected and
qualified.
Section 3. Removal. At a meeting of shareholders or directors, as the case
may be, called expressly for that purpose, any director, or the entire Board of
Directors, may be removed from office at any time, with or without cause, by
only by the affirmative vote of the holders of at least 80% of the outstanding
shares of the Corporation then entitled to be voted in an election of directors
or by the affirmative vote of at least two-thirds (2/3) of the directors then in
office.
Section 4. Amendment, Repeal, Etc. The affirmative vote of the holders of
at least 80% of the outstanding shares of the Corporation then entitled to be
voted in an election of directors shall be required to alter, amend or repeal,
or to adopt any provision inconsistent with, this Article NINTH.
TENTH. Except upon the affirmative vote of shareholders holding all the
issued and outstanding shares of stock of the Corporation, no amendment to this
Certificate of Incorporation may be adopted by the Corporation which would
impose personal liability for the debts of the Corporation on the shareholders
of the Corporation or which would amend, alter or repeal this Article TENTH or
would adopt any provision inconsistent with this Article TENTH.
ELEVENTH. The shareholders of the Corporation duly adopted the Amended and
Restated Certificate of Incorporation originally containing this Article
ELEVENTH (as filed with the Oklahoma Secretary of State on December 16, 1987)
for the purpose of definitively providing that all provisions of the Oklahoma
General Corporation Act will apply to the Corporation and its shareholders to
the fullest extent, and that from and after the filing of such Amended and
Restated Certificate with the Oklahoma Secretary of State the provisions of the
Oklahoma Business Corporation Act and any and all rights, privileges or
immunities thereunder shall be of no further force or effect with regard to the
Corporation and its shareholders.
TWELFTH. Subject to the limitations set forth in this Certificate of
Incorporation, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
shareholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, Pre-Paid Legal Services, Inc. has caused this
Certificate to be signed and attested by its duly authorized officers as of the
28th day of August, 2000.
ATTEST: PRE-PAID LEGAL SERVICES, INC.
/s/ Kathryn Walden By: /s/ Harland C. Stonecipher
- ------------------------------------ ----------------------------------
Kathryn Walden, Secretary Harland C. Stonecipher,
Chairman
Chief Executive Officer
EXHIBIT 10.7
STOCK OPTION PLAN
OF
PRE-PAID LEGAL SERVICES, INC.
(as amended through May 29, 2003)
1. Purpose. This Amended and Restated Stock Option Plan ("Plan") is
intended as an incentive and to encourage stock ownership by certain key
employees, officers and directors of Pre-Paid Legal Services, Inc.
("Corporation") and of its Subsidiaries (as hereinafter defined) in order to
increase their proprietary interest in the Corporation's success.
2. Administration. The Plan shall be administered by the Board of Directors
of the Corporation, which shall determine the persons who shall participate in
the Plan and the extent of their participation; provided, however, that the
Board of Directors shall have the authority to appoint a committee of not less
than two members of the Board ("Stock Option Committee") to administer the Plan
and to make determinations concerning the granting of options thereunder. The
interpretation and construction by the Board of any provisions of the Plan or
any option granted under it and any determination by the Board or the Stock
Option Committee pursuant to any provision of the Plan or any such option shall
be final and conclusive.
No member of the Board of Directors or the Stock Option Committee shall be
liable for any action or determination made in good faith, and the members shall
be entitled to indemnification and reimbursement in the manner provided in the
Corporation's Certificate of Incorporation, or as otherwise permitted by law.
3. Stock. The stock subject to the options and other provisions of the Plan
shall be shares of the Corporation's authorized but unissued Common Stock or
treasury stock, as determined by the Board of Directors. Subject to adjustment
in accordance with the provisions of Subparagraph 6.6 hereof, the total number
of shares of Common Stock of the Corporation on which options may be granted
under the Plan shall not exceed in the aggregate 3,000,000 shares. In the event
that any outstanding option under the Plan for any reason expires or is
terminated prior to the end of the period during which options may be granted,
the shares of Common Stock allocable to the unexercised portion of such option
may again be subject to an option under the Plan.
4. Terms and Conditions of Incentive Options. Options may be granted under
this Plan which qualify as Incentive Stock Options ("Incentive Options") under
Section 422A of the Internal Revenue Code. Incentive Options granted pursuant to
the Plan shall comply with and be subject to the following special terms and
conditions:
4.1 Eligibility. The individuals who shall be eligible to receive Incentive
Stock Options under this Plan shall be such key employees (including
officers and directors who are employees) of the Corporation, or of any
corporation (hereinafter called a "Subsidiary") in which the Corporation
has a proprietary interest by reason of stock ownership or otherwise,
including any corporation in which the Corporation acquires a proprietary
interest after the adoption of this Plan (but only if the Corporation owns,
directly or indirectly, stock possessing not less than 50% of the total
combined voting power of all classes of stock in the corporation), as the
Board of Directors of the Corporation shall determine from time to time.
4.2 Limitation on Aggregate Value of Shares Subject to Incentive Option.
The aggregate fair market value (determined in accordance with Section 6.3)
as of the date of the grant of shares with respect to which options are
exercisable for the first time by an optionee during any calendar year
shall not exceed $100,000.
4.3 Limitation for Certain Shareholders. Any person who owns stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Corporation or its Subsidiaries may not
receive an Incentive Option under the Plan, unless at the time an option is
granted to such person the option price is at lease one hundred ten percent
(110%) of the fair value market value of the shares and the option is not
exercisable after the expiration of five (5) years from the date of the
grant. For purposes of this Section 4.3 a person shall be considered as
owning the shares owned, directly or indirectly, by or for his brothers and
sisters (whether in whole or half blood), spouse, ancestors, and lineal
descendants, and the shares owned, directly or indirectly, by and for a
corporation, partnership, estate or trust shall be considered as being
owned proportionately by or for its shareholders, partners or
beneficiaries.
4.4 Term of Incentive Option. Each Incentive Option granted under the Plan
shall not be exercisable more than 10 years from the date the option is
granted.
5. Terms and Conditions of Non-Incentive Options. In addition to Incentive
Options, options not qualifying as Incentive Options may be granted under this
Plan ("Non-Incentive Options"). Certain special terms and conditions apply to
Non-Incentive Options, as set forth below:
5.1 Eligibility. The individuals who shall be eligible for the grant of
Non-Incentive Options shall be directors, officers and employees of the
Corporation or any Subsidiary (as defined in Section 4.1 above) as the
Board of Directors or the Stock Option Committee shall determine from time
to time.
5.2 Term of Option. Any Non-Incentive Option granted under the Plan shall
be for a term as determined at the time of grant by the Board of Directors
or the Stock Option Committee but not to exceed 15 years from the date of
grant.
6. Terms and Conditions for All Options. The following terms and conditions
shall apply to all options granted under the Plan.
6.1 Medium and Time of Payment. The option price shall be payable in United
States Dollars upon the exercise of the option and may be paid in cash or
by certified check, bank draft or money order payable to the order of the
Corporation, or if so determined by the Board of Directors or the Stock
Option Committee, the option price may be paid in property or in
installment payments.
6.2 Number of Shares. The option shall state the total number of shares to
which it pertains.
6.3 Option Price. The option price shall be determined by the Board of
Directors or the Stock Option Committee but shall be not less than the fair
market value of the shares of Common Stock of the Corporation on the date
of the granting of the option. For this purpose, fair market value means
the last sales price of the shares of Common Stock on any national
securities exchange on which the shares are listed on the day on which such
value is to be determined or, if no shares were traded on such day, on the
next preceding day on which shares were traded, as reported by such
exchange, by National Quotation Bureau, Inc. or other national quotation
service. If the Common Stock is not listed on a national securities
exchange, fair market value means the last sales price of the shares of
Common Stock in the over-the-counter market on the date on which such vale
is to be determined or, if no shares were traded on such day, on the next
preceding day on which the shares were traded, as reported on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) or
other national quotation service. If at any time shares of Common Stock are
not traded on an exchange or in the over-the-counter market, fair market
value shall be the value determined by the Board of Directors or the Stock
Option Committee, taking into consideration those factors affecting or
reflecting value which they deem appropriate. For purposes of determining
the exercise price of any Incentive Option, fair market value shall in any
event be determined in accordance with Section 422 of the Internal Revenue
Code.
6.4 Date of Exercise. Options shall be exercisable at the rate of 20% of
the number of shares covered thereby per year beginning one year from the
date of grant, unless otherwise provided by the Board of Directors or the
Stock Option Committee at the time the option is granted. After becoming
exercisable, the option may be exercised at any time and from time to time
in whole or in part until termination of the option as set forth in
Sections 4.5, 5.2 or 6.5.
6.5 Termination of Employment; Death of Employee. In the event that an
optionee's employment by the Corporation shall terminate, his option
whether or not then exercisable shall terminate immediately; provided,
however, that if the termination is not as a result of embezzlement, theft,
other violation of law, or termination by the Corporation for cause, the
optionee shall have the right to exercise his option (to the extent
exercisable at the date of termination) at any time within 30 days after
such termination; provided, further, that if any termination of employment
is related to retirement with the consent of the Corporation the optionee
shall have the right to exercise his option (to the extent exercisable up
to the date of retirement) at any time within 3 months after such
retirement; and provided, further, that if the optionee shall die while in
the employment of the Corporation or within the period of time after
termination of employment or retirement during which he was entitled to
exercise his option as herein provided, his estate, personal
representative, or beneficiary shall have the right to exercise his option
(to the extent exercisable at the date of death) at any time within 12
months from the date of his death.
Retirement by an optionee at his normal retirement date in accordance with
provisions of any retirement plan of the Corporation or a Subsidiary under
which the optionee is then covered shall be deemed to be a retirement with
the consent of the Corporation. Whether any other termination of employment
is to be considered a retirement with the consent of the Corporation and
whether an authorized leave of absence on military or government service or
for other reasons shall constitute a termination of employment for the
purposes of the Plan, shall be determined by the Board of Directors or
Stock Option Committee, which determination shall be final and conclusive;
provided, however, that where the period of leave exceeds 90 days and where
the individual's employment is not guaranteed by statute or contract, the
employment relationship will be deemed to have been terminated on the 91st
day of any leave. Employment by the Corporation shall be deemed to include
employment by, and to continue during any period in which an optionee is in
the employment of, a Subsidiary.
6.6 Recapitalization. The aggregate number of shares of Common Stock on
which options may be granted to persons participating under the Plan, the
number of shares thereof covered by each outstanding option, and the price
per share thereof in each such option, shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of
Common Stock of the Corporation resulting from a subdivision or
consolidation of shares or other capital adjustment, or the payment of a
stock dividend or other increase or decrease in such shares, effected
without receipt of consideration by the Corporation; provided, however,
that any fractional shares resulting from any such adjustment shall be
eliminated.
In the event of a change in the Corporation's Common Stock which is limited
to a change in the designation thereof to "Capital Stock" or other similar
designation, or a change in the par value thereof, or from par value to no
par value, without increase in the number of issued shares, the shares
resulting from any such change shall be deemed to be Common Stock within
the meaning of the Plan.
6.7 Reorganization of Corporation. Subject to any required action by the
stockholders, if the Corporation shall be the surviving or resulting
corporation in any merger or consolidation which does not result in change
of control of the Corporation, any option granted hereunder shall pertain
to and apply to the securities to which a holder of the number of shares of
Common Stock subject to the option would have been entitled. In the event
of a dissolution or liquidation of the Corporation or a merger or
consolidation in which the Corporation is not the surviving or resulting
corporation or which results in a change in control of the Corporation, or
a tender or exchange offer which results in a change in control of the
Corporation, the Board of Directors or the Stock Option Committee shall
determine: (i) whether all or any part of the unexercised portion of any
option outstanding under the Plan shall terminate; (ii) whether the options
hall become immediately exercisable; or (iii) whether such options may be
exchanged for options covering securities of any surviving or resulting
corporation, subject to the agreement of any such surviving or resulting
corporation, on terms and conditions substantially similar to an option
hereunder.
6.8 Assignability. No option shall be assignable or transferable except by
will or by the laws of descent and distribution. During the lifetime of an
optionee, the option shall be exercisable only by him.
6.9 Optionee's Agreement. If, at the time of the exercise of any option, it
is necessary or desirable, in order to comply with any applicable laws or
regulations relating to the sale of securities, that the optionee
exercising the option shall agree that he will purchase the shares that are
subject to the option for investment and not with any present intention to
resell the same, the optionee will, upon the request of the Corporation,
execute and deliver to the Corporation an agreement to such effect.
6.10 Rights as a Stockholder. An optionee shall have no rights as a
stockholder with respect to shares covered by his option until the date of
the issuance of the shares to him and only after such shares are fully
paid.
6.11 Other Provisions. The option agreements authorized under the Plan may
contain such other provisions as the Board of Directors shall deem
advisable.
7. Non Employee Director Options. Notwithstanding anything elsewhere in the
Plan to the contrary, each person who is a member of the Board of Directors of
the Corporation but who is not an employee of the Corporation (a "Non-Employee
Director") shall be eligible for grants of stock options under the Plan in
accordance with the provisions of this Section 7. The following provisions of
this Section 7 shall apply to the granting of stock options to Non-Employee
Directors.
7.1 Grant of Options. Each individual who is a Non-Employee Director on
December 12, 1995 shall receive an initial option grant to purchase 7,500
shares of the Common Stock of the Corporation. Each Non-Employee Director
shall receive subsequent grants of stock options to purchase 10,000 shares
of Common Stock on March 1st of each year commencing on March 1, 1996 and
each year thereafter during the term of the Plan, subject to there being at
the time of any such grant sufficient remaining shares of Common Stock
available for awards under the Plan. No options shall be granted pursuant
to this Section 7 after any date that the Non-Employee Director becomes
employed by the Corporation or ceases to be a director of the Corporation.
All stock options granted to the Non-Employee Directors shall consist of
options that do not qualify as incentive stock options under the Internal
Revenue Code.
7.2 Purchase Price. The purchase price for each share placed under an
option for a Non-Employee Director shall be equal to 100% of the fair
market value of such share on the date the option is granted (as determined
pursuant to Section 6.3 hereof).
7.3 Vesting and Term. Except as otherwise provided in Section 13 hereof,
(i) the initial options to purchase 7,500 shares granted as of December 12,
1995 shall be fully vested and immediately exercisable on the date of grant
and (ii) the options to purchase 10,000 shares to be granted as of March
1st of each year shall be fully vested and immediately exercisable as to
2,500 shares on the date of grant and shall vest and become exercisable in
additional increments of 2,500 shares on June 1st, September 1st and
December 1st in the year the option is granted; provided, however, that it
shall be a condition to the vesting of each incremental portion of the
option that the Non-Employee Director continue to be a Non-Employee
Director of the Corporation through the applicable vesting date. The period
during which a Non-Employee Director option may be exercised shall be five
years from the date of grant, subject to earlier termination as provided in
Section 7.5 below.
7.4 Exercise of Options. Options granted pursuant to this Section 7, to the
extent the option has vested and become exercisable, may be exercised in
whole or in part from time to time by written notice to the Corporation
accompanied by a certified or bank cashier's check payable to the
Corporation for the aggregate purchase price of the number of shares being
purchased.
7.5 Removal for Cause; Death of Non-Employee Director. In the event that a
Non-Employee Director is removed from the Board of Directors for cause in
accordance with applicable law and the Certificate of Incorporation and
By-Laws of the Corporation, options granted to such Non-Employee Director
pursuant to this Section 7 shall terminate as of the date of such removal
and the Non-Employee Director shall have no further rights to exercise any
portion of such options. If a Non-Employee Director shall die while serving
on the Board of Directors or within any period of time during which any
options granted pursuant to this Section 7 are exercisable as provided
herein, the Non-Employee Director's estate, personal representative, or
beneficiary shall have the right to exercise the options (to the extent
exercisable at the date of death) at any time within 12 months from the
date of death. Notwithstanding any of the foregoing, in no event may an
option granted pursuant to this Section 7 be exercised more than five years
after the date of grant.
7.6 Changes. All options granted to Non-Employee Directors shall be subject
to the provisions of Section 6.6 ("Recapitalization") and Section 6.7
("Reorganization of Corporation") hereof.
8. Term of Plan. No stock option shall be granted pursuant to the Plan
after December 12, 2012.
9. Amendments. The Board of Directors may from time to time amend, alter,
suspend, or discontinue the Plan or alter or amend (including decrease of option
price by cancellation and substitution of options or otherwise) any and all
option agreements granted thereunder; provided, however, that no such action of
the Board of Directors may, without approval of the stockholders, alter the
provisions of the Plan so as to (a) materially increase the benefits accruing to
participants under the Plan; (b) materially increase the number of securities
which may be issued under the Plan; or (c) materially modify the requirements as
to eligibility for participation in the Plan; and provided, further, that no
amendment may, without the consent of the optionee, affect any then outstanding
options or unexercised portions thereof.
10. No Obligation to Exercise Option. The granting of an option shall
impose no obligation upon the optionee to exercise such an option.
11. Registration under Securities Act of 1933. Provided that the
Corporation is filing reports with the Securities and Exchange Commission
pursuant to Section 15(d) of the Securities Exchange Act of 1934 or has a class
of equity securities registered pursuant to the Securities Exchange Act of 1934,
the Corporation will use its best efforts to cause the Common Stock which may be
acquired pursuant to the exercise of any option to be registered under the
Securities Act of 1933.
12. Stockholder Approval. The Plan (as previously amended and restated
through May 29, 2003) has been submitted to and approved by the stockholders of
the Corporation.
EXHIBIT 10.13
AIRCRAFT PURCHASE AGREEMENT
THIS AIRCRAFT PURCHASE AGREEMENT (this "Agreement") is entered into as of
the 9th day of December 2004, by and between S&S Aviation LLC, a limited
liability company organized and existing under the laws of Oklahoma, having
offices at 2800 Airport Road, Hangar 1, Box 6, Ada, Oklahoma 74820 ("Seller"),
and Pre-Paid Legal Services, Inc., a corporation organized and existing under
the laws of Oklahoma ("Buyer"), having offices at One Pre-Paid Way, Ada,
Oklahoma 74820.
W I T N E S S E T H :
WHEREAS, Seller desires to sell the Aircraft (as hereinafter defined), and
Buyer desires to purchase the Aircraft in accordance with the terms and
conditions hereinafter set forth for the purpose of resale;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.01 Definitions. As used in this Agreement:
"Aircraft" shall mean one (1) used MU 300 model Mitsubishi Aircraft
aircraft with manufacturer's serial number A024SA, and United States nationality
and registration number N674AC (hereinafter referred to as the "Airframe"),
together with the Engines and all Parts installed thereon.
"Bill of Sale" shall mean a limited warranty Bill of Sale conveying title
to the Aircraft to Buyer, substantially in the form of Exhibit A annexed hereto,
duly executed by Seller and delivered to Buyer on or before the Closing Date.
"Closing Date" shall mean November 30, or such other business day as the
parties may mutually select, provided that the Seller is then in possession of
the entire Purchase Price in immediately available funds, and a Bill of Sale and
FAA Bill of Sale duly executed by Seller, all Uniform Commercial Code and FAA
documents necessary to convey to Buyer title to the Aircraft free and clear of
all Liens, and all other documents required to be delivered pursuant to Section
8.01.
"Delivery" shall occur on the Closing Date when all conditions set forth in
Sections 7.01 and 7.02 have been satisfied.
"Engines" shall mean the JT15D-4D model Pratt and Whitney engines, bearing
manufacturer's serial numbers PCE-70858 and PCE-71013, and all Parts installed
thereon, installed on the Aircraft.
"FAA" shall mean the United States of America Federal Aviation
Administration, or any successor agency thereto.
"FAA Bill of Sale" shall mean an FAA Bill of Sale (AC Form 8050-2) for
aircraft conveying title to the Aircraft to Buyer.
"Lien" or "Liens" shall mean each of any mortgage, pledge, lien, charge,
encumbrance, security interest or lease (including any conditional sales
agreement, equipment trust agreement or other title retention agreement).
"Part" or "Parts" shall mean each of all appliances, parts, components,
instruments, appurtenances, accessories, furnishings and other equipment or
property of whatever nature (including, without limitation, avionics, radios and
radar, but excluding the Engines and Airframe) which may from time to time be
incorporated or installed in or attached to the Airframe or the Engines.
"Purchase Price" shall mean a total of One Million Two Hundred Thirty
Thousand Two Hundred United States Dollars (U.S. $1,230,200.00).
ARTICLE 2
SUBJECT MATTER OF SALE
2.01 The Purchase and Sale. Subject to the terms and conditions of this
Agreement, Seller shall sell and deliver to Buyer, free and clear of all Liens,
and Buyer shall purchase and accept Delivery from Seller of, the Aircraft and
the Parts installed thereon. THE AIRCRAFT SHALL BE PURCHASED HEREUNDER AT
DELIVERY ON AN "AS IS, WHERE IS" BASIS AND, EXCEPT FOR SELLER'S WARRANTY OF
TITLE, SELLER MAKES NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE
AIRCRAFT WHICH SHALL SURVIVE SALE AND DELIVERY. SELLER'S WARRANTY OF TITLE IS
EXCLUSIVE, AND BUYER, CONCURRENTLY WITH THE SALE AND DELIVERY HEREUNDER OF THE
AIRCRAFT, HEREBY WAIVES, RELEASES AND RENOUNCES ALL OTHER WARRANTIES, PATENT AND
OTHER INDEMNITIES, OBLIGATIONS AND LIABILITIES OF SELLER OR ITS ASSIGNS AND ANY
AND ALL RIGHTS, CLAIMS AND REMEDIES OF BUYER AGAINST SELLER OR ITS ASSIGNS,
EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE WITH RESPECT TO ANY
NON-CONFORMANCE OR DEFECT IN THE AIRCRAFT SO DELIVERED OR OTHER THINGS
DELIVERED, FURNISHED, SOLD, OR TRANSFERRED UNDER THIS AGREEMENT, INCLUDING BUT
NOT LIMITED TO (A) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE,
COURSE OF DEALING, OR USAGE OF TRADE, (B) ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR ANY PURPOSE, (C) ANY OBLIGATION OR LIABILITY WITH
RESPECT TO ANY ACTUAL OR ALLEGED INFRINGEMENT OR SIMILAR MATTER, AND (D) ANY
OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OR DAMAGE TO THE
AIRCRAFT, FOR LOSS OF USE, REVENUE OR PROFIT WITH RESPECT TO THE AIRCRAFT, OR
FOR ANY OTHER DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, ARISING FROM THE
FOREGOING.
ARTICLE 3
PURCHASE PRICE AND PAYMENT
3.01 Purchase Price. Buyer shall pay Seller the Purchase Price for the
Aircraft in full on the Closing Date upon accepting Delivery of the Aircraft.
ARTICLE 4
DELIVERY, INSPECTION AND ACCEPTANCE
4.01 Delivery. The Aircraft shall be delivered to Buyer on the Closing Date
at such place as to which Buyer and Seller may agree.
4.02 Inspection. Buyer has had or shall be given adequate opportunities to
inspect the Aircraft in accordance with any manufacturer's inspection procedures
for used aircraft and engines. Buyer's acceptance of Delivery of the Aircraft on
the Closing Date shall confirm that Buyer is satisfied with the condition of the
Aircraft and accepts such Delivery AS IS. Buyer is aware that the Aircraft is
currently undergoing certain maintenance and overhaul anticipated to be
completed in December 2004 (the "Ongoing Maintenance"). Buyer agrees that upon
Delivery of the Aircraft, Buyer will assume all responsibility for the costs and
expenses associated with the Ongoing Maintenance.
4.03 Title and Risk of Loss. Title to the Aircraft shall be transferred
from Seller to Buyer upon Delivery. Until such completion of Delivery, Seller
shall bear all risk of loss, injury, or destruction or damage of the Aircraft
and shall ensure that such risk is properly insured with a reputable insurance
company. From and after Delivery, Buyer shall bear all risk of loss, injury, or
destruction or damage of the Aircraft.
ARTICLE 5
AIRCRAFT DOCUMENTATION: ACCEPTANCE CERTIFICATE
5.01 Records.
(a) At Delivery, Seller shall provide to Buyer all logs, manuals,
certificates, data and inspection, modification and restoration records and
other materials as are required by any governmental authority having
jurisdiction over the Aircraft to be maintained in respect of the Aircraft
(collectively, the "Aircraft Documentation").
(b) Seller shall also provide all additional documentation, if any,
necessary to effect the assignments provided by Article 9 hereof.
5.02 Acceptance Certificate. Upon Delivery of the Aircraft in accordance
with this Agreement, Buyer shall deliver to Seller a duly executed Acceptance
Certificate in the form of Exhibit "B" hereto (with appropriate insertions).
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
6.01 Seller's Representations and Warranties. Seller represents and
warrants to Buyer that:
(a) At the time of Delivery of the Aircraft, Seller will have full
legal and beneficial title to the Aircraft, together with full power and
lawful authority to deliver the Aircraft to Buyer, and upon delivery of the
Bill of Sale and FAA Bill of Sale to Buyer in accordance with Section 8.01,
Seller shall have transferred full legal and beneficial title to the
Aircraft to Buyer, free and clear of all Liens.
(b) Seller is a limited liability company duly organized and validly
existing and in good standing under the laws of the State of Oklahoma.
(c) Seller has the corporate power to execute this Agreement.
(d) The making, execution and performance of this Agreement by Seller
has been duly authorized by all necessary corporate action, and will not
violate, breach or contravene any provision of law or the articles of
organization or the operating agreement of Seller, or any license or permit
under which Seller conducts its business, and will not result in the breach
of or constitute a default under any indenture, credit or loan agreement,
mortgage or other instrument to which Seller is a party or by which Seller
may be bound, and this Agreement constitutes a valid and binding obligation
of Seller enforceable in accordance with its terms.
6.02 Buyer's Representations and Warranties. Buyer represents and warrants
to Seller that:
(a) Buyer is a corporation duly organized and validly existing under
the laws of the State of Oklahoma.
(b) Buyer has the corporate power to execute this Agreement.
(c) The making, execution and performance of this Agreement by Buyer
has been duly authorized by all necessary corporate action, and will not
violate, breach or contravene any provisions of law or the certificate of
incorporation or the bylaws of Buyer, and will not result in the breach of
or constitute a default under any indenture, credit or loan agreement,
mortgage or other instrument to which Buyer is a party or by which Buyer
may be bound, and this Agreement constitutes a valid and binding obligation
of Buyer enforceable in accordance with its terms.
6.03 Survival of Warranties. All representations and warranties of the
parties contained in this Agreement shall be fully effective and true as of the
Closing Date and shall survive Delivery of the Aircraft.
ARTICLE 7
CONDITIONS PRECEDENT
7.01 Conditions Precedent to Buyer's Obligations. The obligations of Buyer
to consummate the transaction contemplated hereby are subject to and conditional
upon the following conditions having been met (or waived by Buyer) on or before
the Closing Date:
(a) Buyer shall have received all documents referred to in Section
8.01 hereof.
(b) All representations and warranties of Seller made pursuant to this
Agreement shall be true and correct as of the Closing Date.
7.02 Conditions Precedent to Seller's Obligations. The obligations of
Seller to consummate the transaction contemplated hereby is subject to and
conditional upon the following conditions having been met (or waived by Seller)
on or before the Closing Date:
(a) Seller shall have received all the Purchase Price in accordance
with Section 3.01.
(b) Seller shall have received all documents required to be delivered
by Buyer pursuant to Section 8.01.
ARTICLE 8
CLOSING
8.01 Documents. On or before the Closing Date:
(a) Except as otherwise provided in this Section 8.01(a), Seller
shall deliver, or cause to be delivered, to Buyer the following:
(1) A Bill of Sale conveying to Buyer full right, title and
interest in and to the Aircraft and the FAA Bill of Sale
conveying to Buyer full right, title and interest in the
Aircraft, free and clear of all Liens.
(2) Releases, satisfactions and/or terminations of any and
all Liens against the Aircraft.
(3) All Aircraft Documentation as set forth in Section 5.01,
which shall be on board the Aircraft unless alternative delivery
arrangements are agreed to by the parties.
(b) Buyer shall prepare and deliver the following:
(1) An AC Form 8050-1 Aircraft Registration Application for
registration of the Aircraft in the name of the Buyer for filing
with the FAA.
8.02 Closing. On the Closing Date, Buyer shall deliver the Purchase Price.
Upon receipt of the entire Purchase Price, Buyer shall record all documents
delivered pursuant to Section 8.01 which are necessary to convey title to the
Aircraft to Buyer, free and clear of all Liens, and Seller shall deliver all
other documents described in Section 8.01(a) to Buyer. All transactions shall be
deemed to have occurred on the Closing Date simultaneously. Upon Delivery and
the filing of the FAA Bill of Sale and of the releases of all Liens on the
Aircraft with the FAA Registration Office in Oklahoma City and any applicable
state filing office, Buyer shall immediately deliver or cause to be delivered to
Seller the Acceptance Certificate.
ARTICLE 9
ASSIGNMENT OF WARRANTIES,
SERVICE LIFE POLICIES AND PATENT INDEMNITIES
9.01 Seller's Assignment. Seller hereby assigns to Buyer as of Delivery,
any and all existing assignable warranties, service life policies and patent
indemnities of manufacturers and maintenance and overhaul agencies to or for
Seller, of and for the Engines, the Airframe and/or the Aircraft. At Buyer's
request, Seller shall give Buyer reasonable assistance in enforcing the rights
of Buyer arising under such warranties, service life policies and patent
indemnities, but Buyer shall reimburse Seller for the reasonable costs and
expenses incurred by Seller in rendering such assistance. Upon request by Buyer,
Seller shall give written notice to any such manufacturers or maintenance and
overhaul agencies of the assignment of such warranties, service life policies
and patent indemnities to Buyer. In the event any of the foregoing warranties,
service life policies and patent indemnities are not assignable, Seller agrees
to act as agent for and use its best efforts to obtain the benefits of such
warranties, service life policies and patent indemnities for the benefit of
Buyer.
ARTICLE 10
TAXES AND EXPENSES
10.01 Payment of Taxes. Buyer shall do all things necessary to obtain
exemption from any and all taxes, excises, duties and assessments whatsoever,
including, without limitation, sales, use and similar taxes arising solely out
of the sale and delivery of the Aircraft in any manner levied, assessed or
imposed by the any state, local or federal authority, and Buyer hereby agrees to
indemnify Seller for any and all such taxes, excises, duties and assessments.
10.02 Expenses.
(a) Seller shall be responsible for paying Seller's broker's and
attorney's fees for services in connection with the sale and transfer of
ownership of the Aircraft.
(b) Buyer shall be responsible for paying Buyer's broker's and
attorney's fees for services in connection with the purchase and transfer
of ownership of the Aircraft.
ARTICLE 11
DESTRUCTION OF AIRCRAFT
11.01. Loss or Damage to Aircraft Prior to Delivery. Should the Aircraft
suffer a total or a constructive total loss prior to Delivery, the parties shall
have no further liability to each other with respect to the sale and Delivery of
the Aircraft.
ARTICLE 12
MISCELLANEOUS
12.01 Assignment. This Agreement, and the rights and obligations created
hereunder, shall not be assignable or delegable by either party hereto without
the prior written consent of the other party. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties, their
respective successors and assigns.
12.02 Headings. The headings used herein are for convenience only and shall
not be considered part of any Article for purposes of construing provisions
hereof.
12.03 Notices and Requests. All notices and other communications authorized
hereunder shall, except where specifically provided otherwise, be given in
writing either by personal delivery to an officer of the party to whom notice is
given, or by registered or certified mail, return receipt requested, or by
telecopier, and the date upon which any such notice is so personally delivered
(or if the notice is given by registered or certified mail, or by telecopier,
the date upon which it is received by the addressee) shall be deemed to be the
date of such notice, irrespective of the date appearing therein.
Buyer shall be addressed:
Pre-Paid Legal Services, Inc.
One Pre-Paid Way
Ada, Oklahoma 74820
Attention:.......Randy Harp
Seller shall be addressed:
S&S Aviation LLC
2800 Airport Road, Hangar 1, Box 6
Ada, Oklahoma 74820
Attention: ......Harland Stonecipher
12.04 Entire Agreement. This Agreement supersedes all previous discussions,
negotiations and communications and constitutes the entire agreement between the
parties with respect to the subject matter hereof and shall not in any manner be
supplemented, amended or modified except by a written instrument executed on
behalf of the parties by their duly authorized representatives and executed on
or after the date hereof.
12.05 Governing Law. This Agreement shall be construed and determined in
accordance with the laws of the State of Oklahoma.
12.06 Payments. All payments due and owing hereunder shall be made in
immediately available funds without any deduction for any counterclaim or
setoff.
12.07 Execution in Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original document.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
SELLER: BUYER:
S&S AVIATION LLC PRE-PAID LEGAL SERVICES, INC.
By: /s/ Harland C. Stonecipher By: /s/ Randy Harp
--------------------------- --------------------------
Name: Harland Stonecipher Name: Randy Harp
Title: Manager Title: Chief Operating Officer
and
By: /s/ Wilburn L. Smith
-----------------------------------
Name: Wilburn Smith
Title: Manager
EXHIBIT A
WARRANTY BILL OF SALE
For $1.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, S&S Aviation LLC ("Seller") has
bargained, sold, conveyed, transferred and delivered and by these presents does
bargain, sell, convey, transfer and deliver to Pre-Paid Legal Services, Inc.
("Buyer") the MU 300 model Mitsubishi Aircraft aircraft with manufacturer's
serial number A024SA and United States nationality and registration number
N674AC, including the JT15D-4D model Pratt and Whitney aircraft engines with
manufacturer's serial numbers PCE-70858 and PCE-71013; (ii) all data, records,
manuals, aircraft and maintenance log books, and manufacturer's customer
bulletins relating thereto; and (iii) all instruments, accessories, parts,
fittings, special tools and equipment installed thereon or related thereto (all
of the foregoing is hereinafter collectively referred to as the "Aircraft"). The
terms of sale for the Aircraft are set forth in the Aircraft Purchase Agreement
dated November __, 2004, between Seller and Buyer, and are incorporated herein
by reference.
Seller hereby warrants that at the time of transfer of title to the
Aircraft hereunder, Seller has good, legal and beneficial title to the Aircraft,
free and clear of all mortgages, claims, liens, charges, encumbrances, security
interests, leases and other rights of others, and that Seller will warrant and
defend such title against the claims and demands of all persons.
This Warranty Bill of Sale shall be governed by the laws of the State of
Oklahoma.
IN WITNESS WHEREOF, Seller has caused this Warranty Bill of Sale to be
executed and delivered to Buyer this ___ day of ___________, 2004.
S&S AVIATION LLC
By: /s/ Harland C. Stonecipher
-----------------------------------
Name: Harland Stonecipher
Title: Manager
and
By: /s/ Wilburn L. Smith
-----------------------------------
Name: Wilburn Smith
Title: Manager
EXHIBIT B
ACCEPTANCE CERTIFICATE
Place of Delivery: ______________________________
Date of Delivery: _______________________________
Time of Delivery: _______________________________
Received from S&S Aviation LLC ("Seller"), at the time and place set forth
above, in accordance with and subject to the Aircraft Purchase Agreement dated
December 9th, 2004,between Seller and Pre-Paid Legal Services, Inc. ("Buyer").
One MU 300 model Mitsubishi Aircraft aircraft with manufacturer's serial
number A024SA and United States nationality and registration number N674AC,
including the JT15D-4D model Pratt and Whitney aircraft engines with
manufacturer's serial numbers PCE-70858 and PCE-71013 (the "Aircraft").
The undersigned is authorized by Buyer to accept delivery of the Aircraft,
and hereby accepts it on behalf of Buyer.
IN WITNESS WHEREOF, Buyer and Seller have caused this Acceptance
Certificate to be executed by their duly authorized representatives this 9th day
of December, 2004.
Aircraft Delivered by: Aircraft Received and Accepted by:
S&S AVIATION LLC PRE-PAID LEGAL SERVICES, INC.
By: /s/ Harland C. Stonecipher By: /s/ Randy Harp
----------------------- ----------------------------
Name: Harland C. Stonecipher Name: Randy Harp
Title: Title:
----------------------- -------------------
EXHIBIT 10.14
AIRCRAFT PURCHASE AGREEMENT
THIS AIRCRAFT PURCHASE AGREEMENT (this "Agreement") is entered into as of
the 9th day of December, 2004, by and between Harland C. Stonecipher and/or
Shirley A. Stonecipher and Stonecipher Aviation LLC, a limited liability company
organized and existing under the laws of Oklahoma, having offices at Rt. 1 Box
39, Centrahoma, Oklahoma 74534 (collectively, "Seller"), and Pre-Paid Legal
Services, Inc., a corporation organized and existing under the laws of Oklahoma
("Buyer"), having offices at One Pre-Paid Way, Ada, Oklahoma 74820.
W I T N E S S E T H :
WHEREAS, Seller desires to sell the Aircraft (as hereinafter defined), and
Buyer desires to purchase the Aircraft in accordance with the terms and
conditions hereinafter set forth for the purpose of resale;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.01 Definitions. As used in this Agreement:
"Aircraft" shall mean one (1) used 200-Super King Air model Beech Aircraft
Company aircraft with manufacturer's serial number BB-711, and United States
nationality and registration number N1162V and hereinafter referred to as the
"Airframe", together with the Engines and all Parts installed thereon.
"Bill of Sale" shall mean a limited warranty Bill of Sale conveying title
to the Aircraft to Buyer, substantially in the form of Exhibit A annexed hereto,
duly executed by Seller and delivered to Buyer on or before the Closing Date.
"Closing Date" shall mean November 30, or such other business day as the
parties may mutually select, provided that the Seller is then in possession of
the entire Purchase Price in immediately available funds, and a Bill of Sale and
FAA Bill of Sale duly executed by Seller, all Uniform Commercial Code and FAA
documents necessary to convey to Buyer title to the Aircraft free and clear of
all Liens, and all other documents required to be delivered pursuant to Section
9.01.
"Delivery" shall occur on the Closing Date when all conditions set forth in
Sections 8.01 and 8.02 have been satisfied.
"Engines" shall mean the PT6A-41 model Pratt and Whitney engines, bearing
manufacturer's serial numbers PCE-81679 and PCE-81683, and all Parts installed
thereon, installed on the Aircraft.
"FAA" shall mean the United States of America Federal Aviation
Administration, or any successor agency thereto.
"FAA Bill of Sale" shall mean an FAA Bill of Sale (AC Form 8050-2) for
aircraft conveying title to the Aircraft to Buyer.
"Lien" or "Liens" shall mean each of any mortgage, pledge, lien, charge,
encumbrance, security interest or lease (including any conditional sales
agreement, equipment trust agreement or other title retention agreement).
"Part" or "Parts" shall mean each of all appliances, parts, components,
instruments, appurtenances, accessories, furnishings and other equipment or
property of whatever nature (including, without limitation, avionics, radios and
radar, but excluding the Engines and Airframe) which may from time to time be
incorporated or installed in or attached to the Airframe or the Engines.
"Purchase Price" shall mean a total of One Million Eighty Three Thousand
Three Hundred Fifty Five United States Dollars (U.S. $1,083,355.00).
ARTICLE 2
SUBJECT MATTER OF SALE
2.01 The Purchase and Sale. Subject to the terms and conditions of this
Agreement, Seller shall sell and deliver to Buyer, free and clear of all Liens,
and Buyer shall purchase and accept Delivery from Seller of, the Aircraft and
the Parts installed thereon. THE AIRCRAFT SHALL BE PURCHASED HEREUNDER AT
DELIVERY ON AN "AS IS, WHERE IS" BASIS AND, EXCEPT FOR SELLER'S WARRANTY OF
TITLE CONTAINED IN SECTION 7.01(a) AND IN THE BILL OF SALE AND THE PROVISIONS OF
SECTION 5.01, SELLER MAKES NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE
AIRCRAFT WHICH SHALL SURVIVE SALE AND DELIVERY. SELLER'S WARRANTY OF TITLE SET
FORTH IN SECTION 7.01(a) IS EXCLUSIVE AND BUYER, CONCURRENTLY WITH THE SALE AND
DELIVERY HEREUNDER OF THE AIRCRAFT, EXCEPT FOR THE PROVISIONS OF SECTION 5.01,
HEREBY WAIVES, RELEASES AND RENOUNCES ALL OTHER WARRANTIES, PATENT AND OTHER
INDEMNITIES, OBLIGATIONS AND LIABILITIES OF SELLER OR ITS ASSIGNS AND ANY AND
ALL RIGHTS, CLAIMS AND REMEDIES OF BUYER AGAINST SELLER OR ITS ASSIGNS, EXPRESS
OR IMPLIED, ARISING BY LAW OR OTHERWISE WITH RESPECT TO ANY NON-CONFORMANCE OR
DEFECT IN THE AIRCRAFT SO DELIVERED OR OTHER THINGS DELIVERED, FURNISHED, SOLD,
OR TRANSFERRED UNDER THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO (A) ANY
IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING, OR USAGE
OF TRADE, (B) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY
PURPOSE, (C) ANY OBLIGATION OR LIABILITY WITH RESPECT TO ANY ACTUAL OR ALLEGED
INFRINGEMENT OR SIMILAR MATTER, AND (D) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM
OR REMEDY FOR LOSS OR DAMAGE TO THE AIRCRAFT, FOR LOSS OF USE, REVENUE OR PROFIT
WITH RESPECT TO THE AIRCRAFT, OR FOR ANY OTHER DIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES, ARISING FROM THE FOREGOING.
ARTICLE 3
PURCHASE PRICE AND PAYMENT
3.01 Purchase Price. Buyer shall pay Seller the Purchase Price for the
Aircraft in full on the Closing Date upon accepting Delivery of the Aircraft.
ARTICLE 4
DELIVERY, INSPECTION AND ACCEPTANCE
4.01 Delivery. The Aircraft shall be delivered to Buyer on the Closing Date
at such place as to which Buyer and Seller may agree.
4.02 Inspection. Buyer has had or shall be given adequate opportunities to
inspect the Aircraft in accordance with any manufacturer's inspection procedures
for used aircraft and engines. Buyer's acceptance of Delivery of the Aircraft on
the Closing Date shall confirm that Buyer is satisfied with the condition of the
Aircraft and accepts such Delivery AS IS.
4.03 Title and Risk of Loss. Title to the Aircraft shall be transferred
from Seller to Buyer upon Delivery. Until such completion of Delivery, Seller
shall bear all risk of loss, injury, or destruction or damage of the Aircraft
and shall ensure that such risk is properly insured with a reputable insurance
company. From and after Delivery, Buyer shall bear all risk of loss, injury, or
destruction or damage of the Aircraft.
ARTICLE 5
CONDITION OF AIRCRAFT
5.01 Delivery Condition Criteria. At Delivery: (i) the Aircraft shall have
installed thereon the Engines and all Parts which were installed thereon as of
the date of this Agreement, (or replacements for such Parts having like value
and utility), and such Parts shall be functional within FAA guidelines or, if no
such guidelines exist, applicable published industry tolerances; (ii) the
Aircraft shall have a currently effective Certificate of Airworthiness issued by
the FAA and, in any event shall be in such state of maintenance and repair as to
qualify for a Certificate of Airworthiness issued by the FAA; (iii) the Aircraft
shall be suitable for operation under Part 91 of the Federal Aviation
Regulations and shall comply with all outstanding FAA regulations or other
mandatory maintenance directives, including Chapter V corrosion inspection
requirements, airworthiness directives or other instructions or others requiring
compliance; (iv) the Aircraft shall be free and clear of all Liens and rights of
others; and (v) the Aircraft shall have been configured and equipped as it is
configured and equipped on the date of this Agreement.
ARTICLE 6
AIRCRAFT DOCUMENTATION: ACCEPTANCE CERTIFICATE
6.01 Records.
(a) At Delivery, Seller shall provide to Buyer all logs, manuals,
certificates, data and inspection, modification and restoration records and
other materials as are required by any governmental authority having
jurisdiction over the Aircraft to be maintained in respect of the Aircraft
(collectively, the "Aircraft Documentation").
(b) Seller shall also provide all additional documentation, if any,
necessary to effect the assignments provided by Article 10 hereof.
6.02 Acceptance Certificate. Upon Delivery of the Aircraft in accordance
with this Agreement, Buyer shall deliver to Seller a duly executed Acceptance
Certificate in the form of Exhibit "B" hereto (with appropriate insertions).
ARTICLE 7
REPRESENTATIONS AND WARRANTIES
7.01 Seller's Representations and Warranties. Seller represents and
warrants to Buyer that:
(a) At the time of Delivery of the Aircraft, Seller will have full
legal and beneficial title to the Aircraft, together with full power and
lawful authority to deliver the Aircraft to Buyer, and upon delivery of the
Bill of Sale and FAA Bill of Sale to Buyer in accordance with Section 9.01,
Seller shall have transferred full legal and beneficial title to the
Aircraft to Buyer, free and clear of all Liens.
(b) Seller is a limited liability company duly organized and validly
existing and in good standing under the laws of the State of Oklahoma.
(c) Seller has the corporate power to execute this Agreement.
(d) The making, execution and performance of this Agreement by Seller
has been duly authorized by all necessary corporate action, and will not
violate, breach or contravene any provision of law or the articles of
organization or the operating agreement of Seller, or any license or permit
under which Seller conducts its business, and will not result in the breach
of or constitute a default under any indenture, credit or loan agreement,
mortgage or other instrument to which Seller is a party or by which Seller
may be bound, and this Agreement constitutes a valid and binding obligation
of Seller enforceable in accordance with its terms.
(e) At Delivery, the Aircraft is possessed of all Parts installed
thereon as of the date of this Agreement (or replacements for such Parts of
equal value and utility) and complies with the provisions of Section 5.01.
7.02 Buyer's Representations and Warranties. Buyer represents and warrants
to Seller that:
(a) Buyer is a corporation duly organized and validly existing under
the laws of the State of Oklahoma.
(b) Buyer has the corporate power to execute this Agreement.
(c) The making, execution and performance of this Agreement by Buyer
has been duly authorized by all necessary corporate action, and will not
violate, breach or contravene any provisions of law or the certificate of
incorporation or the bylaws of Buyer, and will not result in the breach of
or constitute a default under any indenture, credit or loan agreement,
mortgage or other instrument to which Buyer is a party or by which Buyer
may be bound, and this Agreement constitutes a valid and binding obligation
of Buyer enforceable in accordance with its terms.
7.03 Survival of Warranties. All representations and warranties of the
parties contained in this Article 7 shall be fully effective and true as of the
Closing Date and shall survive Delivery of the Aircraft, except for Seller's
representation in Section 7.01(e) which shall be true as of the Closing Date but
shall not survive such Closing Date.
ARTICLE 8
CONDITIONS PRECEDENT
8.01 Conditions Precedent to Buyer's Obligations. The obligations of Buyer
to consummate the transaction contemplated hereby are subject to and conditional
upon the following conditions having been met (or waived by Buyer) on or before
the Closing Date:
(a) Buyer shall have received all documents referred to in Section
9.01 hereof.
(b) All representations and warranties of Seller made pursuant to this
Agreement shall be true and correct as of the Closing Date.
8.02 Conditions Precedent to Seller's Obligations. The obligations of
Seller to consummate the transaction contemplated hereby is subject to and
conditional upon the following conditions having been met (or waived by Seller)
on or before the Closing Date:
(a) Seller shall have received all the Purchase Price in accordance
with Section 3.01.
(b) Seller shall have received all documents required to be delivered
by Buyer pursuant to Section 9.
ARTICLE 9
CLOSING
9.01 Documents. On or before the Closing Date:
(a) Except as otherwise provided in this Section 9.01(a), Seller shall
deliver, or cause to be delivered, to Buyer the following:
(1) A Bill of Sale conveying to Buyer full right, title and
interest in and to the Aircraft and the FAA Bill of Sale
conveying to Buyer full right, title and interest in the
Aircraft, free and clear of all Liens.
(2) A current standard FAA Certificate of Airworthiness
which shall be on board the Aircraft.
(3) Releases, satisfactions and/or terminations of any and
all Liens against the Aircraft.
(4) All Aircraft Documentation as set forth in Section 6.01,
which shall be on board the Aircraft unless alternative delivery
arrangements are agreed to by the parties.
(b) Buyer shall prepare and deliver the following:
(1) An AC Form 8050-1 Aircraft Registration Application for
registration of the Aircraft in the name of the Buyer for filing
with the FAA.
9.02 Closing. On the Closing Date, Buyer shall deliver the Purchase Price.
Upon receipt of the entire Purchase Price, Buyer shall record all documents
delivered pursuant to Section 9.01 which are necessary to convey title to the
Aircraft to Buyer, free and clear of all Liens, and Seller shall deliver all
other documents described in Section 9.01(a) to Buyer. All transactions shall be
deemed to have occurred on the Closing Date simultaneously. Upon Delivery and
the filing of the FAA Bill of Sale and of the releases of all Liens on the
Aircraft with the FAA Registration Office in Oklahoma City and any applicable
state filing office, Buyer shall immediately deliver or cause to be delivered to
Seller the Acceptance Certificate.
ARTICLE 10
ASSIGNMENT OF WARRANTIES,
SERVICE LIFE POLICIES AND PATENT INDEMNITIES
10.01 Seller's Assignment. Seller hereby assigns to Buyer as of Delivery,
any and all existing assignable warranties, service life policies and patent
indemnities of manufacturers and maintenance and overhaul agencies to or for
Seller, of and for the Engines, the Airframe and/or the Aircraft. At Buyer's
request, Seller shall give Buyer reasonable assistance in enforcing the rights
of Buyer arising under such warranties, service life policies and patent
indemnities, but Buyer shall reimburse Seller for the reasonable costs and
expenses incurred by Seller in rendering such assistance. Upon request by Buyer,
Seller shall give written notice to any such manufacturers or maintenance and
overhaul agencies of the assignment of such warranties, service life policies
and patent indemnities to Buyer. In the event any of the foregoing warranties,
service life policies and patent indemnities are not assignable, Seller agrees
to act as agent for and use its best efforts to obtain the benefits of such
warranties, service life policies and patent indemnities for the benefit of
Buyer.
ARTICLE 11
TAXES AND EXPENSES
11.01 Payment of Taxes. Buyer shall pay any and all taxes, excises, duties
and assessments whatsoever, including, without limitation, sales, use and
similar taxes arising solely out of the sale and delivery of the Aircraft in any
manner levied, assessed or imposed by the any state, local or federal authority,
other than any income tax of Seller or Seller's owners, and Buyer hereby agrees
to indemnify Seller for any and all such taxes, excises, duties and assessments.
11.02 Expenses.
(a) Seller shall be responsible for paying Seller's broker's and
attorney's fees for services in connection with the sale and transfer of
ownership of the Aircraft.
(b) Buyer shall be responsible for paying Buyer's broker's and
attorney's fees for services in connection with the purchase and transfer
of ownership of the Aircraft.
ARTICLE 12
DESTRUCTION OF AIRCRAFT
12.01. Loss or Damage to Aircraft Prior to Delivery. Should the Aircraft
suffer a total or a constructive total loss prior to Delivery, the parties shall
have no further liability to each other with respect to the sale and Delivery of
the Aircraft.
ARTICLE 13
MISCELLANEOUS
13.01 Assignment. This Agreement, and the rights and obligations created
hereunder, shall not be assignable or delegable by either party hereto without
the prior written consent of the other party. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties, their
respective successors and assigns.
13.02 Headings. The headings used herein are for convenience only and shall
not be considered part of any Article for purposes of construing provisions
hereof.
13.03 Notices and Requests. All notices and other communications authorized
hereunder shall, except where specifically provided otherwise, be given in
writing either by personal delivery to an officer of the party to whom notice is
given, or by registered or certified mail, return receipt requested, or by
telecopier, and the date upon which any such notice is so personally delivered
(or if the notice is given by registered or certified mail, or by telecopier,
the date upon which it is received by the addressee) shall be deemed to be the
date of such notice, irrespective of the date appearing therein.
Buyer shall be addressed:
Pre-Paid Legal Services, Inc.
One Pre-Paid Way
Ada, Oklahoma 74820
Attention: Randy Harp
Seller shall be addressed:
Stonecipher Aviation LLC
Rt. 1, Box 39
Centrahoma, Oklahoma 74534
Attention: Harland Stonecipher
13.04 Entire Agreement. This Agreement supersedes all previous discussions,
negotiations and communications and constitutes the entire agreement between the
parties with respect to the subject matter hereof and shall not in any manner be
supplemented, amended or modified except by a written instrument executed on
behalf of the parties by their duly authorized representatives and executed on
or after the date hereof.
13.05 Governing Law. This Agreement shall be construed and determined in
accordance with the laws of the State of Oklahoma.
13.06 Payments. All payments due and owing hereunder shall be made in
immediately available funds without any deduction for any counterclaim or
setoff.
13.07 Execution in Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original document.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
SELLER: BUYER:
STONECIPHER AVIATION LLC PRE-PAID LEGAL SERVICES, INC.
By: /s/ Harland C. Stonecipher By: /s/ Randy Harp
--------------------------- --------------------------
Name: Harland C. Stonecipher Name: Randy Harp
Title: Title: Chief Operating Officer
----------------------------
/s/ Harland C. Stonecipher
- --------------------------
Harland C Stonecipher
/s/ Shirley A. Stonecipher
- --------------------------
Shirley A. Stonecipher
114
EXHIBIT A
WARRANTY BILL OF SALE
For $1.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Stonecipher Aviation LLC
("Seller") has bargained, sold, conveyed, transferred and delivered and by these
presents does bargain, sell, convey, transfer and deliver to Pre-Paid Legal
Services, Inc. ("Buyer") the 200-Super King Air model Beech Aircraft Company
aircraft with manufacturer's serial number BB-711 and United States nationality
and registration number N1162V, including the PT6A-41 model Pratt and Whitney
aircraft engines with manufacturer's serial numbers PCE-81679 and PCE-81683;
(ii) all data, records, manuals, aircraft and maintenance log books, and
manufacturer's customer bulletins relating thereto; and (iii) all instruments,
accessories, parts, fittings, special tools and equipment installed thereon or
related thereto (all of the foregoing is hereinafter collectively referred to as
the "Aircraft"). The terms of sale for the Aircraft are set forth in the
Aircraft Purchase Agreement dated December __, 2004, between Seller and Buyer,
and are incorporated herein by reference.
Seller hereby warrants that at the time of transfer of title to the
Aircraft hereunder, Seller has good, legal and beneficial title to the Aircraft,
free and clear of all mortgages, claims, liens, charges, encumbrances, security
interests, leases and other rights of others, and that Seller will warrant and
defend such title against the claims and demands of all persons.
This Warranty Bill of Sale shall be governed by the laws of the State of
Oklahoma.
IN WITNESS WHEREOF, Seller has caused this Warranty Bill of Sale to be
executed and delivered to Buyer this ___ day of December, 2004.
STONECIPHER AVIATION LLC
By: /s/ Harland C. Stonecipher
--------------------------------------------
Name: Harland C. Stonecipher
Title:
------------------------------
/s/ Harland C. Stonecipher
--------------------------
Harland C Stonecipher
/s/ Shirley A. Stonecipher
--------------------------
Shirley A. Stonecipher
EXHIBIT B
ACCEPTANCE CERTIFICATE
Place of Delivery: ______________________________
Date of Delivery: _______________________________
Time of Delivery: _______________________________
Received from Stonecipher Aviation LLC ("Seller"), at the time and place
set forth above, in accordance with and subject to the Aircraft Purchase
Agreement dated December 9, 2004, between Seller and Pre-Paid Legal Services,
Inc. ("Buyer").
One 200-Super King Air model Beech Aircraft Company aircraft with
manufacturer's serial number BB-711, FAA Registration Number N1162V, equipped
with PT6A-41 model Pratt and Whitney aircraft engines with manufacturer's serial
numbers PCE-81679 and PCE-81683 (the "Aircraft").
The undersigned is authorized by Buyer to accept delivery of the Aircraft,
and hereby accepts it on behalf of Buyer.
IN WITNESS WHEREOF, Buyer and Seller have caused this Acceptance
Certificate to be executed by their duly authorized representatives this 9th day
of December, 2004.
Aircraft Delivered by: Aircraft Received and Accepted by:
STONECIPHER AVIATION LLC PRE-PAID LEGAL SERVICES, INC.
By: /s/ Harland C. Stonecipher By: /s/ Randy Harp
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Name: Harland C. Stonecipher Name: Randy Harp
Title: Title:
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/s/ Harland C. Stonecipher
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Harland C Stonecipher
/s/ Shirley A. Stonecipher
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Shirley A. Stonecipher
EXHIBIT 10.15
Assignment and Assumption of Lease
ASSIGNMENT AND ASSUMPTION OF LEASE (this "Agreement"), entered into as of
effective as of December __, 2004 by and among Harland C. and Shirley
Stonecipher (collectively, "Assignor"), Pre-Paid Legal Services, Inc.
("Assignee"), and Ada Public Works Authority ("Landlord"). Assignor, Assignee
and Landlord are referred to collectively herein as the "Parties."
WITNESSETH:
WHEREAS, Assignor, as "Lessee," and Landlord, as "Lessor," are parties to
that lease dated October 27, 1997 (the "Lease"), presently covering a hangar
facility (the "Premises") located at the Ada Municipal Airport; and
WHEREAS, the Parties mutually desire (a) that Assignor assign all of its
right, title and interest in, under and to the Lease to Assignee, and (b) that
Landlord consent to the assignment contemplated hereby, all on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the receipt and adequacy of which are
expressly acknowledged, the Parties agree as follows:
Effective Date. For all purposes under this Agreement, the term "Effective
Date" shall mean the date hereof.
Assignment and Assumption.
(a) Effective as of the Effective Date, Assignor hereby assigns,
transfers and sets over unto Assignee all of Assignor's right, title and
interest in, under and to (i) the Lease. Assignor will deliver possession
of the Premises to Assignee on the Effective Date.
(b) Assignee hereby accepts the foregoing assignment and hereby agrees
to perform all of the terms and conditions of the Lease to be performed on
the part of Assignor and assumes all of the liabilities and obligations of
Assignor under the Lease, as amended hereby, arising or accruing on or
after the Effective Date, including, without limitation, liability for the
payment of rent and for the due performance of all the terms, covenants and
conditions of the tenant pursuant to the Lease as amended hereby.
Consent to Assignment. Effective as of the Effective Date, Landlord hereby
(a) consents to the assignment effected hereby, (b) agrees to recognize Assignee
as the tenant under the Lease and thereby establish direct privity of estate and
privity of contract with Assignee, and (c) releases Assignor for any obligations
under the Lease after the Effective Date.
Miscellaneous.
Headings. The section headings used herein are inserted for convenience
only and shall not affect in any way the meaning or interpretation of this
Agreement.
Governing law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oklahoma.
Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
LANDLORD:
Ada Public Works Authority
By: /s/ Darrell Nemecek
--------------------
Name: Darrell Nemecek
Title: Mayor/Chairman
ASSIGNOR:
/s/ Harland C. Stonecipher
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Harland C. Stonecipher
/s/ Shirley Stonecipher
- ------------------------
Shirley Stonecipher
ASSIGNEE:
Pre-Paid Legal Services, Inc.
By: /s/ Randy Harp
-------------------------
Randy Harp
Chief Operating Officer
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EXHIBIT 10.16
PRE-PAID LEGAL SERVICES, INC.
AMENDED DEFERRED COMPENSATION PLAN
The formal plan document to amend the Company's Deferred Compensation Plan
to comply with Section 409A of the Internal Revenue Code as amended by the
American Jobs Protection Act of 2004 has not yet been adopted pending further
guidance from the Internal Revenue Service, but when adopted the plan will be
effective as of January 1, 2005. Other than changes designed to comply with
these new provisions and to add additional participants, the amended plan will
be substantially the same as the existing plan filed as Exhibit 10.11 to this
Report.
EXHIBIT 21.1
PRE-PAID LEGAL SERVICES, INC.
Subsidiaries of Registrant
State or Percentage of
Province Ownership by
Name of Subsidiary Incorporation Registrant
------------------ ------------- ---------------
Pre-Paid Legal Casualty, Inc. Oklahoma 100%
American Legal Services, Inc. Oklahoma 100%
Pre-Paid Legal Services, Inc. of Florida Florida 100%
Legal Service Plans of Virginia, Inc. Virginia 100%
Ada Travel Service, Inc. Oklahoma 100%
Pre-Paid Canadian Holdings, L.L.C. Oklahoma 100%
Pre-Paid Legal Access, Inc. Oklahoma 100%
National Pre-Paid Legal Services of Mississippi, Inc. Georgia 100% owned by
Pre-Paid Legal
Services, Inc. of
Florida
Pre-Paid Legal Services of Tennessee, Inc. Tennessee 100% owned by
Pre-Paid Legal
Casualty, Inc.
PPL Legal Care of Canada Corporation Nova Scotia, 100% owned by
Canada Pre-Paid Canadian
Holdings, L.L.C.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated February 25, 2005, accompanying the consolidated
financial statements included in the Annual Report of Pre-Paid Legal Services,
Inc. on Form 10-K for the year ended December 31, 2004. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Pre-Paid Legal Services, Inc. on Forms S-8 (File No. 333-120403, effective
November 12, 2004, File No. 33-82144, effective July 28, 1994, File No.
33-62663, effective September 14, 1995, File No. 333-53183, effective May 20,
1998 and File No. 333-38386, effective June 1, 2000).
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 25, 2005
EXHIBIT 31.1
CERTIFICATION
I, Harland C. Stonecipher, Chief Executive Officer of the registrant, certify
that:
1. I have reviewed this annual report on Form 10-K of Pre-Paid Legal Services,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information.
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: March 3, 2005 /s/ Harland C. Stonecipher
-------------------------------------------
Harland C. Stonecipher
Chief Executive Officer
E>
EXHIBIT 31.2
CERTIFICATION
I, Steve Williamson, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this annual report on Form 10-K of Pre-Paid Legal Services,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information.
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: March 3, 2005 /s/ Steve Williamson
--------------------------------------
Steve Williamson
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 (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: March 3, 2005 /s/ Harland C. Stonecipher
------------------------------------------
Harland C. Stonecipher
Chairman, Chief Executive Officer and
President
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 (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: March 3, 2005 /s/ Steve Williamson
---------------------------
Steve Williamson
Chief Financial Officer