PROXY STATEMENT
PRE-PAID LEGAL SERVICES, INC.
321 East Main Street
P. 0. Box 145
Ada, Oklahoma 74821-0145
1998 ANNUAL MEETING OF SHAREHOLDERS
The following information is furnished in connection with the 1998
Annual Meeting of Shareholders of PRE-PAID LEGAL SERVICES, INC. (the "Company")
to be held in the Liberty Room of the Company located at 321 East Main Street in
Ada, Oklahoma, on Friday, April 17, 1998, at 1:00 p.m., local time. This Proxy
Statement and accompanying materials will be mailed on or about March 13, 1998
to holders of record of Common Stock as of the record date.
The record date for determining shareholders entitled to notice of the
Annual Meeting and to vote has been established as the close of business on
February 27, 1998. On that date, the Company had 22,418,003 shares of Common
Stock, par value $.01 per share, outstanding and eligible to vote, exclusive of
treasury stock. Holders of record of the Company's Common Stock on the record
date will be entitled to one vote for each share held on all matters properly
brought before the Annual Meeting.
The enclosed proxy is being solicited by the Board of Directors of the
Company. All costs of soliciting proxies for the Annual Meeting will be borne by
the Company. In addition to use of the mails, proxies may be solicited by
telephone, telecopy or personal interview by directors, officers or other
regular employees of the Company. No additional compensation will be paid to
directors, officers or other regular employees for such services. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Common Stock beneficially owned
by others to forward to such beneficial owners. The Company will, upon request,
reimburse such persons for their reasonable expenses in forwarding proxy
materials to beneficial owners.
Any shareholder returning the accompanying proxy may revoke such proxy
at any time prior to its exercise by (a) giving written notice to the Company of
such revocation, (b) voting in person at the Annual Meeting, or (c) executing
and delivering to the Company a later dated proxy. Written revocations and later
dated proxies should be sent to PRE-PAID LEGAL SERVICES, INC., P. O. Box 145,
Ada, Oklahoma 74821-0145, Attention: Kathryn Walden, Secretary.
ELECTION OF DIRECTORS
The Board of Directors of the Company is divided into three classes as
nearly equal in size as possible, with the term of office of one class expiring
each year. Since the last Annual Meeting of Shareholders, one director of the
Company, Charles H. Walls, has passed away, and another, Francis A. Tarkenton,
has resigned from the Board, resulting in two vacancies in the Board of
Directors. In addition, pursuant to the Bylaws of the Company, the Board of
Directors has approved an increase in the number of authorized directors by one
additional member, for a total of eight directors. The Board of Directors has
nominated and proposes that the following three persons be elected to fill such
vacancies in the Board: John W. Hail, David A. Savula and Shirley A.
Stonecipher. If elected, Messrs. Hail and Savula will become members of the
class of directors whose term expires as of the Annual Meeting of Shareholders
for the year 2000 and Ms. Stonecipher will become a member of the class of
directors whose term expires as of the Annual Meeting of Shareholders for 2001.
In addition to the three nominees named above, the Board of Directors
has nominated and proposes that Peter K. Grunebaum and Randy Harp, each a
current director of the Company and a member of the class of directors whose
term expires as of the Annual Meeting of Shareholders for 1998, be re-elected
for three year terms as directors.
<PAGE>
The election of directors will require the affirmative vote of a
plurality of the shares of Common Stock voting in person or by proxy at the
Annual Meeting. All proxies received by the Board of Directors of the Company
will be voted, in the absence of instructions to the contrary, FOR the election
of John W. Hail, David A. Savula and Shirley A. Stonecipher and the re-election
of Peter K. Grunebaum and Randy Harp to the Board of Directors.
Should the nominees for election to the Board of Directors be unable to
serve for any reason, the Board of Directors may, unless the Board by resolution
provides for a lesser number of directors, designate substitute nominees in
which event all proxies received without instructions will be voted for the
election of such substitute nominees. However, to the best knowledge of the
Board of Directors of the Company, the named nominees will serve if elected.
The following is certain information about each director and nominee
for director of the Company:
Name Age Director Since Term Expires
- ---------------------- --- -------------- ------------
Peter K. Grunebaum 64 1980 1998
Randy Harp 42 1990 1998
Harland C. Stonecipher 59 1976 1999
Wilburn L. Smith 57 1997 1999
Kathleen S. Pinson 45 1990 2000
John W. Hail 67 * *
David A. Savula 50 * *
Shirley A. Stonecipher 57 * *
- --------------------
* Not applicable since the named nominee has not previously served as a director
of the Company.
Peter K. Grunebaum
Mr. Grunebaum is currently Managing Director of Fortrend International,
an investment firm headquartered in New York, New York, a position he has held
since 1989. He also serves as a director of Prime Succession, Inc.
Randy Harp
Mr. Harp was named Chief Financial Officer in March 1990 and Chief
Operating Officer in March 1996. Mr. Harp is a Certified Public Accountant.
Harland C. Stonecipher
Mr. Stonecipher has been the Chairman of the Board of Directors of the
Company since its organization in 1976. Mr. Stonecipher also served as Chief
Executive Officer until March 1996 and since February 1997. Prior to 1984 and
from May 1987 through January 1995, he also served as its 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 and as a director of
Advantage Marketing Systems, Inc. Mr. Stonecipher is employed pursuant to an
employment agreement which, unless sooner terminated, expires on June 30, 2003,
with the Company retaining the right to extend the agreement for up to ten
additional years.
Wilburn L. Smith
Mr. Smith was named Vice President of Marketing and Agency Director in
July 1990. Mr. Smith has been active in the marketing division of the Company
since 1980 and served as a director of the Company from March 1993 to October
1995. On April 14, 1997, Mr. Smith was appointed by the Board of Directors as
the Company's President and was elected by the Board of Directors to serve once
again as a director of the Company.
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 is a Certified Public Accountant.
John W. Hail
John W. Hail is the founder of Advantage Marketing Systems, Inc. and
has served as its Chief Executive Officer and Chairman of the Board of Directors
of the Company since its inception in June 1988. From July 1986 through May
1988, Mr. Hail served as Executive Vice President, Director and Agency Director
of the Company and also served as Chairman of the Board of Directors of TVC
Marketing, Inc., who was the exclusive marketing agent of the Company from April
1984 through September 1985.
David A. Savula
Mr. Savula has been active in the marketing division of the Company as
an independent contractor since 1992. Prior to his involvement with the Company,
Mr. Savula developed extensive multilevel marketing experience, both in the U.S.
as well as Canada with other multilevel marketing companies.
Shirley A. Stonecipher
Mrs. Stonecipher has been involved with the Company since its inception
in 1972 as an advisor to her husband, Harland C. Stonecipher. Mrs. Stonecipher
has attended most major Company-sponsored marketing rallies over the past 25
years and has been involved with certain specific marketing initiatives, such as
the First Ladies Club aimed at providing recognition for the wives of marketing
associates.
Board Meetings and Committees
The Board of Directors held four meetings during the year ended
December 31, 1997. During such year all directors attended at least 75% of the
meetings of the full Board and the committees on which they served.
The Board of Directors has established an Executive Committee
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 administered the Company's Stock
Option Plan until March 1997. However, since March 1997 the Stock Option Plan
has been administered by the full Board of Directors. 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 Audit Committee held three meetings
during 1997. The Board of Directors does not have standing nominating or
compensation committees.
Harland C. Stonecipher and Shirley A. Stonecipher are husband and wife.
No other family relationships exist among the directors, nominees for director
or executive officers of the Company.
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. Under the Company's
Stock Option Plan, each non-employee director also receives on March 1 of each
year, and each of the new non-employee director nominees will, if elected,
receive on the date of the Annual Meeting, options to purchase 10,000 shares of
Common Stock. These options are immediately exercisable as of the date of grant
as to one-fourth of the shares covered by the options and vest in additional
one-fourth increments on the following June 1st, September 1st and December 1st
in the year of grant, subject to continued service by the non-employee director
during such periods. Options granted to non-employee directors under the Stock
Option Plan have an exercise price equal to the closing price of the Common
Stock on the date of grant as reported by the American Stock Exchange and expire
five years from the date of grant.
On May 13, 1997, the Company granted to Francis A. Tarkenton, a
director of the Company at the time, 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 will become vested and fully exercisable
on May 13, 1998. 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. Mr. Tarkenton resigned from the Board of Directors effective
February 23, 1998 but will continue to engage in certain Company-related
marketing efforts. In connection with Mr. Tarkenton's resignation and in
recognition of Mr. Tarkenton's prior and anticipated future marketing efforts
for the Company, the Board of Directors approved the amendment of the options to
waive the requirement that Mr. Tarkenton remain a director of the Company
through the vesting date.
The Board of Directors recommends that the shareholders vote "FOR" the
election of John W. Hail, David A. Savula and Shirley A. Stonecipher and the
re-election of Peter K. Grunebaum and Randy Harp to the Board of Directors.
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Executive Officers
Name Position
- --------------------------- -------------------------------------
Harland C. Stonecipher Chairman of the Board of Directors and Chief
Executive Officer
Wilburn L. Smith President
Randy Harp Chief Operating Officer and Chief Financial
Officer
Kathleen S. Pinson Vice President and Controller
Each of the executive officers of the Company is also a director of the
Company. For descriptions of the business background and other information
concerning the executive officers, see "Election of Directors" above.
Executive Compensation
The following table sets forth the compensation paid by the Company and
its subsidiaries for services rendered during the twelve months ended December
31, 1997, 1996 and 1995 to the chief executive officer and to each other person
serving as an executive officer of the Company as of December 31, 1997 whose
compensation exceeded $100,000 during 1997. Such individuals are referred to
herein as the "named executive officers."
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus (1) Options Compensation (2)
- ----------------------------------- ----- --------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Harland C. Stonecipher (3)......... 1997 $157,755 $419,555 100,000 $12,811
Chairman of the Board and 1996 160,789 129,293 - 12,939
Chief Executive Officer 1995 157,755 99,107 - 13,500
Wilburn Smith (4).................. 1997 - 682,468 - 5,250
President 1996 - 615,219 - 3,881
1995 - 577,763 2,500 2,925
Randy Harp......................... 1997 107,169 20,000 50,000 3,900
Chief Operating Officer and 1996 102,461 - - 3,975
Chief Financial Officer 1995 101,112 - 50,000 2,600
Jack Mildren (5)................... 1997 25,962 54,162 - -
Former Chief Executive 1996 152,885 72,948 - 778
Officer and President 1995 138,461 5,625 250,000 -
</TABLE>
- ----------------
(1) Bonus to Mr. Stonecipher consists primarily of override commissions earned
by Mr. Stonecipher pursuant to his employment agreement with the Company of
$109,424, $75,990 and $54,183 during 1997, 1996 and 1995, respectively, and
override commissions earned by Mr. Stonecipher with respect to commissions
earned by PPL Agency, Inc., a Company affiliated insurance agency, of
$49,907, $49,496 and $44,924 during 1997, 1996 and 1995, respectively.
Additionally, Mr. Stonecipher received $259,830 during 1997 representing a
payment of $10 for each marketing associate who participated in the
Company's "Fast Start to Success" training program which commenced in
January 1997. No such payments were received in 1996 or 1995. See
"Executive Compensation and Other Information-Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" and "Certain
Relationships and Related Transactions."
Bonus to Mr. Smith consists of override commissions and other fees
paid with respect to commissions earned by and new sales associate
sponsorships within the Company's 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 legal service memberships and earn commissions from sales of
memberships. See "Certain Relationships and Related Transactions."
Bonus to Mr. Harp for 1997 consisted of a performance bonus based upon the
achievement by the Company of certain earnings per share goals.
Bonus to Mr. Mildren for 1997 consisted of commissions earned of $54,162 by
Mr. Mildren pursuant to his employment agreement with the Company. See
"Executive Compensation and Other Information-Employment Contracts and
Termination of Employment and Change-in-Control Arrangements."
(2) All Other Compensation of Mr. Stonecipher includes $6,501, $6,739 and
$6,958 for the years 1997, 1996 and 1995, 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 $6,310, $6,200 and
$6,542 for the years 1997, 1996 and 1995, respectively, representing vested
contributions by the Company to the Employee Stock Ownership and Thrift
Plan and Trust (the "ESOP").
All Other Compensation of Messrs. Smith, Harp and Mildren consists of
vested contributions by the Company to the ESOP.
(3) Mr. Stonecipher also served as Chief Executive Officer and President until
January 1995, and as Chief Executive Officer until March 1996. In February
1997, Mr. Stonecipher resumed his position as Chief Executive Officer when
Mr. Mildren resigned.
(4) Mr. Smith has been active in the marketing division of the Company since
1980 and served as a director of the Company from March 1993 to October
1995. On April 14, 1997, Mr. Smith was appointed by the Board of Directors
as the Company's President and was elected by the Board of Directors to
serve once again as a director of the Company.
(5) Mr. Mildren joined the Company as its President and a director in January
1995 and was appointed as Chief Executive Officer in March 1996. Mr.
Mildren resigned as President and Chief Executive Officer and director in
February 1997 at the expiration of his employment contract.
The following table contains information concerning the grant of stock
options during the year ended December 31, 1997 under the Company's Stock Option
Plan to each of the named executive officers who received option grants during
such year.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation For
Individual Grants Option Term (3)
------------------------------------------------------------------------------- ------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted (1) Year ($/Sh) (2) Date 5% 10%
- -------------------------- ------------ ------------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Harland C. Stonecipher 100,000 30.4% $14.25 04/14/2002 $394,000 $870,000
Randy Harp 50,000 15.2 14.25 04/14/2002 197,000 435,000
</TABLE>
- -----------------
(1) All options granted to the named executive officers during 1997 were
granted under the Company's Stock Option Plan. The exercise price of such
options is equal to 100% of the market price per share of the Common Stock
on the date of grant. The options were immediately exercisable as of the
date of grant as to one-fourth of the shares covered thereby and became
exercisable in additional one-fourth increments on June 1, September 1,
and December 1, 1997. The options expire if not exercised five years after
the date of grant.
(2) Exercise price of the options must be paid in cash or, if the Board of
Directors so permits, by tender of shares of Common Stock or other
property, or by a combination of such means of payment.
(3) Potential realizable value is the amount that would be realized upon
exercise by the named executive officer of the options immediately prior
to the expiration of their respective terms, assuming the specified
compound annual rates of appreciation of the Company's Common Stock over
the respective terms of the options. These amounts represent assumed rates
of appreciation only. Actual gains, if any, on stock option exercises
depend on the future performance of the Common Stock and overall market
conditions. There can be no assurances that the potential values reflected
in this table will be achieved.
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised In-the-Money
Options at Options at
December 31, 1997 December 31, 1997 (1)
-------------------------- --------------------------
Shares
Acquired Value
Name on Exercise Realized (2) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ------------- -------------- --------------- ----------------- -------------- ----------------
<S> <C> <C> <C>
Harland C. Stonecipher - $ - 100,000 - $ 1,993,750 -
Randy Harp 20,000 297,500 100,000 - 2,243,750 -
- ----------------------------
</TABLE>
(1) Value of unexercised in-the-money options at December 31, 1997 is
calculated based on the market price per share of Common Stock of $34.19
per share on December 31, 1997 less the option exercise price.
(2) Value realized is calculated based on the market price per share of Common
Stock of $15.25 on the date of exercise less the option exercise price.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company has an employment agreement with Mr. Stonecipher which
commenced in January 1993, and, unless sooner terminated, expires on June 30,
2003. Under the terms of the employment agreement, Mr. Stonecipher is to receive
compensation as determined by the Board of Directors but not less than $157,750
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 Shirley A. Stonecipher, Mr. Stonecipher's wife,
described below. If the Company terminates the employment agreement for any
reason (other than Mr. Stonecipher's death) or Mr. Stonecipher terminates the
agreement for certain specified events including a change of control of the
Company (as defined in the agreement), the Company is required to pay Mr.
Stonecipher a lump sum payment equal to the present value (using a 3% discount
rate) of the remaining salary and retirement benefits throughout the term of the
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 membership sales for the Company.
The amounts paid to Mr. Stonecipher under this agreement during the fiscal year
ended December 31, 1997 are reflected in the summary compensation table set
forth above. Mr. Stonecipher has deferred payments under this agreement of
$89,348 at December 31, 1997. Mr. Stonecipher also receives a portion of the
annualized commission revenue of PPL Agency, Inc., which is owned by Mr.
Stonecipher as a nominee for the Company. See "Certain Relationships and Related
Transactions." Such amounts paid to Mr. Stonecipher are also reflected in the
summary compensation table set forth above.
Commencing in January 1997, the Company implemented its "Fast Start to
Success" program pursuant to which electing marketing associates may participate
in Company-sponsored sales training programs, including use of an interactive
video and other training aides developed by the Company. The cost to each
marketing associate for participation in the program is $249. Mr. Stonecipher
receives a payment of $10 for each marketing associate who participates in the
program. Such amounts paid to Mr. Stonecipher in connection with the "Fast Start
to Success" program are reflected in the summary compensation table set forth
above.
In July 1984, the Company entered into a life insurance arrangement
with Shirley A. Stonecipher, Mr. Stonecipher's wife, whereby the Company agreed
to pay premiums on a life insurance policy covering Mr. Stonecipher. The face
amount of the policy is $600,000 and Mrs. Stonecipher is the owner and
beneficiary. Mrs. Stonecipher has an agreement with the Company whereby upon Mr.
Stonecipher's death, the proceeds of the policy will be paid to the Company in
an amount sufficient to reimburse premiums paid to date by the Company and any
supplemental retirement payments made pursuant to his employment contract. This
agreement is secured by a collateral assignment of the policy proceeds.
Pursuant to an employment agreement which expired in February 1997, Mr.
Mildren served as the Company's President and Chief Executive Officer and
received a base salary of $150,000 and an override commission equal to $.025 per
active membership for memberships written since January 1, 1995, a date which
approximates the date Mr. Mildren joined the Company, through February 1997, the
expiration of his employment contract. Override commissions will be paid for Mr.
Mildren's life on all memberships written during his employment. Mr. Mildren
resigned as President and Chief Executive Officer and director in February 1997
at the expiration of his employment contract.
Board of Director Interlocks and Insider Participation in Executive Compensation
Decisions
The Board of Directors of the Company is responsible for establishing
compensation of Harland C. Stonecipher, Chairman and Chief Executive Officer of
the Company. Mr. Stonecipher establishes the cash compensation of all other
executive officers. The Board of Directors does not have a standing compensation
committee. Since Mr. Stonecipher's cash compensation for 1997 was determined
pursuant to his employment agreement and other arrangements with the Company
approved by the Board of Directors prior to 1997, the Board of Directors did not
have any deliberations during 1997 relating to Mr. Stonecipher's cash
compensation for such year. However, during 1997, the Board of Directors
approved the grant of stock options to Mr. Stonecipher and to Randy Harp and
Kathleen S. Pinson, each executive officers and directors of the Company, for
the purchase of 100,000, 50,000 and 5,000 shares, respectively, under the
Company's Stock Option Plan. Messrs. Stonecipher and Harp and Ms. Pinson
participated in the deliberations of the Board of Directors with respect to such
stock option grants.
Report On Executive Compensation
As previously indicated, the Board of Directors of the Company (the
"Board") is responsible for establishing compensation of the Chairman. The
Chairman is responsible for establishing the cash compensation of all other
executive officers including, as applicable, the negotiation of employment
contracts with executive officers. The Board does not have a standing
compensation committee. The Company's compensation of executives is established
to provide reasonable base salaries and other compensation in the form of cash
and equity incentive compensation opportunities that are linked to performance
of the Company and increases in shareholder value.
The base salaries of Mr. Stonecipher and Mr. Mildren during 1997 were
as provided in their employment agreements with the Company entered into in 1993
and 1995, respectively. The principal terms of these employment agreements are
described elsewhere herein. See "Executive Compensation and Other Information -
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements." The levels of base salary for Mr. Stonecipher and Mr. Mildren in
the employment agreements were determined through negotiations with the
respective executive officers and the base salaries of the other executive
officers of the Company for 1997 were determined by the Chairman based upon his
assessment of the respective executive officer's performance and potential
contribution to the Company's financial and operational objectives.
Pursuant to his employment agreement, Mr. Stonecipher receives a
monthly override commission of $0.025 per active membership, subject to certain
limitations, and a portion of the annualized commission revenue of PPL Agency,
Inc., which is owned by Mr. Stonecipher as a nominee of the Company. Pursuant to
his employment agreement, Mr. Mildren receives a monthly override commission of
$0.025 per active membership written from January 1, 1995, a date which
approximates the date Mr. Mildren joined the Company, through February 1997, the
expiration of his employment contract. During 1997, Mr. Stonecipher and Mr.
Mildren received $159,331 and $54,162, respectively, pursuant to these
commission-based incentive compensation arrangements. These arrangements foster
the goals of the Company's compensation policy by linking a significant portion
of the respective executive officer's annual compensation to the level of
revenues derived from active memberships, thereby creating strong financial
incentives to such executive officers for the continued growth of the Company's
membership base. During 1997, new membership sales increased 46% to 283,723
compared to 194,843 during 1996, and active memberships in force of 425,381 at
December 31, 1997 increased 45% compared to 294,151 memberships in force at
December 31, 1996. The Company has achieved increased levels of total active
memberships in force each year since 1992.
During 1997, the Company implemented its "Fast Start to Success"
program. The "Fast Start to Success" program is a Company-sponsored classroom
and field training program for the Company's marketing associates that utilizes
interactive video and other training aides developed by the Company and is
designed to increase new memberships sold and new sales associates recruited per
participating associate. Participating associates are required to pay the
Company a one-time training fee to offset the Company's direct and indirect
costs incurred in developing and maintaining the program. Mr. Stonecipher
receives a payment from the Company of $10 for each marketing associate who
participates in the "Fast Start to Success" program. Such payments totaled
$259,830 during 1997. During such year, marketing associates who participated in
the "Fast Start to Success" program sold new memberships at a rate 6.1 times
greater and recruited new associates at a rate 4.1 times greater than associates
who did not participate in the program. Mr. Stonecipher was instrumental in the
conception and development of the program, which the Board believes has enhanced
the Company's marketing efforts and contributed to the growth of new membership
sales during 1997. Mr. Stonecipher's compensation in connection with the program
represents another element in the Company's incentive compensation policy
designed to link significant portions of the chief executive officer's
compensation with growth in the Company's membership base.
The Company maintains a Stock Option Plan (the "Plan") pursuant to
which the Board may grant options to purchase Common Stock to directors and
employees of the Company, including the executive officers. The exercise price
of options granted under the Plan may not be less than the fair market value per
share of Common Stock on the date of grant. In authorizing option awards under
the Plan to executive officers, the Board considers various factors including
the recommendation of the Chairman, the relative responsibilities of the
optionee, the Board's subjective evaluation of the optionee's performance, and
the optionee's relative equity interest in the Company in the form of stock and
options. The Board granted options during 1997 to Mr. Stonecipher and Mr. Harp
of 100,000 shares and 50,000 shares, respectively. The Board considers stock
options to be an important element of the Company's incentive compensation
policies and anticipates that additional options will be granted to certain
executive officers during 1998.
The preceding report is presented by each of the current members of the
Board of Directors.
Harland C. Stonecipher Wilburn L. Smith Peter K. Grunebaum
Randy Harp Kathleen S. Pinson
Shareholder Return Performance Graph
The following graph compares the cumulative total shareholder returns
of the Company's Common Stock during the seven years ended December 31, 1997
with the cumulative total shareholder returns of the Russell 2000 Index and a
selected peer group. The peer group consists of companies principally engaged in
activities within the Standard Industrial Classification Code applicable to the
activities of the Company (Insurance Carriers Not Elsewhere Classified) and
includes the following companies: American Annuity Group, Inc.; E. W. Blanch
Holdings, Inc.; Enhance Financial Services Group, Inc.; Financial Security
Assurance Holdings LTD.; Foundation Health Systems, Inc. Class A; Hallmark
Financial Services, Inc.; and Horace Mann Educators Corporation. The Company has
selected this peer group primarily because there are no comparable issuers with
publicly traded securities that are engaged principally in the development,
underwriting and marketing of prepaid legal service plans. The comparison
assumes an investment of $100 on December 31, 1990 in each of the Company's
Common Stock, the Russell 2000 Index and the peer group and that any dividends
were reinvested.
Comparison of Cumulative Total Return of Company,
Russell 2000 Index and Peer Group
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
=============================================================================================================
FISCAL YEAR ENDING
COMPANY 12/31/90 12/31/91 12/31/92 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRE-PAID LEGAL SVCS INC 100.00 320.00 400.00 540.00 640.00 3,320.00 5,840.00 10,940.00
PEER GROUP 100.00 139.06 176.14 175.22 193.33 246.04 287.87 421.86
RUSSELL 2000 100.00 146.05 172.94 205.64 201.91 259.33 302.39 369.95
=============================================================================================================
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of shares of Common Stock of the Company by each person
(other than directors and executive officers of the Company) known by the
Company to be the beneficial owner of more than five percent of the issued and
outstanding Common Stock.
Security Ownership of Certain Beneficial Owners
Beneficial Ownership
-----------------------
Number Percent
Name and Address of Beneficial Owner of Shares of Class
- ---------------------------------------- ----------- -----------
Thomas W. Smith
323 Railroad Avenue
Greenwich, CT 06830.......................... 2,031,950 (1) 9.1
Thomas N. Tryforos
323 Railroad Avenue
Greenwich, CT 06830.......................... 1,837,500 (1) 8.2
- ---------------------
(1) Included in the shares of Common Stock indicated as beneficially owned by
Thomas W. Smith ("Smith") and Thomas N. Tryforos ("Tryforos") are 1,826,000
shares as to which they have shared voting and shared dispositive power.
These shares are beneficially owned by Smith and Tryforos in their
respective capacities as investment managers of certain managed accounts
and are included in the respective beneficial ownership totals of both
Smith and Tryforos. In addition, Smith beneficially owns 205,950 shares of
Common Stock as to which he has sole voting and dispositive power and
Tryforos beneficially owns 11,500 shares of Common Stock as to which he has
sole voting and dispositive power. This information is based on a Schedule
13D and amendments thereto filed by Smith and Tryforos with the Securities
and Exchange Commission.
The following table sets forth certain information concerning the
beneficial ownership of shares of Common Stock of the Company as of February 27,
1998 by (a) each director and nominee for director of the Company, (b) each
executive officer of the Company, and (c) all of the directors and executive
officers of the Company as a group.
<PAGE>
Security Ownership of Directors and Executive Officers
Beneficial Ownership (1)
------------------------------
Number Percent
Name of Director or Executive Officer of Shares of Class
--------------------------------------- ---------------- ------------
Harland C. Stonecipher
321 East Main Street
Ada, Oklahoma 74820...................... 1,193,035 (2) (3) 5.3
Randy Harp................................... 130,201 (4) *
Wilburn L. Smith............................. 81,900 (5) *
Kathleen S. Pinson........................... 58,548 (6) *
Peter K. Grunebaum........................... 38,100 (7) *
John W. Hail................................. 618 (8) *
David A. Savula.............................. 40,278 *
Shirley A. Stonecipher....................... 1,076,025 (2) (9) 4.8
All directors and executive officers as
a group (5 persons)......................... 1,501,784 (10) 6.2
- ---------------------
* Less than 1%.
(1) Unless otherwise indicated in the footnotes to the table and subject to
community property laws where applicable, each of the shareholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. The percentage of ownership for each
person is calculated in accordance with rules of the Securities and
Exchange Commission without regard to shares of Common Stock issuable upon
exercise of outstanding stock options, except that any shares a person is
deemed to own by having a right to acquire by exercise of an option are
considered outstanding solely for purposes of calculating such person's
percentage ownership.
(2) Harland C. Stonecipher and Shirley A. Stonecipher are husband and wife.
Included in the shares of Common Stock indicated as beneficially owned by
Mr. and Mrs. Stonecipher are 1,076,025 shares as to which they have shared
voting and shared dispositive power.
(3) Includes 17,010 shares owned under the ESOP as to which Mr. Stonecipher has
sole voting power, but shared dispositive power, and 100,000 shares
issuable upon exercise of outstanding options.
(4) Includes 15,201 shares owned under the ESOP as to which Mr. Harp has sole
voting power, but shared dispositive power, and 100,000 shares issuable
upon exercise of outstanding options.
(5) Includes 32,934 shares owned under the ESOP as to which Mr. Smith has
sole voting power, but shared dispositive power.
(6) Includes 17,753 shares owned under the ESOP as to which Ms. Pinson has sole
voting power, but shared dispositive power, and 17,500 shares issuable upon
the exercise of outstanding options. Also, includes 2,388 shares owned
under the ESOP by Ms. Pinson's husband, also an employee of the Company, as
to which he has sole voting power, but shared dispositive power. Ms. Pinson
disclaims beneficial ownership of shares that are owned by her husband.
(7) Includes 27,500 shares issuable upon exercise of outstanding options.
(8) Includes 493 shares owned by a corporation that Mr. Hail controls.
(9) Does not include the shares beneficially owned by Mr. Stonecipher described
in Note (3) above as to which Mrs. Stonecipher shares neither voting nor
dispositive power, and Mrs. Stonecipher disclaims beneficial ownership of
such shares.
(10) Includes 245,000 shares issuable upon exercise of outstanding options and
85,286 shares owned under the ESOP as to which the respective executive
officers and directors have sole voting power, but shared dispositive
power.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Harland C. Stonecipher, Chairman of the Board of Directors and Chief
Executive Officer of the Company, 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 combined basis. Agency earned
commissions, net of amounts paid directly to its agents by the underwriter,
during 1997 and 1996 of $110,000 and $130,000, respectively, through its sales
of insurance products of an unaffiliated company. Annual management fees paid to
the Company in 1997 and 1996 were $72,000 for each year. Agency had a net loss
of $12,500 for the year ended December 31, 1997 and net income for the year
ended December 31, 1996 of $6,700, after the payment of commissions to Mr.
Stonecipher of $49,906 and $49,496, respectively.
Mr. Stonecipher and Shirley A. Stonecipher own Stonecipher Aviation LLC
("SA"). The Company has agreed to reimburse SA for certain expenses pertaining
to trips made by Company personnel for Company business purposes using aircraft
owned by SA. Such reimbursement represents the pro rata portion of direct
operating expenses, such as fuel, maintenance, pilot fees and landing fees,
incurred in connection with such aircraft based on the relative number of
flights taken for Company business purposes versus the number of other flights
during the applicable period. No reimbursement is made for depreciation, capital
expenditures or improvements relating to such aircraft. During 1997, the Company
paid $192,000 to SA as reimbursement for such transportation expenses.
Wilburn L. Smith, President and a director of the Company, has loans
from the Company made in December 1992 and December 1996. The largest aggregate
balance of the loans during the year ended December 31, 1997 was $296,000. The
outstanding balance of the loans as of December 31, 1997 was $296,000. The loans
bear annual interest at the rate of 3% in excess of the prime rate, adjusted on
January 1 of each year, and are secured by Mr. Smith's commissions from the
Company. Mr. Smith also 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 legal service memberships and which earn commissions from sales of
memberships. These entities earned commissions, net of amounts passed through as
commissions to their sales agents, during 1997 and 1996 of $49,000 and $54,000,
respectively.
John W. Hail, a nominee for director of the Company, served as
Executive Vice President, Director and Agency Director of the Company from July
1986 through May 1988 and also served as Chairman of the Board of Directors of
TVC Marketing, Inc., which was the exclusive marketing agent of the Company from
April 1984 through September 1985. Pursuant to agreements between Mr. Hail and
the Company entered into during the period in which Mr. Hail was an executive
officer of the Company, Mr. Hail receives override commissions from renewals of
certain memberships initially sold by the Company during such period. During
1997 and 1996, such override commissions on renewals totaled $99,938 and
$68,521, respectively. Mr. Hail also owns interests ranging from 12% to 100% in
corporations not currently affiliated with the Company, including TVC Marketing,
Inc., but which were engaged in the marketing of the Company's legal service
memberships and which earn renewal commissions from memberships previously sold.
These entities earned renewal commissions, net of amounts passed through as
commissions to their sales agents, during 1997 and 1996 of $293,932 and
$283,686, respectively.
David A. Savula, a nominee for director of the Company, is actively
engaged as an independent contractor in the marketing of the Company's legal
service memberships. During 1997 and 1996, Mr. Savula received from the Company
$594,081 and $712,744, respectively, pursuant to an agreement with the Company
providing for the payment to Mr. Savula of override commissions and other fees
with respect to commissions earned by and new sales associate sponsorships
within the Company's multi-level marketing sales force.
COMPLIANCE WITH SECTION 16 REPORTING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934 requires directors
and executive officers of the Company and persons who beneficially own more than
10% of the Company's Common Stock to file reports of ownership and changes in
ownership of the Company's Common Stock with the Securities and Exchange
Commission. The Company is required to disclose delinquent filings of reports by
such persons during 1997.
Based on a review of the copies of such reports and amendments thereto
received by the Company, or written representations that no filings were
required, the Company believes that, except as described below, during 1997, all
Section 16(a) filing requirements applicable to its executive officers,
directors and 10% shareholders were met. During 1997, Jack Mildren was
delinquent in the filing of one Form 4 relating to seven transactions. Such Form
4 was electronically filed on a timely basis via the Securities and Exchange
Commission's EDGAR filing system but was not accepted due to an invalid EDGAR
filing tag. The filing tag was corrected and the Form 4 was re-filed and
accepted on the following day.
VOTING
Directors will be elected by a plurality of the votes of the shares
present in person or represented by proxy at the Annual Meeting. All other
matters properly brought before the Annual Meeting will be decided by a majority
of the votes cast on the matter, unless otherwise required by law.
Shares represented by proxies which are marked "withhold authority"
with respect to the election of any one or more nominee for election as director
will be counted for purposes of determining the number of shares represented by
proxy at the Annual Meeting. However, because directors are elected by a
plurality rather than a majority of the shares present in person or represented
by proxy at the Annual Meeting, proxies marked "withhold authority" with respect
to any one or more nominee will not affect the outcome of the nominee's election
unless the nominee receives no affirmative votes or unless other candidates are
nominated for election as directors.
Shares represented by limited proxies will be treated as represented at
the meeting only as to such matter or matters for which authority is granted in
the limited proxy. Shares represented by proxies returned by brokers where the
brokers' discretionary authority is limited by stock exchange rules will be
treated as represented at the Annual Meeting only as to such matter or matters
voted on in the proxies.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company engaged Deloitte & Touche LLP as its independent
accountants in September 1994. Deloitte & Touche LLP served as the Company's
independent accountants for the year ended December 31, 1997. Representatives of
Deloitte & Touche LLP are expected to be present at the Annual Meeting, with the
opportunity to make a statement if they desire to do so, and will be available
to respond to appropriate questions.
ANNUAL REPORT TO SHAREHOLDERS
The Company's Annual Report to Shareholders for the year ended December
31, 1997, including audited financial statements, accompanies this Proxy
Statement. The Annual Report is not incorporated by reference into this Proxy
Statement or deemed to be a part of the materials for the solicitation of
proxies.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 filed with the Securities and Exchange Commission is available
without charge to any shareholder of the Company who requests a copy in writing
from the Company, Attn.: Janice Stinson, Investor Relations, P. O. Box 145, Ada,
Oklahoma 74821-0145.
PROPOSALS OF SHAREHOLDERS
The Board of Directors will consider properly presented proposals of
shareholders intended to be presented for action at the Annual Meeting of
Shareholders. Such proposals must comply with the applicable requirements of the
Securities and Exchange Commission and the Company's bylaws. Under the Company's
bylaws, a notice of intent of a shareholder to bring any matter before a meeting
shall be made in writing and received by the Secretary of the Company not more
than 150 days and not less than 90 days in advance of the annual meeting or, in
the event of a special meeting of shareholders, such notice shall be received by
the Secretary of the Company not later than the close of the fifteenth day
following the day on which notice of the meeting is first mailed to
shareholders. Every such notice by a shareholder shall set forth: (a) the name
and address of the shareholder who intends to bring up any matter; (b) a
representation that the shareholder is a registered holder of the Company's
voting stock and intends to appear in person or by proxy at the meeting to bring
up the matter specified in the notice; (c) with respect to notice of an intent
to make a nomination, a description of all understandings among the shareholder
and each nominee and any other person (naming such person or persons) pursuant
to which the nomination or nominations are to be made by the shareholder and
such other information regarding each nominee proposed by the shareholder as
would have been required to be included in a proxy statement filed pursuant to
the proxy rules of the Securities and Exchange Commission had each nominee been
nominated by the Board of Directors of the Company; and (d) with respect to
notice of an intent to bring up any other matter, a description of the matter,
and any material interest of the shareholder in the matter. Notice of intent to
make a nomination shall be accompanied by the written consent of each nominee to
serve as a director of the Company, if elected. According to the rules of the
Securities and Exchange Commission and the Company's bylaws, in order for a
shareholder proposal to be included in the Company's Proxy Statement relating to
the 1999 Annual Meeting of Shareholders, a written proposal complying with the
requirements established by the Securities and Exchange Commission and the above
requirements must be received by the Secretary of the Company at P. O. Box 145,
Ada, Oklahoma 74821-0145, no later than November 14, 1998.
OTHER MATTERS
The Board of Directors of the Company does not know of any other
matters to be presented for action at the Annual Meeting other than those listed
in the Notice of Meeting and referred to herein. If any other matters properly
come before the Annual Meeting or any adjournment thereof, it is intended that
the proxy solicited hereby be voted as to any such matter in accordance with the
recommendations of the Board of Directors of the Company.
