SCHEDULE 14A INFORMATION STATEMENT
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)
(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
PRE-PAID LEGAL SERVICES, INC.
(Name of Registrant as Specified in its Charter)
NOT APPLICABLE
(Name of Person(s) Filing Proxy Statement if Other Than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i) (4) and 0-11.
(1) Title of each class of securities to which transaction applies:________.
(2) Aggregate number of securities to which transaction applies:___________.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: ___________________.
(4) Proposed maximum aggregate value of transaction:_________________.
(5) Total fee paid: ___________________.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: __________________.
(2) Form, Schedule or Registration Statement No.: _________________.
(3) Filing Party: __________________________.
(4) Date Filed: ___________________________.
PRE-PAID LEGAL SERVICES, INC.
321 East Main Street
P. 0. Box 145
Ada, Oklahoma 74821-0145
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE HOLDERS OF SHARES OF COMMON STOCK:
The Annual Meeting of Shareholders of PRE-PAID LEGAL SERVICES, INC. (the
"Company") will be held in the Seminar Center at Pontotoc Technology Center at
601 West 33rd Street in Ada, Oklahoma, on Thursday, May 29, 2003, at 1:00 p.m.,
local time, for the following purposes:
(1) To elect two members to the Company's Board of Directors.
(2) To approve the amendment of the Company's Stock Option Plan to
increase the maximum number of shares of Common Stock in respect of
which options may be granted under the Stock Option Plan from
2,000,000 shares to 3,000,000 shares and to extend the termination
date of the Stock Option Plan from December 12, 2005 to December 12,
2012.
(3) To transact such other business as may properly be brought before the
Annual Meeting or any adjournment thereof.
The Annual Meeting may be recessed from time to time and, at any reconvened
meeting, action with respect to the matters specified in this notice may be
taken without further notice to shareholders unless required by the bylaws.
Shareholders of record of Common Stock at the close of business on April 4,
2003 are entitled to notice of, and to vote on all matters at, the Annual
Meeting. A list of all shareholders will be available for inspection at the
Annual Meeting and, during normal business hours the ten days prior thereto, at
the offices of the Company, 321 East Main Street, Ada, Oklahoma.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ KATHRYN WALDEN
----------------------------------
Kathryn Walden, Secretary
Ada, Oklahoma
April 14, 2003
Please vote by telephone or by using the Internet as instructed on the enclosed
Proxy Card or complete, sign and date the enclosed Proxy Card and return it
promptly in the envelope enclosed for that purpose. You may nevertheless vote in
person if you do attend the meeting.
PROXY STATEMENT
PRE-PAID LEGAL SERVICES, INC.
321 East Main Street
P. 0. Box 145
Ada, Oklahoma 74821-0145
2003 ANNUAL MEETING OF SHAREHOLDERS
The following information is furnished in connection with the 2003 Annual
Meeting of Shareholders of PRE-PAID LEGAL SERVICES, INC. (the "Company") to be
held in the Seminar Center at Pontotoc Technology Center at 601 West 33rd Street
in Ada, Oklahoma, on Thursday, May 29, 2003, at 1:00 p.m., local time. This
Proxy Statement and accompanying materials will be mailed on or about April 14,
2003 to holders of record of Common Stock as of the record date.
The record date for determining shareholders entitled to notice of the
Annual Meeting and to vote has been established as the close of business on
April 4, 2003. On that date, the Company had 17,835,726 shares of Common Stock,
par value $.01 per share, outstanding and eligible to vote, exclusive of
treasury stock. Holders of record of the Company's Common Stock on the record
date will be entitled to one vote for each share held on all matters properly
brought before the Annual Meeting.
The Board of Directors of the Company is soliciting the enclosed proxy. All
costs of soliciting proxies for the Annual Meeting will be borne by the Company.
In addition to use of the mails, proxies may be solicited by telephone, telecopy
or personal interview by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or other
regular employees for such services. Copies of solicitation materials will be
furnished to banks, brokerage houses, fiduciaries and custodians holding in
their names shares of Common Stock beneficially owned by others to forward to
such beneficial owners. The Company will, upon request, reimburse such persons
for their reasonable expenses in forwarding proxy materials to beneficial
owners.
Any shareholder returning the accompanying proxy or voting by telephone or
the Internet may revoke such proxy at any time prior to its exercise by (a)
giving written notice to the Company of such revocation, (b) voting in person at
the Annual Meeting, (c) voting by telephone or using the Internet as instructed
below (your latest telephone or Internet proxy is counted) or (d) executing and
delivering to the Company a later dated proxy. Written revocations and later
dated proxies should be sent to PRE-PAID LEGAL SERVICES, INC., P. O. Box 145,
Ada, Oklahoma 74821-0145, Attention: Kathryn Walden, Secretary.
ELECTION OF DIRECTORS
The Board of Directors of the Company consists of six members and is
divided into three classes equal in size, with the term of office of one class
expiring each year. The Board of Directors has nominated and proposes that John
W. Hail, whose term as a director expires as of the Annual Meeting of
Shareholders for 2003, be re-elected for a three-year term as a director, and
Steven R. Hague, a nominee for election to the Board of Directors, be elected
for a three-year term as a director.
The election of directors requires the affirmative vote of a plurality of
the shares of Common Stock voting in person or by proxy at the Annual Meeting.
All proxies received by the Board of Directors of the Company will be voted, in
the absence of instructions to the contrary, FOR the re-election of John W. Hail
and the election of Steven R. Hague to the Board of Directors.
Should the nominees for election to the Board of Directors be unable to
serve for any reason, the Board of Directors may, unless the Board by resolution
provides for a lesser number of directors, designate substitute nominees in
which event all proxies received without instructions will be voted for the
election of such substitute nominees. However, to the best knowledge of the
Board of Directors of the Company, the named nominees will serve if elected.
The following is certain information about each director and nominee for
director of the Company:
Existing
Name Age Director Since Term Expires
---------------------------- -------- -------------- ------------
John W. Hail 72 1998 2003
Peter K. Grunebaum 69 1980 2004
Randy Harp 47 1990 2004
Harland C. Stonecipher 64 1976 2005
Martin H. Belsky 58 1998 2005
Steven R. Hague 58 NA NA
John W. Hail
John W. Hail is the founder of Advantage Marketing Systems, Inc. and has
served as Chief Executive Officer and Chairman of the Board of Directors of
Advantage Marketing Systems, Inc. since its inception in June 1988. From July
1986 through May 1988, Mr. Hail served as Executive Vice President, Director and
Agency Director of the Company and also served as Chairman of the Board of
Directors of TVC Marketing, Inc., which was the exclusive marketing agent of the
Company from April 1984 through September 1985. Mr. Hail also serves as a
director of Duraswitch Industries, Inc.
Peter K. Grunebaum
Mr. Grunebaum is currently Managing Director of Fortrend International, an
investment firm headquartered in New York, New York, a position he has held
since 1989.
Randy Harp
Mr. Harp was named Chief Financial Officer in March 1990 and served in that
capacity until May 2000 and has served as Chief Operating Officer since March
1996. Mr. Harp is a Certified Public Accountant.
Harland C. Stonecipher
Mr. Stonecipher has been the Chairman of the Board of Directors of the
Company since its organization in 1976 and served as Chief Executive Officer
until March 1996 and since February 1997. Mr. Stonecipher also served as
President of the Company at various times through January 1995 and since
December 2002. Mr. Stonecipher also serves as an executive officer of various
subsidiaries of the Company and as a director of Advantage Marketing Systems,
Inc. Mr. Stonecipher is employed pursuant to an employment agreement which,
unless sooner terminated, expires on June 30, 2003, subject to automatic renewal
for successive one-year periods unless either party gives at least 30 days
notice of an election to terminate.
Martin H. Belsky
Mr. Belsky, currently Dean and Professor of Law at the University of Tulsa
College of Law, teaches courses in constitutional law, ethics, international
law, and oceans policy. Previously, Mr. Belsky was Dean and Professor of Law at
Albany Law School from 1986 to 1995.
Steven R. Hague
Steven R. Hague has been a partner at One Source Advisors since 1999. One
Source Advisors is a management and actuarial consulting firm that provides
services related to product development; merger, acquisition and venture
development; bank insurance development and analysis; operational performance
analysis and financial reporting and forecasting. Previously Mr. Hague was Chief
Executive Officer of American Southwest Holding Company from 1998 to 1999 and
President and CEO of Bankers Protective Life Insurance Company from 1993 to
1997. Mr. Hague has been nominated to serve as a director of Advantage Marketing
Systems, Inc.
Board Meetings and Committees
The Board of Directors held four meetings during the year ended December
31, 2002 and acted by unanimous consent four times. During such year all
directors listed above attended at least 75% of the meetings of the full Board
and the committees on which they served.
The Board of Directors has established an Executive Committee currently
consisting of Messrs. Stonecipher, Harp and Grunebaum and an Audit Committee
currently consisting of Messrs. Grunebaum and Belsky. The Executive Committee
may exercise all of the powers of the Board of Directors, except to the extent
limited by law. The Audit Committee makes recommendations to the Board of
Directors concerning the selection of and oversees the Company's relationship
with its independent auditors and reviews with the independent auditors the
scope and results of the annual audit. The Audit Committee also reviews
financial statements and reports including proxy statements, Forms 10-K and
Forms 10-Q, reviews all significant financial reporting issues and practices and
monitors internal control policies. Each of the members of the Audit Committee
meets the independence standards of the New York Stock Exchange. The Audit
Committee held five meetings during 2002.
Additionally, during 2002, the Board of Directors formed a nominating
committee and a compensation committee, both currently consisting of Messrs.
Grunebaum and Belsky. The nominating committee is designed to assist the full
Board of Directors in selecting individuals for service on the Board of
Directors and evaluating their performance. The compensation committee was
designed to evaluate and recommend the compensation of the executive officers of
the Company to assure they are compensated effectively in a manner consistent
with the overall objectives of the Company and to communicate the Company's
compensation policies and the reasoning behind such policies to shareholders.
Both of these committees were designed to consist of two or more independent
directors as defined in and determined pursuant to the corporate governance
policies of the New York Stock Exchange. Members of these committees are elected
by the Board of Directors annually for one-year terms, or until their successors
shall be duly elected and qualified. During 2002, the nominating committee did
not meet and the compensation committee met one time.
Compensation of Directors
Directors who are also employees of the Company or its subsidiaries receive
no additional compensation for their services as directors. Non-employee
directors of the Company receive $500 per board and committee meeting attended.
Under the Company's Stock Option Plan, each non-employee director also receives
on March 1 of each year options to purchase 10,000 shares of Common Stock. These
options are immediately exercisable as of the date of grant as to one-fourth of
the shares covered by the options and vest in additional one-fourth increments
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 Stock Option Plan have an
exercise price equal to the closing price of the Common Stock on the date of
grant as reported by the New York Stock Exchange and expire five years from the
date of grant. Additionally, Martin H. Belsky receives a consulting fee, not to
exceed $6,000 annually, for his consulting services, primarily related to the
relationship between the Company and its provider law firms. The Board of
Directors has considered such compensation and determined that such arrangement
does not impair his judgment or independence.
The Board of Directors recommends that the shareholders vote "FOR" the
re-election of John W. Hail and the election of Steven R. Hague to the Board of
Directors.
PROPOSAL TWO
APPROVAL OF AMENDMENT TO INCREASE SHARES UNDER STOCK OPTION PLAN
AND TO EXTEND THE TERMINATION DATE OF THE STOCKOPTION PLAN
The Company's Stock Option Plan (the "Plan") is intended to promote and
advance the interests of the Company and its shareholders by providing a means
for the Company to encourage stock ownership by directors, officers and
employees of the Company and its subsidiaries in order to increase the
proprietary interests of such persons in the growth and financial success of the
Company. The Plan was originally adopted by the Board and approved by
shareholders in 1995. In May 2000, the Plan was amended to increase the number
of shares authorized under the Plan from 1,000,000 to 2,000,000 shares. The Plan
currently expires in December 2005.
The Board of Directors has adopted, subject to shareholder approval, an
amendment to the Plan to increase the maximum number of shares of Common Stock
in respect of which options may be granted under the Plan from 2,000,000 shares
to 3,000,000 shares and to extend the Plan until December 12, 2012. The
amendment was adopted in order to ensure that the Company will continue to have
appropriate equity incentive compensation opportunities for its directors,
officers, and employees. The Board of Directors considers the Company's ability
to offer competitive compensation opportunities, including long-term equity
based compensation in the form of stock options, as an important component of
the Company's management retention and strategy. Because it is necessary to
amend the Plan to authorize additional shares, the Board believes it is a
convenient time to extend the term of the Plan to avoid having to do so in 2004
or 2005.
Description of the Plan
Administration. The Plan is administered by the Board of Directors of the
Company. The Board has the authority to appoint a committee ("Committee") of not
less than two members of the Board to administer the Plan and to make
determinations concerning the granting of options thereunder. The Board may
appoint and remove members of the Committee as it sees fit from time to time.
The Board or Committee has sole authority to determine the persons who shall
participate in the Plan and the extent of their participation and to construe
and interpret provisions of the Plan and any option granted thereunder. No
member of the Board or Committee will be liable for any action or determination
made in good faith, and such members will be entitled to indemnification and
reimbursement in the manner provided in the Company's Certificate of
Incorporation, or as otherwise permitted by law.
Shares Subject to the Plan. The maximum number of shares of Common Stock
reserved for issuance under the Plan and in respect of which options may be
granted pursuant to the terms of the Plan will be increased by the proposed
amendment from 2,000,000 shares to 3,000,000 shares. These shares consist of
authorized but unissued shares or treasury shares held by the Company. This
number is subject to appropriate equitable adjustment in the event of any
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 Company. 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 options granted under the Plan.
Eligibility. Persons eligible to participate in the Plan consist of such
directors, officers and employees of the Company and its subsidiaries as the
Board or Committee may determine from time to time. There is no limit to the
total number of eligible persons to whom options may be granted under the Plan.
The Board or Committee will determine in accordance with the Plan the persons to
whom option awards are granted, the size of any option awards and the conditions
applicable thereto.
Exercise of Options. Options may be exercised solely by the optionee during
the optionee's lifetime 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 or Committee at the time the option is granted. After
becoming exercisable, options granted under the Plan may be exercised, in whole
or in part, at any time prior to the expiration or termination of the options.
The exercise price of options granted under the Plan is determined by the Board
or the Committee, but may not be less than the fair market value of the Common
Stock on the date of grant of the option. The exercise price of options granted
under the Plan must be paid upon the exercise of the option and may be paid in
cash or, if so determined by the Board or the Committee, the exercise price may
be paid in property or installment payments.
Nontransferability. Options granted under the Plan are not assignable or
transferable by the optionee except by will or by the laws of descent and
distribution, and are exercisable during the optionee's lifetime only by the
optionee.
Effect of Death, Termination of Employment and Retirement. If an optionee
dies while employed by the Company at a time when the optionee is entitled to
exercise an option granted pursuant to the Plan, then at any time or times
within 12 months after the optionee's death the options may be exercised by the
optionee's estate, personal representative, beneficiary or other person upon
whom such right devolves by will or the laws of descent and distribution, and
except as so exercised, will expire at the end of such 12-month period. If the
optionee's employment is terminated as a result of a violation of law or for
cause, the optionee's options whether or not then exercisable will terminate
immediately. If the termination is for a reason other than a violation of law or
for cause, the optionee will have the right to exercise his or her options at
any time within 30 days after such termination, except if the termination is as
a result of retirement as described below. In the event an optionee's
termination of employment is as a result of retirement with the consent of the
Company, the optionee will have the right to exercise his or her option within
three months after retirement to the extent exercisable on the day of
retirement. However, in any event, no option may be exercised after its
expiration date set forth in the applicable option agreement.
Option Awards to Non-Employee Directors. Each member of the Board of
Directors who is not an employee of the Company (a "Non-Employee Director") is
eligible to receive option grants under the Plan on the same basis as other
eligible persons. In addition, each Non-Employee Director receives annual grants
of stock options to purchase 10,000 shares of Common Stock on March 1st of each
year 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. The purchase price for each share placed under an annual option grant for
a Non-Employee Director is equal to 100% of the fair market value of such share
on the date the option is granted. No options will be granted to a Non-Employee
Director after any date that the Non-Employee Director ceases to be a director
of the Company. All stock options granted to a Non-Employee Director shall
consist of options that do not qualify as incentive stock options under the
Code.
Except as otherwise provided in the Plan, the annual option grants to
Non-Employee Directors are fully vested and immediately exercisable as to 2,500
shares on the date of grant and will become vested and exercisable in additional
increments of 2,500 shares on June 1, September 1, and December 1 in the year
the option is granted; provided however, that it is 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 Company through the applicable
vesting date. The period during which such Non-Employee Director options may be
exercised is 5 years from the date of grant, subject to earlier termination as
provided in the Plan.
Recapitalization or Reorganization. In the event of 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 Company, the number of shares covered by each
outstanding option and the price of each outstanding option will be
proportionately adjusted.
Subject to any required action by the shareholders, if the Company is a
party to a merger or consolidation which does not result in a change of control
of the Company, any option granted under the Plan will apply to the securities
to which a holder of the number of shares of Common Stock subject to the option
would have been entitled. If, however, the Company dissolves, liquidates, or is
reorganized in a manner which results in a change in control of the Company, or
in the event of a tender or exchange offer which results in a change in control
of the Company, the Board or Committee will determine: (i) whether all or any
part of the unexercised portion of any option outstanding under the Plan will
terminate; (ii) whether the options will 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 options under the Plan.
Modification and Termination of the Plan. The Board of Directors may from
time to time amend, alter, suspend, or discontinue the Plan or alter or amend
(including any decrease of the option price by cancellation and substitution of
options or otherwise) any and all options granted thereunder. However, the Board
may not, without shareholder approval, alter the Plan so as to (i) materially
increase the benefits accruing to participants under the Plan; (ii) materially
increase the number of securities which may be issued under the Plan; or (iii)
materially modify the requirements as to eligibility for participation in the
Plan. Additionally, no amendment may affect any then outstanding options or
unexercised portions thereof without the consent of the optionee. The
termination date of the Plan will be extended from December 12, 2005, to
December 12, 2012 except with respect to awards then outstanding.
Special Provisions Applicable to Incentive Stock Options. The Board or the
Committee will determine at the time of any option grant whether such option
will be an incentive stock option intended to qualify under Section 422 of the
Internal Revenue Code or a nonstatutory stock option. Options granted to
Non-Employee Directors will not qualify as incentive stock options. Incentive
stock options granted pursuant to the Plan will comply with all the previously
mentioned provisions of the Plan modified by the following special terms and
conditions:
(i) Eligibility. Persons eligible to receive incentive stock options
are employees (including officers and directors who are employees) of the
Company or its subsidiaries only.
(ii) Limitations on Aggregate Value of Shares Subject to Incentive
Stock Options. The aggregate fair market value as of the date of the grant
of shares with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year will not exceed
$100,000.
(iii) Term of Incentive Stock Options. Each Incentive stock option
granted under the Plan will not be exercisable more than 10 years from the
date the option is granted.
(iv) Limitations for Certain Shareholders. Any person who owns,
directly or indirectly, stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or its
subsidiaries may not receive an incentive stock option under the Plan,
unless at the time the option is granted to such person the exercise price
is at least 110% of the fair market value of the shares covered by the
option and the option is not exercisable after the expiration of five years
from the date of the grant.
Federal Income Tax Consequences. An optionee receiving an option qualifying
as an "incentive stock option" under Section 422 of the Internal Revenue Code
will not recognize taxable income upon the grant or exercise of the option. Upon
disposition of the shares acquired, the optionee will recognize a capital gain
or loss based on the difference between the amount realized and the option
price, assuming certain holding period requirements are satisfied and the shares
are held as a capital asset. However, alternative minimum tax may be applicable.
The Company will not receive any tax deduction in connection with the grant or
exercise of an incentive stock option or, assuming the holding period
requirements are satisfied, sale of the shares by an optionee.
An optionee receiving a nonstatutory stock option will not recognize
taxable income on the grant of an option, but will be deemed to have received
ordinary income on the exercise of an option equal in amount to the difference
between the fair market value of the shares acquired as of the date of exercise
and the option price. The Company will be entitled to a tax deduction at the
same time in the same amount. An optionee's tax basis in the shares acquired
will be equal to the fair market value of the shares as of the date of exercise
for purposes of measuring any gain or loss on subsequent disposition of the
shares.
Summary of Award Activity Pursuant to the Plan
The following table indicates as of April 4, 2003 the number of shares
authorized for issuance under the Plan (including the proposed increase in the
authorized number of shares), the aggregate number of shares subject to
outstanding awards (net of cancellations), the number of shares issued pursuant
to prior awards, and the number of shares available for future awards (including
the proposed increase in the authorized number of shares):
Subject to Outstanding Available for Future
Authorized (including Awards (net of Issued Pursuant to Prior Awards (including proposed
proposed increase) cancellations) (1) Awards increase)
--------------------- ----------------------- ------------------------- ---------------------------
3,000,000 1,052,752 791,998 1,155,250
-----------------------
(1) Includes options to purchase 821,252 shares of Common Stock granted to
executive officers and eligible employees of the Company at exercise prices
ranging from $16.46 to $32.81 per share. The exercise prices of such
options are 100% of the market value of the Common Stock on the date of
grant. The expiration dates of such options range from April 2004 to March
2011. Of such options, 685,000 were granted to four executive officers of
the Company and 136,252 were granted to a total of ten employees of the
Company other than executive officers. Also includes 231,500 options
granted to five Non-Employee Directors pursuant to the annual grant
provisions described above at exercise prices ranging from $17.03 to $39.50
per share.
Based on the closing sale price of the Common Stock as reported by the New
York Stock Exchange on April 1, 2003 of $17.48 per share, the market value of
the total number of shares of Common Stock previously issued pursuant to
exercise of option awards under the Plan was $13.8 million, the market value of
shares underlying outstanding awards under the Plan was $18.4 million and the
market value of shares available for future awards (including the proposed
increase in the number of shares authorized for issuance under the Plan) was
$20.2 million.
Consequences of Non-Approval
If the shareholders do not approve the proposed amendment of the Plan, no
further awards will be made pursuant to the Plan after all existing available
awards of 155,250 options are granted before the existing expiration date of
December 12, 2005.
Recommendation
Provided that the shareholders approve the proposed amendment of the Plan,
the increased number of shares will be available for awards to all eligible
participants in the Plan and the Plan will be extended. Except as described
above in connection with the annual awards to Non-Employee Directors, the Board
of Directors has not at this time considered or approved any future awards under
the Plan, and, as a result, the identity of future award recipients and the size
and terms of future awards are not known at this time.
The Board of Directors recommends that the shareholders for "FOR" the
proposed amendment to increase the number of shares under the Stock Option Plan
and to extend the termination date of the Stock Option Plan.
Fiscal 2002 Audit and Other Fees
The firm of Grant Thornton LLP was originally engaged in September 2001 to
serve as the Company's independent auditor and subsequently retained for the
annual audit for the fiscal year ended December 31, 2002. The aggregate fees
billed by Grant Thornton LLP for the annual audit of the Company's consolidated
financial statements for the fiscal year 2002 and for reviews of the Company's
interim financial statements included in Forms 10-Q for 2002 are set forth below
under the caption Audit Fees. Grant Thornton LLP performed no services, and
therefore no fees were billed by Grant Thornton LLP for financial information
systems design and implementation, or for other professional services during
fiscal 2002:
Audit Fees...................................................... $ 157,500
Financial Information Systems Design and Implementation Fees.... $ -
All Other Fees.................................................. $ 22,350
The Audit Committee has considered whether the provision of non-audit
services by Grant Thornton LLP is compatible with maintaining auditor
independence.
AUDIT COMMITTEE REPORT
In accordance with its written charter adopted by the Board of Directors
("Board"), the Audit Committee of the Board ("Committee") assists the Board in
fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing and financial reporting practices of the Company. During
fiscal 2002, the Committee met five times, and the Committee chair, as
representative of the Committee, discussed the interim financial information
contained in each quarterly earnings announcement with the CFO and independent
auditors prior to public release.
In discharging its oversight responsibility as to the audit process, the Audit
Committee obtained from the independent auditors a formal written statement
describing all relationships between the auditors and the Company that might
bear on the auditors' independence consistent with Independence Standards Board
Standard No. 1, "Independence Discussions with Audit Committees," discussed with
the auditors any relationships that may impact their objectivity and
independence and satisfied itself as to the auditors' independence. The
Committee also discussed with management and the independent auditors the
quality and adequacy of the Company's internal controls. The Committee reviewed
with the independent auditors their audit plans, audit scope, and identification
of audit risks.
The Committee discussed and reviewed with the independent auditors all
communications required by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees" and, with and without management present,
discussed and reviewed the results of the independent auditors' examination of
the financial statements.
The Committee reviewed the audited financial statements of the Company as of and
for the fiscal year ended December 31, 2002, with management and the independent
auditors. Management has the responsibility for the preparation of the Company's
financial statements and the independent auditors have the responsibility for
the examination of those statements.
Based on the above-mentioned review and discussions with management and the
independent auditors, the Committee recommended to the Board that the Company's
audited financial statements be included in its Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, for filing with the Securities and
Exchange Commission. The Committee intends to recommend reappointment of the
independent auditors to the Board.
Peter K. Grunebaum Martin H. Belsky
Committee Chairman Committee Member
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Executive Officers
The current executive officers of the Company are named below:
Name Position
---------------------- ---------------------------------------------------
Harland C. Stonecipher Chairman of the Board of Directors, Chief Executive
Officer and President (since December 30, 2002)
Randy Harp Chief Operating Officer
Kathleen S. Pinson Vice President of Regulatory Compliance
Steve Williamson Chief Financial Officer
For descriptions of the business background and other information
concerning Mr. Stonecipher and Mr. Harp, see "Election of Directors" above.
Kathleen S. Pinson
Ms. Pinson was named Controller of the Company in May 1989 and has been a
Vice President of the Company since June 1982. Ms. Pinson served on the Board of
Directors from April 1990 until August 2002 when she resigned from the Board of
Directors together with three other directors as part of a corporate governance
initiative to have outside directors comprise the majority of the Board. Ms.
Pinson has been employed by the Company since 1979 and currently serves as Vice
President of Regulatory Compliance. Ms. Pinson is a Certified Public Accountant.
Steve Williamson
Mr. Williamson was named Chief Financial Officer of the Company in May
2000. From April 1997 until his employment with the Company in March 2000, Mr.
Williamson served as the Chief Financial Officer of Peripheral Enhancements,
Inc., an electronic memory assembly company. Prior to April 1997, Mr. Williamson
served as Director in Charge of Banking Practice for Horne & Company, a public
accounting firm. Mr. Williamson is a Certified Public Accountant.
Executive Compensation
The following table sets forth the compensation paid by the Company and its
subsidiaries for services rendered during the years ended December 31, 2002,
2001 and 2000 to the chief executive officer and to each other person serving as
an executive officer of the Company as of December 31, 2002 (or former executive
officers) whose compensation exceeded $100,000 during 2002. Such individuals are
referred to herein as the "named executive officers."
Summary Compensation Table
Long Term
Annual Compensation(1) Compensation
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus (2) Options Compensation (3)
------------------------------- ---- -------- ---------- ------------- ----------------
Harland C. Stonecipher......... 2002 $160,789 $2,011,785 100,000 $11,404
Chairman of the Board and 2001 157,755 1,473,556 100,000 11,740
Chief Executive Officer 2000 157,755 1,230,297 100,000 11,970
Wilburn L. Smith............... 2002 - 2,483,260 - 7,135
Former President (until 2001 - 1,967,795 - 7,110
December 30, 2002) 2000 - 1,562,532 - 5,250
Randy Harp..................... 2002 233,654 - 50,000 8,800
Chief Operating Officer 2001 167,019 32,500 80,000 5,282
2000 145,196 40,000 50,000 7,575
Kathleen S. Pinson............. 2002 130,095 - 5,000 5,300
Vice President of Regulatory 2001 110,613 12,500 5,000 5,282
Compliance 2000 100,763 9,000 5,000 3,900
Steve Williamson............... 2002 120,384 5,414 5,000 3,774
Chief Financial Officer 2001 99,365 7,500 15,000 1,740
---------------
(1) Annual compensation amounts include amounts deferred at the election of the
named individuals pursuant to a non-qualified deferred compensation plan
adopted by the Company in 2002.
(2) Bonus to Mr. Stonecipher consists of override commissions earned by Mr.
Stonecipher pursuant to his employment agreement with the Company of
$240,000 during each of 2002, 2001 and 2000, and override commissions
earned by Mr. Stonecipher with respect to commissions earned by PPL Agency,
Inc., a Company affiliated insurance agency, of $57,932, $56,576 and
$50,467 during 2002, 2001 and 2000, respectively. The bonus amount also
includes $1,176,980 and $939,830 during 2001 and 2000, respectively,
representing a payment of $10 for each marketing associate who participated
in the Company's "Fast Start to Success" training program that commenced in
January 1997. Effective August 2002, and in lieu of the $10 fee, Mr.
Stonecipher began receiving one-half of one percent of collected membership
fees and, accordingly, the 2002 bonus amount includes $1,033,340 of Fast
Start bonuses and $680,513 of membership fee bonuses. See "Executive
Compensation and Other Information-Employment Contracts and Termination of
Employment and Change-in-Control Arrangements" and "Certain Relationships
and Related Transactions."
Bonus to Mr. Smith consists of override commissions and other fees paid
with respect to commissions earned by, and new sales associate sponsorships
within, the Company's multilevel marketing sales force. The amounts
indicated for Mr. Smith do not include any amounts received by Mr. Smith as
a result of his equity ownership in certain entities which are not
affiliated with the Company but which are engaged in the marketing of the
Company's legal service memberships and earn commissions from sales of
memberships. See "Certain Relationships and Related Transactions."
Bonus to Mr. Williamson during 2002 pertained to the completion of a
transaction related to the sale of a subsidiary and bonuses to Messrs. Harp
and Williamson and Ms. Pinson during 2001 and 2000 consisted of performance
bonuses based upon the achievement by the Company of certain earnings per
share goals.
(3) All Other Compensation of Mr. Stonecipher includes $4,972, $5,331 and
$5,660 for the years 2002, 2001 and 2000, respectively, relating to the
time value of premiums paid pursuant to a certain split dollar life
insurance agreement that provides for such premiums to be refunded to the
Company upon Mr. Stonecipher's death, and also includes $6,432, $6,409 and
$6,310 for the years 2002, 2001 and 2000, respectively, representing vested
contributions by the Company to the Employee Stock Ownership and Thrift
Plan and Trust (the "ESOP").
All Other Compensation of Messrs. Smith, Harp and Williamson and Ms. Pinson
consists of vested contributions by the Company to the ESOP.
The following table contains information concerning the grant of stock
options during the year ended December 31, 2002 under the Company's Stock Option
Plan to each of the named executive officers who received option grants during
such year.
Option Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation For
Individual Grants Option Term (3)
------------------------------------------------------------------------------------- -----------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted (1) Year ($/Sh) (2) Date 5% 10%
-------------------- ---------------------- ---------- -------------- -------------- ----------- -------------
Harland C. Stonecipher 100,000 20.0% $24.20 5/31/2007 $668,601 $1,477,434
Randy Harp 50,000 10.0 24.20 5/31/2007 334,301 738,717
Kathleen S. Pinson 5,000 1.0 24.20 5/31/2007 33,430 73,872
Steve Williamson 5,000 1.0 24.20 5/31/2007 33,430 73,872
-----------------
(1) All options granted to the named executive officers during 2002 were
granted under the Company's Stock Option Plan. The exercise price of such
options is equal to 100% of the market price per share of the Common Stock
on the date of grant. The options granted to Mr. Stonecipher and Mr. Harp
were immediately exercisable as of the date of grant as to one-fourth of
the shares covered thereby and became exercisable in additional one-fourth
increments on June 1, September 1, and December 1, 2002. The options
granted to Ms. Pinson and Mr. Williamson become exercisable in one-half
increments beginning one year after the grant date. The options expire if
not exercised five years after the date of grant.
(2) Exercise price of the options must be paid in cash or, if the Board of
Directors so permits, by tender of shares of Common Stock or other
property, or by a combination of such means of payment.
(3) Potential realizable value is the amount that would be realized upon
exercise by the named executive officer of the options immediately prior to
the expiration of their respective terms, assuming the specified compound
annual rates of appreciation of the Company's Common Stock over the
respective terms of the options. These amounts represent assumed rates of
appreciation only. Actual gains, if any, on stock option exercises depend
on the future performance of the Common Stock and overall market
conditions. There can be no assurances that the potential values reflected
in this table will be achieved.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Value of
Underlying Unexercised Unexercised In-the-Money
Options at Options at
December 31, 2002 December 31, 2002 (1)
Acquired Value --------------------------- ---------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------------- ----------- ---------- ----------- ------------- ----------- --------------
Harland C. Stonecipher 100,000 $1,265,000 500,000 - $1,181,500 $ -
Randy Harp 50,000 636,000 256,000 24,000 632,750 168,000
Kathleen S. Pinson 5,000 45,250 12,500 7,500 24,725 34,350
Steve Williamson - - 19,500 10,500 38,350 80,350
----------------------------
(1) Value of unexercised in-the-money options at December 31, 2002 is
calculated based on the market price per share of Common Stock of $26.20
per share on December 31, 2002 less the option exercise price.
Equity Compensation Plans
The following table provides information with respect to the Company's
equity compensation plans as of December 31, 2002, (other than its 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 plans
exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
------------------------------------ -------------------- -------------------- -------------------------
Equity compensation plans approved
by security holders (1)........... 1,192,752 $26.69 15,250 (1)
Equity compensation plans not
approved by security holders (2).. 305,640 23.72 - (2)
-------------------- -------------------- -------------------------
Total............................... 1,498,392 $26.09 15,250
-------------------- -------------------- -------------------------
-----------
(1) These stock options have been issued pursuant to the Company's Stock Option
Plan which has been approved by security holders.
(2) These stock options have been issued to the Company's Regional Vice
Presidents ("RVPs") in order to encourage stock ownership by its RVPs and
to increase the proprietary interest of such persons in its 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
244,679, 131,288 and 90,892 total options granted to RVPs in the years
ended December 31, 2002, 2001 and 2000, respectively. The Company has not
adopted any limit for the number of options that may be granted to RVPs.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company has an employment agreement with Mr. Stonecipher that commenced
in January 1993, and, unless sooner terminated, expires on June 30, 2003. The
agreement will be automatically extended for successive one-year periods unless
either party elects to terminate at least 30 days prior to the expiration date.
Under the terms of the employment agreement, Mr. Stonecipher is to receive
compensation as determined by the Board of Directors but not less than $157,755
per year. In addition to his annual salary, Mr. Stonecipher also is entitled to
receive a supplemental retirement benefit in the amount of $26,000 per year
payable on the first day of the month following his termination of employment
and annually thereafter until the earlier of his death or the date upon which
ten such payments have been made. Mr. Stonecipher must meet certain minimal
conditions subsequent to the termination of his employment in order to receive
such payments. The Company's obligation for supplemental retirement benefits
pursuant to the employment agreement is subject to the continuation of a certain
split dollar life insurance agreement between the Company and Shirley A.
Stonecipher, Mr. Stonecipher's wife, described below. If the Company terminates
the employment agreement for any reason (other than Mr. Stonecipher's death) or
Mr. Stonecipher terminates the agreement for certain specified events including
a change of control of the Company (as defined in the agreement), the Company is
required to pay Mr. Stonecipher a lump sum payment equal to the present value
(using a 3% discount rate) of the remaining salary and retirement benefits
throughout the term of the agreement.
Pursuant to an agreement with the Company, Mr. Stonecipher is also entitled
to an override commission, payable monthly, in an amount equal to $.025 per
active membership as compensation for his efforts in assisting in the growth and
development of new production for the Company and its subsidiaries. The
agreement provides that the amount of the commissions shall in no event exceed
$20,000 per month. The payment of such commissions to Mr. Stonecipher continues
during his lifetime and after his death to his designated beneficiaries and
their successors. The agreement requires that Mr. Stonecipher devote reasonable
efforts to the generation of new membership sales for the Company. The amounts
paid to Mr. Stonecipher under this agreement during the fiscal year ended
December 31, 2002 are reflected in the summary compensation table set forth
above. Mr. Stonecipher has deferred payments under this agreement of $63,176 at
December 31, 2002. Mr. Stonecipher also receives a portion of the annualized
commission revenue of PPL Agency, Inc., which is owned by Mr. Stonecipher as a
nominee for the Company. See "Certain Relationships and Related Transactions."
Such amounts paid to Mr. Stonecipher are also reflected in the summary
compensation table set forth above.
Commencing in January 1997, the Company implemented its "Fast Start to
Success" program pursuant to which electing marketing associates may participate
in Company-sponsored sales training programs, including use of a video and other
training aides developed by the Company. The cost to each marketing associate
for participation in the program is typically $249, except for special
promotions the Company implements from time to time. Mr. Stonecipher received a
payment of $10 for each marketing associate who participated in the program
until August 2002 at which time this form of compensation ceased and was
replaced by one-half of one percent (.5%) of Membership premiums collected. Such
amounts paid to Mr. Stonecipher are reflected in the summary compensation table
set forth above. Mr. Stonecipher has deferred payments under this agreement of
$134,279 at December 31, 2002. In January 2003, the Board of the Company
approved a modification in this compensation arrangement for 2003 to provide for
Mr. Stonecipher to receive a monthly commission of one-quarter of one percent
(0.25%) of monthly Membership premiums so long as monthly Membership premiums
are at least 85% of the comparable month of the prior year and a quarterly
commission of one-quarter of one percent (0.25%) of quarterly Membership
premiums so long as quarterly Membership premiums exceed Membership premiums for
the comparable quarter of the prior year.
In July 1984, the Company entered into a life insurance arrangement with
Shirley A. Stonecipher, Mr. Stonecipher's wife, whereby the Company agreed to
pay premiums on a life insurance policy covering Mr. Stonecipher. The face
amount of the policy is $600,000 and Mrs. Stonecipher is the owner and
beneficiary. Mrs. Stonecipher has an agreement with the Company whereby upon Mr.
Stonecipher's death, the proceeds of the policy will be paid to the Company in
an amount sufficient to reimburse premiums paid to date by the Company and any
supplemental retirement payments made pursuant to his employment contract. This
agreement is secured by a collateral assignment of the policy proceeds.
In November 2002, the Company adopted a deferred compensation plan, which
permits executive officers 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 the
Company to the participating officers, the Company has purchased company-owned
variable life insurance policies insuring the lives of the group of participants
to finance its obligations under the plan. Such life insurance was purchased
subsequent to December 31, 2002. As of December 31, 2002, the Company had a
deferred compensation liability for Mr. Stonecipher, Mr. Harp, Ms. Pinson, Mr.
Williamson and Mr. Smith (the Company's former President) in the amounts of
$258,249, $5,192, $1,923, $1,846 and $40,095, respectively.
Board of Director Interlocks and Insider Participation in Executive Compensation
Decisions
The Board of Directors of the Company is responsible for establishing
compensation of Harland C. Stonecipher, Chairman, Chief Executive Officer and
President of the Company. The Board of Directors formed a compensation committee
during 2002 as described above and recommended that Mr. Stonecipher accept
one-half of one percent (.5%) of Membership premiums collected in lieu of the
$10 payment for each associate that participated in the Fast Start to Success
training program. Mr. Stonecipher's cash compensation for 2002 was determined
pursuant to his employment agreement and other arrangements with the Company
approved by the Board of Directors prior to 2002, as amended by the Compensation
Committee's recommendation described above. However, during 2002, the Board of
Directors approved the grant of stock options to Mr. Stonecipher, Randy Harp,
Steve Williamson and Kathleen S. Pinson, each executive officers and directors
of the Company, for the purchase of 100,000, 50,000, 5,000 and 5,000 shares,
respectively, under the Company's Stock Option Plan. Messrs. Stonecipher, Smith
and Harp and Ms. Pinson participated in the deliberations of the Board of
Directors with respect to such stock option grants.
Report On Executive Compensation
As previously indicated, the Board of Directors of the Company (the
"Board") is responsible for establishing compensation of Harland C. Stonecipher,
the Chairman, Chief Executive Officer and President. The Board formed a
compensation committee during 2002. The compensation committee was designed to
evaluate and recommend the compensation of the executive officers of the Company
to assure they are compensated effectively in a manner consistent with the
overall objectives of the Company and to communicate the Company's compensation
policies and the reasoning behind such policies to shareholders. The
compensation committee met one time during 2002 and recommended a change in the
compensation structure of Mr. Stonecipher but did not recommend any changes to
the compensation of any other executive officer.
The base salary of Mr. Stonecipher for 2002 was as provided in his
employment agreement with the Company entered into in 1993. The principal terms
of his employment agreement are described elsewhere herein. See "Executive
Compensation and Other Information - Employment Contracts and Termination of
Employment and Change-in-Control Arrangements." The level of base salary for Mr.
Stonecipher in the employment agreement was determined through negotiations with
Mr. Stonecipher at the time the employment agreement was entered into, and the
base salaries of the other executive officers of the Company for 2002 were
determined by Mr. Stonecipher based upon his assessment of the respective
executive officer's performance and potential contribution to the Company's
financial and operational objectives.
Pursuant to his employment agreement, Mr. Stonecipher receives a monthly
override commission of $.025 per active membership, subject to certain
limitations, and a portion of the annualized commission revenue of PPL Agency,
Inc., which is owned by Mr. Stonecipher as a nominee of the Company. During
2002, Mr. Stonecipher earned $297,932 pursuant to these commission-based
incentive compensation arrangements. These arrangements foster the goals of the
Company's compensation policy by linking a significant portion of the chief
executive officer's annual compensation to the level of revenues derived from
active memberships, thereby creating strong financial incentives to the chief
executive officer for the continued growth of the Company's membership base.
During 2002, new membership sales increased 6% to 773,767 compared to 728,295
during 2001, and active memberships in force of 1,382,306 at December 31, 2002
increased 11% compared to 1,242,908 memberships in force at December 31, 2001.
Over the last five years, the compounded growth rate of the Company's active
membership base has exceeded 25% per year and earnings per share has grown from
$.48 per share to $1.82 per share for 2002.
During 1997, the Company implemented its "Fast Start to Success" program.
The "Fast Start to Success" program is a Company-sponsored field training
program for the Company's marketing associates that utilizes audio, video and
other training aides developed by the Company and is designed to increase new
memberships sold and new sales associates recruited per participating associate.
Participating associates are required to pay the Company a one-time training fee
to offset the Company's direct and indirect costs incurred in developing and
maintaining the program. Mr. Stonecipher received a payment from the Company of
$10 for each marketing associate who participated in the "Fast Start to Success"
program through July 2002 and such payments totaled $1,033,340 during 2002. Mr.
Stonecipher was instrumental in the conception and development of the program,
which the Board believes has enhanced the Company's marketing efforts and
contributed to the growth of new membership sales during 2002. Beginning in
August 2002 and in lieu of the $10 for each Fast Start participant, Mr.
Stonecipher began receiving one-half of one percent (.5%) of Membership premiums
collected. This change in Mr. Stonecipher's compensation was designed to more
closely link his compensation with realized membership revenues. Another change
in this arrangement was made for 2003 as described above to tie the compensation
based on percentage of premiums to the achievement of specified thresholds of
total membership premiums in 2003 compared to membership premiums in 2002.
The Company maintains a Stock Option Plan (the "Plan") pursuant to which
the Board may grant options to purchase Common Stock to directors and employees
of the Company, including the executive officers. The exercise price of options
granted under the Plan may not be less than the fair market value per share of
Common Stock on the date of grant. In authorizing option awards under the Plan
to executive officers, the Board considers various factors including the
recommendation of the Chairman, the relative responsibilities of the optionee,
the Board's subjective evaluation of the optionee's performance, and the
optionee's relative equity interest in the Company in the form of stock and
options. The Board granted options during 2002 to the Company's executive
officers as follows: Harland C. Stonecipher - 100,000; Randy Harp - 50,000,
Steve Williamson - 5,000 and Kathleen S. Pinson - 5,000. The Board considers
stock options to be an important element of the Company's incentive compensation
policies and anticipates that additional options will be granted to certain
executive officers during 2003.
In 2002, the Company adopted a deferred compensation plan for its executive
officers as described under "Executive Contracts and Termination of Employment
and Change-in-Control Arrangements." This plan is intended to supplement the
Company's existing tax-qualified retirement plans to provide the participants
with improved long-term retirement security.
Section 162(m) of the Internal Revenue Code provides that the Company may
be limited in deducting annual compensation in excess of $1 million paid to
certain executive officers. The Board of Directors has considered the effect of
Section 162(m) on the Company's compensation program. The deferred compensation
plan was adopted in 2002 in part to be responsive to the limitations of Section
162, to permit the deferral of compensation that would not otherwise be
deductible under Section 162. In certain circumstances it may be in the best
interests of the Company and its shareholders to retain the flexibility to pay
compensation that may not be deductible under Section 162.
The preceding report is presented by each of the current members of the
Board of Directors.
Harland C. Stonecipher Randy Harp Martin H. Belsky
John W. Hail Peter K. Grunebaum
Shareholder Return Performance Graph
The following graph compares the cumulative total shareholder returns of
the Company's Common Stock during the five years ended December 31, 2002 with
the cumulative total shareholder returns of the Russell 2000 Index and the Media
General Personal Services industry index. The comparison assumes an investment
of $100 on January 1, 1998 in each of the Company's Common Stock, the Russell
2000 Index and Media General's Personal Services industry index and that any
dividends were reinvested.
Comparison of Cumulative Total Return of Company,
Russell 2000 Index and Industry Index
[GRAPH APPEARS HERE]
FISCAL YEAR ENDING
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Pre-Paid Legal Services, Inc. 100.00 96.53 70.20 74.59 64.06 76.64
Personal Services Index 100.00 102.69 46.71 43.55 71.00 68.78
Russell 2000 Index 100.00 97.20 116.24 111.22 112.36 88.11
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of shares of Common Stock of the Company by each person
(other than directors and executive officers of the Company) known by the
Company to be the beneficial owner of more than five percent of the issued and
outstanding Common Stock. The information is based on Schedules 13D or 13G filed
by the applicable beneficial owner with the Securities and Exchange Commission
or other information provided to the Company by the beneficial owner.
Security Ownership of Certain Beneficial Owners
Beneficial Ownership
--------------------------
Number Percent
of of
Name and Address of Beneficial Owner Shares Claim
------------------------------------ ------------- ----------
Thomas W. Smith
323 Railroad Avenue
Greenwich, CT 06830......................................... 4,038,951 (1) 22.7
Thomas N. Tryforos
323 Railroad Avenue
Greenwich, CT 06830......................................... 2,845,503 (1) 16.0
Scott Vassalluzzo
323 Railroad Avenue
Greenwich, CT 06830......................................... 2,800,700 (1) 15.7
---------------------
(1) Included in the shares of Common Stock indicated as beneficially owned by
Thomas W. Smith ("Smith"), Thomas N. Tryforos ("Tryforos") and Scott
Vassalluzzo ("Vassalluzzo") are 2,780,600 shares as to which they have
shared voting and shared dispositive power. In addition, Smith beneficially
owns 1,258,351 shares of Common Stock as to which he has sole voting and
dispositive power, Tryforos beneficially owns 64,903 shares of Common Stock
as to which he has sole voting and dispositive power and Vassalluzzo
beneficially owns 20,100 shares of Common Stock as to which he has sole
voting and dispositive power. Of the shares indicated as beneficially owned
by Smith, Tryforos and Vassalluzzo, 3,138,951, 2,785,103 and 2,791,600
shares in the aggregate, respectively, are beneficially owned in their
capacities as investment managers for certain managed accounts.
The following table sets forth certain information concerning the
beneficial ownership of shares of Common Stock of the Company as of April 4,
2003 by (a) each director or nominee for director of the Company, (b) each of
the named executive officers, and (c) all of the directors, nominee and named
executive officers of the Company as a group.
Security Ownership of Directors, Nominee and Named Executive Officers
Beneficial Ownership (1)
------------------------------
Number of Percent of
Name of Director, Nominee or Named Executive Officer Shares Class
---------------------------------------------------- --------------- ----------
Harland C. Stonecipher
321 East Main Street, Ada, Oklahoma 74820.......................... 1,616,619 (2) 8.8
Randy Harp............................................................. 255,492 (3) 1.4
Kathleen S. Pinson..................................................... 78,646 (4) *
Peter K. Grunebaum..................................................... 46,200 (5) *
John W. Hail........................................................... 53,912 (6) *
Martin H. Belsky....................................................... 44,350 (7) *
Steve Williamson....................................................... 22,636 (8) *
Steven R. Hague........................................................ - -
Wilburn Smith.......................................................... 106,217 (9) *
All directors, nominees and executive officers as a group (9 persons).. 2,224,072 (10) 11.9
--------------------
* Less than 1%.
(1) Unless otherwise indicated in the footnotes to the table and subject to
community property laws where applicable, each of the shareholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. The percentage of ownership for each
person is calculated in accordance with rules of the Securities and
Exchange Commission without regard to shares of Common Stock issuable upon
exercise of outstanding stock options, except that any shares a person is
deemed to own by having a right to acquire by exercise of an option are
considered outstanding solely for purposes of calculating such person's
percentage ownership.
(2) Included in the shares of Common Stock indicated as beneficially owned by
Mr. Stonecipher are (i) 1,147,325 shares as to which he has shared voting
and shared dispositive power with his wife; (ii) 50,000 shares issuable
upon exercise of outstanding options held by his wife earned during the
time she was a member of the Board of Directors; (iii) 19,294 shares owned
under the ESOP as to which Mr. Stonecipher has sole voting power, but
shared dispositive power; and, (iv) 400,000 shares issuable to Mr.
Stonecipher upon exercise of outstanding options.
(3) Includes 17,442 shares owned under the ESOP as to which Mr. Harp has sole
voting power, but shared dispositive power, and 212,000 shares issuable
upon exercise of outstanding options.
(4) Includes 19,285 shares owned under the ESOP as to which Ms. Pinson has sole
voting power, but shared dispositive power, and 12,500 shares issuable upon
the exercise of outstanding options. Also, includes 3,254 shares owned
under the ESOP by Ms. Pinson's husband, also an employee of the Company, as
to which he has sole voting power, but shared dispositive power. Ms. Pinson
disclaims beneficial ownership of shares that are owned by her husband.
(5) Includes 42,500 shares issuable upon exercise of outstanding options.
(6) Includes 500 shares owned by a corporation that Mr. Hail controls and
52,500 shares issuable upon exercise of outstanding options.
(7) Includes 44,000 shares issuable upon exercise of outstanding options.
(8) Includes 746 shares owned under the ESOP as to which Mr. Williamson has
sole voting power, but shared dispositive power, and 21,500 shares issuable
upon exercise of outstanding options.
(9) Includes 35,351 shares owned under the ESOP as to which Mr. Smith has sole
voting power, but shared dispositive power. Mr. Smith is included in this
ownership table because he was an executive officer during 2002 until his
resignation as President on December 30, 2002 to devote more time to
membership sales and recruiting.
(10) Includes 835,000 shares issuable upon exercise of outstanding options and
95,372 shares owned under the ESOP as to which the respective executive
officers and directors have sole voting power, but shared dispositive
power.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Chairman, Harland C. Stonecipher, is the owner of PPL Agency,
Inc. ("Agency"). The Company has 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 the Company. The Company
provides 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 the
Company's financial statements on a combined basis. Agency earned commissions,
net of amounts paid directly to its agents by the underwriter, during 2002, 2001
and 2000 of $138,000, $121,000 and $122,000, respectively, through its sales of
insurance products of an unaffiliated company. Agency had net income of $33,000,
$16,000 and $12,000 for the years ended December 31, 2002, 2001 and 2000,
respectively after incurring commissions earned by the Chairman of $58,000,
$57,000 and $50,000, respectively, and annual management fees paid to the
Company of $36,000 for 2002, 2001 and 2000.
Mr. Stonecipher and his wife, Shirley A. Stonecipher, own Stonecipher
Aviation LLC ("SA") and Mr. and Mrs. Stonecipher together with Wilburn L. Smith,
National Marketing Director and formerly President and a director of the
Company, own S & S Aviation LLC ("S&SA"). The Company has 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 2002, the Company paid $397,000, to SA as
reimbursement for such transportation expenses. The Company paid $436,000 to
S&SA during 2002 as reimbursement for such transportation expenses. The Company
expects to make similar reimbursements in 2003.
Mr. Smith had loans from the Company made in December 1992, December 1996
and October 1998. The largest aggregate balance of the loans during the year
ended December 31, 2002 was $521,000. These loans were fully repaid during 2002
including interest of $24,100. Mr. Smith also owns corporations or partnerships
not affiliated with the Company but engaged in the marketing of the Company's
legal service memberships and which earn commissions from sales of memberships.
These entities earned commissions of $15,000, during 2002, of which $9,000 was
net of amounts passed through as commissions to their sales agents.
Randy Harp, Chief Operating Officer and a director of the Company, had
loans from the Company made in 2000 and 2002, including an advance of $489,000
during 2002. The largest aggregate balance of the loans during the year ended
December 31, 2002 was $1.0 million. These loans were fully repaid during 2002
including interest of $105,200.
John W. Hail, a director of the Company, served as Executive Vice
President, Director and Agency Director of the Company from July 1986 through
May 1988 and also served as Chairman of the Board of Directors of TVC Marketing,
Inc., which was the exclusive marketing agent of the Company from April 1984
through September 1985. Pursuant to agreements between Mr. Hail and the Company
entered into during the period in which Mr. Hail was an executive officer of the
Company, Mr. Hail receives override commissions from renewals of certain
memberships initially sold by the Company during such period. During 2002, such
override commissions on renewals totaled $87,000. Mr. Hail also owns interests
ranging from 12% to 100% in corporations not currently affiliated with the
Company, including TVC Marketing, Inc., but which were engaged in the marketing
of the Company's legal service memberships and which earn renewal commissions
from memberships previously sold. These entities earned renewal commissions of
$526,000 during 2002, of which $266,000 was net of amounts passed through as
commissions to their sales agents. The Company expects similar commissions will
be paid in 2003.
COMPLIANCE WITH SECTION 16 REPORTING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934 requires directors and
executive officers of the Company and persons who beneficially own more than 10%
of the Company's Common Stock to file reports of ownership and changes in
ownership of the Company's Common Stock with the Securities and Exchange
Commission. The Company is required to disclose delinquent filings of reports by
such persons during 2002. Based on a review of the copies of such reports and
amendments thereto received by the Company, or written representations that no
filings were required, the Company believes that during 2002 all Section 16(a)
filing requirements applicable to its executive officers, directors and 10%
shareholders were met.
VOTING
Directors will be elected by a plurality of the votes of the shares present
in person or represented by proxy at the Annual Meeting. All other matters
properly brought before the Annual Meeting, including the proposal to amend the
Stock Option Plan will be decided by a majority of the votes cast on the matter,
unless otherwise required by law
Shares represented by proxies which are marked "withhold authority" with
respect to the election of any one or more nominees for election as directors or
"abstain" with respect to the Stock Option Plan will be counted for the purpose
of determining the number of shares represented by proxy at the meeting. As a
result, proxies marked "abstain" with respect to the proposed amendment to the
Stock Operation Plan will have the same effect as if they were voted against
approval. However, because directors are elected by a plurality rather than a
majority of the shares present in person or represented by proxy at the Annual
Meeting, proxies marked "withhold authority" with respect to any one or more
nominee will not affect the outcome of the nominee's election unless the nominee
receives no affirmative votes or unless other candidates are nominated for
election as directors.
Shares represented by limited proxies will be treated as represented at the
meeting only as to such matter or matters for which authority is granted in the
limited proxy. Shares represented by proxies returned by brokers where the
brokers' discretionary authority is limited by stock exchange rules will be
treated as represented at the Annual Meeting only as to such matter or matters
voted on in the proxies.
INDEPENDENT PUBLIC ACCOUNTANTS
Grant Thornton LLP served as the Company's independent accountants for the
year ended December 31, 2002. Representatives of Grant Thornton LLP are expected
to be present at the Annual Meeting, with the opportunity to make a statement if
they desire to do so, and will be available to respond to appropriate questions.
As previously reported, on August 1, 2001, the Company and its former
independent auditor, Deloitte & Touche LLP ("Deloitte"), reached a mutual
agreement to cease their client-auditor relationship. Deloitte's reports on the
Company's financial statements for 1999 and 2000 did not contain an adverse
opinion or a disclaimer of opinion, nor were such reports qualified or modified
as to uncertainty, audit scope, or accounting principle. The mutual agreement to
cease the client-auditor relationship was approved by the Company's audit
committee of the Board of Directors.
During the Company's two most recent fiscal years and the subsequent
interim period preceding the mutual agreement to cease the client-auditor
relationship there were no disagreements between the Company and Deloitte on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Deloitte, would have caused it to make reference to the subject
matter of the disagreement in connection with its report, except as described in
the following paragraph.
On July 30, 2001, the Company publicly announced that, although it believed
its historical accounting policies for commission advance receivables were in
compliance with generally accepted accounting principles ("GAAP"), it had
decided not to further contest the SEC's conclusion that the Company's advance
commission payments should be expensed over the one month term of the Company's
legal plan membership contracts. Accordingly, the Company announced that it
would amend its previously filed SEC reports to restate its financial statements
to reflect the SEC's conclusion. In addition, the Company prepared its interim
financial statements for the three- and six-month periods ended June 30, 2001,
in accordance with the revised accounting policy reflecting the SEC's
conclusion. Deloitte informed the Company and publicly announced that Deloitte
continues to believe that the Company's historical accounting for commission
advances was correct and in compliance with GAAP, that Deloitte respectfully
disagrees with the SEC staff's interpretation of GAAP in this case and the SEC's
decision to require that the Company restate its financial statements, and that
Deloitte is therefore unable to render an unqualified opinion with respect to
the Company's restated financial statements. Deloitte previously issued an
unqualified opinion on the December 31, 2000 financial statements contained in
the Company's Form 10-K and issued unqualified opinions for each of the previous
six years. Because an unqualified opinion is necessary for the Company to be in
compliance with the SEC reporting requirements and Deloitte is unable to render
such an opinion, the Company had no choice but to seek another auditor.
Accordingly, Deloitte and the Company, after discussion of these issues with the
Company's audit committee, agreed to cease the client-auditor relationship. The
Company authorized Deloitte to respond fully to the inquiries of the Company's
successor accountant concerning this matter.
Except for the matter described in the preceding paragraph, during the
Company's two most recent fiscal years and the subsequent interim period
preceding the mutual agreement to cease the client-auditor relationship there
were no "reportable events" as defined in Item 304 of Regulation S-K promulgated
by the SEC.
The Company engaged Grant Thornton LLP as its new independent accountants
as of September 17, 2001. During the two most recent fiscal years prior to, and
through, September 17, 2001, the Company did not consult with Grant Thornton LLP
regarding (i) the application of accounting principles to any specific completed
or contemplated transaction, or the type of audit opinion that might be rendered
on the Company's financial statements or (ii) any matter that was the subject of
a disagreement or reportable event with the former auditor except as described
in the following paragraph.
As described above, the Company and Deloitte, its former auditor,
agreed to cease the client-auditor relationship after the Company decided not to
further contest the SEC's conclusion that the Company's advance commission
payments should be expensed over the one month term of the Company's legal plan
membership contracts. The Company provided Grant Thornton LLP copies of all
correspondence with, and from, the SEC regarding the accounting for advance
commission payments. Based on review of this correspondence and discussions with
the Company, Grant Thornton LLP advised the Company that expensing advance
commission payments over the one-month term of the Company's legal membership
contracts is acceptable under accounting principles generally accepted in the
United States of America.
ANNUAL REPORT TO SHAREHOLDERS
The Company's Annual Report to Shareholders for the year ended December 31,
2002, including audited financial statements, accompanies this Proxy Statement.
The Annual Report is not incorporated by reference into this Proxy Statement or
deemed to be a part of the materials for the solicitation of proxies.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002 filed with the Securities and Exchange Commission is available
without charge to any shareholder of the Company who requests a copy in writing
from the Company, Attn.: Janice Stinson, Investor Relations, P. O. Box 145, Ada,
Oklahoma 74821-0145.
PROPOSALS OF SHAREHOLDERS
The Board of Directors will consider properly presented proposals of
shareholders intended to be presented for action at the Annual Meeting of
Shareholders. Such proposals must comply with the applicable requirements of the
Securities and Exchange Commission and the Company's bylaws. Under the Company's
bylaws, a notice of intent of a shareholder to bring any matter before a meeting
shall be made in writing and received by the Secretary of the Company not more
than 150 days and not less than 90 days in advance of the annual meeting or, in
the event of a special meeting of shareholders, such notice shall be received by
the Secretary of the Company not later than the close of the fifteenth day
following the day on which notice of the meeting is first mailed to
shareholders. Every such notice by a shareholder shall set forth: (a) the name
and address of the shareholder who intends to bring up any matter; (b) a
representation that the shareholder is a registered holder of the Company's
voting stock and intends to appear in person or by proxy at the meeting to bring
up the matter specified in the notice; (c) with respect to notice of an intent
to make a nomination, a description of all understandings among the shareholder
and each nominee and any other person (naming such person or persons) pursuant
to which the nomination or nominations are to be made by the shareholder and
such other information regarding each nominee proposed by the shareholder as
would have been required to be included in a proxy statement filed pursuant to
the proxy rules of the Securities and Exchange Commission had each nominee been
nominated by the Board of Directors of the Company; and (d) with respect to
notice of an intent to bring up any other matter, a description of the matter,
and any material interest of the shareholder in the matter. Notice of intent to
make a nomination shall be accompanied by the written consent of each nominee to
serve as a director of the Company, if elected. All shareholder proposals should
be sent to the Secretary of the Company at P.O. Box 145, Ada, Oklahoma
74821-0145.
A shareholder proposal submitted pursuant to Rule 14a-8 under the
Securities Exchange Act of 1934 and intended to be included in the Company's
proxy statement relating to the 2004 Annual Meeting must be received no later
than December 12, 2003. To be considered for presentation at the 2004 Annual
Meeting, although not included in the Proxy Statement for such meeting, a
proposal must be received within the time period set forth in the Company's
bylaws as described above. In addition, the proxy solicited by the Board of
Directors for the 2004 Annual Meeting will confer discretionary authority to
vote on any such shareholder proposal presented at the 2004 Annual Meeting
unless the Company is provided with notice of such proposal no later than ninety
days prior to the date of the 2004 annual meeting.
OTHER MATTERS
The Board of Directors of the Company does not know of any other matters to
be presented for action at the Annual Meeting other than those listed in the
Notice of Meeting and referred to herein. If any other matters properly come
before the Annual Meeting or any adjournment thereof, it is intended that the
proxy solicited hereby be voted as to any such matter in accordance with the
recommendations of the Board of Directors of the Company.
YOUR VOTE IS IMPORTANT!
You can vote one of three ways:
1. Vote by Telephone.
2. Vote by Internet.
3. Vote by Mail.
VOTE BY TELEPHONE
Your Telephone vote is quick, easy and immediate. Just follow these easy steps:
1. Read the accompanying Proxy Statement.
2. Using a Touch-Tone Telephone, call Toll Free 1-800-758-6973 and follow
the instructions.
3. When instructed, enter the Control Number, which is printed on the
lower right-hand corner of the back-side of your proxy card.
4. Follow the simple recorded instructions.
Please note that all votes cast by Telephone must be made prior to 5:00 p.m.
Central Time, May 27, 2003.
Your telephone vote authorizes the named proxies to vote your shares to the same
extent as if you marked, signed, dated, and returned the proxy card.
If you vote by telephone, please do not return your proxy by mail.
VOTE BY INTERNET
Your Internet vote is quick, convenient and your vote is immediately submitted.
Just follow these easy steps:
1. Read the accompanying Proxy Statement.
2. Visit our Internet voting site at http://www.eproxyvote.com/ppd and
follow the instructions on the screen.
Please note that all votes cast by Internet must be submitted prior to 5:00 p.m.
Central Time, May 27, 2003.
Your Internet vote authorizes the named proxies to vote your shares to the same
extent as if you marked, signed, dated and returned the proxy card.
If you vote by Internet, please do not return your proxy card by mail.
VOTE BY MAIL
To vote by mail, read the accompanying Proxy Statement then complete, sign and
date the proxy card below. Detach the card and return it in the envelope
provided herein.
IF YOU ARE NOT VOTING BY TELEPHONE OR INTERNET, DETACH PROXY CARD AND RETURN.
PROXY
PRE-PAID LEGAL SERVICES, INC.
Proxy Solicited on Behalf of the Board of Directors
Annual Meeting of the Shareholders to be held on Thursday, May 29, 2003
The undersigned shareholder of Pre-Paid Legal Services, Inc., an Oklahoma
corporation (the "Company"), hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders and Proxy Statement, each dated April 14, 2003, and
hereby appoints Randy Harp and Kathleen S. Pinson, or either of them, as proxies
and attorneys-in-fact, with full power to each of substitution, on behalf and in
the name of the undersigned, to represent the undersigned at the 2003 Annual
Meeting of Shareholders of the Company, to be held in the Seminar Center at
Pontotoc Technology Center at 601 West 33rd Street in Ada, Oklahoma, on
Thursday, May 29, 2003, at 1:00 p.m., local time, and at any adjournment
thereof, and to vote all shares of Common Stock of the Company which the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth below.
(1) Election of directors:
____ FOR all nominees listed below (except as indicated).
____ WITHHOLD AUTHORITY to vote for all nominees listed below.
If you wish to withhold authority to vote for any individual nominee,
strike a line through that nominee's name in the list below.
John W. Hail Steven R. Hague
(2) Approval of amendment to increase number of shares under the Stock
Option Plan from 2,000,000 to 3,000,000 shares and extend the
termination date of the Stock Option Plan to December 12, 2012.
____ FOR ____ AGAINST ____ ABSTAIN
(3) In their discretion, upon such matters as may properly come before the
meeting or any adjournment or adjournments thereof.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED "FOR" THE NOMINEES LISTED IN ITEM 1 AND "FOR" THE
PROPOSAL LISTED IN ITEM 2. IF ANY OTHER MATTERS ARE BROUGHT BEFORE THE
MEETING OR IF A NOMINEE FOR ELECTION AS A DIRECTOR NAMED IN THE PROXY
STATEMENT FOR ELECTION AS A DIRECTOR IS UNABLE TO SERVE OR FOR GOOD CAUSE
WILL NOT SERVE, THE PROXY WILL BE VOTED IN ACCORDANCE WITH THE
RECOMMENDATIONS OF THE BOARD ON SUCH MATTERS OR FOR SUCH SUBSTITUTE
NOMINEES AS THE BOARD MAY RECOMMEND.
DATED: ___________________________, 2003
Printed Name(s) of Shareholder(s)
Signature(s): ___________________________
___________________________
(Please sign exactly as name appears on the proxy card. If shares are held
jointly, only one holder is required to sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, limited liability company or other entity,
please sign in the name of the entity by an authorized person).