UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to ____________
Commission File Number: 1-9293
______________________________________________________________
PRE-PAID LEGAL SERVICES, INC.
(Name of small business issuer in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 East Main
Ada, Oklahoma 74820
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (405) 436-1234
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
Common Stock, $0.01 Par Value American Stock Exchange
Securities registered under Section 12 (g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB ( ).
The issuer's revenues for the most recent fiscal year were $37,484,000.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days:
As of March 26, 1996 - $ 271,917,546.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of March 26, 1996 there
were 21,046,191 shares of Common Stock, par value $.01 per share, outstanding.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
FORM 10-KSB
For the year ended December 31, 1995
TABLE OF CONTENTS
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
General
Industry Overview
Description of Contracts
Provider Attorneys
Marketing
Operations
Quality Control
Competition
Regulation
Employees
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II.
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
Selected Financial Data
General
Results of Operations:
1995 compared to 1994
1994 compared to 1993
Liquidity and Capital Resources
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
<PAGE>
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS: COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1995
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
General
The Company was one of the first companies in the United States organized
solely to design, underwrite and market legal expense plans. The Company's
predecessor commenced business in 1972 and began offering legal expense
reimbursement services as a "motor service club" under Oklahoma law. In 1976,
the Company was formed and acquired its predecessor in a stock exchange. The
Company began offering memberships independent of the motor service club product
by adding a legal consultation and advice service, and in 1979 the Company
implemented a legal expense benefit which provided for partial payment of legal
fees in connection with the defense of certain civil and criminal actions. The
Company's legal expense plans (referred to as "Contracts") currently provide for
or reimburse a portion of the legal fees associated with a variety of legal
services in a manner similar to medical reimbursement plans. At December 31,
1995, the Company had 203,535 Contracts in force with members in all 50 states,
and the District of Columbia. Approximately 76% of such Contracts were in 12
states.
Industry Overview
Legal service plans, while used in Europe for many years, were first
developed in the United States in the 1970s. 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. According to estimates developed
by the National Resource Center for Consumers of Legal Services ("NRC"), there
were 88.5 million Americans entitled to service through at least one legal
service plan in 1995, compared to 4 million in 1981, 15 million in 1985, 58
million in 1990 and 85 million in 1994. The legal service plan industry
continues to evolve and market acceptance of legal service plans, as indicated
by the recent 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. The types of plans offered
include "free" plans which generally provide limited benefits on an automatic
enrollment basis without any direct cost to the individual user. Free plans
include those sponsored by labor unions, the American Association of Retired
Persons, the National Education Association and military services and, according
to NRC estimates, accounted for approximately 61% of covered persons in 1995.
The NRC estimates that an additional 22% are covered by employee assistance
plans which are also automatic enrollment plans without direct cost to
participants designed to provide limited telephonic access to attorneys for
employee groups. Employer paid plans pursuant to which more comprehensive
benefits are offered by the employer as a fringe benefit are estimated by the
NRC to account for approximately 8% of covered persons in 1995. Until June 30,
1992, employer provided group legal services were excluded from an employee's
income, similar to the tax treatment of employer provided health care benefits.
Such exclusion was repealed for tax years beginning after June 30, 1992, but the
debate regarding the repeal continues with each Congressional session.
According to the NRC, the remaining covered persons in 1995 were covered by
individual enrollment plans, other employment based plans, including voluntary
payroll deduction plans, and miscellaneous plans. These plans were estimated by
the NRC to account for approximately 9% of the market in 1995 and represent the
market segment in which the Company primarily competes. According to the NRC,
these plans typically have more comprehensive benefits, higher utilization,
involve higher costs to participants, and are offered on an individual
enrollment or voluntary basis.
<PAGE>
The NRC estimates that approximately 78% of the total U.S. work force was
not covered by a legal service plan in 1995. Of the 22% of the work force
covered by legal service plans, only 4% was estimated by the NRC to be covered
by plans having benefits comparable to those provided by the Company's
Contracts. Accordingly, the Company believes that significant opportunities
exist for successful marketing of the Company's Contracts to employee groups and
other individual consumers.
Description of Contracts
Legal services have been offered under two types of Contracts: closed panel
and open panel. Since 1987, substantially all of the Contracts sold by the
Company have been closed panel Contracts which allow members to access legal
services through a network of independent attorneys ("provider attorneys") under
contract with the Company. Provider attorneys are paid a fixed fee on a per
capita basis to render services to plan members residing within the state in
which the provider attorney is licensed to practice. Because the fixed fee
payments by the Company to provider attorneys in connection with closed panel
plans do not vary based on the type and amount of benefits utilized by the
member, the closed panel plans provide significant advantages to the Company in
managing claims risk. At December 31, 1995, closed panel Contracts comprised
approximately 80% of the Company's active Contracts. Prior to 1987, the Company
sold primarily open panel Contracts which allow members to locate their own
attorney to provide legal services available under the Contract with the
member's attorney being reimbursed for services rendered based on usual,
reasonable and customary fees.
The family legal plan currently marketed by the Company consists of four
basic benefits which provide coverage for a broad range of preventive and
litigation-related legal expenses. The family plan accounted for approximately
92% of the outstanding Contracts at December 31, 1995. In addition to the family
plan, the Company markets other specialized legal services products specifically
related to employment in certain professions. 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. 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 attorney and provides legal services associated
with administrative hearings. The School Teachers Legal Plan, developed in 1993
and marketed to school employees, also provides legal services associated with
administrative hearings. The Small Business Owners plan was developed during
1995 and test marketed in selected geographical areas. This plan provides
business oriented legal service benefits for small business with 15 or fewer
employees and $250,000 or less in net income per year. Also developed during
1995 in conjunction with a regional CPA firm and test marketed to sales
associates is the Tax and Financial Services plan. This plan has a minimum one
year enrollment and provides unlimited toll free consultation and annual tax
return preparation for both the State and Federal income tax returns.
In addition to the various plans described above, the Company has made its
plans available in several states in Spanish. The plan benefits are identical to
the family legal service plans but all marketing and membership related
materials are provided in Spanish. Additionally, the provider law firms have
bilingual staff and attorney resources and the Company has bilingual staff for
both customer service and marketing service functions. The Company is in the
process of developing its materials and making the necessary staffing additions
in its offices and those of the provider law firms in order to make its legal
service plans available in additional languages based on the expected market
strength.
In exchange for a fixed monthly, quarterly, semi-annual or annual payment,
members are entitled to specified legal services. Each Contract is guaranteed
renewable, except in the case of fraud or nonpayment of Contract fees. Contracts
are automatically renewed at the end of each membership year unless the member
cancels prior to the renewal date or fails to make payment on a timely basis.
The basic legal service plan Contract is sold as a package consisting of
five separate benefits known as "Titles." Contracts range in cost from $10.00 to
$25.00 per month depending in part on the schedule of benefits, which varies
from state to state in compliance with regulatory requirements, and on certain
other state regulations. Benefits for most corporate and commercial matters are
excluded from open panel Contracts. Benefits for domestic matters and drug and
alcohol related matters are limited in all Contracts.
Title I: Preventive Legal Services. This benefit offers unlimited toll-free
access to a member's provider attorney firm for any legal matter. This Title
also offers last will and testament preparation for the member and annual will
reviews at no additional cost. Document review benefits and letter writing
benefits are also Title I benefits.
Title I benefits offered on the open panel plan basis permit half-hour
consultations for personal legal matters with the attorney of choice and pay an
attorney's reasonable fee for covered consultations. This benefit, however, does
not provide for a duplication of services previously billed relating to the same
matter per membership in a 90-day period. The member is responsible for any fees
incurred as a result of legal work in addition to the half-hour consultation or
legal assistance provided under this benefit.
Title II: Automobile Legal Protection. This benefit offers legal assistance
for matters resulting from the operation of a licensed motor vehicle or boat.
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 or boat 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 or boat 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 Title 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.
Title III: Trial Defense. This Title offers assistance to the member and
the member's spouse through an increasing schedule of benefits based on
membership year. Up to 60 hours of attorney time are available for the defense
of civil or job-related criminal charges in the first membership year. The
criminal action must be a result of the direct performance 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 Title 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 Title 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 incrementing 5
additional hours each membership year to the maximum limit of 35 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. The
Company has experienced increased sales of this option during the last two
years.
Title IV: 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 remainder of the 50 hours 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
Title.
With pre-trial benefits limited to 2.5 hours to 4.5 hours based on the
membership year under Title III (without the pre-trial option described) and 3.5
hours under Title IV, these Titles do not ensure complete pre-trial coverage.
While Title I provides unlimited toll-free access to a member's provider
attorney firm for consultation on any legal matter, a matter must actually
proceed to trial before additional Title III and IV benefits are available. The
costs of pre-trial preparation that exceed the benefits under the Contract are
the responsibility of the member. Provider attorneys under the closed panel
Contract have agreed to provide to members any legal service beyond those
stipulated in the Contract at a 25% discount from the provider's customary and
usual rate.
Title II, III and IV benefits available on an open panel plan basis provide
comparable benefits with limitations based on fees incurred rather than hours of
service.
Title V: Preferred Member Discount. Provider attorneys under the closed
panel Contract have agreed to provide to members any legal services beyond those
stipulated in the Contract at a fee discounted 25% from the provider's customary
and usual rate.
Commercial Driver's Legal Plan
The Commercial Driver's Legal Plan provides coverage on a closed panel plan
basis for persons who drive a commercial vehicle for a living. The Company has
members covered under the Commercial Driver's Legal Plan in 45 states. The
Commercial Driver's Legal Plan is underwritten by the Road America Motor Club,
an unrelated motor service club. During the years ended December 31, 1995 and
1994, this plan accounted for approximately 4.7% and 7.8%, respectively, of
Contract premiums. The Plan is available at the monthly rate of $35.95. Benefits
include Title II, defense of Department of Transportation violations and the 25%
discounted rate for services beyond plan scope, such as defense of non-moving
violations, bail and arrest bonds, and services for family vehicles.
Law Officers Legal Plan
The Law Officers Legal Plan was designed in 1991 to meet the legal needs of
persons in the law enforcement profession and is currently marketed at the
monthly group rate of $14.95. The Company has members covered under the Law
Officers Legal Plan in 16 states. The Law Officers Legal Plan offers the basic
plan benefits of Titles I, III and IV. Title II is available in the Law Officers
Legal Plan only for defense of criminal charges resulting from the operation of
a licensed motor vehicle. Provider attorneys have agreed to provide any legal
service not specifically covered by this plan at a 25% discount from the
standard fee for services. No coverage for members' spouses is available beyond
these benefits. Additionally, at no charge to the member, a 24-hour emergency
hotline is available to access the services of the provider attorney 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 is 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 Title III, Trial Defense.
During the years ended December 31, 1995 and 1994, the Law Officers Legal Plan
accounted for approximately 3.4% and 3.9%, respectively, of the Company's
Contract premiums.
Provider Attorneys
The Company currently markets Contracts primarily on a closed panel basis.
Closed panel Contracts allow members to access legal services through a network
of independent attorneys under contract with the Company generally referred to
as "provider attorneys." Provider attorneys are paid a fixed fee on a per capita
basis to render services to plan members residing within the state in which the
provider attorney is licensed to practice. Because the fixed fee payments by the
Company to provider attorneys in connection with closed panel Contracts do not
vary based on the type and amount of benefits utilized by the member, the closed
panel Contracts provide significant advantages to the Company in managing claims
risk. Prior to 1987, the Company sold Contracts on an open panel basis. Open
panel Contracts allow members to locate their own attorney to provide legal
services available under the membership. Members' attorneys are reimbursed for
services rendered according to a payment schedule commonly termed "usual,
reasonable, and customary" relevant to the average cost of legal services in
their area. At December 31, 1995, closed panel Contracts comprised approximately
80% of the Company's active memberships while open panel Contracts accounted for
the remainder.
Provider attorney firms are selected to serve closed panel plan members
based on a number of factors, including recommendations from provider attorneys
and other attorneys in the area in which the candidate provider attorney is
located and in neighboring states, investigation by the Company of bar
association standing and client references, evaluation of the education,
experience and areas of practice of attorneys within the firm, on-site
evaluations by Company management, and interviews with attorneys in the firm who
would be responsible for providing services. Each provider attorney must have at
least two years of experience as an attorney, unless the Company waives this
requirement due to special circumstances such as instances when the attorney
demonstrates significant legal experience acquired in an academic, judicial or
similar capacity other than as an attorney.
Agreements with provider attorney firms: (a) generally permit termination
of the agreement by either party upon 60 days prior written notice, (b) permit
the Company to terminate the Agreement for cause immediately upon written
notice, (c) require the firm to maintain a specified minimum amount of
malpractice insurance, (d) preclude the Company from interference with the
attorney-client relationship, and (e) provide for periodic review of services
provided. The Company is 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, the Company enrolls a group
of 500 or more members, or when the agreement is terminated by either party.
Provider attorneys are not precluded from contracting with other prepaid legal
service companies. Provider attorneys receive a fixed monthly payment for each
closed plan member in the service area and are responsible for providing the
Contract benefits without additional remuneration. If a closed panel Contract
provider attorney delivers legal services to an open panel member, the attorney
is reimbursed for services rendered according to the open panel membership
Contract.
The Company has had occasional disputes with provider attorneys, some of
which have resulted in litigation. Nonetheless, the Company believes that its
relations with provider attorneys are generally good. At the end of 1995, the
Company had 27 provider attorney firms compared to 23 provider attorney firms at
the end of 1994 and 1993. During the last three years, the Company's
relationships with an average of three provider attorney firms annually were
terminated by the Company or the provider attorney firm for reasons other than
the lack of a sufficient number of members in the geographic area to support the
use of the provider attorney firm.
The Company's agreements with provider attorney firms provide that the
provider attorney firms will indemnify the Company against liabilities resulting
from legal services rendered by the provider attorney firm.
Marketing
Multi-Level Marketing
Until the end of 1983, the Company experienced modest growth in marketing
its products to groups as an employee benefit through commissioned agents.
Beginning in 1984, the Company commenced marketing its products through a
multi-level marketing plan designed to emphasize individual sales. This
technique resulted in dramatic growth. New Contract sales increased from
approximately 39,836 in 1983 to 49,490 in 1984 to 134,000 in 1985 to
approximately 221,000 in 1986. From Contract premiums of just under $8 million
in 1984, the Company's Contract premiums increased to more than $16 million in
1985, approximately $36 million in 1986, and approximately $42 million in 1987.
In order to finance its growth, the Company raised approximately $25
million in various financing transactions between 1983 and 1986. However, these
amounts were not adequate to fund the continuing growth in new Contract sales.
In 1987, in order to improve cash flow, the Company implemented a number of
measures to curtail growth, including modifications to its marketing plan to
de-emphasize multi-level marketing. In 1992, as a result of improvements in the
Company's financial condition, the Company implemented changes in its marketing
plans to encourage sales of new Contracts, including increasing the amount of
first year Commissions paid on new Contract sales. During 1995, the Company sold
109,922 new Contracts compared to 45,893 new Contracts during 1994 and 34,294
during 1993. Since 1987, the Company also implemented a number of actions to
reduce indebtedness incurred to finance its rapid growth and retired all
outstanding debt during 1994 from approximately $23.3 million in 1987.
The Company's multi-level marketing program encourages individuals to sell
Contracts and allows individuals to recruit and develop their own sales
organizations. Commissions are paid only when a Contract is sold and are not
based solely on recruitment. When a Contract is sold, commissions are paid to
the associate making the sale, and to other associates (often as many as nine
others) who are in the line of associates who directly or indirectly recruited
the selling associate. Each sales associate is responsible for monitoring the
progress and sales practices of the associates recruited by him or her. The
Company provides training materials, organizes area training meetings and
designates personnel at the home office specially trained to answer questions
and inquiries from associates.
Multi-level marketing is primarily used for product marketing based on
personal sales since it encourages individual or group face-to-face meetings
with prospective purchasers of the product and has the potential of attracting a
large number of sales personnel within a short period of time. The Company's
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.
Contracts with individuals or families sold by the multi-level sales force
constituted 78% of the Company's Contracts in force at December 31, 1995,
compared to 75% and 72% at December 1994 and 1993, respectively. Although other
means of payment are available, approximately 64% of premiums on Contracts
purchased by individuals or families are paid on a monthly basis by means of
automatic bank draft.
The Company's marketing efforts towards employee groups, principally on a
payroll deduction payment basis, are designed to permit its sales associates to
reach more potential members with each sales presentation and strive to
capitalize on, among other things, what the Company perceives to be a growing
interest among employers in the value of providing legal service plans to their
employees. Contracts in force at December 31, 1995 sold through employee groups
constituted approximately 22% of total Contracts in force compared to 25% and
28% at December 31, 1994, and 1993, respectively. The majority of employee group
Contracts are sold to school systems, governmental entities and businesses. No
group accounted for more than 10% of the Company's consolidated revenues from
Contracts during 1995 or 1994.
Sales associates under the Company's multi-level marketing system are
generally engaged as independent contractors and are provided with training
guides and are given the opportunity to participate in Company training
programs. Sales associates are required to complete a specified training program
prior to marketing the Company's Contracts to employee groups. All advertising
and solicitation materials used by sales associates must be approved by the
Company prior to use. A substantial number of the Company's sales associates
market the Company's Contracts on a part-time basis only. At December 31, 1995,
the Company had 78,281 "active" sales associates compared to 43,909 "active"
sales associates at December 31, 1994. A sales associate is considered to be
"active" if he or she has originated at least three new Contracts per quarter or
if he or she retains a personal Company Contract. During 1995, the Company had
21,116 sales associates who sold at least one Contract, of which 18,313 (87%)
made first time sales, compared to 7,048 sales associates producing at least one
Contract sale in 1994, of which 5,089 (72%) made first time sales.
The Company derives revenues from services provided to its multi-level
marketing sales force, principally from a one-time enrollment fee of
approximately $49 ($55 beginning February 1, 1996) from each new sales associate
and the sale of marketing supplies and promotional materials to associates.
Amounts collected from sales associates are intended primarily to offset the
Company's direct and indirect costs incurred in recruiting, monitoring and
providing materials to sales associates and are not intended to generate
material profits from such activities.
Cooperative Marketing
The Company is continuing to develop a cooperative marketing strategy
pursuant to which the Company seeks 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 the Company's
Contracts 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
the Company's product to the marketing partner's existing range of products and
services, while the Company is able to gain broader Contract distribution and
access to established customer bases.
The premium and commission structures in connection with Contracts sold
under cooperative marketing arrangements are generally similar to the structure
found in the Company's multi-level marketing system, although the specific terms
of each cooperative marketing arrangement may vary depending on the strength of
and the specific marketing, training and administrative responsibilities assumed
by the cooperative marketing partner.
The Company has had mixed success with cooperative marketing arrangements
in the past and is unable to predict with certainty what success it will
achieve, if any, under its current cooperative marketing arrangements.
Operations
The Company's corporate operations involve membership application
processing, member-related customer service, various associate-related services
including commission payments, receipt of premiums, related general ledger
accounting, and managing and processing benefit claims.
The Company employs a computerized management information system to control
operations costs and monitor benefit utilization. Among other functions, the
system evaluates benefit claims, monitors member use of attorneys, calculates
average amount of claims incurred, processed and paid by benefit category, and
monitors marketing/sales data and financial reporting records. The Company
believes its management information system has substantial capacity to
accommodate increases in data flow before substantial upgrades will be required.
The Company believes this excess capacity may enable it to make significant
increases in the volume of its business and the number of members serviced with
less than commensurate increases in administrative costs.
The Company's operations also include departments specifically responsible
for marketing support and regulatory and licensing compliance.
Quality Control
The Company systematically monitors the services provided by provider
attorneys to members through periodic member surveys and review of member
complaints. Problems discovered in connection with member surveys or complaints
are evaluated to determine remedial actions which the Company might recommend to
provider attorneys and in the most extreme cases may result in the termination
of a provider attorney. The Company meets with provider attorneys frequently to
encourage dialogue and information sharing relating to the timely and effective
delivery of services to members and requires provider attorneys to provide
various reports to the Company to enable the Company to monitor Contract usage.
The Company has an extensive data base of attorneys who have provided
services to its members. Attorneys with whom members have experienced service
problems are not listed on the Company's referral list for use by members when a
designated provider attorney is not available.
The Company also closely monitors the performance of its home office
personnel, especially those who have telephone contact with members or sales
associates. The Company records home office employee telephone calls with its
provider attorneys and members to assure that Company policies are being
followed and to gather data about recurring problems which may be avoided
through modifications in policies.
Competition
The Company competes in a variety of market segments in the prepaid legal
services industry, including, among others, individual enrollment plans,
employee benefit plans and certain specialty segments. An estimated 50% of the
total estimated market in the segments in which the Company competes is served
by a large number of small companies with regional areas of emphasis. The
remaining 50% of such market is served primarily by the Company and five other
principal competitors: Hyatt Legal Services, Midwest Legal Services, LawPhone,
National Legal Plan, Montgomery Ward's Signature Group and The Prudential.
If a greater number of companies seek to enter the prepaid legal services
market, the Company will experience increased competition in the marketing of
its Contracts. However, the Company believes its competitive position is
enhanced by its actuarial data base and the ability to tailor products to suit
any type of distribution channel or target market. Serious competition is most
likely from companies with significant financial resources and advanced
marketing techniques.
Regulation
The Company is 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. While some states regulate
legal expense plans as insurance or specialized legal expense products, others
regulate them as services.
As of December 31, 1995, the Company or one of its subsidiaries was
marketing new Contracts in 29 states which require no special licensing or
regulatory compliance. The Company's subsidiaries serve as operating companies
in 11 states which regulate Contracts 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 the Company's total Contracts in force as of December 31, 1995,
33% were written in jurisdictions which subject the Company or one of its
subsidiaries to insurance or specialized legal expense regulation.
In states with no special licensing or regulatory requirements, the Company
commences 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 Contracts will be exempt from insurance regulation
even in states with no specific regulations. In these situations, the Company or
one of its 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 Contracts 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. These agencies regulate the
Company'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. Dividends paid by PPLCI are restricted under
Oklahoma law to available surplus funds derived from realized net profits.
The Company is 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 the Company 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 dividend by PPLCI to the
Company from its statutory surplus or net gain from operations requires approval
of the Oklahoma Insurance Commissioner. Any change in control of the Company,
defined as acquisition by any method of more than 10% of the Company's
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, such as Texas, provide for comparable registration and
regulation of the Company.
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, Contracts 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 the Company by such
subsidiaries. PPLSIF is subject to restrictions of this type under the laws of
the State of Florida and other jurisdictions in which it conducts business,
including restrictions with respect to payment of dividends to the Company.
As the legal plan industry matures, the Company anticipates enactment of
additional legislation which would affect the Company and its subsidiaries. The
Company cannot predict with any accuracy if such legislation would be adopted or
its ultimate effect on operations, but expects to continue to work closely with
regulatory authorities to attempt to minimize any undesirable impact.
The Company's 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 an attorney 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 attorney's professional judgment. The ABA Code prohibits
attorney participation in closed panel legal service programs in certain
circumstances. The Company's agreements with provider attorney firms comply with
both the Model Rules and the ABA Code. The Company relies on the attorneys
serving as the designated attorneys for the closed panel benefits to determine
whether their participation would violate any ethical guidelines applicable to
them. The Company and its subsidiaries comply with filing requirements of state
bar associations or other applicable regulatory authorities.
The Company also is required to comply with state and federal laws
governing the Company's multi-level marketing approach. These laws generally
relate to unfair or deceptive trade practices, lotteries, business opportunities
and securities. The Company has experienced no material problems with marketing
compliance. In jurisdictions which require associates to be licensed, the
Company receives all applications for licenses from the associates and forwards
them to the appropriate regulatory authority. The Company maintains records of
all associates licensed, including effective and expiration dates of licenses
and all states in which an associate is licensed. The Company does not accept
new Contract sale applications from any unlicensed associate in such
jurisdictions.
Employees
At December 31, 1995, the Company and its subsidiaries employed 119
individuals on a full-time basis, exclusive of independent agents and sales
associates. None of the Company's employees are represented by a union.
Management considers its employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The executive and administrative offices of the Company and its
subsidiaries are located at 321 East Main Street, Ada, Oklahoma. These offices,
containing approximately 40,000 square feet of office space, are owned by the
Company. While the Company currently fully utilizes these existing facilities,
management believes that it will have no difficulty in securing additional
facilities in close proximity to its office building if necessary for future
expansion.
ITEM 3. LEGAL PROCEEDINGS
The Company is a named defendant in certain lawsuits arising in the
ordinary course of the Company's business. While the outcome of these lawsuits
cannot be predicted with certainty, the Company does not expect these matters to
have a material adverse effect on the Company's financial condition liquidity or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At March 26, 1996, there were approximately 9,200 holders of record
(including brokerage firms and other nominees) of the Company's Common Stock.
The Common Stock is listed on the American 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 American
Stock Exchange.
High Low
1996:
1st Quarter (through March 26).................... $14.00 $ 9.13
1995:
4th Quarter....................................... $10.88 $ 6.75
3rd Quarter....................................... 8.88 5.56
2nd Quarter....................................... 7.06 3.19
1st Quarter....................................... 3.69 1.69
1994:
4th Quarter....................................... $ 2.25 $ 1.94
3rd Quarter....................................... 2.38 1.31
2nd Quarter....................................... 2.06 1.31
1st Quarter....................................... 2.25 1.25
The Company has never declared a cash dividend on its Common Stock. For the
foreseeable future, it is anticipated that any earnings which may be generated
from the operations of the Company will be used to finance the Company's growth
and that cash dividends will not be paid to holders of the Common Stock. Any
decision by the Board of Directors of the Company to pay cash dividends in the
future will depend upon, among other factors, the Company's earnings, financial
condition and capital requirements. In addition, the Company's ability to pay
dividends is dependent in part on its ability to derive dividends from its
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. At December 31,
1995, PPLCI did not have funds available for payment of dividends without the
prior approval of the Oklahoma Insurance Commissioner. Additionally, the Company
is restricted pursuant to a bank credit agreement from paying any dividends on
its common stock as long as any debt remains outstanding pursuant to such
agreement. To date, the Company has not borrowed under the bank credit
agreement.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Selected Consolidated Financial And Statistical Data
The following table sets forth selected historical financial and
statistical data for the Company as of the dates and for the periods indicated.
This information is not necessarily indicative of the Company's future
performance. The following information should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
Income Statement Data: (In thousands, except ratio, per share and Contract amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract premiums ........................................ $ 31,290 $ 22,852 $ 19,182 $ 19,026 $ 20,822
Associate services ....................................... 3,183 912 462 41 24
Interest income .......................................... 1,308 466 195 292 343
Other .................................................... 1,703 878 676 600 639
Total revenues ......................................... 37,484 25,108 20,515 19,959 21,828
Costs and expenses:
Contract benefits ........................................ 10,574 7,990 7,480 7,011 7,342
Commissions .............................................. 7,708 6,788 6,117 3,629 3,764
Direct marketing expenses ................................ 1,023 644 527 521 277
Cost of associate services ............................... 1,044 451 262 78 20
General and administrative expenses ...................... 4,811 4,384 3,880 3,847 4,301
Interest ................................................. 10 320 518 792 1,226
Other expenses ........................................... 1,070 1,135 1,594 1,093 1,105
Total costs and expenses ............................... 26,240 21,712 20,378 16,971 18,035
Income before income taxes ................................. 11,244 3,396 137 2,988 3,793
Provision (benefit) for income taxes ....................... 3,932 (319) 29 47 75
Net income ................................................. 7,312 3,715 108 2,941 3,718
Less dividends on preferred shares ......................... 125 465 15 15 15
Net income applicable to common shares ..................... $ 7,187 $ 3,250 $ 93 $ 2,926 $ 3,703
Net income per common and common equivalent share ......... $ .35 $ .26 $ .01 $ .23 $ .33
Net income per common share - assuming full dilution ....... .34 .24 .01 .22 .32
Weighted average number of common shares outstanding(1) ... 21,778 15,772 12,643 13,806 11,661
Contract Benefit Cost and Statistical Data:
Loss ratio(2) .............................................. 34.1% 35.0% 39.0% 36.8% 35.3%
Expense ratio(2) ........................................... 45.3% 55.9% 64.1% 50.4% 49.9%
Combined loss and expense ratio ............................ 79.4% 90.9% 103.1% 87.2% 85.2%
New Contracts sold ......................................... 109,922 45,893 34,294 14,439 9,437
Period end Contracts in force .............................. 203,535 144,438 133,121 123,123 132,687
Cash Flow Data:
Net cash provided by operating activities .................. $ 548 $ 3,040 $ 1,100 $ 2,437 $ 4,423
Net cash provided by (used in) investing activities ........ (2,192) 254 (611) 320 (610)
Net cash provided by (used in) financing activities ....... 6,621 3,802 (1,307) (2,889) (2,228)
Balance Sheet Data:
Total assets ............................................... $ 36,069 $ 18,154 $ 11,109 $ 11,547 $ 12,000
Notes payable, financing transactions and
subordinated debentures .................................... - - 3,837 5,449 8,324
Total liabilities .......................................... 6,329 2,347 6,656 7,267 10,650
Stockholders' equity ....................................... 29,740 15,807 4,453 4,280 1,350
<FN>
(1) Weighted average shares outstanding gives effect to dilutive effect of
outstanding common stock equivalents and other potentially dilutive
securities except during loss years when the effects of such equivalents
and securities would be anti-dilutive. See Note 1 of Notes to Consolidated
Financial Statements of the Company.
(2) The loss ratio represents Contract benefit costs as a percentage of
Contract premiums. The expense ratio represents the total of commissions,
direct marketing expenses, general and administrative expenses, premium
taxes, interest and certain other normal operating expenses as a percentage
of Contract premiums. The combined ratio does not measure total
profitability because it does not take into account all revenues and
expenses.
</FN>
</TABLE>
<PAGE>
General
Contract Premiums and Contract Benefit Costs
The Company's principal revenues are derived from Contract premiums, most
of which are collected on a monthly basis. Contracts are generally guaranteed
renewable and non-cancelable except for fraud, non-payment of Contract premiums
or upon written request by the member.
Contract benefit costs vary depending on the type of Contract. Closed panel
plans provide the Contract benefits only through a designated provider attorney
with whom the Company has arranged for the services to be provided in a
particular geographic area. Provider attorneys receive a fixed monthly payment
for each member in their service area and are responsible for providing the
Contract benefits without additional remuneration. The fixed cost aspect of
closed panel plans provides significant advantages to the Company in managing
its claims risk. Under closed panel plans, the Company has the ability to more
effectively monitor the quality of legal services provided and, due to the
volume of claims that may be directed to particular provider attorney law firms,
has potential access to larger, more diversified law firms. At December 31,
1995, approximately 80% of the Company's Contracts were closed panel plans.
Contract benefit costs relating to open panel Contracts, which constituted
approximately 20% of Contracts in force at December 31, 1995, are based on the
usual, reasonable and customary fee for providing the required services. Such
costs are generally paid on a current basis as most costs are certain in amount
and require only limited investigation. The Company maintains a reserve for
estimated incurred but not reported open panel Contract benefit costs as well as
costs which are in the payment process. These reserves are periodically reviewed
by an independent actuary as necessary in conjunction with the preparation and
filing of financial statements and other reports with various state insurance
regulatory authorities. Underwriting risks associated with the open panel
Contracts are managed primarily through contractual benefit limitations and, as
a result, underwriting decisions are not necessarily based on individual
Contract purchases.
Commissions
Beginning with new membership Contracts written after March 1, 1995, the
Company implemented a level commission schedule which results in the Company
incurring commission expense related to the sale of its legal expense plans on a
basis more consistent with the collection of the premiums generated by the sale
of such contracts. Historically, the Company had incurred much higher
commissions (approximately 70%) during the first year of the membership with
substantially lower commissions (approximately 16%) in all subsequent years. The
level commission structure results in the Company incurring commissions at the
rate of approximately 25% per year for all membership years. The Company
currently advances commissions at the time of sale of a new membership contract.
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 approximately equal to three years overall commission earnings. Although
the average number of marketing associates receiving an advance commission
payment on a new membership is ten, the overall initial advance may be paid to
as many as nineteen different individuals, each at a different level within the
overall commission structure. This commission advance immediately increase an
associate's account with the Company and represents prepaid commissions on
active memberships. These advance commission payments ("advances") are recovered
at different rates depending on the amount of commission earnings ("earnings")
attributable to each level with in the commission structure and are determined
by the relationship between the advance amount and the earnings amount
attributable to each commission level. These recovery periods range from a
period of 12 months to 64 months.
Should a membership lapse before the advances have been recovered for each
commission level, the Company immediately generates a "charge-back" to the
applicable sales associate to recapture 50% of any unearned advance. This
charge-back is immediately deducted from any future advances that would
otherwise be payable to the associate for additional new memberships. The
Company historically has been able to immediately recover the majority of such
charge-backs. Any remaining unrecovered advance on a membership that has lapsed
represents a receivable from the associate and is reflected as commission
advances and is categorized as current or non-current based on the expected
recovery period. Additionally, even though a commission advance may have been
fully recovered on a particular membership, no additional commission earnings
from any membership will be paid to an associate until all previous advances on
all memberships, both active and lapsed, have been recovered.
The Company's commission advance policy exposes the Company to the risk of
uncollectible commission advances particularly for associates who do not receive
commissions on a large number of memberships or who experience below average
persistency. The Company closely monitors such commission advances to ensure
maximum recoverability and maintains a recoverability reserve which at December
31, 1995 was $2.7 million.
Contract Persistency
One of the major factors affecting the Company's profitability and cash
flow is Contract persistency, which represents the ability of the Company to
retain a Contract, and therefore receive premiums, once it has been written. The
Company periodically monitors its overall Contract persistency rate, as well as
the persistency rates with respect to Contracts sold by individual associates
and agents and persistency rates with respect to Contract sales by geographic
region and payment method. The Company's Contract persistency rate measures the
number of Contracts in force at the end of a year as a percentage of the total
of (i) Contracts in force at the beginning of such year, plus (ii) new Contracts
sold during such year. From 1981 through the year ended December 31, 1995, the
Company's annual Contract persistency rates, using the foregoing method, have
averaged approximately 76%. The annual Contract persistency rates were 80.0%,
80.7% and 84.6% for 1995, 1994 and 1993, respectively. The Company's overall
Contract persistency rate varies based on, among other factors, the relative age
of total Contracts in force. The Company's overall Contract persistency rate
could be lower when the Contracts in force include a higher proportion of newer
Contracts. The Company has recently experienced significant increases in new
Contract sales and, as a result, the percentage of newer Contracts in its total
Contracts in force has increased. Unless offset by other factors, this increase
could result in a decline in the Company's overall Contract persistency rate as
it did during 1995 and 1994. The Company's financial condition and results of
operations may be materially adversely affected if the persistency rates of
existing and new Contracts are materially lower than the Company's historical
experience.
Operating Ratios
Two principal operating measures monitored by the Company in addition to
Contract persistency are the loss ratio and the expense ratio. The loss ratio
represents Contract benefit costs as a percentage of Contract premiums. The
expense ratio represents the total of commissions, direct marketing expenses,
general and administrative expenses, premium taxes, interest and certain other
normal operating expenses as a percentage of Contract premiums. The Company
strives to maintain a combined loss and expense ratio as low as possible. The
combined ratio does not measure total profitability because it does not take
into account all revenues and expenses.
Cash Flow Considerations Relating to Sales of Contracts
The Company advances significant commissions at the time a Contract is
sold. Since approximately 91% of Contract premiums are collected on a monthly
basis, a significant cash flow deficit is created at the time a Contract is
sold. This deficit is reduced as monthly premiums are remitted and no additional
commissions are paid on the Contract until all previous commission advances have
been fully recovered. Since the cash advanced at the time of sale of a new
membership Contract will be recovered more slowly as a result of the changes
described above in the Company's commissions, the new commission structure may
have an adverse effect on cash flow from operations depending on the number of
new membership Contracts written and the composition of new or existing sales
associates producing such Contracts.
Income Tax Matters-Net Operating Losses
At December 31, 1995, the Company had net operating loss carryforwards
("NOLs") for regular and alternative minimum tax purposes of approximately $9.1
million and $8.7 million, respectively, expiring in 2001 and 2002, respectively.
In addition, the Company had general business and rehabilitation tax credit
carryforwards of approximately $325,000 expiring primarily in 1998 to 2001, and
an alternative minimum tax credit carryforward of $366,000 which does not
expire. The Company has established a valuation allowance for its deferred tax
asset since the Company does not believe it is more likely than not that the tax
benefits from its NOLs and other carryforwards will be realized. The Company
believes it is unlikely that it will generate sufficient taxable income to
realize these benefits before they expire, primarily as a result of tax
deductions attributable to expected levels of commissions to be paid on new
Contract sales. However, these benefits were used during 1994 and 1993 to offset
current tax liabilities in periods in which the Company reported net taxable
income. As a result, the Company's provision for income taxes for 1994 and 1993
was generally limited to taxes actually paid, which was significantly less than
statutory rates. The Company accrued tax expense for 1995 at the applicable
statutory rates and expects to continue such accrual for 1996 since it does not
expect to be able to utilize available tax benefits from its existing
carryforwards. However, if the level of tax deductions for commissions is less
than expected in 1996 (as a result of new Contract sales being less than
expected or for any other reason), the Company may have taxable income. In such
case, the Company's tax expense for 1996 would be reduced to reflect any actual
or anticipated future utilization of deferred tax benefits through reduction in
the current valuation allowance.
The ability of the Company to utilize NOLs and tax credit carryforwards to
reduce future federal income taxes of the Company is also subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
One such limitation is contained in Section 382 of the Code which imposes an
annual limitation on the amount of a corporation's taxable income that can be
offset by those carryforwards in the event of a substantial change in ownership
as defined in Section 382 ("Ownership Change"). In general, an Ownership Change
occurs if during a specified three-year period there are capital stock
transactions which result in an aggregate change of more than 50% in the
beneficial ownership of the stock of the Company. The Company is not aware of
any pending or contemplated transactions that would result in an Ownership
Change under Section 382. However, the Company does not have control over all
possible variables which can affect the Ownership Change calculation and,
accordingly, it is possible that an Ownership Change could occur in the future.
The effect of any such Ownership Change on the Company's financial condition or
results of operations cannot be determined because it is dependent upon unknown
future facts and circumstances at the time of any such change, including, among
others, the amount of the Company's NOLs, the fair market value of the Company's
stock and the Company's other tax attributes.
Associate Services
The Company derives revenues from services provided to its marketing sales
force, principally from a one-time enrollment fee of approximately $49 ($55
effective February 1, 1996) from each new sales associate and the sale of
marketing supplies and promotional materials to associates on an ongoing basis.
The Company enrolled 50,464 new sales associates during 1995 compared to 19,129
during 1994, resulting in significant increases in associate services revenues
and costs. The Company's direct costs of providing materials and services to
associates are reflected as costs of associate services. Amounts collected from
sales associates are intended primarily to offset the Company's direct and
indirect costs incurred in recruiting, monitoring and providing materials to
sales associates and are not intended to generate material profits from such
activities.
Investment Policy
The Company's 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. The Company's investments consist principally of short term
instruments issued by the United States Treasury, insured bank certificates of
deposit, high grade government bonds and similar investments. The Company is
required to pledge investments to various state insurance departments as a
condition to obtaining authority to do business in certain states.
Accounting Standards to be Adopted
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Effective for fiscal years beginning after December 15, 1995, FAS 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to such assets. The
Company will adopt FAS 121 in 1996. Management has not evaluated the effect of
this pronouncement on the Company's consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock
- -Based Compensation." FAS 123 establishes a fair value method and disclosure
standards for stock-based employee compensation arrangements, such as stock
purchase plans and stock options. It also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
nonemployees, requiring that such transactions be accounted for based on fair
value. As allowed by FAS 123, the Company will continue to follow the provisions
of Accounting Principles Board Opinion No. 25 for its stock-based employee
compensation arrangements, and disclose the pro forma effects of applying FAS
123 for 1995 and 1996 in its 1996 financial statements. Pursuant to its 1995
Stock Option Plan for Associates, the Company will record compensation expense
based on the fair value of the options issued under such Plan.
Results of Operations
Comparison of 1995 to 1994
The Company reported net income applicable to common shares of $7.2
million, or $.35 per common share, for 1995 up 35% from net income applicable to
common shares of $3.3 million, or $.26 per common share, for 1994. This 35%
increase in net income applicable to common shares was achieved despite a 67%
increase in the weighted average number of shares used in computing earnings per
share from 12.5 million shares in 1994 to 20.8 million shares for 1995. The
increase in the net income applicable to common shares for 1995 is primarily the
result of increases in every revenue category for 1995 as compared to 1994.
Contract premiums totaled $31.2 million during 1995 compared to $22.9
million for 1994, an increase of 37%. The increase in Contract premiums was
primarily the result of increased new Contract sales resulting in a higher
number of active Contracts in force. New Contract sales during 1995 were 109,922
compared to 45,893 during 1994. At December 31, 1995, there were 203,535 active
Contracts in force compared to 144,438 at December 31, 1994. Additionally, the
average annual premium per Contract has increased from $229 for those Contracts
written in 1994 to $239 for Contracts written during 1995, a 4.0% increase, as a
result of a higher portion of Contracts written during 1995 including the
additional pre-trial hours benefits at an additional cost to the member.
Associate services revenue increased from $912,000 for 1994 to $3.2 million
during 1995 as a result of higher new associate enrollments. New associates
enrolled during 1995 were 50,464 compared to 14,129 for 1994, an increase of
257%. Associate services revenue also increased as a result of increases in
sales of marketing materials used by the associates in sales presentations of
the Company's Contracts. Associate services revenue for 1995 was comprised of
$2.5 million in enrollment fees and $677,000 in sales of marketing materials.
Future revenues from associate services will depend primarily on the number of
new associates enrolled, but the Company expects that such revenues will
continue to be largely offset by the direct and indirect cost to the Company of
providing associate services.
Interest income for 1995 increased to $1.3 million compared to $466,000 for
1994. Interest income increased primarily as a result of increases in the
average investments outstanding. At December 31, 1995 the Company reported $18.3
million in cash and investments compared to $11.7 million at December 31, 1994.
Primarily as a result of the increase in Contract premiums, total revenues
increased to $37.4 million for 1995 from $25.1 million during 1994, an increase
of 49%.
Contract benefits totaled $10.6 million for 1995 compared to $8.0 million
for 1994, an increase of 33%. However, the loss ratio for 1995 decreased to 34%
from 35% for 1994.
Commissions were $7.5 million for 1995 compared to $6.8 million for 1994,
and represented 24% and 30% of Contract premiums for 1995 and 1994,
respectively. Commission expense, as a percentage of Contract premiums, should
continue to decline as a result of changes in the commission structure for
Contracts sold after March 1, 1995, and should not exceed 25% of Contract
premiums during future years.
General and administrative expenses during 1995 and 1994 were $4.9 million
and $4.4 million, respectively, and represented 16% and 19% of Contract premiums
for such years. Although the total amount of general and administrative expenses
increased approximately $500,000 during 1995, these expenses, as a percent of
Contract premiums, decreased 3%. This trend of gradual increases in the total
dollar amount of these expenses but decreases when expressed as a percentage of
Contract premiums should continue as a result of certain economies of scale
pertaining to the Company's operating leverage.
Direct marketing costs increased to $1.0 million for 1995 from $644,000 for
1994 but were fairly consistent as a percent of Contract premiums and include
those costs other than commissions, which are directly associated with new
Contract sales.
As a result of retirement of outstanding debt, interest decreased for 1995
to $10,000 compared to $320,000 during 1994. The Company's expense ratio
decreased from 56% for 1994 to 45% for 1995. These factors resulted in a
combined loss and expense ratio of 79% and 91% for 1995 and 1994, respectively.
Provision for income taxes increased significantly during 1995 to $3.9
million, or 35% of net income before taxes from a 1994 benefit of $319,000. This
$4.2 million change is attributable to the 1994 expense which reflected the
benefit of net operating loss carryforwards, general business and rehabilitation
tax credit carryforwards and alternative minimum tax credit carryforward. The
Company has established a valuation allowance for its deferred tax asset since
the Company does not believe it is more likely than not that the tax benefits
from its NOLs and other carryforwards will be realized. The Company believes it
is unlikely that it will generate sufficient taxable income to realize these
benefits before they expire, primarily as a result of tax deductions
attributable to expected levels of commissions to be paid on new Contract sales.
Dividends paid on outstanding preferred stock decreased to $125,000 for
1995 from $465,000 during 1994. This $340,000 decrease is attributable to the
automatic conversion of preferred stock to common stock pursuant to its terms on
February 27, 1995, as described below.
Comparison of 1994 to 1993
The Company reported net income of $3.7 million and net income applicable
to common shares of $3.3 million, or $.26 per common share, for 1994 compared to
net income of $108,000 and net income applicable to common shares of $93,000, or
$.01 per common share, for 1993. The increase in the net income for 1994 is
primarily the result of increases in every revenue category for 1994 as compared
to 1993 and non-recurring contingency reserves established during 1993.
Contract premiums totaled $22.9 million during 1994 compared to $19.2
million for 1993, an increase of 19%. The increase in Contract premiums was
primarily the result of increased new Contract sales resulting in a higher
number of active Contracts in force. New Contract sales during 1994 were 45,893
compared to 34,294 during 1993. At December 31, 1994, there were 144,438 active
Contracts in force compared to 133,121 at December 31, 1993. Additionally, the
average annual premium per Contract has increased from $206 for those Contracts
written in 1993 to $229 for Contracts written during 1994, an 11% increase, as a
result of a higher portion of Contracts written during 1994 including the
additional pre-trial hours benefits at an additional cost to the member.
Associate services revenue increased from $462,000 for 1993 to $912,000
during 1994 as a result of higher new associate enrollments. New associates
enrolled during 1994 were 14,129 compared to 8,386 for 1993, an increase of 68%.
Associate services revenue also increased as a result of increases in sales of
marketing materials used by the associates in sales presentations of the
Company's Contracts. Associate services revenue for 1994 was comprised of
$686,000 in enrollment fees and $226,000 in sales of marketing materials. Future
revenues from associate services will depend primarily on the number of new
associates enrolled, but the Company expects that such revenues will continue to
be largely offset by the direct and indirect cost to the Company of providing
associate services.
During the fourth quarter of 1993 the Company implemented a charge to
associates on advance commissions which have not yet been earned. Primarily as a
result of this charge, interest income for 1994 increased to $466,000 compared
to $195,000 for 1993. Interest income also increased as a result of increases in
the average investments outstanding and higher interest rates on investments. At
December 31, 1994 the Company reported $11.7 million in cash and investments
compared to $5.4 million at December 31, 1993. Future interest income
attributable to the charge to associates for commission advances will depend
upon the number of new Contracts sold and will be impacted by the reduced
monthly rate of .5% compared to the prior 1.5%, offset by the expected higher
levels of associate commission advances.
Primarily as a result of the increase in Contract premiums, total revenues
increased to $25.1 million for 1994 from $20.5 million during 1993, an increase
of 22%.
Contract benefits totaled $8.0 million for 1994 compared to $7.5 million
for 1993, an increase of 7%. However, the loss ratio for 1994 decreased to 35%
from 39% for 1993 as a result of non-recurring litigation fees included in
contract benefits during 1993 of $550,000 (which was approximately 3% of 1993
Contract premiums) related to the termination of two previous provider
attorneys.
Commissions were $6.8 million for 1994 compared to $6.1 million for 1993,
and represented 30% and 32% of Contract premiums for 1994 and 1993,
respectively. Commission expense, as a percentage of Contract premiums, should
continue to decline as a result of changes in the commission structure for
Contracts sold after March 1, 1995, and should approach 25% of Contract premiums
during future years.
General and administrative expenses during 1994 and 1993 were $4.4 million
and $3.9 million, respectively, and represented 19% and 20% of Contract premiums
for such years. Although the total amount of general and administrative expenses
increased approximately $500,000 during 1994, these expenses, as a percent of
Contract premiums, decreased 1%. This trend of gradual increases in the total
dollar amount of these expenses but decreases when expressed as a percentage of
Contract premiums should continue as a result of certain economies of scale
pertaining to the Company's operating leverage.
Direct marketing costs increased to $644,000 for 1994 from $527,000 for
1993 but were fairly consistent as a percent of Contract premiums and include
those costs other than commissions, which are directly associated with new
Contract sales. As a result of retirement of outstanding debt and aging of
property and equipment, interest and depreciation both decreased for 1994
compared to 1993. Primarily as a result of the non-recurring contingency
reserves established during 1993, the Company's expense ratio decreased from 64%
for 1993 to 56% for 1994. These factors resulted in a combined loss and expense
ratio of 91% and 103% for 1994 and 1993, respectively.
The provision for current income taxes in both 1994 and 1993 was
insignificant because the Company in each period had unused tax benefits which
substantially offset any current tax liabilities. A deferred tax benefit was
recorded in 1994 related to recognition of the Company's alternative minimum tax
carryforward.
Dividends paid on outstanding preferred stock during 1994 increased to
$465,000 from $15,000 during 1993. This $450,000 increase is attributable to
dividends paid on outstanding shares of $2.40 Cumulative Convertible Preferred
Stock issued during June and July, 1994 in conjunction with a public unit
offering. This series of preferred stock automatically converted to common stock
pursuant to its terms on February 27, 1995, as described below.
Liquidity and Capital Resources
Public unit offering
During the second quarter of 1994 the Company completed the sale of 346,500
units consisting of a total of 346,500 shares of $2.40 Cumulative Convertible
Preferred Stock and 2,425,500 common stock purchase warrants in a public
offering. Each unit, sold at a price of $24.00 per unit, consisted of one share
of preferred stock and seven warrants. Each share of preferred stock had a
cumulative dividend of $2.40 per year, a liquidation preference of $24.00 per
share and was convertible at any time at the option of the holder into 14 shares
of common stock. Each share of preferred stock was also automatically
convertible into common stock if the closing price of the preferred stock
exceeded $33.60 for ten consecutive trading days. The closing price of preferred
stock exceeded such price level for the 10 consecutive trading days ending
February 24, 1995, and, as a result, the then outstanding 277,700 shares of
preferred stock were converted into common stock. The remaining shares of
preferred stock had been previously voluntarily converted. The automatic
conversion of the preferred stock together with earlier voluntary conversions
will result in savings of $831,600 per year in dividends.
Each warrant entitled the holder to purchase one share of common stock at
an exercise price of $2.50 per share at any time until September 8, 1999. The
warrants were redeemable at the option of the Company at a price of $.25 per
warrant following the date upon which the last reported sale price of the common
stock of the Company exceeds $3.75 per share (150% of the warrant exercise
price) for five consecutive trading days. The closing price of the common stock
exceeded that price level for the five consecutive trading days ended April 20,
1995.
The Company exercised its right to call the warrants for redemption and all
of the 2.4 million warrants with an exercise price of $2.50 per warrant were
exercised and resulted in net cash proceeds to the Company of more than $6
million. As a result of the exercise, the number of outstanding shares of the
Company's common stock increased to 20,545,661 shares from 18,120,171. The
proceeds from the exercise of the warrants have been invested in short term
obligations of the U.S. Treasury and other government agencies and will be used
primarily for the payment of commission advances upon the sale of new contracts.
General
Consolidated net cash provided by operating activities was $548,000, $3.0
million and $1.1 million for 1995, 1994 and 1993, respectively. The decrease of
$2.5 million from 1995 to 1994 was primarily the result of increases in
commission advances of $9.2 million which was partially offset by an increase in
net income of $3.6 million and an increase in provision for deferred income
taxes of $4.3 million. The increase of $1.9 million from 1993 to 1994 in cash
provided by operating activities resulted primarily from an increase in net
income of $3.6 million and was only partially reduced by the decrease in
accounts payable and accrued expenses and contingency reserves of $518,000 and
the decreases in accrued Contract benefit costs of $955,000.
During 1995, the Company had net cash provided by financing activities of
$6.7 million as a result of the exercise proceeds of warrants to purchase common
stock during May, 1995. The Company used $3.9 million for debt retirement during
1994. However, the cash used to retire debt during 1994 was more than offset by
the $8.1 million of proceeds received as a result of new issuances of common and
preferred stock primarily from the public offering completed in June, 1994
together with the exercise of other outstanding common stock warrants. Dividends
on preferred stock of $465,000 together with the debt retirement, offset by the
stock issuance proceeds, resulted in net cash provided by financing activities
of $3.8 million for 1994.
The Company had a consolidated working capital surplus of $17.6 million at
December 31, 1995 compared to a consolidated working capital surplus of $9.3
million at December 31, 1994. The $8.3 million increase in working capital
during 1995 was primarily the result of increased cash and short-term
investments of $6.1 million together with the increases in the current portion
of commission advances of $2.4 million.
The Company has an unsecured revolving credit agreement with Bank One,
Texas under which the Company may borrow up to $5 million, as determined by the
borrowing base defined by the agreement, through July, 1996. The borrowing base
is determined by a formula based on 80% of the net cash flow from certain of the
Company's Contracts that have been in existence for 18 months or more. At
December 31, 1995, the borrowing base was approximately $4.9 million. Under the
agreement, the interest rate, at the option of the Company is at the bank's base
lending rate or an adjusted London interbank rate and is determined at the time
of borrowing. Interest is to be paid monthly and any outstanding principal,
unless converted to an 18 month term loan upon the occurrence of certain events,
comes due in its entirety on July 1, 1996. The agreement contains restrictions
which, among other things, require maintenance of certain financial ratios,
restrict encumbrance of assets and creation of indebtedness, and limit the
payment of dividends. To date, the Company has not borrowed under the bank
credit agreement. The Company expects to renew or replace the credit agreement
at its expiration in July 1996.
As a result of the retirement of all outstanding debt during 1994, the
Company has no outstanding material financial commitments.
The Company believes that it has significant ability to finance expected
future growth in Contract sales based on its existing amount of cash and cash
equivalents and investments at December 31, 1995 ($15.5 million) and the unused
revolving credit agreement availability of $4.9 million.
Parent Company Funding and Dividends
Although the Company is the operating entity in many jurisdictions, the
Company's subsidiaries serve as operating companies in various states which
regulate Contracts as insurance or specialized legal expense products. The most
significant of these wholly-owned subsidiaries are PPLCI and PPLSIF. The ability
of PPLCI and PPLSIF to provide funds to the Company is subject to a number of
restrictions under various insurance laws in the jurisdictions in which PPLCI
and PPLSIF conduct business, including limitations on the amount of dividends
and management fees that may be paid and requirements to maintain specified
levels of capital and reserves. In addition PPLCI will be required to maintain
its stockholders' equity at levels sufficient to satisfy various state
regulatory requirements, the most restrictive of which is currently $3 million.
Additional capital requirements of either PPLCI or PPLSIF will be funded by the
Company in the form of capital contributions or surplus debentures.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Operations - For the years ended December 31, 1995,
1994 and 1993
Consolidated Statements of Cash Flows - For the years ended December 31, 1995,
1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity - For the years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Pre-Paid Legal Services, Inc.
We have audited the accompanying consolidated balance sheets of Pre-Paid Legal
Services, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years then ended. 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 generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Pre-Paid Legal Services, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Oklahoma City, Oklahoma
February 21, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Pre-Paid Legal Services, Inc.
In our opinion, the consolidated statements of operations, of cash flows and of
changes in stockholders' equity for the year ended December 31, 1993 present
fairly, in all material respects, the results of operations and cash flows of
Pre-Paid Legal Services, Inc. and its subsidiaries for the year ended December
31, 1993, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Pre-Paid
Legal Services, Inc. for any period subsequent to December 31, 1993.
PRICE WATERHOUSE LLP
Dallas, Texas
May 16, 1994
<PAGE>
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
December 31,
<S> <C> <C>
1995 1994
Current assets:
Cash ....................................................................................... $ 14,489 $ 2,972
Held-to-maturity short-term investments...................................................... - 6,540
Total cash and unpledged cash equivalents.................................................. 14,489 9,512
Held-to-maturity investments - current portion............................................... 500 -
Accrued contract income...................................................................... 1,038 563
Commission advances - current portion........................................................ 3,923 1,550
Total current assets..................................................................... 19,950 11,625
Held-to-maturity investments................................................................... 500 110
Investments pledged............................................................................ 2,766 2,072
Commission advances............................................................................ 8,548 983
Property and equipment, net.................................................................... 2,202 2,071
Other.......................................................................................... 1,663 1,293
Total assets............................................................................. $ 35,629 $ 18,154
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Contract benefits............................................................................ $ 1,547 $ 1,409
Accounts payable and accrued expenses........................................................ 646 496
Contingency reserves on trust preparation services........................................... 130 442
Total current liabilities................................................................ 2,323 2,347
Deferred income taxes.......................................................................... 3,566 -
Total liabilities........................................................................ 5,889 2,347
Stockholders' equity:
Preferred stock, $1 par value; authorized 400 shares; 5 issued and outstanding
as follows:
$2.40 Cumulative Convertible Preferred Stock, authorized 391 shares; 0 and 299 shares
outstanding at December 31, 1995 and 1994, respectively; liquidation value of $7,188
at December 31, 1994.................................................................. - 299
$3.00 Cumulative Convertible Preferred Stock, authorized 5 shares; 5 shares outstanding;
liquidation value of $84 ............................................................. 5 5
Special preferred stock, $1 par value; authorized 500 shares, issued and
outstanding in one series designated as follows:
$1.00 Non-Cumulative Special Preferred Stock, 45 and 60 shares authorized, issued and
outstanding at December 31, 1995 and 1994, respectively; liquidation value of $605 and
$803 at December 31, 1995 and 1994 respectively....................................... 45 60
Common stock, $.01 par value; 100,000 shares authorized; 21,513 and 14,216 issued at December
31, 1995 and 1994, respectively............................................................ 215 142
Capital in excess of par value............................................................... 37,757 30,770
Retained earnings (deficit).................................................................. (6,105) (13,292)
Less: Treasury stock at cost; 747 shares..................................................... (2,177) (2,177)
Total stockholders' equity................................................................. 29,740 15,807
Total liabilities and stockholders' equity............................................... $ 35,629 $ 18,154
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000's, except per share amounts)
Year Ended December 31,
<S> <C> <C> <C>
1995 1994 1993
Revenues:
Contract premiums.................................................. $31,290 $22,852 $19,182
Associate services................................................. 3,183 912 462
Interest income.................................................... 1,308 466 195
Other.............................................................. 1,703 878 676
37,484 25,108 20,515
Costs and expenses:
Contract benefits.................................................. 10,574 7,990 7,480
Commissions........................................................ 7,708 6,788 6,117
General and administrative......................................... 4,811 4,384 3,880
Direct marketing expenses.......................................... 1,023 644 527
Costs of associate services........................................ 1,044 451 262
Interest........................................................... 10 320 518
Depreciation....................................................... 477 410 538
Premium taxes...................................................... 242 226 215
Other.............................................................. 351 499 347
Provision for loss on trust preparation services................... - - 494
26,240 21,712 20,378
Income before income taxes........................................... 11,244 3,396 137
Provision (benefit) for income taxes................................. 3,932 (319) 29
Net income........................................................... 7,312 3,715 108
Less dividends on preferred shares................................... 125 465 15
Net income applicable to common shares............................... $ 7,187 $ 3,250 $ 93
Earnings per common and common equivalent share...................... $ .35 $ .26 $ .01
Earnings per common share - assuming full dilution................... $ .34 $ .24 $ .01
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
Year Ended December 31,
<S> <C> <C> <C>
1995 1994 1993
Cash flows from operating activities:
Net income ..................................................................... $ 7,312 $ 3,715 $ 108
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision (benefit) for deferred income taxes ............................... 3,932 (362) --
Depreciation and amortization ................................................ 477 410 541
(Increase) decrease in accrued contract income ............................... (475) 22 (58)
Increase in commission advances .............................................. (9,938) (709) (689)
(Increase) decrease in other assets .......................................... (736) 436 197
Increase (decrease) in contract benefits ..................................... 138 (515) 440
(Decrease) increase in accounts payable and accrued expenses and
contingency reserves ....................................................... (162) 43 561
Net cash provided by operating activities ............................... 548 3,040 1,100
Cash flows from investing activities:
Additions to property and equipment .......................................... (608) (528) (190)
Purchases of investments ................................................... (1,695) (51) (819)
Maturities of investments ................................................... 111 833 398
Cash provided by (used in) investing activities .......................... (2,192) 254 (611)
Cash flows from financing activities:
Reduction in notes payable ................................................... -- (2,669) (1,453)
Payment of debentures ........................................................ -- (1,243) (535)
Proceeds from conversion of sinking fund debentures .......................... -- -- 243
Proceeds from issuance of promissory notes ................................... -- 75 373
Proceeds from sale of common and preferred stock ............................. 6,746 8,104 80
Dividends paid on preferred stock ............................................ (125) (465) (15)
Net cash provided by (used in) financing activities ..................... 6,621 3,802 (1,307)
Net increase (decrease) in cash and
unpledged cash equivalents ................................................... 4,977 7,096 (818)
Cash and cash equivalents at beginning of year.. ............................... 9,512 2,416 3,234
Cash and cash equivalents at end of year.. ..................................... $14,489 $ 9,512 $ 2,416
Supplemental disclosure of cash flow information:
Cash paid for interest ....................................................... $ 10 $ 334 $ 511
Cash paid for income taxes ................................................... $ 18 $ 30 $ 40
Supplemental schedule of non-cash investing and financing activities:
Conversion of sinking fund debentures to secured promissory notes ............ $ - $ - $ 295
Conversion of subordinated debentures for common stock ....................... $ - $ 529 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts and shares in 000's, except dividend rates and par values)
Year Ended December 31,
<S> <C> <C> <C>
1995 1994 1993
Preferred Stock - $1 par value, 400 shares authorized; issued and outstanding
in two series designated as follows:
$2.40 Cumulative Convertible Preferred Stock, authorized 391 shares; shares
issued and outstanding at beginning of year (299 in 1995 and 0 in 1994) ....... $ 299 $ - $ -
Shares issued during year (346 in 1994) .......................................... -- 346 -
Shares exchanged for Common Stock (299 in 1995 and 47 in 1994) .................. (299) (47) -
Shares issued and outstanding at end of year (0 in 1995 and 299 in
1994), liquidation value of $7,188 at December 31, 1994......................... - 299 -
$3.00 Cumulative Convertible Preferred Stock, authorized 5 shares;
5 shares issued and outstanding at beginning and end of year,
liquidation value of $84 ....................................................... 5 5 5
Special Preferred Stock - $1 par value, 500 shares authorized; series of fixed
annual dividends $1, non-cumulative, convertible, shares issued and
outstanding at beginning of year (60 in 1995, 62 in 1994 and 81 in 1993) ........ 60 62 81
Shares exchanged for Common Stock (15 in 1995, 2 in 1994 and 19 in 1993) ........... (15) (2) (19)
Shares issued and outstanding at end of year (45 in 1995, 60 in 1994 and 62
in 1993), liquidation value of $605 at December 31, 1995 ......................... 45 60 62
Common Stock - $.01 par value, shares authorized 100,000, shares issued and
outstanding at beginning of year (14,216 in 1995, 11,542 in 1994 and
11,332 in 1993) .................................................................. 142 115 113
Shares issued during year:
Conversion of Preferred Stock and convertible debentures (4,245 in 1995,
1,191 in 1994 and 70 in 1993) .................................................... 42 12 1
Contributed to Company's employee stock ownership plan (20 in 1995, 20 in
1994 and 18 in 1993) ............................................................. - - -
Exercise of warrants (3,032 in 1995, 1,463 in 1994 and 122 in 1993) .............. 31 15 1
Shares issued and outstanding at end of year (21,513 in 1995, 14,216 in 1994
and 11,542 in 1993) .............................................................. 215 142 115
Capital in Excess of Par Value
Balance at beginning of year ....................................................... 30,770 22,990 23,839
Preferred stock offering ......................................................... - 6,486 -
Allowance for stock subscription receivable ...................................... - - (946)
Exercise of warrants ............................................................. 6,567 790 61
Conversion of preferred stock and convertible debentures ......................... 272 566 19
Stock contribution to employee stock ownership plan .............................. 39 34 22
Other ............................................................................ 109 (96) (5)
Balance at end of year ............................................................. 37,757 30,770 22,990
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
(Amounts and shares in 000's, except dividend rates and par values)
Year Ended December 31,
<S> <C> <C> <C>
1995 1994 1993
Retained Earnings (Deficit)
Balance at beginning of year ................................................. $(13,292) $(16,542) $(16,635)
Net income ................................................................... 7,312 3,715 108
Cash dividends ............................................................... (125) (465) (15)
Balance at end of year ....................................................... (6,105) (13,292) (16,542)
Treasury stock
Balance at beginning and end of year ......................................... (2,177) (2,177) (2,177)
Stock Subscription Receivable
Balance at beginning of year.. ............................................... -- -- (946)
Allowance for stock subscription receivable .................................. -- -- 946
Balance at end of year ....................................................... -- -- --
Total Stockholders' Equity ................................................. $ 29,740 $ 15,807 $ 4,453
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 "Company") underwrites and markets legal
service plans (referred to as "Contracts") which provide for or reimburse a
portion of legal fees incurred by members in connection with specified matters.
Contracts are guaranteed renewable, are principally collected on a monthly basis
and are marketed primarily in 12 states by a sales force referred to as
"Associates".
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.
Commissions
Effective March 1, 1995 the Company implemented a level commission schedule
of approximately 25% of annual premium revenue per year for all membership
years. This commission schedule results in the Company incurring commission
expense related to the sale of its legal expense plans on a consistent basis
with the collection of the premiums generated by the sale of such Contracts. The
Company currently advances the equivalent of three years of commissions on new
Contract sales. Prior to March 1, 1995 first year commissions payable on the
sale of a Contract, and earned in the first contract year, were approximately
70% of annual Contract premiums while renewal commissions (payable as earned
after the first Contract year) were approximately 16% of annual premiums.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which vary in some respects from
statutory accounting principles used when reporting to state insurance
regulatory authorities. Certain reclassifications have been made to conform to
current year presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, as well as those of PPL Agency, Inc. See Note
8 for additional information regarding PPL Agency, Inc. Significant subsidiaries
of the Company 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.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, certificates
of deposit, other short-term investments, receivables and trade payables. Fair
value estimates have been determined by the Company, using available market
information and appropriate valuation methodologies. The carrying value of cash,
certificates of deposit, other short-term investments, net receivables and trade
payables are considered to be representative of their respective fair value, due
to the short term nature of these instruments.
Investment Securities
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires the Company to
classify its investments in debt and equity securities into three categories as
held to maturity, trading and available for sale. The classifications the
Company utilizes determine the related accounting treatment for each category of
investments. Investments classified as trading are accounted for at fair value,
available for sale are accounted for at fair value with unrealized gains and
losses, net of taxes, excluded from earnings and reported as a separate
component of stockholders' equity, and held to maturity are accounted for at
amortized cost. The Company adopted SFAS 115 effective January 1, 1994. Prior
years' financial statements were not restated.
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. The Company has the ability and
intent to hold to maturity its investment securities classified as held to
maturity; accordingly, no adjustment has been made for the excess, if any of
amortized cost over market. In determining the investment category
classifications, management considers its asset/liability strategy, changes in
interest rates and prepayment risk, the need to increase capital and other
factors. Under certain circumstances (including the deterioration of the
issuer's creditworthiness, a change in tax law, or statutory or regulatory
requirements), the Company may change the investment security classification.
Gain or loss on sale of investments is based upon the specific identification
method. Income earned on the Company's investments in state and political
subdivisions is not taxable.
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.
Revenue Recognition
Contract premiums are recognized in income when due in accordance with
Contract terms which generally require the holder of the Contract to remit
premiums on a monthly basis. Contracts are canceled for nonpayment of premium
after ninety days. Premiums due but not collected at the end of an accounting
period are recorded as accrued contract income; a provision for uncollectible
premiums, if any, is recorded currently. Sales of marketing kits to Associates
are recognized as revenue when cash is received.
Commission advances
Commission advances represent the unearned portion of commissions advanced
to Associates on sales of memberships. Commissions are earned as premiums are
collected, usually on a monthly basis. The Company reduces Commission Advances
as premiums are paid and commissions earned. Unearned commission advances on
lapsed memberships must subsequently be recovered through an associate's active
memberships. The Company has recorded an allowance of $2.7 million to provide
for estimated uncollectible balances. Effective November 1, 1993, the Company
imposed a charge of 1.5% per month on unearned commission advances made between
November 1, 1993 and March 1, 1995. Effective March 1, 1995, and in conjunction
with other commission structure changes, the Company reduced the charge from
1.5% to .17% per month for commission advances made after such date.
Contract Benefit Costs
Contract benefit costs represent claims reported but not paid and
actuarially estimated claims incurred but not reported. The Company calculates
Contract benefit costs based on completion factors which consider historical
claims experience based on the dates that claims are incurred, reported to the
Company and subsequently paid. Processing costs related to these claims are
accrued based on an estimate of expenses to process such claims.
Income Taxes
Deferred 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. The
Company records 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, the Company establishes a valuation allowance to reduce
such assets to estimated realizable value.
Earnings Per Share
Earnings per common and common equivalent share are computed by dividing
net income applicable to common shares by the weighted average number of shares
of Common Stock and Common Stock equivalents outstanding during the year.
Neither series of Cumulative Convertible Preferred Stock are included in the
weighted average number of common shares outstanding since they are not
considered to be Common Stock equivalents. The Special Preferred Stock has been
considered to be the equivalent of Common Stock from the time of its issuance in
1988 and the number of shares issuable on conversion of the Special Preferred
Stock is added to the number of common shares. The number of common shares is
also increased by the number of shares issuable on the exercise of warrants and
options less the number of common shares assumed to have been purchased with the
proceeds from the exercise of the options and warrants pursuant to the modified
treasury stock method; those purchases are assumed to have been made at the
average price of the common stock during the respective periods. Weighted
average number of shares used in computing earnings per common and common
equivalent share are 20,762,000, 12,460,000, and 12,407,000 for 1995, 1994 and
1993 respectively.
Earnings per common share - assuming full dilution are determined on the
assumptions described above except that the purchases assumed to have been made
upon the exercise of warrants and options are assumed to have been made at the
market price at the close of the respective periods if that market price is
higher than the average market price for such periods. Additionally, the $2.40
Cumulative Convertible Preferred Stock and certain convertible subordinated
Debentures are assumed to have been converted and the respective dividends and
interest are included in determining net income applicable to common shares.
Weighted average number of shares used in computing earnings per common
share-assuming full dilution are 21,778,000, 15,772,000, and 12,643,000 for
1995, 1994 and 1993, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid unpledged investments with
maturities of three months or less at time of acquisition to be cash
equivalents.
Accounting Standards to be Adopted
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Effective for fiscal years beginning after December 15, 1995, FAS 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to such assets. The
Company will adopt FAS 121 in 1996. Management has not evaluated the effect of
this pronouncement on the Company's consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock
- -Based Compensation." FAS 123 establishes a fair value method and disclosure
standards for stock-based employee compensation arrangements, such as stock
purchase plans and stock options. It also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
nonemployees, requiring that such transactions be accounted for based on fair
value. As allowed by FAS 123, the Company will continue to follow the provisions
of Accounting Principles Board Opinion No. 25 for its stock-based employee
compensation arrangements, and disclose the pro forma effects of applying FAS
123 for 1995 and 1996 in its 1996 financial statements.
Note 2 - Investment Securities
A summary of the amortized cost, unrealized gains and losses and fair
values of held to maturity investment securities at December 31, 1995 and 1994
follows:
December 31, 1995
Amortized Gross Unrealized
Cost Gains Losses Fair Value
U.S. Government $ 1,143 $ - $ - $ 1,143
obligations
Obligations of 412 - 9 403
state and political
subdivisions
Total $ 1,555 $ - $ 9 $ 1,546
December 31, 1994
Amortized Gross Unrealized
Cost Gains Losses Fair Value
U.S. Government $ 5,989 $ - $ 37 $ 5,952
obligations
Obligations of 410 7 24 393
state and political
subdivisions
Total =========== ========= ========= ========
$ 6,399 $ 7 $ 61 $ 6,345
A comparison of the amortized cost and fair value of the Company's held to
maturity investment securities at December 31, 1995 by maturity date follows:
Amortized Cost Fair Value
One year or less $ 500 $ 500
Two years through five years 1,055 1,046
Total $ 1,555 $ 1,546
The Company's investment securities are included in the accompanying
consolidated balance sheets at December 31, 1995 and 1994 as follows. Remaining
amounts recorded in these accounts represent certificates of deposit.
December 31,
1995 1994
Held-to-maturity short-term investments $ - $ 5,989
Held-to-maturity investments-current portion 500 -
Held-to-maturity investments 112 110
Investments pledged 943 300
Total $ 1,555 $ 6,399
The Company is required to pledge investments to various state insurance
departments as a condition to obtaining authority to do business in certain
states. The Company has investments pledged to state regulatory agencies as
follows:
December 31,
1995 1994
Certificates of deposit........................... $1,822 $1,772
Obligation of state and political subdivisions.... 300 300
U. S. Government obligations...................... 644 -
Total $2,766 $2,072
Note 3 - Property and Equipment
Property and equipment is comprised of the following:
Estimated December 31,
Useful Life 1995 1994
Equipment, furniture and fixtures .......... 3-10 years $ 4,338 $ 4,020
Computer software .......................... 5 years 1,822 1,651
Building and improvements .................. 20 years 1,621 1,618
Automotive ................................. 3 years 163 89
Land ....................................... 110 110
8,054 7,488
Accumulated depreciation ................... (5,852) (5,417)
Property and equipment, net ................. $ 2,202 $ 2,071
Note 4 - Revolving Credit Agreement
The Company has an unsecured revolving credit agreement with Bank One,
Texas under which the Company may borrow up to $5 million, as determined by the
borrowing base defined by the agreement, through July, 1996. The borrowing base
is determined by a formula based on 80% of the net cash flow from certain of the
Company's Contracts that have been in existence for 18 months or more. At
December 31, 1995, the borrowing base was approximately $4.9 million. Under the
agreement, the interest rate, at the option of the Company is at the bank's base
lending rate or an adjusted London interbank rate and is determined at the time
of borrowing. Interest is to be paid monthly and any outstanding principal,
unless converted to an 18 month term loan upon the occurrence of certain events,
comes due in its entirety on July 1, 1996. The agreement contains restrictions
which, among other things, require maintenance of certain financial ratios,
restrict encumbrance of assets and creation of indebtedness, and limit the
payment of dividends. To date, the Company has not borrowed under the bank
credit agreement.
Note 5 - Income Taxes
The Company accounts for income taxes in accordance with SFAS 109, which is
an 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 the Company's financial statements and
tax returns. In estimating future tax consequences, SFAS 109 generally considers
all future events other than enactments of changes in the tax law or rates. The
cumulative effect of adopting SFAS 109 as of January 1, 1993 was immaterial.
<PAGE>
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
1995 1994 1993
Current .................................... $ $ 43 $ 29
Deferred ................................... 3,932 (362) --
Total provision (benefit) for income taxes $ 3,932 $ (319) $ 29
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate is as follows:
Year Ended December 31,
1995 1994 1993
Statutory Federal income tax rate ..... 34.0% 34.0% 34.0%
Tax exempt interest ................... (.2) (.3) (8.7)
Benefit of operating loss carryforwards -- (32.5) --
Benefit of AMT credit carryforward .... -- (10.6) --
State income taxes and other .......... 1.2 -- (4.1)
Effective income tax rate ............. 35.0% (9.4)% 21.2%
Deferred tax liabilities and assets at December 31, 1995 and 1994 are
comprised of the following:
December 31,
1995 1994
Deferred tax liabilities:
Commissions advanced ................................. $ 4,408 $ 914
Depreciation ......................................... 179 207
Total deferred tax liabilities .................... 4,587 1,121
Deferred tax assets:
Litigation accruals .................................. 135 340
Contract benefit reserve ............................. 226 302
Receivables allowance ................................ 201 333
Net operating loss carryforward ...................... 3,188 3,429
Capital loss carryforward ............................ 653 704
General Business Credit carryforward ................. 325 325
AMT Credit carryforward .............................. 366 362
Total deferred tax assets ........................ 5,094 5,795
Valuation allowance for deferred tax assets .......... (4,073) (4,312)
Total net deferred tax assets .................... 1,021 1,483
Net deferred (liability) tax asset .................. $(3,566) $ 362
A valuation allowance has been established for deferred tax assets
representing carryforwards except as related to the AMT Credit carryforward
(which is considered to be fully realizable) as the Company does not believe it
is more likely than not that the tax benefits of such carryforwards will be
realized. During the years ended December 31, 1995 and 1994, the valuation
allowance decreased by $239,000 and $1.7 million, respectively. The Company's
net deferred tax asset as of December 31, 1994 is included in the accompanying
consolidated balance sheet in other non-current assets.
At December 31, 1995, the Company has net operating loss carryforwards
(NOLs) for regular tax and alternative minimum tax purposes of approximately
$9.1 million and $8.7 million, respectively, expiring in 2001 and 2002. In
addition, the Company has general business and rehabilitation tax credit
carryforwards of approximately $325,000, expiring primarily in 1998 to 2001, and
an alternative minimum tax credit carryforward of $366,000 which does not
expire. The Company also has a capital loss carryforward of $1,800,000 which
expires in 1997.
The ability of the Company to utilize NOLs and tax credit carryforwards to
reduce future Federal income taxes of the Company is subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
The utilization of such carryforwards may be further limited upon the occurrence
of certain capital stock transactions, including the issuance or exercise of
rights to acquire stock, the purchase or sale of stock by 5% stockholders, as
defined in Temporary Treasury Regulations, and the offering of stock by the
Company during any three-year period resulting in an aggregate change of more
than 50% ("Ownership Change") in the beneficial ownership of the Company. In the
event of an Ownership Change, Section 382 of the Code imposes an annual
limitation on the amount of a corporation's taxable income that can be offset by
those carryforwards.
Note 6 - Stockholders' Equity
On February 27, 1995, all of the Company's remaining outstanding $2.40
Cumulative Convertible Preferred Stock automatically converted into common stock
pursuant to its terms which provided for such automatic mandatory conversion if
its closing price exceeded $33.60 per share for ten (10) consecutive trading
days. The closing price of this Preferred Stock exceeded such price level for
the 10 consecutive trading days resulting in the conversion. Approximately 3.9
million shares of common stock were issued as a result of this conversion.
Each share of $3.00 Cumulative Convertible Preferred Stock is entitled to
receive cumulative cash dividends at the annual rate of $3 per share, payable
quarterly, is convertible into 2.5 shares of Common Stock and is redeemable at
the option of the Company at $25 per share. The $3.00 Cumulative Convertible
Preferred Stock had a liquidation value of $84,000 at December 31, 1995.
Each share of the Special Preferred Stock is entitled to a non-cumulative
annual dividend of $1.00 per share, is convertible into 3.5 shares of Common
Stock and is redeemable at the option of the Company at $13.34 per share, plus
all accumulated and unpaid dividends. The Special Preferred Stock had a
liquidation value of $605,000 at December 31, 1995. During 1995, 1994 and 1993,
Special Preferred Stock consisting of approximately 15,000, 2,000 and 19,000
shares, respectively, were converted into 126,000 shares of Common Stock.
The Company's ability to pay dividends is dependent in part on its ability
to derive dividends from its subsidiaries. The payment of dividends by PPLCI is
restricted under the Oklahoma Insurance Code to available surplus funds derived
from realized net profits. At December 31, 1995, PPLCI did not have funds
available for payment of dividends without the approval of the Oklahoma
Insurance Commissioner. The Company's ability to pay dividends is also
restricted under a line of credit agreement which precludes payments of
dividends on Common Stock as long as any amounts are outstanding pursuant to
such credit agreement. To date, the Company has not borrowed under the bank
credit agreement.
During 1995 the Company issued 3 million shares of Common Stock in
connection with the exercise of existing warrants with an average exercise price
of $2.19 per share.
At December 31, 1995, the Company had outstanding warrants and options to
purchase a total of approximately 1.7 million shares of the Company's Common
Stock at an average price of $3.52 per share expiring at various periods through
December, 2005.
Note 7- Related Party Transactions
The Company's Chairman 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
during 1995, 1994 and 1993 of $413,000, $401,000 and $416,000, respectively,
through its sales of insurance products of an unaffiliated company. Agency had
net income for the year ended December 31, 1995 of $599 and net losses for the
years ended December 31, 1994 and 1993 of $170,000 and $3,000, respectively,
after incurring commissions earned by the Chairman of $45,000, $229,000 and
$44,000, respectively, and annual management fees of $72,000 paid to the
Company.
A former executive officer and director of the Company has a loan from the
Company which was made prior to the time he became a director. The largest
balance of this loan during the year ended December 31, 1995 was $68,000. The
outstanding balance of this loan as of December 31, 1995 was $59,000. The loan
bears annual interest at the rate of 3% in excess of the prime rate, adjusted on
January 1 of each year, and is secured by commissions due from the Company.
The former executive officer and director owns interests ranging from 10%
to 67% in corporations or partnerships not affiliated with the Company but
engaged in the marketing of the Company's Contracts and which earn commissions
from sales of Contracts. These entities earned commissions, net of amounts
passed through as commissions to their sales agents, during 1995, 1994 and 1993
of $55,000, $71,000 and $121,000, respectively.
Note 8 - Commitments and Contingencies
Aggregate rental expense under all operating leases was $28,000, $42,000
and $47,000 in 1995, 1994 and 1993, respectively. There are no significant
operating lease commitments in effect at December 31, 1995.
In the normal course of its business operations, the Company is involved in
various claims and judicial actions. The Company has established contingency
reserves for potential loss in connection with certain proceedings which the
Company believes to be adequate after consultation with its counsel in each such
matter. Such reserves are based on the Company's current estimate of loss and
are subject to change based on developments in each proceeding. Accordingly, it
is possible that the Company may incur losses in excess of the amounts reserved.
Note 9 - Stock Plans
The Company has a stock option plan under which the Board of Directors may
grant options to purchase shares of the Company's Common Stock. Options to
purchase shares of the Company's Common Stock at an average price of $5.29 per
share (market price at time of issuance) have been granted to three officers of
the Company, as shown below.
<TABLE>
<CAPTION>
Exercised during Outstanding at
Grantee Expiration Exercise Price 1995 December 31, 1995
<S> <C> <C> <C>
Various officers Various periods $.38 - $9.25 20,000 shares 390,000
through
December 23, 2005
</TABLE>
Prior to March 1995, non-employee directors also received for each meeting
attended options to purchase 2,500 shares of the Company's Common Stock at the
closing price of the Common Stock on the date of the meeting as quoted by the
American Stock Exchange. In December 1995, the Company's Option Plan was amended
to provide for automatic grants of options to non-employee directors. Under the
Stock Option Plan as amended, each incumbent non-employee director of the
Company received options to purchase 7,500 shares of Common Stock on December
12, 1995, the date of adoption by the Board of Directors of the amendments to
the Stock Option Plan. In addition, the incumbent non-employee directors and any
new non-employee directors will receive additional options to purchase 10,000
shares of Common Stock on March 1 of each year commencing March 1, 1996. The
options granted initially to the incumbent non-employee directors are
immediately exercisable. The options to be granted on March 1 of each year will
be immediately exercisable as to 2,500 shares and will vest 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 Stock Option Plan have an exercise price equal to the
closing price of the Common Stock on the date of grant. Options granted to the
non-employee directors under the Stock Option Plan are subject to the approval
by the shareholders of the Company of the amendments to the Stock Option Plan
providing for such grants. The amendments will be submitted to the shareholders
at the Company's 1996 Annual Meeting of Shareholders. Outside director option
activity during 1995 is shown below.
<TABLE>
<CAPTION>
Exercised during Outstanding at
Grantee Expiration Exercise Price 1995 December 31, 1995
<S> <C> <C> <C>
Outside Directors Various periods $.56 - $8.13 10,000 80,000
through
December 12, 2000
</TABLE>
The Company, effective July 3, 1995 and pursuant to a registration
statement on Form S-3, initiated a stock option plan for its marketing
associates whereby the associates could earn stock options based upon their
production and recruiting efforts. These options have been issued to qualifying
associates at each month end since July, 1995 based on that month's production
and recruiting results. The exercise price is equal to the closing stock price
on the last trading day of each respective month. Additional grants pursuant to
the plan will cease March 31, 1996. Activity related to this plan was as follows
during 1995:
<TABLE>
<CAPTION>
Exercised during Outstanding at
Grantee Expiration Exercise Price 1995 December 31, 1995
<S> <C> <C> <C> <C>
Various Marketing July 31, 1997 $5.81 - $10.38 1,560 shares 298,225
Associates
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", the Company recorded compensation
expense related to the issuance of stock options to Marketing associates of
$76,000 during 1995.
During 1988, the Company 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. The Company, at its
option, may make matching contributions to the plan, and recorded expense during
1995, 1994 and 1993 of $39,150, $34,027 and $22,591 based on contributions of
Company stock of 20,000 shares, 20,000 shares, and 18,000 shares, respectively.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The current directors and executive officers of the Company are identified
below. Unless otherwise noted, the Company's executive officers serve at the
pleasure of the Board of Directors. The Board of Directors consists of six
members and is divided into three equal classes, with the term of office of one
class expiring each year.
Name Age Position
Harland C. Stonecipher........ 57 Chairman of the Board of Directors
Jack Mildren.................. 46 Chief Executive Officer, President and
Director
Randy Harp.................... 40 Chief Operating Officer, Chief Financial
Officer and Director
Kathleen S. Pinson............ 43 Vice President, Controller and Director
Peter K. Grunebaum............ 62 Director
Charles H. Walls.............. 64 Director
Harland C. Stonecipher
Mr. Stonecipher has been the Chairman of the Board of Directors of the
Company since its organization in 1976. Mr Stonecipher also served as Chief
Executive Officer until March 1996. Prior to 1984 and since May 1987 through
January, 1995, he also served as President (except for the period from May 1989
to March 1990). Mr. Stonecipher also serves as an executive officer of various
subsidiaries of the Company. Mr. Stonecipher is employed pursuant to an
employment agreement which, unless sooner terminated, expires on June 30, 2003,
with the Company retaining the right to extend the agreement for up to ten
additional years. Mr. Stonecipher's term as a director expires in 1996.
Jack Mildren
Mr. Mildren was named President of the Company in January 1995 and became
Chief Executive Officer in March 1996. Mr. Mildren was the Lieutenant Governor
of the State of Oklahoma from 1991 until January, 1995. Mr. Mildren is employed
pursuant to an employment agreement which, unless sooner terminated, expires on
January 22, 1997. Mr. Mildren was appointed to the Board on March 3, 1995, and
his term expires in 1996.
Randy Harp
Mr. Harp was named Chief Financial Officer in March 1990 and Chief
Operating Officer in March, 1996. From 1983 to July 1991, Mr. Harp was the
president, treasurer, chief financial officer and a director of Ratex Resources
Incorporated, a small publicly-held oil and gas exploration company in Oklahoma
City, Oklahoma. Mr. Harp was first elected as a director in 1990 and his term
expires in 1998. Mr. Harp is a Certified Public Accountant.
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 has been employed by
the Company since 1979 and has been the chief accounting officer since 1982. Ms.
Pinson was first elected as a director in 1990 and her term expires in 1997. Ms.
Pinson is a Certified Public Accountant.
Peter K. Grunebaum
Mr. Grunebaum is currently Director of Corporate Finance, ICA
International, an investment firm headquartered in New York, New York, a
position he has held since 1989. Mr. Grunebaum was first elected as a director
in 1980 and his term expires in 1998.
Charles H. Walls
Mr. Walls was a principal and teacher in the Rattan, Oklahoma Public School
system from 1980 until his retirement in May 1992. Previously, Mr. Walls served
as a Senior Vice President of Paramount Life Insurance Company of Little Rock,
Arkansas. Mr. Walls was first elected as a director in 1993 and his term expires
in 1997.
Committees
The Board of Directors has established an Executive Committee consisting of
Messrs. Stonecipher, Harp and Grunebaum, a Stock Option Committee consisting of
Messrs. Stonecipher and Grunebaum, and an Audit Committee, of which Mr.
Grunebaum is presently the sole member. The Executive Committee may exercise all
of the powers of the Board of Directors, except to the extent limited by law.
The Stock Option Committee administers the Company's Stock Option Plan. The
Audit Committee makes recommendations to the Board of Directors concerning the
selection of and oversees the Company's independent auditors and reviews with
the independent auditors the scope and results of the annual audit. The Audit
Committee also monitors internal control policies. The Board of Directors does
not have standing nominating or compensation committees.
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 meeting attended. Prior to March 1995,
non-employee directors also received for each meeting attended options to
purchase 2,500 shares of the Company's Common Stock at the closing price of the
Common Stock on the date of the meeting as quoted by the American Stock
Exchange. In December 1995, the Company's Option Plan was amended to provide for
automatic grants of options to non-employee directors. Under the Stock Option
Plan as amended, each incumbent non-employee director of the Company received
options to purchase 7,500 shares of Common Stock on December 12, 1995, the date
of adoption by the Board of Directors of the amendments to the Stock Option
Plan. In addition, the incumbent non-employee directors and any new non-employee
directors will receive additional options to purchase 10,000 shares of Common
Stock on March 1 of each year commencing March 1, 1996. The options granted
initially to the incumbent non-employee directors are immediately exercisable.
The options to be granted on March 1 of each year will be immediately
exercisable as to 2,500 shares and will vest 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 Stock Option Plan
have an exercise price equal to the closing price of the Common Stock on the
date of grant. Options granted to the non-employee directors under the Stock
Option Plan are subject to the approval by the shareholders of the Company of
the amendments to the Stock Option Plan providing for such grants. The
amendments will be submitted to the shareholders at the Company's 1996 Annual
Meeting of Shareholders.
Compliance with Section 16(a) Reporting Requirements
Section 16(a) of the Securities Exchange Act of 1934 requires directors and
executive officers of the Company and persons who 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 1995 or prior years.
Wilburn L. Smith, a former executive officer and director of the Company,
became aware during 1995 that he inadvertently failed to include 625 shares of
Common Stock held by his wife in his initial report of beneficial ownership
filed in 1993. An appropriate amendment to Mr. Smith's initial report was filed
upon discovery of this deficiency. Also, during 1995 Mr. Smith filed one late
report relating to one transaction subsequent to his resignation from the Board
of Directors.
Kathleen S. Pinson, Vice President, Controller and a director of the
Company, inadvertently failed to file certain required reports relating to (i)
the acquisition by her husband, also an employee of the Company, of shares of
Common Stock pursuant to the Company's Employee Stock Ownership and Thrift Plan
during 1992, 1993 and 1994 and (ii) the grant to her husband during 1995 of
options to purchase Common Stock in connection with his participation in the
Company's Marketing Associate Option Plan. Had the applicable reports been filed
on a timely basis, they would have consisted of eight reports relating to eight
transactions. The deficiencies were not discovered until 1996, at which time
appropriate reports were filed.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the cash compensation paid by the Company
and its subsidiaries for services rendered during the twelve months ended
December 31, 1995, 1994 and 1993 to each of the executive officers of the
Company whose cash compensation exceeded $100,000 during 1995. Such individuals
are referred to herein as the "named executive officers."
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
<S> <C> <C> <C> <C> <C>
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus (1) Options Compensation(2)
Harland C. Stonecipher ............. 1995 $157,755 $ 99,107 -- $ 13,500
Chairman of the Board 1994 157,755 273,680 -- 15,249
1993 157,755 82,983 -- 12,062
Wilburn L. Smith (3) ............... 1995 -- 577,763 2,500 2,925
Vice President of Marketing and 1994 -- 208,218 -- 1,300
Agency Director 1993 -- 295,753 -- 1,300
Jack Mildren (4) ................... 1995 138,461 5,625 250,000 --
Chief Executive Officer and
President
Randy Harp ......................... 1995 $101,112 -- 50,000 2,600
Chief Operating Officer and 1994 97,161 -- -- 2,400
Chief Financial Officer 1993 90,144 -- -- 2,186
<FN>
(1) Bonus to Mr. Stonecipher consists primarily of override commissions
earned by Mr. Stonecipher pursuant to an agreement with the Company
described below of $54,183, $44,417 and $38,901 during 1995, 1994 and
1993, respectively, and override commissions earned by Mr. Stonecipher
with respect to commissions earned by PPL Agency, Inc., a Company
affiliated insurance agency, of $44,924, $229,263 and $44,082 during
1995, 1994 and 1993, respectively. The 1994 PPL Agency commissions
reflect a non-recurring payment for renewal commissions. See
"Executive Compensation-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 to Mr. Smith with respect to commissions earned by and new sales
associate sponsorships within the Company's multi-level 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 Contracts and earn
commissions from sales of Contracts. See "Certain Relationships and
Related Transactions."
(2) All Other Compensation of Mr. Stonecipher includes $6,958, $8,159 and
$7,730 for the years 1995, 1994 and 1993, 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 $6,542, $7,090 and $4,332 for the years 1995, 1994 and 1993,
respectively, representing vested contributions by the Company to the
Employee Stock Ownership and Thrift Plan.
All Other Compensation of Mr. Smith and Mr. Harp consists of vested
contributions by the Company to the Employee Stock Ownership and
Thrift Plan.
(3) Mr. Smith became an executive officer of the Company during 1993 and
resigned from that position on October 25, 1995.
(4) Mr. Mildren joined the Company as its President in January 1995.
The following table contains information concerning the grant of stock
options during the year ended December 31, 1995 to each of the named executive
officers who received option grants during such year.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted (1) Year ($/Sh)(2) Date
<S> <C> <C> <C> <C>
Jack Mildren 100,000(3) 32.5% $ 1.8125 1/25/00
139,190 45.3 9.25 12/23/05
10,810 3.5 9.25 12/22/00
Randy Harp 39,190 12.7 $ 9.25 12/23/05
10,810 3.5 9.25 12/22/00
Wilburn L. Smith 2,500 0.8 $ 8.25 12/14/00
<FN>
(1) Unless otherwise indicated, the options are fully exercisable as of the
date of grant.
(2) The exercise prices of the options are in each instance equal to 100%
of the price per share of the Common Stock on the date of grant.
(3) These options became exercisable as to 50% of the shares covered by the
options on July 23, 1995 and will become exercisable as to the remaining
50% on July 23, 1996, provided the optionee remains employed by the Company
through such date.
</FN>
</TABLE>
The following table provides information with respect to each of the named
executive officers who hold stock options from the Company concerning the
exercise of options during the year ended December 31, 1995 and unexercised
options held as of December 31, 1995.
<TABLE>
<CAPTION>
Option Exercises and Year-end Value Table
Number of Securities Value of
Underlying Unexercised Unexercised In-the-Money
Option at Options at
December 31, 1995 December 31, 1995(1)
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Jack Mildren -- -- 200,000 50,000 $ 596,875 $ 428,125
Randy Harp 10,000 $ 76,250(2) 90,000 -- $ 456,250 --
Wilburn L. Smith -- -- 2,500 -- $ 5,312 --
<FN>
(1) Value of unexercised in-the-money options at December 31, 1995 is
calculated based on the market price per share of Common Stock of $10.375
per share on December 29, 1995 (the last trading date prior to year-end)
less the option exercise price.
(2) Value realized is calculated based on the market price per share of
Common Stock of $ 8.00 on the date of exercise less the option exercise
price.
</FN>
</TABLE>
<PAGE>
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company entered into a new employment agreement with Mr. Stonecipher in
January 1993, which, unless sooner terminated, expires on June 30, 2003. The new
agreement replaces a prior agreement originally executed in 1975 which was
scheduled to expire on December 31, 2000. Under the terms of the new employment
agreement, Mr. Stonecipher is to receive compensation as determined by the Board
of Directors but not less than $157,750 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 pursuant to the employment agreement is subject to the continuation
of a certain split dollar life insurance agreement between the Company and 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 contract.
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. The agreement requires that Mr. Stonecipher devote
reasonable efforts to the generation of new Contract sales for the Company. The
amounts paid to Mr. Stonecipher under this agreement during the fiscal year
ended December 31, 1995 are reflected in the summary compensation table set
forth above. Mr. Stonecipher has deferred payments under this agreement of
$67,324 at December 31, 1995. 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.
In July 1984, the Company entered into a life insurance arrangement with
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 Mr. Stonecipher's wife is the owner and beneficiary. Mr.
Stonecipher's wife 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.
During January 1995, the Company entered into an employment agreement with
Jack Mildren which expired January 22, 1996. Pursuant to a new employment
agreement which expires on January 22, 1997, Mr. Mildren will serve as the
Company's President and Chief Executive Officer and is to receive a base salary
of not less than $150,000, a performance bonus of up to $50,000 based upon the
Company's achievement of certain 1996 performance goals, an override commission
equal to $.025 per active membership for memberships written since January 1,
1995 and a Company provided automobile. Override commission will be paid for Mr.
Mildren's life on all memberships written during his employment.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information on the beneficial
ownership of the shares of Common Stock as of March 26, 1996 by (a) each person
known by the Company to be the beneficial owner of more than five percent of the
issued and outstanding shares of Common Stock, (b) each director of the Company,
(c) each executive officer of the Company, and (d) all of the directors and
executive officers of the Company as a group.
Beneficial Ownership
Number Percent
of of
Name and Address of Beneficial Owner Shares Class (1)
Harland C. Stonecipher
321 East Main Street
Ada, Oklahoma 74820 .......................... 1,375,649 (2) 6.5
Wellington Management Company
75 State Street
Boston, MA 02109 ............................ 1,453,000 (3) 6.9
Vanguard Explorer Fund, Inc.
P O Box 2600
Valley Forge, PA 19482 ..................... 1,076,900 (4) 5.1
Jack Mildren .................................. 200,000 (5) *
Peter K. Grunebaum ............................ 60,825 (6) *
Randy Harp .................................... 103,442 (7) *
Kathleen S. Pinson ............................ 69,360 (8) *
Charles Walls ................................. 20,000 (9) *
All directors and executive officers as a
group (6 persons)............................. 1,829,276 (10) 8.5
<PAGE>
(1) This table is based upon information supplied by officers, directors and
principal shareholders and applicable Schedules 13D or 13G filed with the
Securities and Exchange Commission. Unless otherwise indicated in the
footnotes to the table and subject to community property laws where
applicable, each of the shareholder 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 of an option are considered outstanding solely for
purposes of calculating such person's percentage ownership.
(2) Includes 14,359 shares owned under the ESOP Plan as to which Mr.
Stonecipher has sole voting, but not disposition, power.
(3) Wellington Management Company ("WMC"), in its capacity as investment
advisor, may be deemed to beneficially own 1,453,000 shares of Common Stock
of the Company held by numerous investment counseling clients. WMC has
shared voting power as to 376,100 shares indicated as beneficially owned by
WMC and shared dispositive power as to all of the shares indicated as
beneficially owned by WMC. Beneficial ownership information is as of
December 31, 1995.
(4) Vanguard Explorer Fund, Inc. has sole voting power but shared dispositive
power as to all of the shares of Common Stock of the Company indicated as
beneficially owned by it. Beneficial ownership information is as of
December 31, 1995.
(5) Consists of 200,000 shares issuable upon exercise of outstanding options.
(6) Includes 50,000 shares issuable upon exercise of outstanding options.
(7) Includes 13,442 shares owned under the ESOP Plan as to which Mr. Harp has
sole voting, but not disposition, power and 70,000 shares issuable upon
exercise of outstanding options.
(8) Includes 16,613 shares owned under the ESOP Plan as to which Ms. Pinson has
sole voting, but not disposition, power and 40,000 shares issuable upon the
exercise of outstanding options. Also, includes 1,860 shares owned under
the ESOP Plan by Ms. Pinson's husband, also an employee of the Company, as
to which he has sole voting, but not disposition, power and 746 shares
issuable upon exercise of outstanding options held by Ms. Pinson's
husband. Ms. Pinson disclaims beneficial ownership of shares that are owned
by her husband.
(9) Includes 20,000 shares issuable upon exercise of outstanding options.
(10) Includes 380,746 shares issuable upon exercise of outstanding options and
46,274 shares owned under the ESOP Plan as to which the respective
executive officers and directors have sole voting, but not disposition,
power.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Stonecipher owns all of the outstanding shares of PPL Agency, Inc.
("Agency") as a nominee for the Company. Any income of Agency accrues to the
Company and the Company has agreed to indemnify and hold harmless Mr.
Stonecipher for any personal losses as a result of his ownership of Agency.
Agency's financial position and results of operations are included in the
Company's financial statements on a consolidated basis. Agency earned
commissions during 1995 and 1994 of $413,000 and $401,000, respectively, through
its sales of insurance products of an unaffiliated company. Annual management
fees paid to the Company in 1995 and 1994 were $72,000. Agency had net income
for the year ended December 31, 1995 of $599 and a net loss for the year ended
December 31, 1994 of $170,000 after the payment of commissions to Mr.
Stonecipher of $45,000 and $229,000, respectively. The 1994 commission amount
reflects a non-recurring amount for renewal commissions.
Wilburn L. Smith, a former executive officer and director of the Company,
has a loan from the Company which was made prior to the time Mr. Smith became a
director. The largest balance of this loan during the year ended December 31,
1995 was $68,000. The outstanding balance of this loan as of December 31, 1995
was $59,000. The loan bears annual interest at the rate of 3% in excess of the
prime rate, adjusted on January 1 of each year, and is secured by Mr. Smith's
commissions from the Company.
Mr. Smith owns interests ranging from 10% to 67% in corporations or
partnerships not affiliated with the Company but engaged in the marketing of the
Company's Contracts and which earn commissions from sales of Contracts. These
entities earned commissions, net of amounts passed through as commissions to
their sales agents, during 1995 and 1994 of $55,000 and $71,000, respectively.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: For a list of the documents filed as exhibits to this report, see
the Exhibit Index following the signatures to this report.
(b) Reports on Form 8-K: None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: March 26 , 1996 By: /s/ Randy Harp
Randy Harp
Chief Financial Officer
In accordance with the Exchange Act, 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 26, 1996
Harland C. Stonecipher (Principal Executive Officer)
/s/ Jack Mildren Chief Executive Officer, President March 26, 1996
Jack Mildren and Director
/s/ Kathleen S. Pinson Vice President, Controller and March 26, 1996
Kathleen S. Pinson Director,
(Principal Accounting Officer)
/s/ Randy Harp Chief Operating Officer, March 26, 1996
Randy Harp Chief Financial Officer and
Director
(Principal Financial Officer)
/s/ Peter K. Grunebaum Director March 26, 1996
Peter K. Grunebaum
/s/ Charles H. Walls Director March 26, 1996
Charles H. Walls
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (Incorporated by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1992)
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference
to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1987)
*10.1 Employment Agreement effective January 1, 1993 between the Company and
Harland C. Stonecipher (Incorporated by reference to Exhibit 10.1 of
the Company's 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
the Company's 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 the Company's 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
the Company's 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 the Company's Annual Report on Form
10-KSB for the year ended December 31, 1992.)
*10.6 Stock Option Plan, as amended and restated effective December 12, 1995
*10.7 Demand Note of Wilburn L. Smith and Carol Smith dated December 11,
1992 in favor of the Company (Incorporated by reference to Exhibit
10.15 of the Company's Form SB-2 filed February 8, 1994)
*10.8 Security Agreement between the Company, Wilburn L. Smith and Carol
Smith dated December 11, 1992 ((Incorporated by reference to Exhibit
10.16 of the Company's Form SB-2 filed February 8, 1994)
*10.9 Letter Agreements dated July 8, 1993 and March 7, 1994 between the
Company and Wilburn L. Smith (Incorporated by reference to Exhibit
10.17 of the Company's Form 10-KSB filed for the year ending December
31, 1993)
<PAGE>
INDEX TO EXHIBITS, (Continued)
Exhibit No. Description
*10.10 Employment agreement effective March 26, 1996 between the Company and
Jack Mildren
10.11 Revolving Credit Agreement between Company and Bank One, Texas,
National Association dated January 27, 1995 (Incorporated by reference
to Exhibit 10.14 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994)
10.12 Purchase Warrant dated as of June 8, 1994 issued to Paulson Investment
Company, Inc. (Incorporated by reference to Exhibit 10.15 of the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1994)
11.1 Statement of Computation of Per Share Earnings
21.1 List of Subsidiaries of the Company (Incorporated by reference to
Exhibit 22.1 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1991)
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
____________________
* .......Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.
EXHIBIT 10.6
<PAGE>
STOCK OPTION PLAN
OF
PRE-PAID LEGAL SERVICES, INC.
(as amended and restated effective December 12, 1995)
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;
provided that all of the members of the Stock Option Committee shall be persons
who qualify as "disinterested persons" as contemplated by Rule 16b-3 and the
Securities Exchange Act of 1934 (the "Exchange Act"). Each member of the Stock
Option Committee shall not be eligible to receive an option under the Plan or
any other plan of the Corporation entitling participants to acquire stock, stock
options or stock appreciation rights, if their eligibility would result in such
person not being considered a "disinterested person" as such term is defined in
Rule 16b-3 under the Exchange Act. 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.
Notwithstanding the foregoing, and solely to the extent necessary to
satisfy the requirements of Rule 16b-3 under the Exchange Act, the Stock Option
Committee shall have no discretionary authority with respect to the eligibility,
amount, price or timing of any stock option granted pursuant to the provisions
of Section 7 hereof to a Non-Employee Director (as defined in Section 7).
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 1,000,000 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 Agreement after any date that
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; provided, however, that neither the
Board of Directors nor the Stock Option Committee shall have the discretionary
authority to make any determination in connection with a change in control (as
provided in Section 6.7) that would result in acceleration of benefits under any
Non-Employee Director option granted pursuant to this Section 7. The foregoing
requirement eliminating certain discretionary authority that could result in an
acceleration of benefits shall apply only to the extent required pursuant to
Rule 16b-3 under the Exchange Act.
7.7 Amendment. In addition to any other requirements contained herein
pertaining to amendment of the Plan, the provisions of this Section 7 shall not
be amended more than once every six months, other than to comport with any
changes in the Internal Revenue Code or regulations thereunder. The foregoing
requirement shall apply only to the extent required pursuant to Rule 16b-3 under
the Exchange Act.
8. Term of Plan. No stock option shall be granted pursuant to the Plan
after December 12, 2005.
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. This Amended and Restated Plan shall be submitted
to the stockholders of the Corporation for approval. Any option granted as
provided in Section 7 hereof, and any option granted under any other Section
hereof after December 31, 1995, prior to such approval shall not be exercisable
unless and until such approval is obtained.
EXHIBIT 10.10
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into effective the 26th day of March, 1996
by and between Pre-Paid Legal Services, Inc., an Oklahoma corporation
(hereinafter referred to as the "Corporation"), and Jack Mildren, an individual
(hereinafter referred to as the "Employee").
WITNESSETH:
WHEREAS, the Employee has been employed by the Corporation pursuant to an
employment agreement dated January 25, 1995 and the Corporation and the Employee
desire to continue such employment pursuant to the terms of this Agreement;
NOW, THEREFORE, for and in consideration of the terms and conditions
contained herein, the parties hereto agree as follows, to-wit:
1. Employment. The Corporation hereby agrees to continue to employ the
Employee and the Employee hereby agrees to accept said employment with the
Corporation.
2. Term. The employment of the Employee pursuant to this Agreement shall be
for a period beginning on January 23, 1996, and ending on the 22nd day of
January, 1997, unless sooner terminated as provided herein. This Agreement may
be extended for additional periods or its terms amended upon the mutual
agreement acknowledged in writing by the Corporation and the Employee.
3. Duties of the Employee. The Employee shall continue as President of the
Corporation and shall be appointed as Chief Executive Officer, subject to
approval of the Board of Directors, with such duties as are assigned to him from
time to time by the Board of Directors or Chairman of the Corporation, including
but not limited to the duties of the Chief Executive Officer as set forth in the
Bylaws.
4. Working Facilities. The Corporation shall make available a private
office, and such other facilities suitable to Employee's position as President
and Chief Executive Officer and adequate for the performance of his duties and
conduct of the Corporation's business at the corporate headquarters in Ada,
Oklahoma. In addition, similar office space will be made available in Oklahoma
City, including full time secretarial assistance. The Employee's principal
office shall be located in Oklahoma City, Oklahoma provided the Employee agrees
to do such traveling as is reasonably required to carry out his duties
hereunder.
5. Compensation. For all services rendered by the Employee under this
Agreement, the Corporation shall pay the Employee:
5.1. An annual salary of $150,000 payable in equal weekly installments each
Tuesday of each week.
5.2 A performance bonus of up to $50,000 payable as soon as reasonably
practicable after December 31, 1996, based on the Corporation's achievement of
the thresholds set forth below:
(i) The sum of $12,500 shall be payable if the number of new memberships
written by the Corporation in 1996 is 200,000 or more;
(ii) An additional sum of $12,500 shall be payable if the number of new
sales associates enrolled by the Corporation during 1996 is 100,000 or more; and
(iii) An additional $25,000 shall be payable if the Corporation's
consolidated net income per share is at least $.50. For this purpose, net income
per share shall be determined without regard to any extraordinary items or
effect of any accounting principle changes and shall be computed on the basis of
net income per common share assuming full dilution as publicly reported by PPLS.
Employee will not be entitled to the performance bonus if his employment is
terminated prior to December 31, 1996 either voluntarily by Employee pursuant to
Section 12.1 or by Corporation for cause pursuant to Section 12.3.
5.3 A commission of $0.025 per member per month on all new memberships
written by the Corporation or any subsidiary after January 1, 1995 and during
the period of Employee's employment, which memberships are active as of the end
of each month commencing with the month of January 1996. Such commissions shall
be payable for the life of Employee. If Employee's employment is terminated for
any reason prior to his death, such commissions shall nevertheless continue to
be paid to Employee for the remainder of his life. Payment of commissions
hereunder shall be made monthly on an as earned basis within 15 days after the
end of the calendar month.
6. Stock Options. Employee has previously been granted stock options under
his prior employment agreement and has additionally been granted options for one
hundred fifty thousand (150,000) shares of the common stock of the Corporation
granted December 22, 1995 with an exercise price set at the closing sales price
effective the date of the grant of $9.25 per share. Such options shall be
governed by the terms of the relevant option agreements and are independent of
this Agreement. Employee shall also be entitled to participate under any other
incentive plans of the Corporation at the discretion of the Board of Directors.
7. Right to Participate. The Employee shall have the right to participate
in any employee benefit plans or funds adopted by the Corporation, including
medical and disability insurance plans and vacations on the same terms as other
employees.
8. Transportation and Expenses. The Employee shall be provided a mutually
acceptable automobile at the Corporation's expense. The Corporation shall
reimburse the Employee for all reasonable expenses incurred in conducting the
business of the Corporation, including expenses for entertainment, travel,
airline tickets, telephone, and similar items upon the presentation by the
Employee of an itemized account of such expenditures.
9. Death During Employment. If the Employee dies during the term of this
Agreement, the Corporation shall pay to the estate of the Employee the
compensation which would otherwise be payable to the Employee up to the end of
the month in which the Employee's death occurs. In addition, the Corporation
shall pay $5,000, within sixty (60) days after the death of the Employee, to the
widow of the Employee or if he has not been survived by his widow, to the
Employee's surviving children in equal shares, or if there are no surviving
children, to the estate of the Employee.
10. Notice. All notices herein shall be in writing and shall be deemed to
have been duly given at the time personally delivered or deposited in the United
States Mail, postage prepaid, to the last known address of the respective
parties, subject to change upon notice to the other party.
11. Confidential Information. The Employee agrees that he will not, without
the written consent of the Corporation, (i) disclose to anyone not properly
entitled thereto, any confidential information relative to the business, sales,
customers, suppliers, employees, financial condition or products of the
Corporation or affiliates thereof or (ii) induce employees of the Corporation or
any affiliates of the Corporation to terminate their employment. For purposes
hereof, persons properly entitled to such confidential information shall be
members of the Board of Directors, officers, employees and agents of the
Corporation or any affiliates thereof to which such information is furnished in
the normal course of business under established policies approved by the
Corporation and such outside parties as are legally entitled to such
information, and approved banking, lending, collection and data processing
institutions or agencies of the Corporation in the course of maintaining
ordinary business procedures. The Employee further agrees that should he leave
the active service of the Corporation, in no event will he take with him or
retain, or disclose to others without written authorization from the Corporation
any papers, customer lists, price lists, files or other documents or copies
thereof or other confidential information of any kind belonging to the
Corporation or any affiliate thereof pertaining to its business, sales,
customers, suppliers, financial condition or products.
12. Termination. Subject to the provisions of this paragraph 12:
12.1 The Employee may terminate this Agreement upon sixty (60) days' notice
to the Corporation at which time his entitlement to any additional salary
compensation hereunder shall cease; or
12.2 The Corporation may terminate this Agreement, without cause, at any
time upon sixty (60) days' written notice to the Employee; provided, the
Corporation shall be obligated to pay the Employee the compensation which would
accrue to the Employee under this Agreement and provide the same benefits as
described herein for the balance of the term of this Agreement; or
12.3 The Corporation may terminate this Agreement for "cause" at any time
upon written notice to the Employee at which time his entitlement to any
additional compensation hereunder shall cease. "Cause" is used herein to mean an
act of fraud, embezzlement or theft constituting a felony or an act
intentionally against the interests of the Corporation which causes it material
injury as determined by a Court of proper authority or a material failure to
perform his duties after reasonable notice has been given Employee and material
failure continues to exist.
The termination of this Agreement for any reason shall not affect the right
of Employee or his successor or personal representative to continue to receive
commissions payable under Section 5.2 for the period set forth therein.
13. Waiver. Failure to insist upon a strict compliance with any of the
terms or conditions of this Agreement shall not be deemed a waiver of such terms
or conditions, nor shall any waiver of any term, condition or right of any party
at any time to be deemed a waiver of any other term, condition or right of any
party hereto, nor shall it preclude the party from subsequently asserting or
relying upon such term, condition or right.
14. Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
15. Modification. This Agreement contains the entire agreement of the
parties and shall not be changed, modified, or terminated, except in writing
signed by both parties, hereto.
16. Construction. This Agreement shall be governed by and construed under
the laws of the State of Oklahoma.
17. Assignment. The rights and obligations of the Corporation under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Corporation. The Employee's rights, powers, privileges and
immunities under this Agreement shall not be assignable without the prior
written consent of the Corporation.
18. Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns.
19. Other Activities. The Employee will not engage in business independent
of the Employee's employment hereunder requiring any substantial portion of the
Employee's normal business time without obtaining the prior written consent of
the Company.
Executed effective the day and year first above written.
PRE-PAID LEGAL SERVICES, INC.
By: /s/ Harland C. Stonecipher
Harland C. Stonecipher, Chairman
/s/ Jack Mildren
Jack Mildren, Individually
EXHIBIT 11.1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11.1
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
Year Ended December 31,
<S> <C> <C> <C>
1995 1994 1993
PRIMARY EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) .......................................... $ 7,187 $ 3,250 $ 93
Add: Interest on assumed debt reduction, net of tax (b) ......................... -- -- --
Net income, as adjusted ......................................................... $ 7,187 $ 3,250 $ 93
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock .............. 18,947 11,603 10,663
Assumed dilutive conversion of preferred stock .................................. 181 214 238
assumed exercise of options and warrants based on the modified treasury
stock method using average market price ......................................... 1,634 643 1,506
Weighted average number of shares, as adjusted .................................. 20,762 12,460 12,407
Earnings per share (a) .......................................................... $ .35 $ .26 $ .01
FULLY DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) .......................................... $ 7,187 $ 3,250 $ 93
Add: Interest on assumed debt reduction, net of tax (b)....................... -- -- --
Dividends on assumed conversion of preferred stock ...................... 110 450 --
Interest on assumed conversion of subordinated debentures, net of tax (b) -- 47 --
Net income, as adjusted ......................................................... $ 7,297 $ 3,747 $ 93
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock or
subordinated debentures ........................................................ 18,947 11,603 10,663
Assumed dilutive conversion of preferred stock .................................. 827 2,802 238
Assumed dilutive conversion of subordinated debentures .......................... -- 460 --
Assumed exercise of options and warrants based on the modified treasury stock
method using closing market price if higher than average market price .......... 2,004 907 1,742
Weighted average number of shares, as adjusted .................................. 21,778 15,772 12,643
Earnings per share (a) .......................................................... $ .34 $ .24 $ .01
<FN>
(a) These amounts agree with the related amounts in the statements of income.
(b) Adjustments to income have been shown net of tax effects calculated at the
Company's effective tax rate.
</FN>
</TABLE>
EXHIBIT 23.1
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-82144 and No. 33-62663 on Form S-8 and Registration Statements No. 33-59341,
No. 33-60585 and No. 33-62661 on Form S-3 of Pre-Paid Legal Services, Inc., and
the related prospectuses, of our report dated February 21, 1996 appearing in
this Annual Report on Form 10-KSB of Pre-Paid Legal Services, Inc. for the year
ended December 31, 1995.
Deloitte & Touche LLP
Oklahoma City, Oklahoma
March 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This shcedule contains summary finacial information extracted from
the December 31, 1995 financial statements contained in Form 10-KSB
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000311657
<NAME> Pre-Paid Legal Services, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 14,489
<SECURITIES> 3,766
<RECEIVABLES> 1,038
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,950
<PP&E> 2,202
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,629
<CURRENT-LIABILITIES> 2,323
<BONDS> 0
0
50
<COMMON> 215
<OTHER-SE> 29,475
<TOTAL-LIABILITY-AND-EQUITY> 35,629
<SALES> 31,290
<TOTAL-REVENUES> 37,484
<CGS> 0
<TOTAL-COSTS> 26,230
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 11,244
<INCOME-TAX> 3,932
<INCOME-CONTINUING> 7,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,312
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
</TABLE>
