UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-9293
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PRE-PAID LEGAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1016728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 East Main Street
Ada, Oklahoma 74821-0145
(Address of principal executive offices) (Zip Code)
(405) 436-1234
(Registrants' telephone number, including area code)
--------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of July 25, 1997:
Common Stock $.01 par value 22,233,595
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
June 30, December 31,
1997 1996
------------------------
(Unaudited)
Current assets:
Cash ............................................. $19,586 $14,831
Held-to-maturity short-term investments .......... 500 500
Accrued membership income ........................ 2,001 1,710
Commission advances - current portion ............ 12,235 9,108
------- -------
Total current assets ........................... 34,322 26,149
------- -------
Held-to-maturity investments ..................... 2,943 1,757
Investments pledged .............................. 2,772 2,772
Commission advances, net ......................... 28,974 21,744
Property and equipment, net ...................... 2,925 2,955
Other ............................................ 2,229 2,155
------- -------
Total assets ................................. $74,165 $57,532
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits .............................. $ 2,334 $ 1,862
Accounts payable and accrued expenses ............ 1,720 912
------- -------
Total current liabilities ...................... 4,054 2,774
Deferred income taxes .............................. 13,772 9,284
------- -------
Total liabilities ............................ 17,826 12,058
------- -------
Stockholders' equity:
Preferred stock, $1 par value; authorized 400 shares;
issued and outstanding as follows:
$3.00 Cumulative Convertible Preferred Stock,
authorized 5 shares; shares outstanding;
liquidation value of $78 at June 30, 1997 and $84
at December 31, 1996, respectively ............... 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, 32
shares authorized, issued and outstanding at
June 30, 1997 and December 31, 1996; liquidation
value of $413 at June 30, 1997 and $430 at
December 31, 1996 ............................... 32 32
Common stock, $.01 par value; 100,000 shares authorized;
22,952 and 22,459 issued at June 30, 1997 and
December 31, 1996, respectively ................. 230 225
Capital in excess of par value ........................ 43,570 41,039
Retained earnings ..................................... 14,679 6,350
Less: Treasury stock, at cost; 747 shares ............. (2,177) (2,177)
-------- --------
Total stockholders' equity .......................... 56,339 45,474
-------- ---------
Total liabilities and stockholders' equity ........ $ 74,165 $ 57,532
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Six Months Ended
June 30,
------------------
1997 1996
------- -------
Revenues:
Membership premiums .................................. $34,609 $22,565
Associate services ................................... 5,635 2,854
Interest income ...................................... 745 597
Other ................................................ 935 875
------- -------
41,924 26,891
------- -------
Costs and expenses:
Membership benefits .................................. 11,634 7,579
Commissions .......................................... 7,570 5,041
General and administrative ........................... 3,983 2,798
Associate services and direct marketing expenses ..... 5,100 2,222
Depreciation ......................................... 325 266
Premium taxes ........................................ 488 169
------- -------
29,100 18,075
------- -------
Income before income taxes ............................. 12,824 8,816
Provision for income taxes ............................. 4,488 3,086
------- -------
Net income ............................................. 8,336 5,730
Less dividends on preferred shares ..................... 7 8
------- -------
Net income applicable to common shares ................. $ 8,329 $ 5,722
======= =======
Earnings per common and common equivalent share ........ $ .37 $ .26
======= =======
Earnings per common share - assuming full dilution ..... $ .37 $ .26
======= =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended
June 30,
-------------------
1997 1996
-------- -------
Revenues:
Membership premiums .................................. $18,390 $12,261
Associate services ................................... 2,935 1,603
Interest income ...................................... 364 314
Other ................................................ 510 359
------- -------
22,199 14,537
------- -------
Costs and expenses:
Membership benefits .................................. 6,187 3,981
Commissions .......................................... 4,087 2,618
General and administrative ........................... 2,095 1,620
Associate services and direct marketing expenses ..... 2,811 1,231
Depreciation ......................................... 164 128
Premium taxes ........................................ 155 97
------- -------
15,499 9,675
------- -------
Income before income taxes ............................. 6,700 4,862
Provision for income taxes ............................. 2,345 1,702
------- -------
Net income ............................................. 4,355 3,160
Less dividends on preferred shares ..................... 4 4
------- -------
Net income applicable to common shares ................. $ 4,351 $ 3,156
======= =======
Earnings per common and common equivalent share ........ $ .19 $ .14
======= =======
Earnings per common share - assuming full dilution ..... $ .19 $ .14
======= =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Six Months Ended
June 30,
-------------------
1997 1996
Cash flows from operating activities:
Net income .............................................. $ 8,336 $ 5,730
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ........................................ 325 266
Provision for deferred income taxes ................. 4,488 3,086
Provision for associate stock options ............... -- 318
Increase in accrued membership income ............... (291) (283)
Increase in commission advances ..................... (10,357) (9,843)
Increase in other assets ............................ (74) (274)
Increase in membership benefits ..................... 472 256
Increase in accounts payable and accrued expenses ... 808 74
-------- --------
Net cash provided by (used in) operating activities 3,707 (670)
-------- --------
Cash flows from investing activities:
Additions to property and equipment ................... (295) (344)
Purchases of investments .............................. (1,301) (1,082)
Maturities of investments ............................. 115 400
-------- --------
Net cash used in investing activities ............. (1,481) (1,026)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common and preferred stock ...... 2,536 1,376
Dividends paid on preferred stock ..................... (7) (8)
-------- --------
Net cash provided by financing activities ......... 2,529 1,368
-------- --------
Net increase in cash .................................... 4,755 (328)
Cash at beginning of period ............................. 14,831 14,489
-------- --------
Cash at end of period ................................... $ 19,586 $ 14,161
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................ $ 6 $ 6
======== ========
Cash paid for taxes ................................... $ -- $ 15
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated balance sheet as of June 30, 1997, the related
statements of income for the three-month and six-month periods ended June 30,
1997 and 1996 and the statements of cash flows for the six-month periods ended
June 30, 1997 and 1996 are unaudited; in the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included.
These financial statements and notes are prepared pursuant to the rules
and regulations of the Securities and Exchange Commission for interim reporting
and should be read in conjunction with the Company's financial statements and
notes included in the 1996 Annual Report on Form 10-K. Certain reclassifications
have been made to conform to current year presentation.
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.
Statement of Financial Accounting Standards 128, Earnings Per Share,
("SFAS 128") was issued in February, 1997. This statement provides new
accounting and reporting standards for earnings per share and will replace the
currently used primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share represents the potential dilution that could occur if all stock options
and other stock-based awards, as well as convertible securities, were exercised
and converted into common stock. SFAS 128, effective for year-end 1997 financial
statements, requires that prior period earnings per share be restated. The
Company does not expect adoption of this statement to have a material impact on
earnings per common share amounts.
Statement of Financial Accounting Standards 130, Reporting
Comprehensive Income, ("SFAS 130") was issued in June, 1997. This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130, effective for fiscal years beginning after December 15,
1997, requires reclassification of financial statements for earlier periods
provided for comparative purposes. The Company does not expect adoption of this
statement to have a material impact on earnings per common share amounts.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1997 COMPARED TO FIRST SIX MONTHS OF 1996
The Company reported net income applicable to common shares of $8.3
million, or $.37 per share assuming full dilution, for the six months ended June
30, 1997 compared to $5.7 million, or $.26 per share, for the comparable period
of 1996. As a percentage of total revenues, net income applicable to common
shares was 20% in the first six months of 1997, down slightly from 21% in the
first six months of 1996. The decline in this margin is attributable to
increased expenses associated with the implementation of a new program which
became available in January, 1997. The new combination classroom and field
training program, titled Fast Start to Success ("Fast Start"), is aimed at
increasing the level of new membership sales per associate. The positive impact
of the program is reflected in the increase in new memberships written and new
sales associates recruited per Fast Start associate.
Revenues rose 56% to $41.9 million from $26.9 million for the prior
year's comparable period. Income before income taxes for the first half of 1997
increased 45% to $12.8 million, or 31% of revenues, from $8.8 million, or 33% of
revenues for the comparable period of 1996.
Membership premiums totaled $34.6 million during the first half of 1997
compared to $22.6 million for the same period of 1996, an increase of 53%. The
increase in membership premiums was primarily the result of increased new
membership sales resulting in a higher number of active memberships in force.
New membership sales during the first six months of 1997 were 133,607 compared
to 92,529 during the 1996 period, an increase of 44%. At June 30, 1997, there
were 359,579 active memberships in force compared to 253,091 at June 30, 1996,
an increase of 42%. Membership premiums and their impact on total revenues in
any period are determined directly by the number and the average premium of
active memberships in force during any such period. The active memberships in
force are determined by both the number of new memberships sold in any period
together with the persistency, or renewal rate, of existing memberships. The
Company's overall membership persistency rate varies based on, among other
factors, the relative age of total memberships in force. From 1981 through the
year ended December 31, 1996, the Company's annual membership persistency rates
have averaged approximately 76%.
Associate services revenue increased from $2.9 million for the first
half of 1996 to $5.6 million during the same period of 1997 primarily as a
result of Fast Start which resulted in the Company receiving training fees of
approximately $2.6 million during the first six months of 1997. Fast Start
requires a training fee of $184 per new associate ($25 for a limited time period
for existing associates) and upon successful completion of the program provides
for the payment of certain training bonuses. In order to be deemed successful
for Fast Start purposes, the new associate must write three new memberships and
recruit one new sales associate within 15 days of the associate's Fast Start
training. The $2.6 million in training fees was comprised of $184 from each of
approximately 12,100 new sales associates who elected to participate in Fast
Start and training fees of $25 from each of approximately 14,500 existing
associates who participated in the program. New associates enrolled during the
first six months of 1997 were 29,623 compared to 38,087 for the same period of
1996, a decrease of 22%. Future revenues from associate services will depend
primarily on the number of new associates enrolled and the number who choose to
participate in the Company's training program, but the Company expects that such
revenues will continue to be largely offset by the direct and indirect cost to
the Company of training bonuses paid, providing associate services and other
direct marketing expenses.
Interest income increased 25% to $745,000 during the six months ended
June 30, 1997 from $597,000 for the comparable period of 1996 as a result of
increases in the average investments outstanding and higher interest rates on
investments. At June 30, 1997 the Company reported $25.8 million in cash and
investments compared to $18.6 million at June 30, 1996.
Membership benefits totaled $11.6 million for the first half of 1997
compared to $7.6 million for the same period of 1996, an increase of 54%.
However, the loss ratio (membership benefits as a percentage of membership
premiums) for the 1997 period remained level with the loss ratio for the
comparable period of 1996 at 34%. The loss ratio is expected to remain near 35%
as the portion of active memberships which provide for a capitated benefit
continues to increase.
Commission expense was $7.6 million for the first half of 1997 compared
to $5.0 million for the same period of 1996, but remained level, as a percentage
of membership premiums at 22%. Commission expense, as a percentage of membership
premiums, is expected to gradually increase to near 25% of membership premiums
in future years as a result of changes in the commission structure for
memberships sold after March 1, 1995.
General and administrative expenses during the 1997 and 1996 six month
periods were $4.0 million and $2.8 million, and represented 12% of membership
premiums for such periods. These expenses are expected to remain at or near
these levels and gradually decrease when expressed as a percentage of membership
premiums as a result of certain economies of scale pertaining to the Company's
operations.
Associate services and direct marketing expenses increased to $5.1
million for the first half of 1997 from $2.2 million for the same period of 1996
as a result of approximately $1.7 million in Fast Start training bonuses paid,
additional costs of supplies due to increased purchases by associates and higher
administrative staffing requirements. These expenses also include the costs of
providing associate services and marketing costs other than commissions which
are directly associated with new membership sales.
Due to property and equipment additions, depreciation increased from
$266,000 during the first six months of 1996 to $325,000 for the first six
months of 1997. Premium taxes increased to $488,000 during the first six months
of 1997 from $169,000 for the comparable period of 1996, primarily as a result
of a $200,000 accrual related to a prior year tax assessment.
The Company's expense ratio, which represents commissions, general and
administrative expenses and premium taxes as a percentage of contract premiums,
was 35% for both six month periods resulting in a combined loss and expense
ratio of 68% for the first half of 1997 compared to 69% for the same period of
1996. The combined ratio does not measure total profitability because it does
not take into account all revenues and expenses.
The Company has recorded a provision for income taxes of $4.5 million
(35% of pretax income) for the first half of 1997 compared to $3.1 million (35%
of pretax income) for the same period of 1996. The 1997 and 1996 provisions
reflect the Company's expectation that it more likely than not will not be able
to realize the future tax benefit of certain net operating loss carryforwards
primarily as a result of tax deductions attributable to expected levels of
commissions to be paid on new membership sales.
Dividends paid on outstanding preferred stock during the first six
months of 1997 decreased to $6,891 from $7,508 during the same period of 1996.
This decrease is attributable to the conversion of shares of $3.00 Cumulative
Convertible Preferred Stock into common stock.
SECOND QUARTER OF 1997 COMPARED TO THE SECOND QUARTER OF 1996
The results of operations in the second quarter of 1997, compared to
the second quarter of 1996, reflect increases in revenues and expenses primarily
as a result of the same factors discussed in the comparison of the first six
months of 1997 compared to the first six months of 1996.
Total revenues increased 53% or approximately $7.7 million to $22.2
million in the second quarter of 1997 compared to $14.5 million in the second
quarter of 1996, primarily as a result of increases in membership premiums. The
membership premium increase of 50% primarily resulted from an increase in the
number of average active memberships during the second quarter of 1997 compared
to the similar period in 1996.
Membership benefits totaled $6.2 million in the 1997 second quarter
compared to $4.0 million in the 1996 second quarter and resulted in a loss ratio
of 34% and 32%, respectively. The Company's expense ratio for the second quarter
of 1997 was 34% compared to 35% for the 1996 second quarter resulting in a
combined loss and expense ratio of 68% for both periods. The combined ratio does
not measure total profitability because it does not take into account all
revenues and expenses.
The above factors resulted in a 1997 second quarter net income
applicable to common shares of $4.4 million, or $.19 per share, assuming full
dilution compared to $3.2 million, or $.14 per share, for the second quarter of
1996.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated net cash provided by operating activities was $3.7 million
for the first six months of 1997 compared to net cash used in operating
activities of $670,000 for the 1996 period. The increase of $4.4 million in cash
provided by operations during the first six months of 1997 compared to the same
period of 1996 resulted primarily from increases in net income of $2.6 million,
increases in deferred income taxes of $1.4 million, increases in accounts
payable and accrued expenses of $734,000 and only partially reduced by an
increase in commission advances of $514,000 related to the increase in new
membership enrollments.
The Company had consolidated working capital of $30.3 million at June
30, 1997, an increase of $6.9 million compared to consolidated working capital
of $23.4 million at December 31, 1996 and an increase of $10.2 million compared
to consolidated working capital of $20.1 million at June 30, 1996.
The Company advances significant commissions at the time a Membership
is sold. During the six months ended June 30, 1997, the Company advanced
commissions of $17.2 million on new membership sales compared to $14.1 million
for the same period of 1996. Since approximately 92% of Membership premiums are
collected on a monthly basis, a significant cash flow deficit is created at the
time a Membership is sold. This deficit is reduced as monthly premiums are
remitted and no additional commissions are paid on the Membership until all
previous commission advances have been fully recovered. Commission advances were
subsequently reduced by commission earnings of $6.6 million and $4.1 million for
the six month periods ended June 30, 1997 and 1996, respectively. The Company
has recorded an allowance of $3.7 million to provide for estimated uncollectible
balances which includes an increase in the allowance of $300,000 during the six
months ended June 30, 1997.
The Company's unsecured $5 million revolving credit agreement with Bank
One, Texas expired July 1, 1997. The Company had never borrowed under this
agreemewnt and is currently evaluating the need for such a credit facility.
Should the determiniation be made that such a facility is warranted, the Company
expects such a credit agreement with similar terms could be arranged in a timely
manner.
Although the Company is the operating entity in many jurisdictions, the
Company's subsidiaries serve as operating companies in various states which
regulate memberships as insurance or specialized legal expense products. The
most significant of these wholly-owned subsidiaries are Pre-Paid Legal Casualty,
Inc. ("PPLCI") and Pre-Paid Legal Services, Inc. of Florida ("PPLSIF"). 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities:
On May 6, 1997 and June 20, 1997, the Company issued to two sales
associates of the Company a total of 5,000 shares (2,500 shares each) of
Common Stock upon exercise of outstanding warrants to purchase Common Stock
at an exercise price of $8.25 per share. Such warrants were issued in
connection with the achievement of certain sales levels within the Company.
Between May 6, 1997 and May 28, 1997, the Company issued to assignees of
Roger T. Staubach a total of 58,000 shares of Common Stock upon exercise of
outstanding warrants to purchase Common Stock at an exercise price of $.50
per share. Such warrants were issued by the Company during 1993 in
connection with a marketing services agreement entered into between the
Company and Mr. Staubach.
On May 13, 1997, the Company granted to Francis A. Tarkenton, a director of
the Company, options to purchase 120,000 shares of the Company's Common
Stock at an exercise price of $16.75 per share (the closing sale price of
the Common Stock on the date of the grant as reported by the American Stock
Exchange). The options were granted in recognition of Mr. Tarkenton's
efforts in furtherance of the Company's marketing activities, including Mr.
Tarkenton's agreement to participate in certain of the Company's sales
associate marketing rallies.
All such options and shares of Common Stock were issued without
registration under the Securities Act of 1933 in reliance on the exemption
under Section 4(2) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 Annual Meeting of Shareholders of the Company was held on May 23,
1997. The following matters were submitted to a vote of the Company's
shareholders:
1. The election of two directors for a term of three years. The results
of the election for each such director are as follows:
Abstentions and
Votes For Votes Withheld
--------- --------------
Kathleen S. Pinson 15,987,759 132,325
Charles H. Walls 15,983,937 133,565
The Board of Directors of the Company consists of seven members and is
divided into three classes as nearly equal in size as possible, with the
term of office of one class expiring each year. The terms of the other five
directors of the Company did not expire at the Annual Meeting. The names of
such directors and the year of expiration of their respective terms are as
follows: Peter K. Grunebaum - 1998; Randy Harp - 1998; Francis A. Tarkenton
- 1998; Harland C. Stonecipher - 1999; and Wilburn Smith - 1999.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The following exhibits are filed as part of this Form 10-Q:
No. Description
10.1 Stock Option Agreement dated May 13, 1997 between the Company
and Francis A. Tarkenton
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K: There were no reports on Form 8-K filed by the Company
during the quarter ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: July 28, 1997 /s/ HARLAND C. STONECIPHER
------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: July 28, 1997 /s/ RANDY HARP
------------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
Date: July 28, 1997 /s/ KATHY PINSON
------------------------------------
Kathy Pinson
Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
No. Description
10.1 Stock Option Agreement dated May 13, 1997 between the
Company and Francis A. Tarkenton
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
Exhibit 10.1
<PAGE>
PRE-PAID LEGAL SERVICES, INC.
STOCK OPTION AGREEMENT
(Francis A. Tarkenton)
This Stock Option Agreement ("Agreement") is made this 13th day of May,
1997, between Pre-Paid Legal Services, Inc., an Oklahoma corporation (the
"Corporation"), and Francis A. Tarkenton (the "Optionee").
WHEREAS, the Corporation develops, underwrites and markets legal
service plans, in part through commissioned marketing associates;
WHEREAS, Optionee is a director of the Corporation;
WHEREAS, Optionee has agreed to appear and speak at not less than
twelve of the Corporation's marketing rallies during the next twelve months; and
WHEREAS, in consideration for such services in furtherance of the
Corporation's marketing efforts, the Corporation desires to grant to Optionee
options to purchase shares of the Corporation's common stock, par value $.01 per
share ("Common Stock"), on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties hereby agree as follows:
1. Grant of Stock Option. Subject to the terms and conditions herein
set forth, the Corporation hereby grants to Optionee the right and option
("Option") to purchase all or any part of an aggregate number of One Hundred
Twenty Thousand (120,000) shares of Common Stock (which foregoing number of
shares is subject to adjustment as hereinafter provided). Such Option is not
intended to qualify as an incentive stock option under the Internal Revenue
Code.
2. Purchase Price. Subject to adjustments as hereinafter provided, the
purchase price under the Option for shares of Common Stock shall be $16.75 per
share, which represents the closing sale price of the Common Stock on the date
hereof as reported by the American Stock Exchange. The purchase price of one
share of Common Stock payable from time to time upon exercise of the Option
(whether such price be the price specified above or an adjusted price determined
as hereinafter provided) is referred to herein as the "Option Price."
3. Vesting and Term. The Option may not be exercised, in whole or in
part, until May 13, 1998, at which time the Option shall become fully vested and
immediately exercisable; provided, however, that it shall be a condition to the
vesting of the option that Optionee shall not have voluntarily resigned or have
been removed for cause from the Board of Directors on or prior to such vesting
date. The right to exercise the Option, in whole or in part, shall expire on May
13, 2000.
4. Adjustment of Option Price and Number of Shares. The number and kind
of securities issuable upon the exercise of the Option shall be subject to
adjustment from time to time upon the happening of certain events as follows:
4.1 Adjustment for Dividends in Stock. In case at any time or
from time to time on or after the date hereof the holders of all of the
outstanding Common Stock of the Corporation (or any shares of stock or
other securities at the time receivable upon the exercise of the
Option) shall have received or, on or after the record date fixed for
the determination of eligible stockholders, shall have become entitled
to receive, without payment therefore, other or additional stock of the
Corporation by way of dividend, then and in each case, the Optionee
shall, upon the exercise of the Option, be entitled to receive, in
addition to the number of shares of Common Stock receivable thereupon,
and without payment of any additional consideration therefor, the
amount of such other or additional stock of the Corporation which
Optionee would hold on the date of such exercise had he been the holder
of record of such Common Stock on the date hereof and had thereafter,
during the period from the date hereof to and including the date of
such exercise, retained such shares and/or all other additional stock
receivable by him as aforesaid during such period, giving effect to all
adjustments called for during such period by Sections 4.2 and 4.3.
4.2 Adjustment for Reclassification, Reorganization or Merger.
In the event of any reclassification of the Common Stock or other
capital adjustment of the Corporation effected without receipt of
consideration or in the event of a merger or consolidation of the
Corporation which does not result in a change of control of the
Corporation (as determined in the sole discretion of the Board of
Directors of the Corporation), then upon the exercise of the Option at
any time after the consummation of such reclassification, capital
adjustment, merger or consolidation, the Optionee shall be entitled to
receive, in lieu of the stock or other securities and property
receivable upon the exercise hereof prior to such consummation, the
stock or other securities or property to which the Optionee would have
been entitled upon such consummation if Optionee had exercised the
Option immediately prior thereto, all subject to further adjustment as
provided in Sections 4.1 and 4.3. 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 (as determined in the
sole discretion of the Board of Directors of the Corporation) or a
tender or exchange offer which results in a change in control of the
Corporation (as determined in the sole discretion of the Board of
Directors of the Corporation), the Board of Directors shall determine
(i) whether all or any part of the unexercised portion of the Option
shall terminate or (ii) in the case of such merger or consolidation,
whether the Optionee shall, upon exercise hereof, be entitled to
receive securities of the surviving or resulting corporation on the
same basis as described in the first sentence of this Section.
The existence of the Option shall not affect or restrict in
any way the right or power of the Board of Directors or the
shareholders of the Corporation to make or authorize any adjustment,
recapitalization, reorganization or other change in the Corporation's
capital structure or its business, any merger or consolidation of the
Corporation, any issue of securities ahead of or affecting the Common
Stock or the rights thereof, the dissolution or liquidation of the
Corporation or any sale or transfer of all or any part of its assets or
business or any other corporate act proceeding.
4.3 Stock Splits and Reverse Stock Splits. If at any time on
or after the date hereof the Corporation shall subdivide its
outstanding shares of Common Stock into a greater number of shares, the
Option Price in effect immediately prior to such subdivision shall
thereby be proportionately reduced and the number of shares receivable
upon exercise of the Option shall thereby be proportionately increased;
and, conversely, if at any time on or after the date hereof the
outstanding number of shares of Common Stock shall be combined into a
smaller number of shares, the Option Price in effect immediately prior
to such combination shall thereby be proportionately increased and the
number of shares receivable upon exercise of the Option shall hereby be
proportionately decreased.
4.4 De Minimis Adjustments to Option Price. No adjustment in
the Option Price shall be required unless such adjustment would require
any increase or decrease of at least one percent or more of the Option
Price; provided, however, that any adjustments which by reason of this
Section 4.4 are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under
this Section 3 shall be made to the nearest cent.
5. Certificate of Adjustment. Whenever the Option Price is adjusted, as
herein provided, the Corporation shall promptly deliver to Optionee a
certificate of an officer of the Corporation setting forth the Option Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment.
6. No Other Adjustments. Except as provided in Section 4, no adjustment
will be made to the Option Price or the number or type of securities purchasable
upon the exercise hereof.
7. No Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any exercise of the Option and any fractional shares
resulting from any adjustment hereunder shall be eliminated.
8. No Stockholder Rights. The Option shall not entitle Optionee to any
of the rights of a stockholder of the Corporation.
9. Reservation of Stock. The Corporation covenants that during the
period that the Option is exercisable, the Corporation will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide
for the issuance of Common Stock upon the exercise of the Option. The
Corporation agrees that its issuance of the Option shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of the Option.
10. Exercise of Option. The Optionee's ability to exercise the Option
is subject to all applicable laws and to the Corporation having obtained prior
to such exercise all necessary governmental approvals and the approval of any
applicable stock exchange or consolidated trading system upon which the Common
Stock may be listed. The Corporation shall use its best efforts to obtain such
approvals prior to such exercise. Subject to the foregoing and the provisions of
Section 12 below, the Option may be exercised by the Optionee, in whole or in
part, by the surrender of this Agreement at the principal office of the
Corporation, accompanied by payment in full of the Option Price by certified or
cashier's check payable to the Corporation, a completed Subscription Form in the
form attached hereto and any other information, opinions or agreements required
by the Corporation pursuant to the provisions hereof. The Corporation may also
require, as a condition to the exercise of the Option and the issuance of any
shares, that the Optionee remit an amount sufficient, in the Corporation's
opinion, to satisfy applicable federal, state or local withholding tax
requirements, if any. Upon partial exercise hereof, a new option agreement or
agreements containing the same date and provisions as this Agreement shall be
issued by the Corporation to the Optionee for the number of shares of Common
Stock with respect to which the Option shall not have been exercised. The Option
shall be deemed to have been exercised immediately prior to the close of
business on the date of its surrender for exercise as provided above, and the
person entitled to receive the shares of Common Stock issuable upon such
exercise shall be treated for all purposes as the holder of such shares of
record as of the close of business on such date. As promptly as practicable on
or after such date, the Corporation shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates for the
number of full shares of Common Stock issuable upon such exercise.
11. Transfer of Option. The Option and all rights hereunder are not
transferable, in whole or in part, except by will or the laws of descent and may
be exercised during the lifetime of the Optionee only by him. The terms of the
Option shall be binding upon the executors, administrators, heirs and successors
of the Optionee.
12. Compliance with Securities Laws.
12.1 The Optionee represents and agrees that the Option has
been acquired only for investment, for Optionee's own account, and
without any present intention to sell or distribute the Option or the
shares issuable upon exercise thereof. Optionee further acknowledges
that the Option may not be exercised and the shares will not be issued
pursuant to the exercise of the Option unless the exercise of the
Option and the issuance and delivery of such shares shall comply with
all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended (the "Securities Act"), and other
federal and state securities laws and regulations and the requirements
of any stock exchange or consolidated trading system upon which the
Common Stock may then be listed.
12.2 If, at the time of the exercise of the Option, it is, in
the sole opinion of the Corporation, necessary or desirable in order to
comply with any applicable laws or regulations relating to the sale of
the shares, the Optionee shall represent and warrant to, and agree
with, the Corporation that the Optionee will purchase the shares for
which the Option is being exercised for investment and not with any
present intention to resell such shares and without a view to
distribution. The Optionee shall, upon the request of the Corporation,
execute and deliver to the Corporation an agreement to such effect.
12.3 The Optionee acknowledges and agrees that the Option and
the shares issuable upon exercise thereof have not been registered
under the Securities Act and accordingly will not be transferable
except as permitted under the various exemptions contained in the
Securities Act, or upon satisfaction of the registration and prospectus
delivery requirements of the Securities Act. Therefore the Option and
the shares must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such
registration is available. Optionee understands that any certificate
evidencing the shares issuable upon exercise of the Option will be
imprinted with a legend which prohibits the transfer of the shares
unless they are registered or unless the Corporation receives an
opinion of counsel reasonably satisfactory to the Corporation that such
registration is not required. Optionee is aware of Rule 144 under the
Securities Act and that the Corporation, at the time he wishes to sell
the shares, may not be satisfying the current public information
requirements of Rule 144, and, in such case, Optionee would be
precluded from selling the securities under Rule 144. Optionee
understands that a stop transfer instruction will be in effect with
respect to transfer of shares consistent with the requirements of the
securities laws.
13. Miscellaneous. The Option and the Agreement shall be governed by
the laws of the State of Oklahoma. The headings in this Agreement are for
purposes of convenience and reference only, and shall not be deemed to
constitute a part hereof. Neither the Option nor any term hereof may be changed,
waived, discharged or terminated orally but only by an instrument in writing
signed by the Corporation and the Optionee. All notices and other communications
from the Corporation to the Optionee shall be personally delivered or mailed by
first-class registered or certified mail, postage prepaid, to the address
furnished to the Corporation in writing by the Optionee.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its officer thereunto duly authorized, and Optionee has hereunto set
his hand, all on the day and year first above written.
"CORPORATION"
PRE-PAID LEGAL SERVICES, INC.
By: /s/ HARLAND C. STONECIPHER
------------------------------
Name: Harland C. Stonecipher
-------------------------
Title: Chairman of the Board
------------------------
"OPTIONEE"
/s/ FRANCIS A. TARKENTON
------------------------------
Francis A. Tarkenton
<PAGE>
SUBSCRIPTION FORM
(To be signed only upon exercise of Option)
TO: PRE-PAID LEGAL SERVICES, INC.
The undersigned, __________________________, the holder of the attached
Option, hereby irrevocably elects to exercise the purchase right represented by
that Option for, and to purchase under that Option, ________________* shares of
Common Stock of Pre-Paid Legal Services, Inc. and herewith makes payment of $
___________ for those shares, and requests that the certificates for the shares
be issued in the name of and delivered to, the undersigned at the following
address:
Dated: ________________
(Signature must conform in all respects to
name of holder as specified on the face of
the attached Option)
* Insert here the number of shares called for on the face of the Option
(or, in the case of partial exercise, the portion as to which the
Option is being exercised).
Exhibit 11.1
<PAGE>
EXHIBIT 11.1
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
<TABLE>
Six Months Ended
June 30,
--------------------
<CAPTION>
<S> <C> <C>
1997 1996
PRIMARY EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) ................................... $ 8,329 $ 5,722
======= =======
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock ...... 21,935 21,089
Assumed dilutive conversion of preferred stock ........................... 113 155
Assumed exercise of options and warrants based on the treasury stock
method using average market price ...................................... 408 1,086
------- -------
Weighted average number of shares, as adjusted ........................... 22,456 22,330
======= =======
Earnings per share (a) ................................................... $ .37 $ .26
======= =======
FULLY DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) ................................... $ 8,329 $ 5,722
======= =======
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock ...... 21,935 21,089
Assumed dilutive conversion of preferred stock ........................... 113 155
Assumed exercise of options and warrants based on the treasury stock
method using closing market price if higher than average market price .. 479 1,163
Weighted average number of shares, as adjusted ........................... 22,527 22,407
------- -------
Earnings per share (a) ................................................... $ .37 $ .26
======= =======
</TABLE>
(a) These amounts agree with the related amounts in the statements of income.
<PAGE>
EXHIBIT 11.1
(continued)
PRE-PAID LEGAL SERVICES, INC.
Statement re Computation of Per Share Earnings
(In 000's except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
1997 1996
PRIMARY EARNINGS PER SHARE:
<S> <C> <C>
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) ................................... $ 4,351 $ 3,156
======= =======
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock ...... 22,071 21,259
Assumed dilutive conversion of preferred stock ........................... 108 152
Assumed exercise of options and warrants based on the treasury stock
method using average market price ...................................... 336 1,115
------- -------
Weighted average number of shares, as adjusted ........................... 22,515 22,526
======= =======
Earnings per share (a) ................................................... $ .19 $ .14
======= =======
FULLY DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
Earnings:
Income applicable to common shares (a) ................................... $ 4,351 $ 3,156
======= =======
Shares:
Weighted average shares outstanding, (net of 747 shares of treasury stock)
disregarding exercise of options or conversion of preferred stock ...... 22,071 21,259
Assumed dilutive conversion of preferred stock ........................... 108 152
Assumed exercise of options and warrants based on the treasury stock
method using closing market price if higher than average market price .. 408 1,115
------- -------
Weighted average number of shares, as adjusted ........................... 22,587 22,526
======= =======
Earnings per share (a) ................................................... $ .19 $ .14
======= =======
</TABLE>
(a) These amounts agree with the related amounts in the statements of income.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
June 30, 1997 financial statements contained in Form 10-Q and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 19,586
<SECURITIES> 0
<RECEIVABLES> 2,001
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,322
<PP&E> 2,925
<DEPRECIATION> 0
<TOTAL-ASSETS> 74,165
<CURRENT-LIABILITIES> 4,054
<BONDS> 0
0
37
<COMMON> 230
<OTHER-SE> 56,072
<TOTAL-LIABILITY-AND-EQUITY> 74,165
<SALES> 34,609
<TOTAL-REVENUES> 41,924
<CGS> 0
<TOTAL-COSTS> 29,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,824
<INCOME-TAX> 4,488
<INCOME-CONTINUING> 8,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,329
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
