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, 1998
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
--------------------------------------------------------------
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)
(580) 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 14, 1998:
Common Stock $.01 par value 22,447,017
<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,
1998 1997
---------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents............................ $ 17,466 $ 21,803
Held-to-maturity investments - current portion....... 3,000 4,242
Accrued membership income............................ 2,774 2,399
Commission advances - current portion................ 18,539 15,705
-------- --------
Total current assets............................... 41,779 44,149
Held-to-maturity investments........................... 13,076 650
Investments pledged.................................... 2,922 2,772
Commission advances, net............................... 47,499 38,038
Property and equipment, net............................ 3,863 3,594
Other.................................................. 3,409 2,709
-------- --------
Total assets....................................... $112,548 $ 91,912
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits................................... $ 3,179 $ 2,649
Accounts payable and accrued expenses................. 2,720 2,281
-------- --------
Total current liabilities........................... 5,899 4,930
Deferred income taxes.................................. 22,906 16,471
-------- --------
Total liabilities................................... 28,805 21,401
-------- --------
Stockholders' equity:
Preferred stock, $1 par value; authorized 400
shares; issued and outstanding as follows:
$3.00 Cumulative Convertible Preferred Stock, 3
shares authorized, issued and outstanding at
June 30, 1998 and December 31, 1997;
liquidation value of $55 at June 30, 1998 and
December 31, 1997.................................. 3 3
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, 23
shares authorized, issued and outstanding at
June 30, 1998 and December 31, 1997; liquidation
value of $304 at June 30, 1998 and
December 31, 1997.................................. 23 23
Common stock, $.01 par value; 100,000 shares authorized;
23,189 and 23,151 issued at June 30, 1998 and
December 31, 1997.................................. 232 232
Capital in excess of par value......................... 47,979 47,303
Retained earnings...................................... 37,683 25,127
Less: Treasury stock at cost; 747 shares............... (2,177) (2,177)
-------- --------
Total stockholders' equity............................ 83,743 70,511
-------- --------
Total liabilities and stockholders' equity........... $112,548 $ 91,912
======== ========
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,
----------------------
1998 1997
---------- ----------
Revenues:
Membership premiums................................ $ 50,338 $ 34,609
Associate services................................. 7,717 5,635
Interest income.................................... 1,038 745
Other.............................................. 1,239 935
--------- ---------
60,332 41,924
--------- ---------
Costs and expenses:
Membership benefits................................ 16,596 11,634
Commissions........................................ 10,877 7,570
General and administrative......................... 5,606 3,983
Associate services and direct marketing............ 7,212 5,100
Depreciation....................................... 414 325
Premium taxes...................................... 631 488
--------- ---------
41,336 29,100
--------- ---------
Income before income taxes........................... 18,996 12,824
Provision for income taxes........................... 6,435 4,488
--------- ---------
Net income........................................... 12,561 8,336
Less dividends on preferred shares................... 5 7
--------- ---------
Net income applicable to common stockholders......... $ 12,556 $ 8,329
========= =========
Basic earnings per common share...................... $ .56 $ .38
========= =========
Diluted earnings per common share.................... $ .55 $ .37
========= =========
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,
---------------------
1998 1997
---------- ---------
Revenues:
Membership premiums................................ $ 26,385 $ 18,390
Associate services................................. 3,986 2,935
Interest income.................................... 537 364
Other.............................................. 627 510
-------- --------
31,535 22,199
-------- --------
Costs and expenses:
Membership benefits................................ 8,617 6,187
Commissions........................................ 5,780 4,087
General and administrative......................... 2,945 2,095
Associate services and direct marketing............ 3,536 2,811
Depreciation....................................... 209 164
Premium taxes...................................... 266 155
-------- --------
21,353 15,499
-------- --------
Income before income taxes........................... 10,182 6,700
Provision for income taxes........................... 3,457 2,345
-------- --------
Net income........................................... 6,725 4,355
Less dividends on preferred shares................... 3 4
-------- --------
Net income applicable to common stockholders......... $ 6,722 $ 4,351
======== ========
Basic earnings per common share...................... $ .30 $ .20
======== ========
Diluted earnings per common share.................... $ .29 $ .19
======== ========
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,
----------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net income............................................. $ 12,561 $ 8,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes.................. 6,435 4,488
Depreciation and amortization........................ 414 325
Increase in accrued membership income................ (375) (291)
Increase in commission advances...................... (12,295) (10,357)
Increase in other assets............................. (700) (74)
Increase in membership benefits...................... 530 472
Increase in accounts payable and accrued expenses.... 439 808
-------- --------
Net cash provided by operating activities........ 7,009 3,707
-------- --------
Cash flows from investing activities:
Additions to property and equipment.................. (683) (295)
Purchases of investments............................. (13,059) (1,301)
Maturities of investments............................ 1,725 115
-------- --------
Net cash used in investing activities............ (12,017) (1,481)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock................... 676 2,536
Dividends paid on preferred stock.................... (5) (7)
-------- --------
Net cash provided by financing activities........ 671 2,529
-------- --------
Net (decrease) increase in cash and cash equivalents... (4,337) 4,755
Cash and cash equivalents at beginning of period....... 21,803 14,831
-------- --------
Cash and cash equivalents at end of period............. $ 17,466 $ 19,586
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest............................... $ - $ 6
======== ========
Cash paid for income taxes........................... $ - $ -
======== ========
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, 1998, and the related
statements of income for the three-month and six-month periods ended June 30,
1998 and 1997 and the statements of cash flows for the six-month periods ended
June 30, 1998 and 1997 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 1997 Annual Report on Form 10-K.
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.
New Accounting Standards
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. Adoption of this Statement effective January
1, 1998 did not affect the Company's financial statement presentation.
Statement of Financial Accounting Standards 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131") was issued in
June 1997. This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131, effective for fiscal years
beginning after December 15, 1997, requires comparative information for previous
years to be restated to comply with SFAS 131's reporting requirements. The
Company currently does not expect adoption of this Statement to have a material
effect on financial statement presentation or related footnote disclosures. SFAS
131 is not effective for interim financial statements in the initial year of its
application.
Statement of Financial Accounting Standards 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") was issued in June
1998. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. This Statement applies to all entities
and is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. This Statement should not be applied retroactively to financial
statements of prior periods. The Company believes that it holds no derivative
instruments at June 30, 1998.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
- --------------------------
All statements in this report concerning the Company other than purely
historical information, including, but not limited to, statements relating to
the Company's future plans and objectives, expected operating results and
assumptions relating to future performance constitute "Forward-Looking
Statements" within the meaning of Section 21E of the Securities Exchange Act of
1934 and are based on the Company's historical operating trends and financial
condition as of June 30, 1998 and other information currently available to
management. The Company cautions that the Forward-Looking Statements are subject
to all the risks and uncertainties incident to its business, including but not
limited to risks relating to the marketing of its memberships, membership
persistency, regulation and competition risks and the risk relating to the
continued active participation of its principal executive officer, Harland C.
Stonecipher. Moreover, the Company may make acquisitions or dispositions of
assets or businesses, enter into new marketing arrangements or enter into
financing transactions. None of these can be predicted with certainty and,
accordingly, are not taken into consideration in any of the Forward-Looking
Statements made herein. For all of the foregoing reasons, actual results may
vary materially from the Forward-Looking Statements.
Results of Operations
First Six Months of 1998 Compared to First Six Months of 1997
- -------------------------------------------------------------
The Company reported net income applicable to common shares of $12.6
million, or $.55 per diluted common share, for the six months ended June 30,
1998, up 51% from net income applicable to common shares of $8.3 million, or
$.37 per diluted common share, for the same period of 1997. The increase in the
net income applicable to common shares for the 1998 period is primarily the
result of increases in every revenue category for 1998 as compared to 1997.
Membership premiums totaled $50.3 million during the six months ended
June 30, 1998 compared to $34.6 million for the same period of 1997, an increase
of 45%. Membership premiums and their impact on total revenues in any period are
determined directly by the number of active memberships in force during any such
period. The active memberships in force are determined by both the number of new
memberships sold in any period together with the persistency, or renewal rate,
of existing memberships. New membership sales increased 33% during the six
months ended June 30, 1998 to 177,429 from 133,607 during the comparable period
of 1997. At June 30, 1998, there were 507,365 active memberships in force
compared to 359,578 at June 30, 1997. Additionally, the average annual premium
per membership has increased from $221 for all memberships in force at June 30,
1997 to $226 for all memberships in force at June 30, 1998, a 2.3% increase, as
a result of a higher portion of active memberships containing the additional
pre-trial hours benefit at an additional cost to the member together with
increased sales of the Small Business Legal Defense plan.
Associate services revenue increased 37% from $5.6 million for the
first six months of 1997 to $7.7 million during the same period of 1998
primarily as a result of Fast Start which resulted in the Company receiving
training fees of approximately $3.9 million during the first six months of 1998
compared to $2.6 million during the first six months of 1997. The 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.
Fast Start requires a training fee of $184 per new associate 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 $3.9 million in training fees was
comprised of $184 from each of approximately 21,200 new sales associates who
elected to participate in Fast Start during the first six months of 1998. New
associates enrolled during the first six months of 1998 were 30,710 compared to
29,623 for the same period of 1997, an increase of 4%. The Company believes the
slow down in the number of associates recruited is primarily attributable to the
increased costs associated with the Fast Start program. However, while the
number of new associates increased only 4% during 1998, the number of new
memberships sold, at least partially as a result of the Fast Start program,
increased 33%. 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 for the six-month period ended June 30, 1998 increased
39% to $1.0 million from $745,000 for the comparable period of 1997. Interest
income increased as a result of increases in the average investments
outstanding. At June 30, 1998 the Company reported $36.5 million in cash and
investments compared to $25.8 million at June 30, 1997.
Primarily as a result of the increase in membership premiums, total
revenues increased to $60.3 million for the six month period June 30, 1998 from
$41.9 million during the comparable period of 1997, an increase of 44%.
Membership benefits totaled $16.6 million for the six month period
ended June 30, 1998 compared to $11.6 million for same period of 1997, and
represented 33% and 34% of membership premiums for 1998 and 1997, respectively.
This loss ratio (membership benefits as a percentage of membership premiums)
should remain near 35% as the portion of active memberships that provide for a
capitated benefit continues to increase.
Commission expense was $10.9 million for the six months ended June 30,
1998 compared to $7.6 million for the same period of 1997, and represented 22%
of membership premiums for both 1998 and 1997. Commission expense, as a
percentage of membership premiums, should remain at or near these levels in
future periods based on the Company's current commission structure.
General and administrative expenses during the 1998 and 1997 six-month
periods were $5.6 million and $4.0 million, respectively, and represented 11% of
membership premiums for such periods. This trend of gradual increases in the
total dollar amount of these expenses but consistency when expressed as a
percentage of membership premiums should continue and such percentages should
remain at or near these levels in future periods.
Associate services and direct marketing expenses increased to $7.2
million for the first six months of 1998 from $5.1 million for the same period
of 1997 primarily as a result of approximately $3.1 million in Fast Start
training bonuses incurred, additional costs of supplies due to increased
purchases by associates and higher staffing requirements. These expenses also
include the costs of providing associate services and marketing costs other than
commissions that are directly associated with new membership sales.
Due to property and equipment additions during 1998 and 1997,
depreciation increased from $325,000 during the first six months of 1997 to
$414,000 for the first six months of 1998. Premium taxes increased to $631,000
for the first six months of 1998 from $488,000 for the same period of 1997.
The Company's expense ratio, which represents commissions, general and
administrative expenses and premium taxes as a percentage of membership
premiums, was 34% for the first six months of 1998 compared to 35% for the same
period of 1997 resulting in a combined loss and expense ratio of 67% for the
first six months of 1998 compared to 68% for the same period of 1997. 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 $6.4 million
(34% of pretax income) for the first six months of 1998 compared to $4.5 million
(35% of pretax income) for the same period of 1997. The Company has established
a valuation allowance for the portion of its deferred tax asset that the Company
believes more likely than not will not be realized. Historically, the Company
has concluded that it is unlikely it will generate sufficient taxable income to
realize the benefits from its pre-1996 NOLs and certain other carryforwards
before they expire, primarily as a result of future tax deductions attributable
to expected levels of commissions to be paid on new membership sales. Operating
results for the six months ended June 30, 1998 indicate that there is an
increasing possibility that the Company may have taxable income for fiscal 1998.
There are a large number of variables that will effect the determination of
taxable income, and the Company does not have the ability to definitely predict
whether or not it will have taxable income for fiscal 1998 until later in the
current year. Should the Company have taxable income for 1998, the Company's tax
expense for 1998 would be reduced to reflect any actual or anticipated future
utilization of deferred tax benefits through reduction in the current valuation
allowance.
Dividends paid on outstanding preferred stock decreased to $5,000 for
the first six months of 1998 from $7,000 for the same period of 1997, and such
reduction is attributable to the conversion of shares of $3.00 Cumulative
Convertible Preferred Stock into common stock.
Second Quarter of 1998 Compared to the Second Quarter of 1997
- -------------------------------------------------------------
The results of operations in the second quarter of 1998, compared to
the second quarter of 1997, reflect increases in revenues and expenses primarily
as a result of the same factors discussed in the comparison of the first six
months of 1998 to the first six months of 1997.
Total revenues increased 42%, or approximately $9.3 million, to $31.5
million in the second quarter of 1998 compared to $22.2 million in the second
quarter of 1997, primarily as a result of increases in membership premiums. The
membership premium increase of 43% primarily resulted from an increase in the
number of average active memberships during the second quarter of 1998 compared
to the similar period in 1997.
Membership benefits totaled $8.6 million in the 1998 second quarter
compared to $6.2 million in the 1997 second quarter and resulted in a loss ratio
of 33% and 34%, respectively. The Company's expense ratio was 34% for the second
quarter of 1998 and 1997, respectively. This resulted in a combined loss and
expense ratio of 67% and 68%, respectively. The combined ratio does not measure
total profitability because it does not taken into account all revenues and
expenses.
The above factors resulted in a 1998 second quarter net income
applicable to common shares of $6.7 million, or $.29 per diluted common share,
compared to $4.4 million, or $.19 per diluted common share, for the second
quarter of 1997.
Liquidity and Capital Resources
- -------------------------------
General
Consolidated net cash provided by operating activities was $7.0 million
for the first six months of 1998 compared to of $3.7 million for the 1997
period. The increase of $3.3 million in cash provided by operating activities
during the first six months of 1998 compared to the same period of 1997 resulted
primarily from an increase in net income of $4.2 million, an increase in
deferred income taxes of $2.0 million, reduced by increases in other assets of
$600,000 and increases in commission advances of $2.0 million related to the
increase in new membership enrollments.
The Company had a consolidated working capital surplus of $35.9 million
at June 30, 1998, a decrease of $3.3 million compared to a consolidated working
capital of $39.2 million at December 31, 1997 and an increase of $5.6 million
compared to June 30, 1997 working capital of $30.3 million. The $3.3 million
decrease in working capital during the first six months of 1998 was primarily
the result of decreases in cash and cash equivalents and investments of $5.6
million due to the management's decision to move a portion of these current
assets into longer term investments with higher yields. This movement of current
investments to long term investments was partially offset by increases in the
current portion of commission advances of $2.8 million less the $1.0 million
increase in membership benefits and accounts payable and accrued expenses. The
Company's investments consist of investment grade (rated Baa or higher) bonds
primarily issued by the United States Treasury, federal agencies, federally
sponsored agencies and enterprises as well as mortgage-backed securities and
state and municipal tax-exempt bonds.
The Company generally advances significant commissions at the time a
membership is sold. During the three months ended June 30, 1998, the Company
advanced commissions of $22.4 million on new membership sales compared to $17.2
million for the same period of 1997. Since approximately 93% 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 $10.1 million and
$6.6 million for the six-month periods ended June 30, 1998 and 1997,
respectively. The Company has recorded an allowance of $3.7 million to provide
for estimated uncollectible balances.
The Company has no outstanding material financial commitments and
believes that it has significant ability to finance expected future growth in
membership sales based on its existing amount of unpledged cash and investments
at June 30, 1998 of $33.5 million.
Parent Company Funding and Dividends
Although the Company is the operating entity in many jurisdictions, the
Company's subsidiaries serve as operating companies in various states which
regulate 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 is required to
maintain its stockholders' equity at levels sufficient to satisfy various state
regulatory requirements, the most restrictive of which is currently $3 million.
Although the Company does not expect additional capital requirements of either
PPLCI or PPLSIF, such requirements would be funded by the Company in the form of
capital contributions or surplus debentures.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of Shareholders of the Company (the "Annual
Meeting") was held on April 17, 1998. The only matters submitted to a vote of
the Company's shareholders at the Annual Meeting were the election of five
directors. The results of the election for each such director were as follows:
Abstentions and
Votes For Votes Withheld
------------ ----------------
Peter K. Grunebaum 17,647,909 100,409
Randy Harp 17,648,114 100,204
John W. Hail 17,645,413 102,905
David A. Savula 17,645,482 102,836
Shirley A. Stonecipher 17,451,886 296,432
The Board of Directors of the Company consists of eight 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 respective terms of service of
Messrs. Hail and Savula will expire in 2000 and the respective terms of service
of Messrs. Grunebaum and Harp and Ms. Stonecipher will expire in 2001. The terms
of the other three 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: Harland C. Stonecipher - 1999; Wilburn L. Smith
- - 1999; and Kathleen S. Pinson - 2000.
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 Letter Agreement dated July 8, 1993 between the Company and David A.
Savula
10.2 Stock Option Agreement dated as of February 6, 1998 between the Company
and David A. Savula
10.3 Stock Option Agreement dated as of April 3, 1998 between the Company
and David A. Savula
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, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: July 21, 1998 /s/ Harland C. Stonecipher
------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: July 21, 1998 /s/ Randy Harp
------------------------------------
Randy Harp
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
Date: July 21, 1998 /s/ Kathy Pinson
------------------------------------
Kathy Pinson
Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
No. Description
---- ------------------------------------------------------------
10.1 Letter Agreement dated July 8, 1993 between the Company and
David A. Savula
10.2 Stock Option Agreement dated as of February 6, 1998 between
the Company and David A. Savula
10.3 Stock Option Agreement dated as of April 3, 1998 between
the Company and David A. Savula
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
July 8, 1993
Mr. David A. Savula
4501 Karls Gate Drive
Marietta, GA 30068
Dear Dave:
Am writing this letter to confirm in writing our discussions and agreements at
our meeting in Oklahoma City on July 1, 1993.
As you recall, those in attendance at the meeting were myself, Trish Weaver,
Randy Harp, John Hail and Wilburn Smith.
One of the basic reasons for the meeting was to work out an arrangement with
John Hail and AMS that can be satisfactory to you and to all of us at Pre-Paid
Legal Services, Inc.
It is anticipated that on July 12, 1993, you will begin receiving an above the
structure override of one percent (1%) first year, and one-half percent (1/2%)
renewal each year thereafter. This would include the marketing of all Pre-Paid
Legal Services, Inc. memberships marketed by Pre-Paid Legal Services, Inc. and
its subsidiaries at present and AMS.
As of July 12, 1993, you will become and continue to be responsible in the
assisting of developing business, recruiting, training and doing those things
necessary to generate sales of the Pre-Paid Services, Inc. membership and assist
in any way possible the maintaining and servicing of all existing Pre-Paid Legal
Services, Inc.
memberships.
As of January 1, 1994, you will cease to personally recruit first level
associates. You can and are encouraged to assist those in your downline and
those not in your downline on an equal basis.
With the effective date of September 1, 1993 for an associate fee of $49.00 you
will begin, at this time, to receive a one time $2.00 per sponsorship of new
associates as a management fee, with the exception of AMS. No management fee
will be paid on AMS sponsorships.
This sponsorship bonus will offset and replace your travel expenses as of
January 1, 1994.
Any or all of the above is subject to change upon your receipt of written notice
by Pre-Paid Legal Services, Inc.
This letter outlines the agreements between Pre-Paid Legal Services, Inc. and
its subsidiaries to David A. Savula.
The relationship of David A. Savula to Pre-Paid Legal Services, Inc. is that of
an independent contractor and nothing in this letter shall be construed as
creating an employer-employee relationship or any other relationship other than
that of an independent contractor.
You are not authorized, without prior written approval, to make any contract or
incur any debt in the name of Pre-Paid Legal Services, Inc. or its subsidiaries.
You also agree to devote your best efforts to the marketing of Pre-Paid Legal
Services, Inc. memberships.
You recognize and agree that one of the most valuable assets that Pre-Paid Legal
Services, Inc. owns is its experience, expertise and knowledge gained as a
pioneer in the prepaid legal field.
You recognize that materials, supplies, actuarial data, product development,
information, training, company information, marketing expertise, and
administrative systems have been developed by considerable time and expense on
the part of management and at considerable expense to Pre-Paid Legal Services,
Inc. shareholders. We consider these items to be the key to our success and,
therefore, our trade secrets.
You, David A. Savula, agree that to appropriate any information and trade
secrets for your own use or the use of another would be a loss to Pre-Paid Legal
Services, Inc. and would be subject to the Oklahoma Deceptive Trade Practices
Act that would provide and allow certain remedies on the part of Pre-Paid Legal
Services, Inc. and its subsidiaries.
Any employment, association, consulting arrangement, independent contractor
status with any other company and/or individual involved in the business of
legal services within three years of termination of association with Pre-Paid
Legal Services, Inc. may be viewed by Pre-Paid Legal Services, Inc. as a misuse
of trade secrets gained through association with Pre-Paid Legal Services, Inc.
Violation of any of the above would be sufficient reason to justify Pre-Paid
Legal Services, Inc. to terminate payment of any future commission or other
compensation.
Pre-Paid Legal Services, Inc. and David A. Savula agree that either party may
terminate this agreement at any time for any reason. Such termination will be
done by Certified Mail and considered effective upon receipt.
Cordially,
Pre-Paid Legal Services, Inc.
/s/ Harland C. Stonecipher
-----------------------------
Harland C. Stonecipher
President
Accepted:
/s/ David A. Savula
- -----------------------------------
David A. Savula (Date)
PRE-PAID LEGAL SERVICES, INC.
STOCK OPTION AGREEMENT
(David A. Savula - First Quarter 1998 Production and Recruiting Goals)
This Stock Option Agreement ("Agreement") is made effective as of the
6th day of February, 1998 between Pre-Paid Legal Services, Inc., an Oklahoma
corporation (the "Corporation"), and David A. Savula (the "Holder").
In consideration of the mutual covenants hereinafter set forth and for
other good and valuable consideration, the parties hereto agree as follows:
1. Grant of Stock Option. The Corporation hereby grants to Holder the
right and option (the "Option") to purchase an aggregate of Ten Thousand
(10,000) shares of Common Stock, par value $.01 per share, of the Corporation on
the terms and conditions herein set forth.
2. Purchase Price. The purchase price of the shares of Common Stock
subject to the Option shall be $43.13 per share (the fair market value of the
Common Stock on the effective date hereof).
3. Vesting of Option. The Option shall vest, if at all, as of the date
upon which the Corporation determines that the criteria set forth in Exhibit "A"
attached hereto have been satisfied and shall thereafter be exercisable and may
be exercised in all or in part from time to time during the term of the Option.
In no event shall the Option vest or become exercisable if such criteria are not
satisfied within the applicable time period.
4. Expiration Date. The Option shall expire and any rights of the
Holder to exercise the Option shall cease on the date three (3) years after the
date of this Agreement.
5. Non-transferability. The Option shall not be assignable or
transferable by the Holder, except by will or by the laws of descent and
distribution. During the life of the Holder, the Option shall be exercisable
only by him.
6. Changes in Capital Structure. The aggregate number of shares of
Common Stock covered by the Option, and the price per share thereof, shall all
be proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Corporation resulting from a subdivision or
consolidation of shares or other capital adjustment or the payment of a stock
dividend or other increase or decrease in such shares, in each case effected
without receipt of consideration by the Corporation; provided, however, that any
fractional shares resulting from any such adjustment shall be eliminated.
<PAGE>
7. Exercise of Option. Subject to the terms and conditions of this
Agreement, the Option or any portion thereof may be exercised, to the extent
then exercisable, by written notice to the Corporation, Pre-Paid Legal Services,
Inc., 321 East Main Street, Post Office Box 145, Ada, Oklahoma 74820, attention
of the Secretary. Any such notice shall state the election to exercise the
Option and the number of shares in respect of which it is being exercised, shall
be signed by Holder or other permitted person exercising the Option, and shall
be accompanied by payment in full of the applicable purchase price by certified
or by cashier's check payable to the Corporation; or, unless otherwise
determined by the Board of Directors, the purchase price may be paid in
property, including shares of common stock of the Corporation (provided such
shares have been owned by the Holder for at least six months). As soon as
practicable after the date of exercise and receipt of the purchase price, a
certificate or certificates for the shares as to which the options shall have
been so exercised, registered in the name of Holder, shall be issued by the
Corporation. All shares issued as provided herein will be fully paid and
nonassessable.
8. Compliance with Laws. Notwithstanding any provision hereof, the
obligation of Corporation to sell and deliver shares pursuant to this Agreement
shall be subject to all applicable laws, rules and regulations and to such
approvals by governmental agencies or national securities exchanges as may be
required. Holder shall not exercise any portion of the Option and the
Corporation shall not be obligated to issue any shares under the Option if the
exercise thereof or the issuance of the shares thereunder shall constitute a
violation by Holder or the Corporation of any applicable law or regulation. The
Corporation may require as a condition to the issuance of any shares of Common
Stock upon exercise of an option that Holder remit an amount sufficient, in the
Corporation's opinion, to satisfy applicable FICA, federal, state or other
withholding tax requirements, if any, related to the exercise of the Option.
9. Rights as a Shareholder. Holder shall have no rights as a
shareholder with respect to any shares covered by the Option until the date of
issuance of a stock certificate to him for any such shares.
10. Governing Law. This Agreement shall be subject to, and governed by,
the laws of the State of Oklahoma irrespective of the fact that one or more of
the parties now is, or may become, a resident of a different state.
11. Counterpart Execution. This Agreement may be executed in multiple
counterparts and shall constitute one agreement when a counterpart has been
executed by each party.
Executed as of the day and year first above written.
"CORPORATION"
PRE-PAID LEGAL SERVICES, INC.,
an Oklahoma corporation
By: /s/ HARLAND C. STONECIPHER
-------------------------------
Name: Harland C. Stonecipher
Title: Chairman
"HOLDER"
/s/ DAVID A. SAVULA
-------------------------------
David A. Savula
<PAGE>
EXHIBIT"A"
----------
The Option shall vest and become exercisable if, and only if, four (4) or more
Regional Vice Presidents of the Company meet or exceed the production and
recruiting goals established by the Company for the period from December 29,
1997 to March 27, 1998.
PRE-PAID LEGAL SERVICES, INC.
STOCK OPTION AGREEMENT
(David A. Savula - Second Quarter 1998 Production and Recruiting Goals)
This Stock Option Agreement ("Agreement") is made effective as of the
3rd day of April, 1998 between Pre-Paid Legal Services, Inc., an Oklahoma
corporation (the "Corporation"), and David A. Savula (the "Holder").
In consideration of the mutual covenants hereinafter set forth and for
other good and valuable consideration, the parties hereto agree as follows:
1. Grant of Stock Option. The Corporation hereby grants to Holder the
right and option (the "Option") to purchase an aggregate of Five Thousand
(5,000) shares of Common Stock, par value $.01 per share, of the Corporation on
the terms and conditions herein set forth.
2. Purchase Price. The purchase price of the shares of Common Stock
subject to the Option shall be $34.13 per share (the fair market value of the
Common Stock on the effective date hereof).
3. Vesting of Option. The Option shall vest, if at all, as of the date
upon which the Corporation determines that the criteria set forth in Exhibit "A"
attached hereto have been satisfied and shall thereafter be exercisable and may
be exercised in all or in part from time to time during the term of the Option.
In no event shall the Option vest or become exercisable if such criteria are not
satisfied within the applicable time period.
4. Expiration Date. The Option shall expire and any rights of the
Holder to exercise the Option shall cease on the date three (3) years after the
date of this Agreement.
5. Non-transferability. The Option shall not be assignable or
transferable by the Holder, except by will or by the laws of descent and
distribution. During the life of the Holder, the Option shall be exercisable
only by him.
6. Changes in Capital Structure. The aggregate number of shares of
Common Stock covered by the Option, and the price per share thereof, shall all
be proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Corporation resulting from a subdivision or
consolidation of shares or other capital adjustment or the payment of a stock
dividend or other increase or decrease in such shares, in each case effected
without receipt of consideration by the Corporation; provided, however, that any
fractional shares resulting from any such adjustment shall be eliminated.
<PAGE>
7. Exercise of Option. Subject to the terms and conditions of this
Agreement, the Option or any portion thereof may be exercised, to the extent
then exercisable, by written notice to the Corporation, Pre-Paid Legal Services,
Inc., 321 East Main Street, Post Office Box 145, Ada, Oklahoma 74820, attention
of the Secretary. Any such notice shall state the election to exercise the
Option and the number of shares in respect of which it is being exercised, shall
be signed by Holder or other permitted person exercising the Option, and shall
be accompanied by payment in full of the applicable purchase price by certified
or by cashier's check payable to the Corporation; or, unless otherwise
determined by the Board of Directors, the purchase price may be paid in
property, including shares of common stock of the Corporation (provided such
shares have been owned by the Holder for at least six months). As soon as
practicable after the date of exercise and receipt of the purchase price, a
certificate or certificates for the shares as to which the options shall have
been so exercised, registered in the name of Holder, shall be issued by the
Corporation. All shares issued as provided herein will be fully paid and
nonassessable.
8. Compliance with Laws. Notwithstanding any provision hereof, the
obligation of Corporation to sell and deliver shares pursuant to this Agreement
shall be subject to all applicable laws, rules and regulations and to such
approvals by governmental agencies or national securities exchanges as may be
required. Holder shall not exercise any portion of the Option and the
Corporation shall not be obligated to issue any shares under the Option if the
exercise thereof or the issuance of the shares thereunder shall constitute a
violation by Holder or the Corporation of any applicable law or regulation. The
Corporation may require as a condition to the issuance of any shares of Common
Stock upon exercise of an option that Holder remit an amount sufficient, in the
Corporation's opinion, to satisfy applicable FICA, federal, state or other
withholding tax requirements, if any, related to the exercise of the Option.
9. Rights as a Shareholder. Holder shall have no rights as a
shareholder with respect to any shares covered by the Option until the date of
issuance of a stock certificate to him for any such shares.
10. Governing Law. This Agreement shall be subject to, and governed by,
the laws of the State of Oklahoma irrespective of the fact that one or more of
the parties now is, or may become, a resident of a different state.
11. Counterpart Execution. This Agreement may be executed in multiple
counterparts and shall constitute one agreement when a counterpart has been
executed by each party.
Executed as of the day and year first above written.
"CORPORATION"
PRE-PAID LEGAL SERVICES, INC.,
an Oklahoma corporation
By: /s/ HARLAND C. STONECIPHER
-------------------------------
Name: Harland C. Stonecipher
Title: Chairman
"HOLDER"
/s/ DAVID A. SAVULA
-------------------------------
David A. Savula
<PAGE>
EXHIBIT "A"
-----------
The Option shall vest and become exercisable if, and only if, four (4) or more
Regional Vice Presidents of the Company meet or exceed the production and
recruiting goals established by the Company for the period from March 30, 1998
to June 26, 1998.
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)
Six Months Ended
June 30,
1998 1997
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a)............ $12,556 $ 8,329
======= =======
Shares:
- -------
Weighted average shares outstanding, (net of 747 shares of
treasury stock) disregarding exercise of options
or conversion of preferred stock......................... 22,422 21,935
======= =======
Earnings per common share (a)............................... $ .56 $ .38
======= =======
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a)............ $12,556 $ 8,329
======= =======
Shares:
- -------
Weighted average shares outstanding, (net of 747 shares of
treasury stock) disregarding exercise of options
or conversion of preferred stock......................... 22,422 21,935
Assumed dilutive conversion of preferred stock.............. 80 113
Assumed exercise of options and warrants based on the
treasury stock method using average market price.......... 432 408
------- -------
Weighted average number of shares, as adjusted.............. 22,934 22,456
======= =======
Earnings per share - assuming dilution (a).................. $ .55 $ .37
======= =======
(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)
Three Months Ended
June 30,
1998 1997
BASIC EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a)............ $ 6,722 $ 4,351
======= =======
Shares:
Weighted average shares outstanding, (net of 747 shares of
treasury stock) disregarding exercise of options
or conversion of preferred stock......................... 22,431 22,071
======= =======
Earnings per common share (a)............................... $ .30 $ .20
======= =======
DILUTED EARNINGS PER SHARE:
Computation for Statement of Income
- -----------------------------------
Earnings:
Net income applicable to common stockholders (a)............ $ 6,722 $ 4,351
======= =======
Shares:
Weighted average shares outstanding, (net of 747 shares of
treasury stock) disregarding exercise of options
or conversion of preferred stock......................... 22,431 22,071
Assumed dilutive conversion of preferred stock.............. 80 108
Assumed exercise of options and warrants based on the
treasury stock method using average market price.......... 414 336
------- -------
Weighted average number of shares, as adjusted.............. 22,925 22,515
======= =======
Earnings per share - assuming dilution (a).................. $ .29 $ .19
======= =======
(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, 1998 financial statements contained in Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000311657
<NAME> Pre-Paid Legal Services
<MULTIPLIER> 1,000
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 17,466
<SECURITIES> 3,000
<RECEIVABLES> 2,774
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,779
<PP&E> 3,863
<DEPRECIATION> 0
<TOTAL-ASSETS> 112,548
<CURRENT-LIABILITIES> 5,899
<BONDS> 0
26
232
<COMMON> 83,485
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 112,548
<SALES> 50,338
<TOTAL-REVENUES> 60,332
<CGS> 0
<TOTAL-COSTS> 41,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,996
<INCOME-TAX> 6,435
<INCOME-CONTINUING> 12,561
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,561
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
</TABLE>
